WHEN YOUR BEST ISN’T GOOD ENOUGH: PROTECTING DIRECTORS FROM PERSONAL LIABILITY
octobER 2015 | AUTHOR: sarah macdonald
When a person decides to go into business, many people choose the business based on their existing skill set; they have some experience in a certain area (and maybe even some education or training to go along with it) and decide to start their own business to produce or provide those goods or services. Although you may be an expert life coach, clothing designer or event planner, there will be other aspects of your business that will require your attention. Very rarely will someone be an expert in all of the areas necessary to run a successful business. This does not mean that your business will fail; it just means that you need to find the right people to complement your skillset. However, once you have found those people, your involvement cannot end there. You must oversee all aspects of your business; you are an owner first, but you will also be a director of your company and with this role comes enhanced responsibility.
When I speak to owners of an insolvent company, I first try to identify and evaluate personal liability. If there are insufficient assets of a corporation to pay the creditors, those things will take care of themselves through bankruptcy (and it typically means creditors will be paid a very small percentage of the outstanding debt or nothing at all). A more important consideration for my clients is how much they will have to pay out of their own pocket. Will they lose their house and other personal assets?
Directors can be personally liable for a number of liabilities of a business. When the business is going well, there are usually no issues since payables are being paid and all government remittances are up-to-date. However, when a company is faced with financial difficulty and becomes insolvent, a director needs to take note of what is being
paid and what is opening them up to personal liability. The most typical issues that arise in an insolvency situation are payment of employee wages, remittances of source deductions (CPP and EI), remittance of HST, and personal guarantees of leases or bank loans. There is also potential personal liability when some creditors are given a priority over other creditors that is outside the ordinary course of business or if shareholders are paid dividends that would render the corporation insolvent.
Setting aside the personal guarantees, which are nearly impossible to get out of, there are some defences that can be raised for the liabilities imposed by statutes. If a director has made reasonable enquiries and has reviewed the necessary information and could still not have reasonably known that payments were not being made, they may be excused from liability. For example, the director may have given all of the necessary instructions to staff and made the proper enquiries, but the staff member was independently choosing not to remit the HST.
What is not a defence is: “I did my best. I knew about selling my services to people, so I just did that. I don’t know anything about bookkeeping or filing taxes so I had someone else do it and didn’t pay attention to what they were doing”. In this situation, your best is not good enough. You are responsible for watching over the people you have hired and asking the right questions about what is being paid and how financial reporting is being done. The standard is that of the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. The person being examined is the director of a private corporation, not a person who makes widgets or provides marketing services. Because of that standard, you are obligated to go beyond your own skill set and ask the necessary questions to keep you adequately informed about all aspects of your business. These enquiries must be on a regular basis so that any issues can be dealt with in a timely manner before it is too late.
If you have any questions relating to any of the above, please do not hesitate to contact Sarah MacDonald at smacdonald@kmblaw.com or 905.276.0416.
When I speak to owners of an insolvent company, I first try to identify and evaluate personal liability. If there are insufficient assets of a corporation to pay the creditors, those things will take care of themselves through bankruptcy (and it typically means creditors will be paid a very small percentage of the outstanding debt or nothing at all). A more important consideration for my clients is how much they will have to pay out of their own pocket. Will they lose their house and other personal assets?
Directors can be personally liable for a number of liabilities of a business. When the business is going well, there are usually no issues since payables are being paid and all government remittances are up-to-date. However, when a company is faced with financial difficulty and becomes insolvent, a director needs to take note of what is being
paid and what is opening them up to personal liability. The most typical issues that arise in an insolvency situation are payment of employee wages, remittances of source deductions (CPP and EI), remittance of HST, and personal guarantees of leases or bank loans. There is also potential personal liability when some creditors are given a priority over other creditors that is outside the ordinary course of business or if shareholders are paid dividends that would render the corporation insolvent.
Setting aside the personal guarantees, which are nearly impossible to get out of, there are some defences that can be raised for the liabilities imposed by statutes. If a director has made reasonable enquiries and has reviewed the necessary information and could still not have reasonably known that payments were not being made, they may be excused from liability. For example, the director may have given all of the necessary instructions to staff and made the proper enquiries, but the staff member was independently choosing not to remit the HST.
What is not a defence is: “I did my best. I knew about selling my services to people, so I just did that. I don’t know anything about bookkeeping or filing taxes so I had someone else do it and didn’t pay attention to what they were doing”. In this situation, your best is not good enough. You are responsible for watching over the people you have hired and asking the right questions about what is being paid and how financial reporting is being done. The standard is that of the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. The person being examined is the director of a private corporation, not a person who makes widgets or provides marketing services. Because of that standard, you are obligated to go beyond your own skill set and ask the necessary questions to keep you adequately informed about all aspects of your business. These enquiries must be on a regular basis so that any issues can be dealt with in a timely manner before it is too late.
If you have any questions relating to any of the above, please do not hesitate to contact Sarah MacDonald at smacdonald@kmblaw.com or 905.276.0416.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.
