A limited company is considered a “person” under Canadian law. As such, it is complete with its own legal right to do such things as enter into contracts, own assets, is subject to taxes, etc. A company is responsible for debts or liabilities it incurs in its operations. If, over time, the company incurs more debts that it can deal with and is unable to pay, it may become insolvent.
If the limited company has assets that it owns, those assets must be used (i.e. sold) to pay off the company’s debts. In some cases where there really is no value in the assets remaining, the company just stops operating or closes down. In these cases, as there are no assets available for creditors, it may be that individuals running the company may be personally responsible to pay off the company’s debts. This may mean that Directors/Shareholders have to use their own assets (i.e. cash) to pay the debts of the company. But it depends on the types of debts.
Limited Liability for Directors
The concept of a Limited Liability company was designed to limit the liability of the company’s Directors and Shareholders. In this way, if the company found itself to be insolvent, that creditors could not “pierce the corporate veil” and financially go after the Directors/Shareholders. Thus, if there are no assets remaining in the company, then creditors have no one to collect from other than the company’s assets. This does not address Director Liability
Directors and Personal Liability
Directors of a limited corporation may be personally liable for certain types of debt. For instance, in British Columbia a Director of a limited corporation can be held personally responsible for unremitted source deductions from employees, unpaid employee wages, GST/HST, PST, etc. Under recent changes to B.C.’s employment legislation, Directors and Officers of companies are personally responsible for wages owing by the company, even if the company is in bankruptcy.
However, many of the statutes that impose liability on a Director or Officer of a corporation for failure to remit or pay monies due under such statutes also contain due diligence defenses to such liabilities imposed. This means that a Director will not be liable under the statute where he or she has exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances.
Apart from the statutory obligations mentioned above, Directors may also put themselves at risk if they breach their fiduciary duties and or their duty of care. Failure to comply with either duty can subject the Director to personal liability. Any transaction that has the effect of preferring, defeating, delaying or hindering creditors of their just remedies may be considered fraudulent, and will give rise to a cause of action to have such transaction voided and/or set aside. In particular, outside of a formal insolvency proceeding, other creditors will have claims if the transaction are either a “fraudulent preference” (preferring one creditor over another, with the intent to “defeat, delay or hinder” that creditor) or a “fraudulent conveyance” (a conveyance of property, broadly defined, that is made to “defeat, delay or hinder” any creditor of its remedies).
Our lawyers at Hoogbruin and Company are well versed in corporate law and experienced with matters of personal liability. We have been serving the lower mainland since 1987 and are committed to providing our clients with the best possible legal representation and advice. Get in touch with us today for a free consultation and to determine your best next steps.