Director liability

How BC law treats it

A company is a separate legal person, so directors are not generally liable for its debts. Their duties under s. 142 of the Business Corporations Act, SBC 2002, c 57 (BCBCA), to act honestly and in good faith with a view to the best interests of the company and to use the care, diligence and skill of a reasonably prudent individual, are owed to the company, not to individual shareholders (Peoples Department Stores Inc v Wise, 2004 SCC 68; BCE Inc v 1976 Debentureholders, 2008 SCC 69). A shareholder's personal remedy is the oppression remedy (s. 227). Directors are also liable if they authorize improper payments, such as dividends or share redemptions while the company is insolvent (s. 154). Statutes add specific personal liability. Under s. 96 of the Employment Standards Act, directors are liable for up to two months' unpaid wages for each employee. Under s. 227.1 of the Income Tax Act and s. 323 of the Excise Tax Act, directors are jointly and severally liable with the company for unremitted source deductions and GST. The main defence is due diligence: the director exercised the care a reasonably prudent person would to prevent the failure, judged objectively (Canada v Buckingham, 2011 FCA 142). CRA cannot assess a director more than two years after the person last ceased to be a director. A company may indemnify directors and buy directors' and officers' insurance under BCBCA ss. 159 to 165, but indemnity is not available where the director did not act honestly and in good faith.

What it means for your business

Founders and investors often sit on boards without realizing they can be personally assessed for payroll taxes, GST or wages when the business struggles. Watching remittances monthly, documenting efforts to prevent failures, getting indemnity agreements and insurance, and resigning properly with notice to the Registrar all reduce exposure. Directors of a company in financial trouble should get advice before paying dividends or preferring some creditors. Example: A Richmond startup runs short of cash and stops remitting payroll deductions for three months. CRA assesses both directors personally, and the one who can show she pressed for remittances and arranged a payment plan has a stronger due diligence defence.

Risks and common mistakes

Believing directors are never liable for company obligations, or always liable for all of them. Letting payroll deductions or GST go unpaid to keep suppliers paid. Paying dividends or redeeming shares when the company cannot meet its debts. Resigning without filing the change with the Registrar or keeping proof of the resignation date. Serving on a board without an indemnity agreement or directors' and officers' insurance.