One of the main benefits of setting up a corporation is to limit the owner's exposure to personal liability. And a corporation does an admirable job of that for the most part. Shareholders do indeed have limited liability (their liability is essentially limited to the amount contributed toward the acquisition their shares).
This is important . . .
However, the Directors of the corporation do have some liability exposure. This becomes important where:
you have been asked to be on the Board of Directors of a larger corporation; or
you are part of a closely held private corporations (e.g. where the same people are both shareholders and directors).
So consider this . . . If you are a Director of a Corporation, you will be held personally liable, jointly and severally, with the other directors of the Corporation (if any) if you vote for or consent to any resolution authorizing any of the following actions by the Corporation:
Improper Consideration for the Issuance of Shares – An issuance of shares for consideration other than money when the consideration is worth less than what the Corporation would have received if the share was issued for money, the Directors may be held liable for the the difference.
Insolvency - Caused by Share Action – The purchase, redemption or other acquisition of shares which results in the Corporation being insolvent or unable to meet its liabilities as they become due.
Insolvency - Caused by Dividend Payment - The declaration or payment of a dividend which results in the Corporation being insolvent or unable to meet its liabilities as they become due.
Insolvency - Unreasonable Commission – The provision of financial assistance to specified persons, such as shareholders and directors of the Corporation or of an affiliated corporation, or their associates, in circumstances where the Corporation is insolvent or unable to meet its liabilities as they become due.
Insolvency - Caused by Payment to Shareholder - The payment to a dissenting shareholder in circumstances which would result in the Corporation being insolvent or unable to meet its liabilities as they become due
Unreasonable Commission: The payment of an unreasonable commission on a sale of shares.
Unauthorized Indemnity – The payment of an indemnity to an officer or director of the Corporation in circumstances where such indemnification is not authorized by the Business Corporations Act (Alberta) (the “Act”).
Prejudicial Payment - The payment to a shareholder that is oppressive, unfairly prejudicial to, or that unfairly disregards the interests of any of the Corporation’s security holders, creditors, directors or officers.
Employee Wages: potentially liable up to six (6) months wages payable to employees of the Corporation.
Withholdings - where the Corporation has failed to deduct and remit, or withhold and remit, an amount as required by the Income Tax Act (Canada) for patronage refunds, employee wages and benefits, or non-resident withholding taxes, the Directors may be personally liable to pay the amount required to be withheld or deducted plus interest and penalties.
Taxes -where the Corporation fails to remit certain taxes as required by the Excise Tax Act (Canada) the Directors may be liable to pay such amount and any interest thereon or penalties relating thereto.
Employment Standards Regulations - under the Employment Standards Act penalties are imposed for falsification of records and breach of minimum wage laws regarding holidays and holiday pay. Any director who directs, authorizes, assents to, permits, participates in or acquiesces in such offenses committed by the Corporation is also guilty of an offence.
Criminal Conduct - other statutes impose quasi-criminal liability for certain breaches of mandatory statutory requirements. Under the Alberta Business Corporations Act, a general offence section states that every person who, without reasonable cause, contravenes a provision of the Act or the regulations, for which no penalty is provided, is guilty of an offence. In addition, any director who:
Makes or assists in making a report, return, notice or other document required by the Act which contains an untrue statement of a material fact or omits to state a material fact; or
Knowingly fails to notify the auditor of errors or mis-statements in financial statements or fails to cause corrected statements to be prepared; or
Knowingly authorizes, permits or acquiesces in failure to comply with proxy requirements;
is guilty of an offence and is subject to a fine or imprisonment or both as set forth under the Act
So there you have it: a bit of a scary list. As you can see, being a Director is a significant responsibility - with significant potential risks. There isn't much you can do; someone has to run the business and it has to be a Director. There are a few things you can do to lesson the risk.
The first is to act with reasonableness. Just do you best not to do things that will give rise to liability, But beyond that:
if you are being asked to join a Board of a larger corporation where they want outside help, you should consider carefully whether the benefits outweigh the risks;
Some corporations pay a Director fee which can help;
Most corporations offer to pay for Director Liability insurance;
And some also offer a corporate indemnity (where the corporation agrees to cover Director liability claims).
For further information about this topic or any real estate, commercial or corporate matter, contact us anytime.