How You may be Personally Liable as a Director in Alberta

Written by Chiara Lasquety

JD Candidate 2023 | UCalgary Law

The overarching principle in company law is that the corporation is a separate legal entity and is therefore distinct from its members.[1] However, this principle does not exist in a legal vacuum. Practically speaking, the company is a legal fiction, and the directors and officers are the agents – i.e., the ones who exercise the will of the company and control the company's affairs.[2] This has led to numerous legislative provisions in Canadian law that allow directors to be held personally liable for a number of matters.[3] This blog post provides a non-exhaustive list of some of the potential sources of liabilities that directors may face.

Potential Sources of Director Liability

Liability re: Various Corporate Matters Section 118 of the Alberta Business Corporations Act (“ABCA”) states that directors who vote for, or consent to, a resolution in respect of any of the following, will be jointly and severally liable to the corporation:

(a) If consideration was other than money, amounts by which consideration received for shares is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution (s. 118(1)).

(b) Amounts authorized for purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36 (s. 118(3)(a)).

(c) Amounts authorized to pay a commission on a sale of shares not provided for in section 42 (s. 118(3)(b)).

(d) Amounts authorized for payment of dividends contrary to section 43 (s. 118(3)(c)).

(e) Amounts authorized to provide financial assistance contrary to section 45 (s. 118(3)(d)).

(f) Payment of an indemnity contrary to section 124 (s. 118(3)(e)).

(g) Payment to shareholders contrary to section 191 or 242 (s. 118(3)(f)).

Liability for Unpaid Employee Wages Director liability arises for unpaid wages under federal and provincial corporation statutes, as well as under employment standards legislation. Pursuant to section 119 of the ABCA, directors of a corporation are jointly and severally liable to employees of the corporation for all debts not exceeding 6 months wages payable to each employee for services performed for the corporation while they are directors. This provision may take effect when

(a) the corporation has been sued for the debt within 6 months after it has become due and execution has been returned unsatisfied in whole or in part (s. 119(3)(a)),

(b) the corporation has commenced liquidation and dissolution proceedings or has been dissolved and a claim for the debt has been proved within 6 months after the earlier of the date of commencement of the liquidation and dissolution proceedings and the date of dissolution (s. 119(3)(b)), or

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act (Canada) and a claim for the debt has been proved within 6 months after the date of the assignment or receiving order (s. 119(3)(c)).

Liability for Environmental Damage Directors may also face personal liability under various environmental and regulatory statutes, including for failing to prevent commission of offences under the Environmental Protection and Enhancement Act (“EPEA”). Section 232 of the EPEA states that where a corporation commits an offence under the Act, any officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is guilty of the offence and is liable to the punishment provided for the offence – whether or not the corporation has been prosecuted for or convicted of the offence. Offences include, among other things, carrying out prohibited activities and failing to comply with orders.[4]

Liability for Unpaid Remittances by the Corporation Further, directors may be liable to the Crown for unpaid remittances by their corporation of income tax, sales tax, public pension and employment insurance premiums. For example, under the Income Tax Act (“ITA”), s. 227.1 imposes liability on directors for failing to deduct or withhold amounts required by sections 135(3) (amounts to be deducted or withheld from payment to customer), 135.1(7) (withholding on redemption of shares), 153 (withholding for salary and wages, superannuation or pension benefit, retiring allowance, death benefit, etc.) or 215 (non-resident withholding).

Conclusion

While lawsuits against directors are relatively rare, this blog post is illustrative of the various sources of director liability should such liability arise in exceptional circumstances. For further information regarding any of the foregoing, or how to protect directors generally, please contact the BLG Business Venture Clinic.

[1] Stephanie Ben-Ishai & Thomas G.W. Telfer, Bankruptcy and Insolvency Law in Canada: Cases, Materials, and Problems, (Toronto: Irvin Law, 2019) at 343.

[2] Ibid.

[3] Ibid.

[4] Environmental Protection and Enhancement Act, RSA 2000, c E-12, s 227.