Does the consumer debtor have any director’s liabilities?
In the case of a corporate bankruptcy in Ontario, many provincial and federal statutes governing taxes make the directors liable for the corporate debt if the corporation failed to deduct and remit the taxes to the proper authority. In Ontario, for example, there are over 100 federal and provincial statutes that have sections dealing with liabilities of an insolvent corporation. These statutes cover retail sales tax, vacation pay, employee wages and related benefits, health tax, the employees’ portion of income tax, Canada pension, employment insurance premiums and the goods and services tax. Taxes owing on income tax, Canada pension and employment insurance are special and virtually, with minor exceptions, have priority over all the consumer debtor’s assets including real estate irrespective of whether the consumer debtor is in receivership or bankruptcy or both.
While these statutes impose liability on directors, many of them give the directors a defense of “due diligence”; that means the directors took every reasonable step to pay the tax but in view of the declining business they were unable to do so. There is much case law in this area of director liability. Each statute must be examined carefully to see whether this defense exists and to see how the case law has developed in determining the nature of the defense.
In addition, to the due diligence defense, directors may also be protected under the general discretionary power to pursue directors. Governments do not necessarily take legal action against the directors of a bankrupt corporation every time there is a bankruptcy in Ontario unless the corporation has flagrantly, negligently or fraudulently disregarded the laws and the enforcement and compliance sections. If the consumer debtor is a director, it is best to:
- direct that tax payments be deducted and remitted when required,
- verify with the bookkeeper or accountant that the taxes have been done on a regular basis,
- set up a special trust,
- obtain broad insurance,
- obtain an indemnity supported by security against the corporation’s assets, and
- be aware of what the other directors are doing.
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