The federal government has launched a number of initiatives in the past few weeks aimed at helping businesses weather the economic effects of COVID-19. While these initiatives offer short-term solutions, companies will still be required to pay most of the amounts currently being loaned or deferred.
Accordingly, it is important for companies to carefully monitor their revenues and expenses during the pandemic, even if accessing government benefits, as there may still be risks of insolvency at a later date. Directors in particular should be aware of these risks, as they could be liable for corporate debts if a de facto insolvency occurs.
In this article, we discuss the how directors might be exposed to these liabilities under certain statutes, and what they can do now to mitigate their risk through due diligence.
In recent weeks, among other initiatives, the federal government has implemented or proposed the following measures in response to COVID-19:
Arguably, these initiatives place a greater burden on companies to manage their affairs carefully, and for directors to monitor these affairs perhaps more closely than may be otherwise usual. Deferred remittances and wage subsidies do not mean that companies no longer have obligations to remit taxes or to pay wages; the taxes are due eventually and failing to use a subsidy for the sole purpose of paying an employee’s salary can result in significant fines. All of this may simply delay insolvency in the current economic climate. If that happens, directors could be liable for corporate debts because of an express statutory obligation.
Though a corporation is generally considered a separate legal entity from its directors, a number of statutes can hold directors liable for the corporation’s debts. Among others, directors may be found jointly and severally liable for a corporation’s duty to:
In addition to the amounts owing under such statutes as the ETA, ITA, CPPA, or EIA, directors can become liable for interest on those amounts or penalties if they remain unpaid.
Under the ESA and the OBCA, directors can also become jointly and severally liable for all debts owing to the employees. These are debts owed to employees for services performed for the corporation, that become payable while they are directors of that corporation, for up to six months. “Debts” may include amounts owing for vacation pay, public holiday pay, overtime pay, regular earnings, benefits, and out-of-pocket expenses incurred while performing services for the corporation.
Importantly, though an employee may eventually recover more by pursuing an action under the OBCA, the ESA allows for substantial recovery against directors through a simple administrative complaint to the Ministry of Labour (“MOL”). Upon receiving a complaint, the MOL investigates on behalf of the employee. After the investigation, an Employment Standards Officer, rather than a Court, decides the issue of a director’s liability. Proceedings against corporate employers under the ESA do not have to be exhausted before an employee can begin a complaint against the corporation’s directors to collect wages before the MOL.
Directors may avoid the liabilities above if they show that they acted with “due diligence”. This means the director took positive steps to ensure that the corporation complied with its statutory obligations. A director must show that she exercised “the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.” A defence of due diligence is not conditional upon evidence that the default did not occur.
In considering relevant “circumstances”, the Courts inform their analysis by looking at, among other things, the director’s background and experience, as well as the complexity, customs, and practices of the corporation. Typically, directors can rely on a due diligence defence where they have ensured that appropriate protocols are in place to guarantee that required payments are made, or if a payment is not made that the protocol guarantees that this fact was brought to the attention of the board of directors and/or the finance committee of the board.
Regardless of their background, the due diligence defence will not assist a director who is:
The due diligence defence therefore places positive obligations on directors. They should remain actively informed about the corporation and their obligations. A court will be very unlikely to accept an argument that a director was unaware of a corporation’s failures if the director has not made appropriate inquiries about the corporation’s activities.
Still, directors are not expected to know everything. The due diligence defence will apply where a director acted in good faith and in reliance on the performance or opinion of qualified individuals. For example, if a director causes a corporation not to remit certain payments because a legal opinion advised her it was unnecessary, she may still be able to rely on the due diligence defence.
Unlike the OBCA, the ESA does not contain “due diligence” provisions. Directors may therefore face “strict liability” under the ESA for employee debts/wages. This means that once it is established an individual was a director at the times that a debt was not paid to an employee, there is no basis for relief, even if the director shows that she exercised due diligence.
While every case will be different, there are things any director can do to help mitigate her risk and increase the chances that she can successfully rely on a due diligence defence.
Of course, the primary objective should be to always act in good faith and as seems reasonable in the circumstances. With that in mind, however, directors should be sure to at least do the following:
This publication is intended only to provide general information. It should not be relied on as legal advice. For specific legal advice, please contact: Leslie Dizgun, Paul Schwartzman, or Alyssa Jagt.