416 640 1550

Safeguarding directors from liability

September 23, 2002
by Israel Foulon LLP

Add employee expenses to payments directors are personally on the hook for

When Sahelian Goldfields Inc. declared bankruptcy, employees were left in a bind. Staff had signed employment contracts promising reimbursement for all reasonable expenses incurred in the course of their employment, including food and travel expenses. However, at the time of the bankruptcy the employees were owed $60,000 in unpaid expenses. Sahelian Goldfields also owed them $83,000 in vacation pay. To recover these funds, the employees started an action against both Sahelian Goldfields and its directors.

The employees were able to name the directors personally in their action by virtue of Section 131(1) of the Ontario Business Corporations Act which makes corporate directors “jointly and severally liable to the employees of the corporation for all debts not exceeding six months’ wages that become payable while they are directors for services performed for the corporation.” This provision makes corporate directors personally liable for certain debts owed employees. Directors can be required to pay employee debts from their personal holdings if the debts cannot be met by the corporation.

The Sahelian’s directors responded to the employees’ action by asserting that they could not be held liable for unpaid expenses, as Section 131 only made them liable for up to six months’ wages. They argued that since “expenses” were not “wages,” they could not be held personally accountable for them.

This argument was rejected by the Ontario Court of Appeal. The court interpreted section 131 to mean directors could be held liable for “debts … for services performed for the corporation,” up to a monetary amount not greater than six months’ wages. The directors were found personally liable for expenses employees incurred while performing services for the corporation, to the extent that these expenses did not exceed the amount the employees would earn in six months. The directors were ordered to pay $60,000 to the employees.

In this decision, the court has reaffirmed directors can be held responsible for work-related expenses owed employees. In addition to being liable for unpaid wages and vacation pay, directors will also be liable for expenses incurred in the course of providing services for the corporation.

Directors are not personally liable for statutory termination or severance pay or for common-law reasonable notice damages upon termination. The guiding principle for this distinction appears to be that directors will be liable for amounts “earned” by the employee (or that become owing to the employee) during the employment relationship. As these amounts are “earned” they constitute “debts” the corporation owes employees. Conversely, directors are not liable for future obligations that become owing to the employee only after dismissal, such as termination or severance pay.

For reference see, Proulx v. Sahelian Goldfields, Inc., 2001 55 O.R. (3d) 775.

Protecting your firm

Be aware directors can be held liable for the debts owed employees by a corporation. Once this possibility is recognized steps can be taken to ensure directors are protected. Considerations:

  1. Calculate the limits of your directors’ liability for employee debt — directors are liable for an amount equivalent to six months’ wages for each employee. The firm’s payroll for six months, should give a good approximation of maximum liability.
  2. Determine if your Directors and Officers Liability Policy insures against this exposure. Insurance policies can differ with respect to coverage and exclusions. Check that your policy covers not only unpaid wages, but also unpaid vacation pay, expenses and any other work-related debts.
  3. When money is tight, consideration should be given to paying employees amounts for wages, expenses and vacation pay in preference over payments to other creditors.
  4. Payments of termination and severance pay should not be made to employees prior to ensuring that any amounts for wages, expenses or vacation pay can be paid as well.
  5. Be aware of the law. In Ontario, legislation requires employees to make claims within six months of a director ceasing to hold that position. Therefore, it is in a director’s best interest to be formally removed as a director of the corporation at the earliest opportunity in order to limit exposure to claims.

In the courts…

  • In Barrette et al. v. Crabtree et al., employees were awarded damages in a wrongful dismissal action against their employer. Before they could collect however, the corporation became insolvent. The employees attempted to collect from the directors of the corporation. The court held the directors were not liable for this debt since the debt was not incurred through the performance of services for the corporation, but rather the debt occurred as a result of the failure to give sufficient notice upon terminating the employment relationship. Barrette et al. v. Crabtree et al. (1993) 101 D.L.R. (4th) 66 (S.C.C.).
  • In Mesheau v. Campbell et al., ., the Ontario Court of Appeal held directors could not be held personally liable for damages owed employees as result of wrongful dismissal actions. These debts were incurred at the time of termination of the employees and not during the time the employees served the corporation. This was therefore not a ‘’debt … for services performed’’ for the corporation and was not collectable from the directors. Mesheau v. Campbell et al. (1982), 39 O.R. (2d) 702.
  • In Mills-Hughes v. Raynor, the court determined directors of corporations could be held liable for guaranteed bonuses, but not severance payments, owed employees. Guaranteed bonuses are granted to employees regardless of the performance of the corporation. They are therefore akin to salary earned through services performed for the corporation. This would, accordingly, qualify as a ‘’debt… for services performed’’ under s.131(1) of the Ontario Business Corporations Act, and the directors of the corporation were held personally liable. Mills-Hughes v. Raynor (1988), 47 D.L.R. (4th) 381 (Ont. C.A.).

Peter Israel and Chris Foulon are partners in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. They can be reached at 416-640-1550 or pi@israelfoulon.com. or cf@israelfoulon.com. The authors would like to thank Emily Joyce for her assistance with this article. A version of this article originally appeared in the Carswell publication, Canadian HR Reporter.


Legal Disclaimer

This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation. Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.