What are the Liabilities of Shareholders and Directors on Dissolution in Ontario?

• What is Dissolution?
• What are the Liabilities of Shareholders on Dissolution?
• What are the Liabilities of Directors on Dissolution?
• How can Shareholders and Directors Limit their Liability?

What is Dissolution?

Dissolution is the ending of a corporation after it ceases to carry on business.

Dissolution can be done either voluntarily or involuntarily.

Voluntary dissolution happens when the voting shareholders of a corporation, or the corporation’s incorporators (or their personal representatives), authorize the dissolution.

Involuntary dissolution can be initiated by court order when a corporation is wound up.

What are the Liabilities of Shareholders on Dissolution?

When a corporation dissolves, its shareholders are generally not liable for the debts of the corporation.

The following are some exceptions to this:

1. If the corporation cannot pay its liabilities because it reduced its stated capital to minimize or pay the liabilities of its shareholders, those shareholders may be liable to the corporation for the full amount of those payments;
2. Shareholders who are party to a unanimous shareholders agreement may be jointly and severally liable to the corporation’s employees for all debts up to six months’ wages and up to twelve months’ vacation pay;
3. Shareholders may be liable for outstanding debts owed to the corporation’s creditors, to the extent of the amount of property received by those shareholders on the dissolution of the corporation; and
4. A shareholder may be personally liable for the corporation’s debts if that shareholder is a personal guarantor for those debts.

What are the Liabilities of Directors on Dissolution?

Directors are responsible for exercising care, diligence and skill when making decisions on behalf of the corporation. Failure to do so may result in those directors incurring liability.

Some examples of that liability on dissolution are as follows:

1. Directors may be jointly and severally liable to the corporation’s employees for all debts up to six months’ wages and up to twelve months’ vacation pay;
2. Directors may be personally liable if the corporation has failed to remit source deductions such as employee income taxes, employment insurance and Canada Pension Plan contributions;
3. Directors may be personally liable where the corporation has failed to remit HST collected;
4. A director of a public company may be personally liable if he or she misrepresents the company’s disclosure documents;
5. A director may be personally liable for the corporation’s debts if he or she is a personal guarantor for those debts; and
6. Directors may be jointly and severally liable for dividends paid, shares redeemed, or shares purchased if those transactions were made while the corporation was insolvent during the twelve months preceding its bankruptcy.

How can Shareholders and Directors Limit their Liability?

It is prudent for shareholders and directors to maintain accurate corporate records, including meeting minutes and resolutions from day one.

Having up-to-date corporate records will be helpful when dissolving a corporation.

Shareholders and directors should consider utilizing professional advisors to ensure they fulfill their duties on dissolution.

At Hummingbird Lawyers LLP, our Business and Corporate lawyers are experienced and successful in assisting business owners, as they consider dissolving their corporations.

If you are a director and/or shareholder of a private corporation seeking to dissolve your corporation, we can help you explore your rights and obligations.

Hummingbird Lawyers LLP has two offices for your convenience. Providing qualified, skilled and experienced lawyers in Toronto and lawyers in Vaughan, we are committed to giving our clients the convenience, expertise and guidance they need.

Call us today or fill out the form below for more information.

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