What personal liability can directors face when an Ontario corporation becomes insolvent?

When a corporation becomes insolvent, directors face heightened scrutiny of decisions made in the period leading up to and after insolvency. Several specific liability risks arise. Directors remain personally liable for unremitted source deductions and HST incurred up to the date of insolvency — and indeed up to the point they ceased to be directors. Wage liability under the Ontario Business Corporations Act also continues to attach regardless of insolvency.

Under federal insolvency legislation, transactions that occurred within certain time periods before bankruptcy — including payments to related parties, dividends, or asset transfers at undervalue — may be reviewed and reversed by a trustee in bankruptcy. While these clawback remedies run against the corporation and the recipient of the transfer rather than automatically against directors personally, directors who authorized fraudulent preferences or oppressive distributions can face personal exposure in certain circumstances.

Directors who continue to operate an insolvent corporation — incurring new debts that the corporation clearly cannot pay — may also face claims for breach of duty to creditors. The key inflection point is when directors knew or ought to have known the corporation was insolvent. Getting insolvency and corporate legal advice at the first signs of serious financial distress is critical: the options available and the liability exposure both depend significantly on how early action is taken.