Do Ontario directors owe duties to creditors when the corporation is insolvent or near insolvency?

As a corporation approaches insolvency or becomes insolvent, Ontario courts have recognized that the interests of creditors become increasingly central to directors' decision-making. Directors still owe their primary duties to the corporation, but because the corporation's value at that stage effectively belongs to creditors rather than shareholders, acting in the creditors' interests is part of acting in the corporation's best interests.

Practically, this means directors of financially distressed corporations should avoid paying dividends, approving transactions at undervalue, or allowing transfers of assets in ways that would prefer one creditor over others in a manner inconsistent with insolvency law principles. Certain transactions made while the corporation is insolvent or in anticipation of insolvency may be reversed by a trustee in bankruptcy or court under federal insolvency legislation.

Directors who continue to trade and incur obligations they know cannot be met, or who allow the corporation to pay wages and incur debts with no prospect of repayment, may face personal liability. Seeking insolvency counsel at the first sign of serious financial distress — rather than waiting for creditor action — gives the board options: restructuring, assignment in bankruptcy, or an orderly wind-down can all be preferable to uncontrolled collapse. Directors in this situation should also consider their own personal exposure carefully.