Personal liability of directors with respect to salaries

A company has its own legal personality distinct from that of its shareholders and directors. It also has its own separate rights and obligations. This characteristic allows for the limitation of shareholders' and directors' liability who need not fear being sued personally for every debt incurred by the company.

However, many laws override that principle holding directors of companies personally liable with regard to unpaid salaries. The two major acts with such provisions are the Québec Companies Act ("QCA") and the Canada Business Corporations Act ("CBCA"). And since they regulate the majority of corporate entities in Québec, directors must be aware of that liability.

Pursuant to these two acts, the directors' personal liability extends up to six (6) months' salary per employee: and it goes without saying that it is quite a heavy liability!

Companies incorporated pursuant to the QCA

The QCA provides for two possible scenarios that could lead to the personal liability of directors for unpaid salaries.

In the first one, if proceedings for unpaid salaries are brought against a company and employees cannot enforce judgment on the total, they then have the choice of personally going after the directors of the company. Proceedings against the company can be initiated by employees, a union or the Commission des normes du travail and must be brought in the year the unpaid salaries are due.

The second situation is more common, the company goes bankrupt in the same period (1 year) as that in which the salaries are due, and employees then file a claim in the bankruptcy. Here again, employees, a union or the Commission des normes du travail can file a claim in the bankruptcy.

Once one of the scenarios happens, employees are allowed moreover to launch proceedings against the directors personally. The limitation period for that recourse is of three (3) years starting from the moment the conditions of section 96 of the QCA are met.

Companies incorporated pursuant to the CBCA

This federal legislation essentially provides for the same two situations than that of its abovementioned provincial equivalent, and also holds directors personally liable for up to six (6) months' salary. There are, however, two major differences.

Firstly, the period covered by the recourse is of six (6) months and not of one (1) year. Secondly, the recourse must be initiated during the directors' mandate or at the latest in the two (2) years following the end of their mandate.

Scope of liability

The expression "six months' salary" must be understood as a monetary limitation and not as a time limit: according to which each employee can sue a director "for an amount equivalent to up to six months' salary" and not "for the unpaid salary in the course of a six-month period."

What's more, the definition of salary is not limited to simple compensation: it can include among others, bonuses, vacations, holidays and overtime. Severance pay is usually not comprised in the word "salary", but in some instances, courts have decided otherwise.

In conclusion, be aware of the fact that a director will be able to defend himself by alleging that he was not director during the period where the salaries were unpaid, by proving that the conditions of the recourse were not met by the employees or by alleging the recourse's prescription. However, due diligence, here, can not be used as a defense.