Personal liability of shareholders in Alberta

When will shareholders and directors be personally liable to creditors of a corporation?

An incorporated corporation in Alberta is generally considered to be a separate body independent and separate from the individuals who own or run the corporation. Contractual obligations and debts of the corporation do not affect the Directors or shareholders personally.

However, there are some exceptions to that rule. In some cases, the Courts can pierce the corporate veil and hold the Directors or shareholders liable for debts of the corporation. Those cases occur in very exceptional situations where the directors or shareholders have acted improperly or fraudulently to intentionally cause harm to the creditors.

The legal remedies

Legally, a corporation is a separate legal body and not the alter ego, or alternative personality, or the shareholders or directors. In other words, shareholders and Directors cannot use or misuse the corporate body as a shield to protect themselves from wrongful actions to defraud creditors of the corporation. If a shareholder or director has defrauded a creditor, there is a statutory remedy and a common law remedy.

Under section 242 of Alberta’s Business Corporations Act, a creditor can bring an action against the shareholders or directors of a corporation personally if it can be established with evidence that:

• The creditor had a reasonable expectation that their interests would be protected; and
• The shareholder/director violated that reasonable expectation oppressively, or with unfair prejudice or unfair disregard to the creditor’s interests.

Broadly speaking, the key test for establishing oppression is to show that the shareholder or director acted unfairly against the creditor of the corporation. In addition to oppression remedy, the common law also allows the Court to lift the corporate veil and hold the shareholder or director personally liable to the creditors of the corporation. This remedy is generally available where the responsible shareholder or director acts in a way to benefit themselves personally, and not in the interest of their corporation.

In some cases, both the remedies will be available where the shareholders or directors have acted dishonestly, wrongfully or improperly with a clear intention to defraud creditors. Generally, courts are reluctant to lift the corporate veil, unless it can be shown that the person expressly directed that a wrongful thing be done, or when the corporation is being used as a cover for a deliberate wrongful act.

Actions that may lead to personal liability

For example, a businessperson may set up a corporation, start a business and accrue substantial debts under the name of the corporation. Instead of paying back the creditors, the businessperson may incorporate a new corporation, transfer the assets and contracts of the original corporation to the new corporation, continue business under the new corporation and leave the original corporation without any assets to meet its liabilities.

This can be considered as an action of the businessperson calculated to defraud the creditors of the corporation by dishonestly incorporating a new corporation to avoid liability. In such a case, a creditor may be able to bring an action against the businessperson personally.

In another case (Wisser v CEM International Management Consultants Ltd, 2022 ABQB 414), the Alberta Court of Queen’s held directors of a corporation personally liable for damages for wrongful dismissal of an employee after they transferred the assets of the corporation, ceased running the corporation, and incorporated another corporation to do the exact same business.

In other words, shutting down a heavily indebted corporation and incorporating a fresh new corporation will not help avoid liability. On the contrary, the shareholders and directors may attract personal liability for such actions.

If a shareholder or director is responsible for such oppressive or unfair conduct leading to causing financial harm to a creditor, the creditor can initiate proceedings against the shareholder or director personally and against any new corporation that they have incorporated. The Court has the power to issue an injunction order to restrain the shareholder or director from engaging in the conduct complained off, freeze bank accounts where appropriate, and direct funds to be paid to an aggrieved creditor where applicable.

What Osuji & Smith Calgary Corporate Lawyers can do for you

A Calgary business lawyer can properly advise on whether the facts and circumstances are sufficiently serious to go after the shareholder or director of a corporate debtor. A lawyer may be able to advise you on alternatives or potential settlements to avoid litigation, if appropriate.

If you are a small business owner and have been defrauded or treated unfairly by another business and wish to consider your options for recovery of any amount owed to you, our team of experienced business lawyers and litigators at Osuji & Smith Lawyers can assist you. If you have are experiencing any difficulties with recovering payments owed to you, please do not hesitate to contact us for a consultation.

Author: Imtiaz Hafiz