Anonymised, illustrative composite. The vendor’s counsel said the buyer’s nominees had picked up six months of unpaid wages on appointment. They had not, and the reason is four words in the middle of the subsection.
At a glance
A metal fabrication business with plants in Ontario and Quebec was sold on a share basis for $9,150,000, with $900,000 of the price held back against indemnity claims. The company was federally incorporated. Two of the buyer’s people were appointed to the board on closing; the three vendor-side directors resigned the same day.
Eleven days later the buyer’s controller finished reconciling the payroll clearing account and found something the quality of earnings work had not: the company had been paying its hourly staff late, and in three of the five pay periods before closing it had paid only part of what it owed. The shortfall was $286,000 across 41 employees.
The vendor’s counsel made a plausible argument: directors are personally liable for up to six months of unpaid wages, the buyer’s nominees are now the directors, so they are on the hook for $286,000 — and a holdback claim for the same money would be the buyer suing the vendor over the buyer’s own directors’ problem.
The argument depends on reading the liability as attaching to the office. It does not. It attaches to a period.
Section 119(1) of the Canada Business Corporations Act reads: “Directors of a corporation are jointly and severally, or solidarily, liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.”
The operative words are the last seven. The wages caught are wages for services performed while they are such directors. A director appointed on 14 May is not liable for wages earned by work done in March, however unpaid those wages still are on the day of the appointment. Nothing is inherited. What the incoming directors acquired was exposure running forward from their own appointment, and only that.
The six-month figure is a cap on quantum, per employee — “all debts not exceeding six months wages payable to each such employee” — not a six-month look-back window. Reading it as a look-back is the commonest way this subsection gets misapplied, and it is what makes the arrears of a departing board look like they follow the seat.
There is a second gate before anyone pays anything. Section 119(2) sets three conditions precedent, and at least one has to be satisfied: the corporation has been sued and “the corporation has been sued for the debt within six months after it has become due and execution has been returned unsatisfied in whole or in part”; or liquidation and dissolution proceedings have started, or the corporation has been dissolved, and the claim has been proved within six months; or there has been an assignment or bankruptcy order under the Bankruptcy and Insolvency Act and the claim has been proved within six months. A solvent corporation that pays its arrears produces no director liability at all, whoever sits on the board.
The reconciliation split cleanly by pay period. Of the $286,000, $234,000 related to services performed before the closing date and $52,000 to services performed in the eleven days between the buyer’s nominees joining the board and the arrears being cleared in full.
So the incoming directors’ theoretical s.119 exposure was $52,000, not $286,000 — and it was theoretical, because the company paid, no employee sued, and no s.119(2) condition was ever met. The outgoing directors’ theoretical exposure was $234,000, and that one does not expire on resignation: s.119(3) provides that “A director, unless sued for a debt referred to in subsection (1) while a director or within two years after ceasing to be a director, is not liable under this section.” The vendor’s three nominees were exposed for two years from the day they resigned.
Three things were done, none of them expensive. The arrears were paid in full out of the post-closing funds flow within eleven days, removing the s.119(2) trigger before it could arise. The vendor gave a specific indemnity for the pre-closing wage period — a straightforward ask once it was clear that the vendor’s own former directors carried that period. And on the next two deals in the programme the purchaser’s nominees were appointed the day after identified arrears were cleared, which costs nothing and removes the overlap entirely.
The buyer also asked whether the directors could recover from each other. They can: s.119(6) provides that “A director who has satisfied a claim under this section is entitled to contribution from the other directors who were liable for the claim.” The contribution right runs among directors who were liable for that claim — which, given the period split, meant the two boards were never contributors to each other in the first place.
Had the buyer accepted the vendor’s framing, the negotiation would have been about whether $286,000 came out of a $900,000 holdback. The real number in issue was $234,000, and it was in issue against the vendor’s people, not the buyer’s. On a holdback that size, conceding the point would have consumed a quarter of the buyer’s entire post-closing protection over a liability it never had.
The tell is a sentence that names an office rather than a period. Any time an adviser says a director “inherits” a statutory liability on appointment, the next question is which words in the provision fix the unit — the person, the period, or the debt. Section 119 fixes it by period; the parallel tax provision fixes it by moment of default; a third statute may fix it another way again. They are not interchangeable, and reasoning from one to another is how a $52,000 exposure gets quoted as $286,000.
The contrast worth keeping in view is section 227.1 of the Income Tax Act, which is a different regime with a different unit. It makes liable “the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount” — the moment of the default, not the period of the services. It carries a due-diligence defence that s.119 does not: a director is not liable “where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances”. And its limitation period runs two years from the day the director last ceased to be a director, rather than requiring suit while a director or within two years of ceasing. Unremitted source deductions are the subject of a separate case file and should not be reasoned about through s.119.
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