One of the primary benefits of incorporating a business is that corporations are deemed to have a separate legal existence from the persons that own and control the business.  This will generally provide the shareholders and directors of the corporation with limited personal liability from the obligations that arise from the business’s activities.  Because the corporate entity itself is responsible for the liabilities of the business, the shareholders and directors generally have reduced personal risk to their own personal assets from business activities. While a corporation’s separate legal identity can be an important advantage of incorporating a business, legislatures have recognized that some actions by corporations can have serious and detrimental impacts on third parties that require holding those that control the corporation personally responsible for certain corporate actions.  Examples of these types of statutory provisions include director liability for particular types of repurchases of company shares under the  Saskatchewan Business Corporations Act (SBCA), director liability for conducting transactions for property sold at less than fair market value in a year preceding a bankruptcy under the Bankruptcy and Insolvency Act, director liability for occupational health and safety violations under the Saskatchewan Occupational Health and Safety Act, and director liability for a corporation’s failure to withhold and pay tax under the Income Tax Act (ITA).  Directors can also be held criminally liable in circumstances such as failing to file required income tax forms for a tax year under the ITA. A potential issue can arise for these types of statutory provisions when the power to control a corporation is taken away from the directors of the corporation and transferred to a corporation’s shareholders by way of a Unanimous Shareholder Agreement (USA).   Under s 140 of the SBCA, a corporation’s shareholders can assume the rights, powers and duties of the directors to manage the business and affairs of the corporation.  When a USA is used to remove power and control from the hands of directors, liability is shifted to the shareholders that assume power and control.  The potential statutory liabilities of the corporation’s directors are transferred to the shareholders by way of the USA to the same extent that the directors’ powers were restricted by the USA. Transferring director liability to shareholders under a USA could defeat the statutory director liability provisions that are aimed at holding the controlling minds of a corporation personally liable for the consequences of certain corporate decisions.  This could be achieved by a USA that transfers the directors’ powers and liabilities away from the directors to a separate limited liability corporation or to other persons with a smaller pool of personal assets at risk than the directors.    The effect of such a transfer could be detrimental to those third party persons and entities that the statutory director liability provisions were intended to protect by reducing the potential pool of personal assets available that would be subject to statutory liability. In the Quebec Court of Appeal case of Allard v Myhill, 2012 QCCA 2024 (CanLII), the Court of Appeal considered the circumstances of a corporation incorporated under the Canada Business Corporations Act (CBCA) that enacted a USA to transfer power away for the corporation’s directors at a time a financial duress for the corporation.   The three defendants in the case were former directors of the company that had resigned as directors during this time and were not replaced, leaving the company with no directors in office.  A USA removed all powers from the directors and placed these powers in an insolvent corporation.    The company subsequently went bankrupt and the three former directors were sued under s 119 of the CBCA, which is a statutory provision that holds directors of a corporation personally liable for unpaid employee wages. The Quebec Court of Appeal found that the liability attributed under s 119 of the CBCA is a personal obligation on the part of those who hold the ultimate decision-making power within a corporation. In situations where the directors of the corporation do not exercise control, or have the power or right to exercise control over the actions of the corporation, the Court  found that it is those individuals who do have genuine control over the corporation (the de facto directors) who should be held liable.   The Court found that a person that assumed the role of a de facto director should not be released from any liability resulting from his or her failure to implement protective measures for his or her employees simply because a USA exists that extinguishes directors’ liability. The Court ultimately decided that the three former directors remained de facto directors of the company and should be held liable for the unpaid employee wages under s 119 of the CBCA. Allard v Myhill illustrates that the separate legal existence of corporations from the persons that own and control the business is not absolute and that there are circumstances where the courts will find individuals personally liable for the actions and inactions of a corporation.  Those that make decisions for the corporation should be aware that they may find themselves liable for certain corporate actions. About the author: David is a student at law practicing in the Saskatoon office.  He has an interest in corporate and business law. About McKercher LLP: One of Saskatchewan’s oldest, largest law firms with offices in Saskatoon and Regina. Our deep roots and client-first philosophy have made us a top ranked firm by Canadian Lawyer magazine (2011, 2013). Expertise, experience and capacity provide innovative solutions for our clients’ diverse legal issues and complex business transactions.