In Ontario, businesses are incorporated for many reasons including shielding its shareholders from personal liabilities.

The Ontario Business Corporations Act's oppression remedy is one way in which debtors may pierce the corporate veil. This article discusses another difficulty for shareholders. Canadian courts have found shareholders' personally liable when said shareholder failed to "bring home" to the debtor that he is negotiating on behalf of his corporation. But I incorporated..... that is what Darren Convery must have thought when the judge found him personally liable for a company debt. Why do people incorporate companies? One of the main reasons is that generally, if a company does business, no employee or officer of the corporation is personally liable for any act done within the scope of their duties on behalf of the corporation. Now there are some exceptions to that general rule that could result in personal liability even if the business is incorporated. Lets take one example where a careless mistake may prove very costly. Darren Convery had a nursery and garden business called Maple Lane Nurseries and Landscape". After some time he and his wife incorporated the business. For some time Darren had been doing business with Bernard Kobes of Kobes Nurseries Inc. Darren told Kobes he planned to incorporate. Business for Darren went bad and he owed Kobes $78,000.00 for supplies provided. Darren said these supplies were purchased after the incorporation so the company owes the money. Even though Darren told Kobes about the incorporation, Darren failed to document it on his checks, letterhead and contracts. Kobes Nurseries Inc. sued Darren Personally. Since Darren told Kobes about the incorporation Darren should not be personally liable - right? Thats not what Justice Lauwers of the Ontario Superior Court of Justice thought. Lets review the decision of the court in Kobes Nurseries Inc. v. Convery. After the incorporation Darren still sent Kobes Nurseries Inc. checks and faxes from Maple Lane Nurseries and Landscape. The documents and checks made no mention of the company name or the fact that the business was incorporated. The court found that while Darren told his suppliers that he planned to incorporate, that does not mean they understood that he did incorporate. In the words of the judge, I find that Mr. Convery did not bring home to the plaintiff the fact that the status under which he was carrying on business had changed from that of sole proprietorship to a corporation. The case law suggests that if a person wants to escape personal liability on a contract he has a duty to make it clear to the person with whom he is contracting that he is negotiating on behalf of his corporation and not in his personal capacity. Given the obligations set out in sections 6(2) of the Business Names Act and 10(10) of the Business Corporations Act, the court found Darren personally liable. This short review of the caselaw should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If there is a lesson to be learned from this story it is that failure to pay attention to details can be costly. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action. ABOUT THE AUTHOR: Charles B. Wagner Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

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Personal liability for directors: HMRC tightens the noose

Blake Lapthorn Dan Geddes and Theo Anderton United Kingdom September 22 2011

There has been a great deal of commentary recently on the proposed reform to the procedures governing pre-pack administrations. One of the main objections to pre-packs that the proposed reform is intended to address is the perception that the directors of a failed business are able to "dump" the business's debt and then to start the same business all over again, debt-free, under a new company. In reality, it will not always be this simple for directors. Quite apart from any personal guarantees and other personal liabilities that they may have in relation to the failed business, directors are now receiving Personal Liability Notices from HM Revenue & Customs (HMRC) on an increasingly regular basis. what is a Personal Liability Notice (PLN)? A PLN, when sent to a director, makes him or her personally liable for the company's unpaid PAYE deductions and National Insurance contributions. However, HMRC may only issue a PLN if it appears to them that the failure of the company to pay its tax liabilities is "attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers" of the company. Directors may appeal a PLN on the basis that: 1. the sum claimed in the PLN is not covered by a relevant provision (see below) 2. the failure to pay the tax liability was not attributable to any fraud or neglect on the part of the director in question 3. the director was not an officer of the company at the time of the alleged fraud or neglect, or 4. the opinion formed by HMRC when deciding to issue the PLN was unreasonable.

The power to issue PLNs has been available to HMRC since 1992 (the power derives from Section 121C of the Social Security Administration Act 1992) but we understand that PLNs are now being used more widely than before. Accordingly, directors who are accused of acting fraudulently or negligently by a liquidator, an administrator or creditors generally should be aware of their possible liability to HMRC, as well as any liability he or she may have to the company itself (or its liquidator or administrator). This may well mean that directors may become unwilling to settle claims threatened against them by liquidators or administrators unless they can also be sure that they will not subsequently be issued with a PLN. BIBLIOGRAPHY. Books. Iyer, L V V, Guide to Company Directors Powers, Rights, Duties & Liabilities, 2nd Edn, Wadhwa & Company, Nagpur, 2003. Singh, Avtar, Company Law, 14th Edn, Eastern Book Company, Lucknow, 2005. Statutes. Companies Act, 1956