Can I be personally liable if the company I sold later goes bankrupt?

Selling a company does not by itself make you liable for what it owes afterwards, and it does not end every claim either. Three things decide your position: what you held (shares, a directorship, a guarantee), what happened while you held it, and how the sale was documented.

Shareholders are generally not liable

Both the Canada Business Corporations Act and Ontario’s Business Corporations Act say shareholders are not, as shareholders, liable for the corporation’s liabilities, apart from exceptions each Act lists. The company’s later debts are therefore not yours merely because you used to own the shares.

Where your time as a director can reach you

Directors can be personally liable for specific amounts that arose while they held office. The Income Tax Act and the Excise Tax Act make the directors at the time the amount was due jointly and severally liable, together with the corporation, for amounts it failed to deduct, withhold or remit under listed provisions (such as source deductions) and for unremitted GST/HST net tax, subject to conditions. A director is not liable who exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. Both Business Corporations Acts make directors liable to employees, up to a limit and subject to conditions, for wages tied to their term: for services performed while they were directors under the federal Act, and that became payable while they were directors under Ontario’s. Under the Income Tax Act no action to recover may be commenced, and under the Excise Tax Act no assessment may be made, more than two years after the person last ceased to be a director. The CRA says changes to a corporation need to be updated with the incorporating authority first and then reported to the CRA, so that both have the correct directors’ names on file.

Payments to owners before the bankruptcy

The Bankruptcy and Insolvency Act lets a court, on a trustee’s application, inquire into dividends, share redemptions and certain payments to directors and officers made in the period beginning one year before the initial bankruptcy event and ending on the date of the bankruptcy. If the company was insolvent or was made insolvent, and the directors lacked reasonable grounds to believe otherwise, the court may give judgment against the directors, subject to the Act’s exceptions, and in some cases against a shareholder related to a director or to the corporation. The Act adds further conditions for the payments to directors and officers. A trustee can also challenge a transfer at undervalue to someone not dealing at arm’s length with the company, over a longer look-back period in some cases.

Guarantees and indemnities

Treadstone Law, an Ontario firm, notes in the context of lease assignments that a personal guarantee is a contract between the guarantor and the landlord, separate from the lease, and generally survives unless it is specifically dealt with. If you gave other guarantees, such as one for a loan, check what each says about release. Ask the creditor for a written release at closing, and check how long the warranties and indemnities in your own sale agreement last.