Why would a director want run-off insurance after a share sale?

In a share sale the buyer takes over the company, and the seller may step down as director. Stepping down does not end every exposure. Several federal statutes allow claims against a former director for a limited time after they stop being a director. Those periods are one reason a departing director may ask about insurance that continues after closing. This page covers the rules; it does not describe any insurance product, because the policy wording is what counts.

Unpaid wages under the CBCA

For companies incorporated under the Canada Business Corporations Act, section 119(1) makes directors jointly and severally liable to employees for debts not exceeding six months’ wages for services performed while they were directors. Under section 119(3), a director who is not sued for such a debt while a director, or within two years after ceasing to be one, is not liable under that section. Under section 119(2), a director is not liable unless the corporation was sued for the debt within six months after it became due and execution was returned unsatisfied in whole or in part, or a claim for the debt was proved within the six months that section allows after liquidation and dissolution proceedings, dissolution, an assignment or a bankruptcy order.

Unremitted source deductions and HST

Under section 227.1 of the Income Tax Act, where a corporation failed to deduct, withhold, remit or pay certain amounts, the directors at the time it was required to do so are jointly and severally liable with it for that amount and related interest or penalties. Under subsection 227.1(2), a director is not liable unless a certificate for the amount was registered in the Federal Court and execution was returned unsatisfied in whole or in part, or a claim for it was proved within the six months that subsection allows in liquidation, dissolution or bankruptcy. A director is also not liable where they exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. Proceedings must start within two years after the director last ceased to be a director. Under section 323 of the Excise Tax Act, if a corporation fails to remit net tax as required under subsection 228(2) or (2.3), or to pay back certain net tax refunds as section 230.1 requires, its directors at the time are jointly and severally liable with it, subject to parallel conditions in subsection 323(2). A director is not liable where they exercised the same degree of care, diligence and skill, and an assessment cannot be made more than two years after the person last ceased to be a director.

What the CBCA says about insurance

Section 124(6) of the CBCA says a corporation may purchase and maintain insurance for the benefit of a director or officer, or a former one, against liability incurred in that capacity, or in a similar capacity of another entity at the corporation’s request. The word is “may”. What a policy covers is a matter for its wording, so ask to read it and check what the purchase agreement says. For a company under provincial law, ask your lawyer which statute applies.

Questions to raise before closing

• Does the company carry insurance for directors, and does it continue after you resign?
• Does the purchase agreement say who is responsible for pre-closing tax and payroll remittances?
• Has the company filed and remitted what it owes up to the closing date?