Types of Corporate Debts and Obligations

Types of corporate debt include:

Trade Creditors: your basic accounts payable from suppliers etc. to fund daily operations.

Canada Revenue Agency obligations: GST, source deductions, and corporate tax
Provincial tax.

WCB or Worker’s Compensation Board.

Employee obligations: holiday pay, and possible severance pay in lieu of notice.

Contract dispute issues: breach of contract, product deficiency/returns obligations.

Secured debt: these can include lines of credit, overdrafts from banking or other institutions . A General Security Agreement secures corporation’s assets as security in case of default. This means that if the terms of the debt or breached, company’s assets would be liquidated.

Directors’ liabilities: As a director of the limited corporation some debts automatically follow and become personally payable by directors. These director obligations include payroll/source deductions, GST/HST, some portion of employee wages and holiday pay.

Personal obligations of shareholders and directors:

Often in small or medium business, a creditor may require personal guarantees of the owners of the company. This is often true with banks who require shareholders (and often their spouses) to sign personal guarantees for the business debt.  So, if a company stops operating and is not able to pay the corporate debt, then the guarantors will have to pay personally.   Personal guarantees are joint and several with the corporation.

If upon review of the assets and debts of the corporation, that is, if there is sufficient value in the assets above any secured claims or priority charges, then a formal corporate bankruptcy may be the best option to ensure a fair and orderly distribution of funds to the creditors.

Company Closed – but debts remain – who is responsible?

A company will still be considered a legal entity if it files its Annual Corporate return with the Registrar of Companies.  Even if there are assets remaining.  However, in British Columbia, if after 2 years of non-filing, any company will be struck from the registry.  If a company is struck, it ceases to exist legally. (This varies by province). In the meantime, creditors can try to sue the company if they have not been paid, but with no assets remaining, there is no benefit to them of suing.

Personal Guarantees

However, creditors can go after directors and others for specific kinds of debts. As mentioned above. banks and creditors often require that personal guarantees from principles of the company.  A personal guarantee results in someone else also being responsible for the corporate debts. (the “guarantor”) The nature of guarantee is outlined in agreement that was signed.

Director Liability

As well, by legislation Director or Officer of a limited corporation are automatically held responsible for some corporate debts.   These specific types of obligations and the individual amounts vary from province to province, but can include such items as:
 

• CRA trust claims (employee remittance)
• HST/GST
• Employee wages
• Provincial Tax
• WCB (Workers Compensation)
• Personal guarantees