Personal Liability of Officers and Directors Under Ontario’s Construction Legislation
A common misconception in the construction industry is that officers and directors of a corporation cannot be held personally liable for the financial indiscretions of the corporation, when in fact they can. Using a corporation to conduct business in the construction industry is not a foolproof way to avoid personal liability as a result of the ‘trust remedy’.
The previous Construction Lien Act and the new Construction Act both impose liability on every officer and director of a corporation, and any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities, if they assent to, or acquiesce in, conduct that he or she knows or reasonably ought to know, amounts to breach of trust by the corporation.
The trust provisions are designed to keep project funds within the “construction pyramid”. A breach of trust is committed where project funds are used to pay any kind of overhead expense (rent, insurance, lease payments, general wages, etc.) or where the funds are misappropriated to another project, before the labour and materials in connection with the specific project are paid in full.
Breach of Trust Provisions
Essentially, the breach of trust provisions in the legislation prevent the use of a shell corporation or resignation from corporate office as a device for avoiding trust obligations under the Act, by providing for the personal liability of a corporation’s directing minds for a breach of trust by that corporation.
The provisions further allow the court to “pierce the corporate veil” by permitting the court to disregard the form of any transaction and the separate corporate existence of any participant. The corporate veil normally affords good protection against personal liability but can be successfully lifted in the construction industry and this is something that all officers and directors need to be aware of.
For more information on the trust provisions of Ontario’s Construction Legislation, or for any questions relating to Construction Law, contact the experts in Brown Beattie O’Donovan’s Construction Law & Liens Group.