Directors and officers of a corporation are subject to various duties including certain federal and provincial statutory duties that apply generally to carrying on a business and under the statute governing the corporation. In a number of instances, a director or an officer can be held personally liable for failing to fulfill these duties.
Officers face many of the same potential liabilities as directors. Whether an employee is an officer will depend not on the employee’s stated position or title, but on the degree of actual power and control that the employee has over the corporation.
Directors must act honestly and in good faith with a view to the best interests of the corporation. They also have to act loyally to the corporation and avoid situations where the director’s duty to the corporation conflicts with his or her self-interest. Acting in compliance, a director must disclose his or her personal interest in a material contract with the corporation, refrain from voting on any resolution that presents a conflict of interest for the director and refrain from using corporate information or corporate property for personal benefit and/ or advantage. If a director fails to accord with any of these requirements, the director may be found to have breached his or her fiduciary duty and held accountable to the corporation for any gain earned as a result of the breach.
Duty of Care
Duty of care is set out in the relevant corporate statute as a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. As part of fulfilling this duty, the director must apply his or her knowledge, experience, skills and best judgment when exercising powers, performing functions and making decisions as a director. This duty may however vary depending on the competence expected of a particular director based on the professional experience of that director.
Some Other Duties may include:
- Duties relating to wages and pensions: Under the various statutes governing employment standards, directors can be held liable to the corporation’s employees for unpaid wages and vacation pay earned by the employees during the individual’s directorship. Moreover, where a corporation commits an offence under provincial pension benefits legislation, a director may be held personally liable if the director participated in the offence.
- Tax-related duties: A director may be liable for employee source deductions, non-resident withholding taxes, excise taxes, and certain other provincial taxes that the corporation fails to withhold, deduct or remit, as required.
- Duties relating to publicly traded corporations: A director of a publicly traded corporation must ensure that the corporation has complied with the various filing, disclosure and reporting requirements, and restrictions arising from relevant provincial securities statutes. Failing to do so in such circumstances, directors may be fined, imprisoned or found liable for damages for the corporation’s offences.
- Other duties: Directors may be subject to a number of other duties and liabilities, including those arising from bankruptcy and insolvency legislation, pension benefits legislation, environmental offences and legislation governing financial institutions. The penalties for breaching these duties may consist of fines, imprisonment or liability for payment of damages.
Protections and Defences for Directors and Officers
Directors and officers can limit their personal liability in the following ways:
- Corporate Indemnity: in certain circumstances, corporations may indemnify their directors and officers for actions taken on the corporation’s behalf.
- Shareholders Agreement: by drafting a unanimous shareholders agreement allows the director’s liability and scope to be limited and transfers liability from the directors to the shareholders of the corporation.
- Insurance: directors and officers can gain further protection by obtaining liability insurance to protect against certain types of losses and claims. A corporation may purchase and maintain insurance for the benefit of directors and officers for certain liabilities incurred in such capacity. It should be noted that, insurance typically does not cover cases such as fraud, conspiracy, criminal behaviour and human rights violations.
- Resignation: to avoid participation, a director or an officer can resign to prevent liability arising from future events. However, this does not exonerate the director or officer from liability arising from events that occurred during his or her tenure.
- Due Diligence: Generally, such a defence may protect a director from liability if it can be proven that the director took all reasonable measurements to avoid the event giving rise to liability, or that the director had a reasonable belief in a mistaken set of facts that, if true, would have made the director’s conduct reasonable in the circumstances.
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question please consult with our lawyer.