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Legal Guide

In Canada, directors and officers of corporations may be subject to personal liability while acting within their corporate capacity. Such personal liability is intended to ensure that directors are accountable to certain third parties and are responsible for the failure of a corporation to meet its legal obligations.

Director liability

General duties under common law and corporations statutes

The common law and corporate statutes each impose several duties on directors that may affect personal liability.

  1. A.     Fiduciary duty

Directors are considered “fiduciaries” of the corporations they serve. This principle requires directors to act honestly and in good faith with a view to the best interests of the corporation, and to put the corporation’s interests ahead of their own. It is important to note that case law indicates that there may be instances where the best interests of the corporation and its shareholders diverge, such as where a corporation is nearing insolvency or in the context of a change in control and that in such cases, it is the duty of the directors and officers to act in the best interests of the corporation over those of the shareholders (as well as the creditors).

A director’s fiduciary duty also requires that he or she avoid conflicts of interest. Typical conflicts arise where a director holds a personal interest in a material contract with the corporation or gains an opportunity because of information learned in the course of his/her position. Generally, directors are required to disclose all such conflicts and refrain from voting on any related resolution. Failure to disclose a conflict may make a director liable for any gain earned from the conflicting interest. Directors are also, generally, prohibited from taking advantage of a business opportunity that the corporation either had or was seeking. Taking advantage of such a corporate opportunity may attract personal liability even where a director resigns prior to engaging in the opportunity and the corporation suffers no demonstrable loss from the breach of fiduciary duty.

  1. B.     Duty of care

Directors are required to provide a minimum standard of care in carrying out their responsibilities. This minimum standard is generally described in the corporation statutes as exercising “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” This standard, however, varies from province to province. As well, there are a number of provincial corporation statutes that do not define the minimum standard of care. In these provinces, the minimum standard is governed by the common law which requires that a director exhibit the degree of care and skill that might be expected of a person with the knowledge and experience of the director in question. In Quebec, the Business Corporations Act requires directors to “act with prudence and diligence, honesty and loyalty and in the interests of the corporation”.

Courts generally apply the “business judgment rule” in evaluating whether the minimum standard has been applied. The rule focuses on the process applied in coming to a decision, rather than on the results of such a decision. The “reasonableness” of the actions of the directors in the process of reaching their decision is an important factor considered by the courts. Courts in Canada have suggested directors may need to consider the interests of all stakeholders (including employees, creditors and communities), in addition to the shareholders, in their carrying out this duty. Inside directors (individuals who hold other positions within management) may also be held to a higher standard of care than outside or independent directors since they are generally better informed about the corporation’s affairs.

  1. C.     Delegation and reliance

While directors may delegate authority and responsibility to management, special committees and, in certain cases, independent advisors; all work must be done under the general supervision of the directors. Directors are entitled to rely on the information provided by such parties, provided the director has verified that such person(s) is qualified, and provided the director makes the proper inquiries when the work product is presented to them. However, directors are statutorily prevented from delegating certain responsibilities.

Directors should keep in mind that they are liable for any acts or omissions of the board of directors carried out in their absence, since they are deemed to have consented, unless they register their dissent according to the procedures set out in the governing corporate statute.

Specific statutory duties

When assessing the potential liabilities which may attach to the directors of a corporation, it is important to review the entire regulatory regime applicable to the business that the corporation carries on. The following are examples of the provincial and federal statutes that impose personal liability on directors while acting in their corporate capacity. Depending on the business of the corporation, there may be others.

  1. A.     Environmental Legislation

Directors may be held liable for environmental offenses, for causing or permitting environmental damage or for environmental offenses committed by the companies they serve. Directors can be charged both as principals under environmental legislation, for their personal involvement in the activity constituting the offense, and as indirect actors, on the basis that control over the corporation and its employees had been improperly exercised. Directors face both common law and statutory liability for environmental offences. Common law liability can arise out of, among other things, nuisance, negligence, trespass and strict liability actions. Statutory liability can arise under the federal Canadian Environmental Protection Act (CEPA) or any of a number of provincial statutes.

Under CEPA, a director may incur liability for offenses committed by the corporation that the director “directed, authorized, assented to, acquiesced in or participated in”. Provincial environmental legislation often goes beyond CEPA’s provisions and imposes a stricter standard. In Ontario, for example, directors and officers have a statutory duty to “take all reasonable care” to prevent the corporation from committing environmental offenses. The penalties imposed under environmental statutes are particularly onerous. In Ontario, the fines can reach as high as $4 million per day on which the offense occurs on a first conviction and/or imprisonment for up to five years less a day. In fact, a recent tribunal decision suggests that environmental legislation is now sufficiently broad in Ontario that former directors and officers of bankrupt companies can be found liable to pay clean-up costs for contaminated sites, even where the contamination occurred before their tenure. Note as well that directors may also face civil liability for damages suffered by third parties as a result of an environmental offense committed by a corporation. The defence of due diligence (discussed below) may be available to directors in respect of certain environmental liabilities.

  1. B.     Employee Related Legislation
Directors are exposed to a number of employee-related liabilities. Directors can be held liable for unpaid employee wages and vacation pay and for a corporation’s failure to remit source deductions such as Canada Pension Plan and Employment Insurance on behalf of its employees. In practice, a director’s liability for wages is only relevant in cases of corporate insolvency, as an employee must first attempt to satisfy his/her claim out of the assets of the corporation. Directors can only be held liable where they were a director when the employee services in question were performed.
Directors can also be held personally liable where a corporation commits an offense under provincial pension benefits legislation, provided the director participated in the commission of the offense. An example would be failure by a corporation to submit payment to a pension fund or insurance company on behalf of employees. Directors can also be held liable where they have not directly participated in the commission of the offense. However, in such a situation they are entitled to a due diligence defence (discussed below).

Directors can also be held personally liable for a corporation’s failure to comply with provincial occupational health and safety legislation requirements.

  1. C.     Tax Legislation

Personal liability arises for directors as a result of a variety of offenses under federal and provincial tax statutes, including. Most commonly, directors are responsible for a corporation’s failure to remit any prescribed amounts under the federal Income Tax Act (Canada) and Excise Tax Act (Canada) (covering the Goods and Services Tax) which is considered to be held in trust for the Crown. There is also a general liability section in the Income Tax Act (Canada) which applies when a corporation has committed an offense. Under that provision, a director “who directed, authorized, assented to, acquiesced in, or participated in commission of the offense” is considered a party to it. Both the Income Tax Act and the Excise Tax Act provide a due diligence defence (discussed below).

Duties specific to public corporations

Directors of public corporations are subject to additional potential liabilities not present in private corporations. Where a corporation has issued securities to the public, directors are responsible for ensuring that their actions are consistent with the duties listed above, as well as the requirements of provincial securities regulation.

Directors can be held liable for incorrect information (written or oral) distributed by the corporation to the public; for failure to comply with continuous disclosure requirements or for misrepresentations in such documents.

The provincial securities regimes have each  extended this liability for directors (and officers) of public companies to investors purchasing securities in the secondary market. According to these rules, such investors need not prove reliance on a misrepresentation to make a claim.

Directors can also be held personally liable for insider trading (trading in securities of their corporation with knowledge of material information that is not generally disclosed) where they pass on such undisclosed material information to another party who trades with knowledge of the information, or even where they acquiesce to another director’s trading offenses.

The number of regulations that allow directors and officers to be found personally liable for decisions and actions of a corporation has increased significantly in recent years. 
Though Canadian securities regulators have not been as eager as their US counterparts to adopt new regulations exposing directors and officers to increased liability (see Sarbanes-Oxley); directors should still be aware that changes to Canadian securities regulation, and an increased sensitivity to corporate malfeasance, do impose a higher standard of care and potentially expose them to liabilities that did not previously exist.

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