Apart from the diligent discharge of their duties, there are of number of ways that directors and officers can manage the risks associated with their personal liability.
A unanimous shareholder agreement can be used to shift some or all of the directorial responsibilities and liabilities to the shareholders of a corporation. Trust accounts and letters of credits can also be set up to ensure that the corporation does not default on payment of sums for which the directors and officers are personally liable. As well, resignation can protect directors and officers from liability for any events that occur subsequent to departure.
Corporations are also permitted to indemnify their directors and officers for various actions taken on behalf of the corporation, subject to certain criteria. Generally, the director or officer must have acted honestly and in good faith with a view to the best interests of the corporation. In the case of a criminal or administrative action or proceeding that is enforced by a fine, the director or officer must have had reasonable grounds for believing that his or her conduct was lawful. Indemnification can also be prohibited in any circumstances where the court determines it is unenforceable for reasons of public policy. Although indemnities provide significant protection to directors and officers, it is important to remember that, in the context of insolvency, an indemnity is only as good as the corporation’s ability to honour it (and a director or officer will generally rank as an unsecured creditor).
Corporations may also obtain liability insurance for a director or officer against any liability incurred, although some statutes prohibit obtaining insurance covering events where a director or officer did not act honestly and in good faith with a view to the best interests of the corporation. While insurance provides important protection, there are many exclusions from typical insurance policies, including:
- a. actions involving fraud, conspiracy, criminal acts, human rights violations or other intentional acts;
- b. the obtaining of a personal profit or advantage to which the recipient was not legally entitled;
- c. claims arising out of statutory liabilities;
- d. claims for fines or penalties imposed by law, punitive or exemplary damages; and
- e. matters which the law may determine to be uninsurable.
For some corporations, the premiums for such policies may be prohibitive.
Additional posts from the blog
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In an interesting decision, the Human Rights Tribunal of Ontario has ruled that an employer is not liable for discriminatory and harassing texts sent by a rogue employee to another of its workers.
On April 8, 2014, Canada’s government introduced Bill S-4, the Digital Privacy Act, in the Senate. Bill S-4 is the federal government’s latest attempt to reform the federal Personal Information Protection and Electronic Documents Act (“PIPEDA”). It would be a mistake to say that it is largely recycled from the government’s last attempt to reform PIPEDA in 2011 through Bill C-12, which died on the order paper. Here’s what’s different, what’s been dropped, and what seems to be largely the same. Caveat: This is a first read!