Why do people incorporate companies? One of the main reasons is that generally, if a company does business, no employee or officer of the corporation is personally liable for any act done within the scope of their duties on behalf of the corporation. Now there are some exceptions to that general rule that could result in personal liability. This blog outlines the duties and responsibilities of directors acting in a duly incorporated corporation.
Every director needs to be aware that, in Canada, there is a large body of statutory and common law which provides guidance regarding the standard of conduct expected from directors. Where directors fail to discharge these duties, this same body of law imposes personal liability for failing to meet those standards. Directors now owe expanded duties to the corporation they are a director of, to shareholders, employees, creditors, and other stakeholders. We are increasingly observing instances where directors are being held personally responsible in specific circumstances where the corporation fails to act or directors fail to provide proper oversight or fulfill their duties. Liability attaches under various statutes. To name a few : (i) Business Corporations Act (such as: Canada Business Corporations Act, the Ontario Business Corporations Act and the Québec Business Corporations Act), (ii) Federal and Provincial Tax Act, (iii) Employment Insurance act, Pension Plan Act (Federal and Provincial) and (iv) any acts with respect to the protection of the environment.
Fiduciary Duty and Duty of Care of a Director
The Canada Business Corporations Act (see S. 122), the Business Corporations Act (Ontario) (see S. 134), the Business Corporations Act (Québec) (see S. 119) and the Civil Code of Québec (see Art. 321 and following) impose two main duties on directors known respectively as the fiduciary duty, and the duty of care.
With respect to the fiduciary duties, directors are regarded as fiduciaries of their corporation and, as such, directors must ensure the corporation’s interests are paramount (see BCE Inc. v. 1976 Debenture holders, [2008] 3 S.C.R. 560, 2008 CSC 69). It is the fiduciary duty of the director to act honestly and in good faith, with a view to the best interests of the corporation and not only in the interests of the shareholders who nominated them. If a director fails to meet his or her fiduciary duty, courts will hold the director strictly liable.
The fiduciary duty prevents directors from pursuing, for their own benefit, business opportunities that belong to the corporation. The prohibition may extend even further, creating a duty whereby directors must bring to the attention of the corporation opportunities of which they become aware and in which the corporation may be interested.
The fiduciary duty also prevent directors to enter into engagements in which they have or can have a conflict of personal interest unless, directors who have an interest in a material contract or transaction with the corporation disclose the nature and extent of their interest in writing, request to have the conflict entered in the minutes of the board and such director shall not vote on any resolution to approve the contract or transaction. Finally, when a director is in conflict of interest, even when a director acts in good faith, the director’s gain of even an incidental advantage by a board decision may bear directly on his personal liability when an oppression remedy is claimed (see: Wilson v. Aalharayeri, 2017, SCC 39, [2017] 1 S.C.R. 1037).
The duty of care of a director imposes that such director exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The duty of care requires directors to take appropriate steps to make informed decisions. Directors must ensure they have the information needed in order to make decisions, assess the information critically and seek input from and test the recommendations of management and the corporation’s advisors and professionals. Of course in failing to fulfill such duty, a director may engage his or her direct liability. I will present other sources of liabilities for Directors in another blog shortly.
Should you have any further questions about director liability, I would be glad to provide you with further information.
