Liabilities of Directors

LIABILITIES OF DIRECTORS

The role of director of a corporation has several prerequisites. A director must be:

1. An individual (not a corporation);
2. At least 18 years of age;
3. Of sound mind; and,
4. Not bankrupt.

Beyond the prerequisites, there are duties and liabilities that focus on protecting the interests of shareholders of the corporation.

The Business Corporations Act (Ontario) (the “OBCA”) requires that “directors [ ] manage or supervise the management of the business and affairs of the corporation” (OBCA, s.115(1)). From these requirements stem certain liabilities imposed by statute and by common law.

Statutory Liabilities

Statutory liability is imposed on a director of a corporation for:

1. Unpaid employee wages and vacation pay – directors are “jointly and severally liable to employees of the corporation for all debts not exceeding six months’ wages” and up to 12 months’ vacation (OBCA, s. 131);
2. Failure to remit source deductions for employee income taxes – this also extends to Employment Insurance and Canada Pension Plan contributions; and,
3. Misrepresentations in prospectuses or other public company disclosure documents – this directly stems from a director’s duty to act honestly and in good faith when exercising their powers and duties, in addition to keeping the best interests of the corporation in mind (OBCA, s. 134(1)). For more information on the duties of directors of a corporation, please see our blog “Directors’ Duties”: https://amklaw.ca/blog/directors-duties/

 Common Law Liabilities

A director can also be held personally liable for damages that arise as a result of various actions, or inaction. This includes, but is not limited to:

1. Illegal acts – this includes a breach of the aforementioned duty to act honestly and in good faith, or a breach of duties under the OBCA;
2. Permitting the corporation to act outside of its authority; and,
3. Torts – this includes torts committed as an individual, and on behalf of the corporation.

Indemnification

A corporation, either, may indemnify a director, must indemnify a director or is prohibited from indemnifying a director.

Corporations may indemnify directors against liabilities incurred by reason of them acting as director, provided the director acted consistently with his or her fiduciary duties, and/or had reasonable grounds for believing his or her conduct was lawful (OBCA, s.136(1)).

Corporations must indemnify a director for costs incurred from the defence of a civil, criminal or administrative proceeding to which the director was subject due to association with the corporation when:

1. the director fulfilled their fiduciary duty to the corporation,
2. the director had reasonable grounds for believing the conduct was lawful; and,
3. the court finds that the director did not improperly (OBCA, s.136(1)).

Indemnification is prohibited when the director failed to full their fiduciary duty, and/or did not have reasonable grounds for believing the conduct was lawful (OBCA, s.136(3)).

Take-Away

A director of a corporation assumes many responsibilities when taking the role.  As such, a director must take proactive steps in learning the potential liabilities that are associated with this position, including:

1. Knowing and complying with the appropriate statute, and a corporation’s organizational documents – directors must familiarize themselves with the OBCA, in addition to the articles, by-laws and any existing shareholder agreements of the corporation (OBCA, s. 134(2)); and,
2. Carefully selecting knowledgeable and competent officers and consultants – directors should document any advice received in the course of their duties, and evidence any corresponding reliance on said advice; this can substantiate an argument that they in good faith relied upon financial statements and reports prepared when making decisions that affect the corporation.

Contact Us

If you wish to learn more about the liabilities imposed on directors both by statute and by common law, contact our office today for your free initial consultation.

We look forward to hearing from you.

Disclaimer: This article is for informational purposes only and does not provide legal advice, nor does it create a solicitor-client relationship with you or any other reader.