Canada: Director’s Liability - The Long Arm Of The Law (And How To Loosen The Grip)

Many entrepreneurial businesses are organized as corporations. As a result, the owner of a business is often also a director of a corporation. The obvious reason for becoming an owner and a director is to retain control of your business, in terms of long range planning and the day-to-day operation of the business. However, along with the control that comes with being a director, is exposure to legal liability from various sources. A lawsuit against the former directors of the Canadian Commercial Bank involving many millions of dollars was recently settled. Directors' liability is a very real concern. In this edition of The Entrepreneur, we will examine a few of the potential sources of legal liability to which directors are exposed, and some practical ways to protect yourself from such liability.

The Standard of Care for Directors

Both federal and provincial business corporations legislation provide for the standard of behaviour which directors must meet when exercising their duties as directors. A director who fails to meet this standard will be liable to the corporation for any damages suffered by the corporation as a result. For example, the Business Corporations Act (Alberta) provides that "every director ... in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation, and shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". This contains two requirements: a "good faith" requirement and a "standard of care" requirement. This standard of care can only be met by regular attendance at directors' meetings and by paying careful attention to the corporation's affairs. A director or officer of a corporation must comply with the applicable legislation and also with the articles, by-laws and any unanimous shareholder agreement of the corporation. No provision in a contract or in the corporation's articles, by-laws or resolutions relieves a director or officer from the duty to act in accordance with the required standard of care. Although it may appear unlikely that your closely held corporation would sue you because you are a director and perhaps the controlling force behind the corpora-tion, in situations where bankruptcy trustees or receivers or other interested parties (such as banks or other creditors) become involved in a corporation, legal actions can be brought by those parties on behalf of the corporation, thus exposing you as a director to liability. Therefore, it is critical that the director conducts himself prudently in all matters relating to the corporation, even if he or she is the sole director and shareholder of the corporation.

The standard of care required of directors is probably becoming even more stringent. In a number of recent cases the courts appeared to examine the business merits of decisions taken by boards of directors in respect of takeover bids for their corporations. In some cases, the courts made the directors personally liable to the shareholders because the directors did not make sufficient enquiries as to the value of the corporations' shares. Since such cases, the cost of directors' liability insurance has risen dramatically. These cases illustrate the willingness of courts to impose personal liability on directors.

Directors may also be liable for a breach of the good faith requirement. Such liability may exist not only in relation to the corporation or its shareholders, but also to parties with whom the corporation deals. For example, if a director decides that the corporation should not perform a particular contract and this decision is made by the director on the basis of his own interest, instead of on the basis of the best interests of the corporation, then not only can the corporation be liable to the other party for a breach of contract, but the director may be personally liable to that other party for causing the corporation to breach the contract. Directors must base their decisions on the corporation's interests, not on their own interests.

Director's Liability Under Business Corporations Legislation

Business corporations legislation also makes directors personally liable in various ways. For example, the Business Corporations Act (Alberta) makes the directors of a corporation jointly and severally liable to the corporation's employees for all debts owing by the corporation to those employees, to a maximum of six months wages for each employee. Thus as a director you will want to ensure that employees' wages are always paid promptly out of the corporation's funds. The Alberta Act makes directors personally liable to restore to the corporation amounts paid by the corporation for share repurchases or redemptions, or amounts paid by the corporation as dividends, in circumstances where the corporation could not meet the financial tests prescribed by the Act. As a director authorizing such corporate proceedings you should ensure that those corporate financial tests can be met.

Other Areas of Director's Liability

There are a number of specific federal and provincial laws which make directors liable for things which the corporation should have done. For example, the Income Tax Act (Canada) makes the directors of a corporation personally liable for the failure of the corporation to withhold certain taxes from employees' paycheques and remit the deductions to Revenue Canada. If a corporation fails to deduct unemployment insurance premiums from its employees' wages, then the Unemployment Insurance Act (Canada) makes the directors of the corporation personally liable for those amounts which the corporation should have deducted and remitted to the federal government for unemployment insurance premiums. The Canada Pension Plan Act has a similar provision with respect to the deduction and remittance of Canada Pension Plan contributions. Because of this personal exposure of directors to Revenue Canada for income tax, UIC and CPP deductions, it is worth-while for directors to ensure that the corporation is making the proper deductions when paying salaries, wages and commissions to employees. The Excise Tax Act makes directors liable to Revenue Canada for Goods and Services Tax which the corporation ought to have collected and remitted to Revenue Canada. As you are aware, this GST arises on a daily basis for most corporations. These are just examples. There are all kinds of other specific laws imposing liability on directors, but they are too numerous to mention here.

Disclosure of Interests in Contracts

Business corporations legislation requires disclosure by a director of any interest in a material contract. A director is liable to restore to the corporation any profits that the director makes as a result of contracts entered into between the corporation and any party in which the director has a personal interest. This liability can be avoided if the director has disclosed this personal interest and abstained from voting as a director of the corporation in respect of that particular transaction. If you as a director are in such a position make sure you disclose your personal interest and abstain from the vote. This is related to the good faith requirement mentioned above.

Director's Liability Insurance

To protect yourself as a director against potential liability you may wish to consider obtaining director's liability insurance. However, you may decide that the cost of such insurance is too high to justify obtaining it. The insurance industry is concerned not only with the increased likelihood of liability for directors' conduct and the large damage awards involved, but also with the legal costs that may be involved in defending a suit. Your insurance agent or broker can give you advice in this area.

Avoidance of Liability

The Alberta Business Corporations Act states that a director who is present at a meeting of directors is deemed to have consented to resolutions passed or actions taken unless (a) he requests that his dissent be entered in the minutes, (b) he sends his written dissent to the secretary of the meeting before the meeting is adjourned, (c) he sends his dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned, or (d) he otherwise proves that he did not consent to the resolution or action. A director who votes for or consents to a resolution or action is not entitled to dissent. If you think a particular corporate action should not be taken, then express your dissent at the directors' meeting and have that dissent recorded.

A director is not liable (except for liability for wages) if he relies on (a) financial statements of the corporation presented to him by an officer of the corporation or in a written report of the auditor of the corporation which fairly reflect the financial condition of the corporation, or (b) an opinion or report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him. It is no defence to say that you were uninformed or did not have the time to keep up with the corporation's affairs. As a director, you are obligated to make yourself informed, even if you require expert reports or opinions.


The foregoing is provided to you for the purpose of highlighting a few of the relevant legal issues relating to directors' liability. There are a number of other ways in which a director can become personally liable to the corporation or third parties, including its shareholders. These legal issues may have serious practical consequences for you as a director. By consulting your legal advisors you may find ways in which you can minimize your exposure to such personal liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions