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At law, a corporation is a separate legal entity with its own
assets and liabilities. In broad terms, the duty of a director is
to be responsible for the management and governance of that
corporation. The interplay between the liabilities of the
corporation and how those may translate into potential liability
for its directors and officers is a common topic for discussion
with business lawyers and a common source of concern for
clients.
Directors must carry out their duties to a standard prescribed
by law. The law in question depends primarily on the jurisdiction
which governs the corporation. A director of a business corporation
in Ontario will be required to carry out their duties to the
standard prescribed by Ontario's Business Corporations
Act and the common law. At the time of writing, the statutory
standard is contained at section 134 of the Act and includes duties
to act honestly, in good faith and with a view to the best
interests of the corporation; to exercise the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances; and to comply with the Act, regulations, articles,
by-laws and any unanimous shareholders' agreement. These
standards have been interpreted and applied through a body of case
law on the issue. When a director's actions or inaction depart
from the standard, there is the potential for liability both to the
shareholders of a corporation along with other parties such as
creditors.
The Business Corporations Act also imposes the
potential for personal liability on directors in a number of
situations such as for certain payments and other actions
prohibited by the Act when the corporation is insolvent, for
employee's wages, and for personal gains resulting from a
failure to disclose conflicts of interest in contracts.
In addition to the general duties above, there are specific laws
and regulations that impose liability on the directors and/or
officers of a corporation. In fact, there are over 200 statutes
that have the potential to give rise to personal liability for a
director. This liability can be in the form of civil liability or,
in some cases, quasi-criminal prosecution. Some of these areas of
law include:
taxation laws that impose joint and several liability for the
remittance of certain taxes or other government withholdings;
employment, workplace safety and labour laws that impose
liability for certain types of unpaid claims of employees in the
event of an insolvency or for other types of employee claims;
and
environmental protection laws that impose liability for
breaches of certain prescribed standards.
Many, but not all, of these laws have a due diligence defence
available to directors that require proactive steps on the part of
a director to avoid liability. When in doubt, ask questions and
seek legal advice before a problem arises. As well, there are a
number of steps an individual can and should take prior to becoming
a director or officer to minimize their risk and the personal
liability arising from the role (see, for example, the informative
article
DIRECTOR & OFFICER LIABILITY: 8 Tips for Protecting Your
Personal Assets by David Street and Jane Southren).
Consult Lerners for more information on this important area of
law.
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.
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