Canada: The De Facto Director

Introduction

No matter what a person may call himself or herself, if he or she acts as a director, the person may be deemed to be a director and is called a de facto director. As such, the person may be on the hook together with the other directors for any liability that may arise from their role.

By definition in both the Canada Business Corporations Act ("CBCA") and the Ontario Business Corporations Act ("OBCA") (ss. 2(1) and 1(1), respectively), a director includes any person occupying or acting in the position of director, by whatever name it is called.

What is a De Facto Director?

De facto directors typically fall into one of the following three categories: (i) persons who are properly elected but lack some qualification under the relevant company law that disqualifies them from legally being directors; (ii) former directors whose term of office has expired but who have continued to act as directors; or (iii) those who simply assume the role of director without any pretense of legal qualification. It is the latter situation that this article addresses.

In determining whether an officer or an employee is a de facto director, the courts have considered, among other factors, whether outsiders would assume the person was a director, whether representations were made by the person, and whether the person participated in directorial acts, such as signing documents as a director or sitting on the board of directors.

One of the most often-cited definitions of a de facto director is in the case of Re Hydrodam (Corby) Ltd., [1994] 2 B.C.L.C. 180, where Millet J stated that:

A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director.

The person must have assumed the status and functions of a company director and exercised real influence in the corporate governance of the company. More specifically, the person must have participated in directing the affairs of the company on an equal footing with the other director(s) as part of the board and not in a subordinate role.

The Test for a De Facto Director

The test for de facto directors is one established by jurisprudence. While it is not statutorily mandated, this does not take away from the importance of understanding one's roles and responsibilities when the person is acting in such a manner that may deem the person to be a director of a corporation.

The test used to establish whether a person acted as a de facto director looks at whether the individual in question had influence and control over the management of the affairs of the corporation.

The Courts have recently had the opportunity to address the test for de facto directors. In the English case of Elsworth Ethanol v. Ensus, [2014] EWHC 99, the Court confirmed that there is no single test, but listed some of the non-exhaustive factors that should be considered in order to determine if an individual is a de facto director:

  1. Whether an individual (the putative de facto director) was acting with one or more "true directors" on an equal footing in directing the affairs of the corporation;
  2. Whether there was a holding out by the company of the individual as a director;
  3. Whether the individual used the title of director; and
  4. Whether the individual was part of the corporate governing structure, being the system by which the company is directed and controlled.

The Court emphasized in this case that the first factor is particularly important, that is, whether the individual acted on equal footing to manage the affairs of the corporation. However, the Court also found that if it is unclear whether the person is a de facto director, the benefit of the doubt should be given. It was held that directorship should not be inferred unless there is clear evidence that the individual had assumed the role.

Deeming Statutory Provision

As noted above, corporate statutes define a director as "a person occupying the position of director of a corporation by whatever name called." While there is no statutory provision that dictates when an individual will be held to be a de facto director, it is evident from this definition that no matter what name an individual may give to his or her position within a corporation, if he or she acts as a director, he or she will be deemed to be one.

There is one other provision that deems an individual to have assumed that role. This provision can be found in s. 115(4) of the OBCA and s. 109(4) of the CBCA. These provisions provide that if all the directors of a corporation have resigned or have been removed from office, the law will infer that "any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director."

For example, in the case of Gerald Grupp v. R., 2014 TCC 184, the Tax Court of Canada found that the appellant remained a de facto director until the business closed in 2010, even though he had resigned from the role in 1995. There were no other directors in the corporation and no one was appointed to replace the appellant after his resignation. Furthermore, he remained active in the business, managed the affairs of the corporation, and did not inform third parties that he was no longer a director.

Interestingly, the term "director" is not defined as such in the taxation statutes but, as noted, the Courts find a way to make a de facto director liable.

Liabilities of a De Facto Director

If an individual is found to be a de facto director, he or she will be jointly and individually liable with the other directors for any liability that may arise while the de facto director acted in such a role.

However, liabilities of de facto directors can also extend to more than one corporation such as the parent companies and their subsidiaries. In this context, the Courts will look to examine whether corporate formalities between the parent and subsidiary have been properly observed and whether the chain of actual decision-making matches the legal decision-making chain in the corporate structure. Where corporate formalities are not properly observed, a director or de facto director could be liable for both the parent's and subsidiary's liabilities.

The impact of de facto directors' liability is widespread and one could be held personally liable for matters such as employee wages, withholding taxes that were not remitted to the government, improperly paid dividends, environmental liability facing the corporation, product liability and outstanding fines.

Conclusion

Individuals that get involved in the management and affairs of a corporation should be very cautious about the level of their involvement if they do not wish to assume the possible liability connected with being a director of the corporation. While in most situations there may not be any liability that arises from acting as a director, or being deemed to act as such, it is important to keep in mind that an individual's actions may result in them being deemed a de facto director. As such, all individuals that act in a manner which may deem them to be directors should ensure that they get adequately informed about the affairs of the corporation so as to properly protect themselves against possible liability.

Originally published by The Directors' Manual, May 2015.

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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Authors
Ira Stuchberry
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