Canada: Duties And Liabilities Of Directors And Officers

First presented at a Client D & O Seminar


Directors and officers, acting as a manager of a corporation, have a number of duties and responsibilities that they are required to carry out. These duties are largely set in place to protect the interests of shareholders and other individuals who are not shareholders but nevertheless have a stake in the corporation, such as creditors.1 While most of these duties were established at common law, the majority of Canadian jurisdictions have codified them.2 Often times, if these duties are not met directors and officers will be personally liable. A finding of liability will often result in remuneration to the corporation.

The following paper will outline the main duties that directors and officers have. Further the following article will examine the liability that will ensue for the breach of such duties.

Fiduciary Duty

Directors and officers owe a fiduciary duty to the corporation.3 This is a "standard of behavior" that is expected of a director and officer with regards to their dealings or interactions with the corporation.4 This duty can be found in section 122(1)(a) of the Canada Business Corporations Act ("CBCA"):5

122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation

This often entails that directors and officers refrain from placing their own interests before that of the corporation. Typically, where this duty is breached the director or officer gains a profit "at the expense of the corporation".6 As such, the main remedy provided by the courts is to ensure that the director or officer is held to account for his or her profits to the corporation.7

It is important to note that when a court is examining the actions of directors or officers they will often employ the "Business Judgement Rule". This refers to instances where the court acknowledges that they are not experts in business and instead the court will show deference to the corporation.8

Issues surrounding breaches of fiduciary duty often arise where: (a) the director/officer transacts with the corporation, (b) the director/officer takes opportunities away from the corporation, and (c) where the director/officer competes with the corporation. Each of these will be explored in turn.

(a) Transacting with the Corporation

This scenario is often seen in the situation where a director or officer sells goods or services to its corporation. As the seller of the goods, the director strives to sell its product for as much as it can. However, as the director of the corporation, that individual has an obligation to get the goods or services at the lowest possible price.9 Due to this inherent conflict, these transactions were traditionally considered voidable, regardless of whether the deal struck between the parties was a fair one or not.10

However, in an attempt to lax this universal prohibition, the CBCA has been modified to allow for certain transactions between the corporation and its directors or officers.11 In particular, these transactions are allowed where:

  1. the director or officer provides the corporation with written notice, which must be evidenced in the minutes of a directors meeting,
  2. the transaction must be approved by the shareholders or directors of the corporation, and
  3. the transaction has to be "fair and reasonable to the corporation".12 Where directors or officers are able to meet these three requirements the transaction is permissible.

In cases where these three requirements are not met, the CBCA offers an alternative saving provision. In particular, the contract can still be enforced if: (1) the interest of the director or officer was disclosed to the shareholders of the corporation in "sufficient detail", (2) the contract received approval by way of special resolution of the shareholders, and (3) that the contract was "reasonable for the corporation at the time it was approved".13

If these requirements are not met, then the director or officer has breached their fiduciary duty. As such, the court may either set aside the deal or require the individual to account to the corporation for his or her profits.14

It is important to note that the provisions in the articles or bylaws of the corporation "permit" these dealings are not effective [(OBCA s. 134(3), CBCA s. 122(3)].15 Further, the corporation or its directors are not allowed to set an "easier" standard for fiduciaries than the one found in the statute.16

(b) Taking Corporate Opportunities

Another scenario where issues surrounding fiduciary duty arise is where the director or officer takes a corporate opportunity away from the corporation. This generally occurs where the director or officer invests in a project or opportunity that the corporation also has an interest in.17 The court in Cook v Deeks held that a corporate opportunity "belongs" to a corporation where that corporation is "actively seeking an opportunity".18 In Canadian Aero Service Ltd. v O'Malley, the Supreme Court of Canada formulated a test to determine if seizing a corporate opportunity constitutes a breach of fiduciary duty.19 The first part of the test requires determining the closeness of the opportunity to the corporation.20

A list of non-exhaustive factors to consider in determining the proximity between a corporation and a particular opportunity include: (a) maturity of opportunity, (b) specificity of the opportunity, (c) significance of the opportunity, (d) whether the opportunity was private or public, and (e) whether the corporation rejected the opportunity.21 The second part of the test requires an examination of the relationship of the fiduciary to the opportunity.22 This involves looking at (a) the connection between the fiduciary's responsibilities and the opportunity, (b) whether the knowledge of the opportunity was acquired as a fiduciary, (c) whether the fiduciary used his or her role to get the opportunity, and (d) whether and when the opportunity was rejected by the corporation.23

Once the test has been applied to the facts at hand and if both the corporation and the fiduciary have a close relationship to the opportunity, then the appropriation of that opportunity by the fiduciary is likely to constitute a breach of duty.

(c) Competing with the Corporation

The fiduciary duty that directors and officers have to a corporation does not permit them to compete with the corporation.24 However, the fiduciary is able to resign from their positon and then compete. It is important to note that the director or officer cannot use his or her position as a fiduciary to obtain opportunities and then quit and capitalize on those opportunities.25 If the fiduciary duty competes with the corporation, a court will likely require that he or she pay over the profits earned from the competition back to the corporation.

Duty of Care

In addition to the fiduciary duty owed to the corporation, directors and officers also owe a duty of care. This duty is found in section 122(1)(b) of the CBCA:26

122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

There is some debate as to whether the duty of care is owed only to the corporation or to other stakeholders as well.27 However, the answer seems to be related to how the corporation was incorporated. In particular, if the corporation was incorporated under the Ontario Business Corporations Act ("OBCA") then the duty is owed only to the corporation.28 However, if the corporation was incorporated under the CBCA, the Supreme Court of Canada has held the duty of care is a general standard of behavior and it is owed to all the corporate stakeholders, such as creditor and shareholders of the corporation.29

The content of the duty of care owed by directors and officers includes a number of elements. First, the statutory duty requires that directors and officers have a minimum standard of competence.30 This entails a rudimentary knowledge of business.31 Second, to meet the duty of care, there is a degree of monitoring that is expected of directors and officers. This typically means that the director or officer has to keep himself or herself appraised of the general affairs of the corporation.32 This entails being familiar with the financial status of the corporation by way of reviewing the financial statements regularly.33

Unlike some of the other obligations of the directors and officers, the duty of care cannot be delegated.34 Further, the duty of care is an objective standard. However, it has a contextual (subjective) element due to the referral to "comparable circumstances".35 Finally, the standard of care is higher for directors who are also officers of the corporation.36

Liability for Unpaid Wages

In cases where the corporation becomes bankrupt or is involved in liquidation, directors are liable to its employees for up to six months of wages.37 However, the employee must be cognizant of a number of timelines. In particular, if the employer brings an action six months after the payments were required, then directors are not liable.38 In cases involving bankruptcy, the claim for unpaid wages has to be substantiated with six months of the bankruptcy.38 Finally, where the corporation is going through a liquidation or dissolution proceeding, the unpaid employer must prove his or her claim within 6 months of the commencement of proceedings. Moreover, a director's liability for unpaid wages expires two years after he or she is no longer a director.

Employees legally entitled to work in Canada are afforded protections under the Wage Earner Protection Program (WEPP) Act. This program provides payments of wages, vacation, severance, and termination pay that are owed to eligible workers, up to an amount equalling four weeks' of maximum insurance earnings under the Employment Insurance (EI) Act. 40

An employee that is terminated and is owed unpaid wages is required to file a proof of claim with the trustee or receiver as soon as possible after their employer has filed for bankruptcy or is subject to a receivership. In terms of the quantum of payments, WEPP payments to terminated employees are reduced by any amount paid to them after the date of bankruptcy or receiver. These payments are also subject to an offset (reduction) in the amount of 6.82% as required by the WEPP Regulations.41

When an employee applies for payments from WEPP, he or she agrees to allow the Government of Canada to subrogate their claim, up to the amount of the payment received from the Program. The Government will attempt to recover the amount it has paid under the program from the estate or property of the insolvent employer at the time the assets are distributed through the bankruptcy and receivership process.

Restrictions on the Use of Corporate Funds

There are a number of restrictions placed on directors with regards to the use of corporate funds. In particular, before a director can distribute money to the shareholders of the corporation the directors have to meet a number of requirements. Money is distributed to shareholders for a number of reasons such as: (a) payment of dividends, (b) share redemption or repurchase, and (c) even when paying shareholders for remedies (i.e. dissent and appraisal).42

Prior to any form of payment is made to shareholders, the directors must ensure that they meet two financial tests. First, the solvency test must be met. This ensures that the corporation is solvent at the time the payment is made. Meaning, the corporation is able to meet its liabilities as they come due.43 The second test the directors must meet is the capital impairment test. This test requires that that prior to any payment being made, the realizable value of a corporation's assets are at least equal to the sum of its liabilities.44 The rationale on these restrictions is that payment should not be made to shareholders where it would be prejudicial to the creditors of the corporation.

If payment is made to the shareholders without the director being satisfied, based on a reasonable belief standard, then the director will be personally liable to the creditors for that amount owed.45

Directors and officers have a number of duties as managers of the corporation. The main duties they have include: fiduciary duty, duty of care, they are responsible to a certain amount for employees unpaid wages and finally, there are a number of obligations they have with regards to the use of corporate funds. The major theme of these duties or obligations is balance the needs of the corporation with their own interests and to balance the interests of the shareholders as against the creditors of the corporation. The liability that ensues for breach of these duties is often in the form of remuneration which often takes the incentive to breach these duties away.


1 Anthony J VanDuzer, The Law of Partnerships & Corporations, 3rd ed (Toronto: Irwin Law Inc, 2009) at pp. 338-339.

2 Ibid at pp. 339..

3 Ibid.

4 Ibid at pp. 340.

5 Canada Business Corporations Act, RSC 1985, c C-44 at s. 122(1) (a). ["CBCA"].s

6 Supra note 1 at pp. 341.

7 Ibid.

8 Ibid at pp. 344.

9 Ibid at pp. 345.

10 Ibid.

11 Ibid at pp. 346.

12 Ibid at pp. 349-350.

13 Ibid at pp. 350-351.

14 Ibid at pp. 351.

15 Ibid.

16 Ibid.

17 Ibid at pp.352.

18 Ibid at pp. 353.

19 Ibid at pp. 356-357.

20 Ibid at pp. 356-360.

21 Ibid.

22 Ibid.

23 Ibid.

24 Ibid at pp. 362-363..

25 Ibid.

26 Supra note 5 at s. 122(1) (b).

27 Ibid at pp. 375.

28 Ibid.

29 Ibid.

30 Ibid at pp. 378.

31 Ibid at pp. 379.

32 Ibid.

33 Ibid.

34 Ibid at pp. 382.

35 Ibid at pp. 381.

36 Ibid at pp. 382.

37 Ibid at pp. 385.

38 Ibid.

39 Ibid.

40 Government of Canada, Wage Earner Protection Program (WEPP), (Labour Program)



42 Supra note 1 at pp. 386.

43 Ibid.

44 Ibid at pp 386-387.

45 Ibid at pp 387.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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