The global pandemic of the disease caused by a novel coronavirus, COVID-19, has caused unprecedented disruption to global supply chains and consumer demand and resulted in government-mandated restrictions to almost all businesses. Many companies, small and large, are facing insolvency and forced to make rapid decisions about what steps that they should take.
Directors of companies have certain obligations under both common law and the laws of Canada and the provinces. In addition are specific obligations and liabilities that arise when a company is insolvent or close to insolvency. This is intended as a general overview of such obligations under Canadian law and the laws of British Columbia and Alberta and does not constitute legal advice. Contact Lawson Lundell's insolvency and restructuring group for specific advice.
There are four important concepts related to director liability:
- The "fiduciary duty" directors owe to the company;
- The "duty of care" that directors must exercise;
- The statutory duty of directors to disclose information under corporate statutes; and
- Common liabilities imposed on directors through other statutes, both federal and provincial.
Most Canadian corporate statutes have a similar prescribed duty of directors and officers, along the following lines1 :
"A director or officer of a company, when exercising the powers and functions of a director or officer of the company, as the case may be, must
- act honestly and in good faith with a view to the best interests of the company; and
- exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.
The duties described in (a) are commonly referred to as the common law fiduciary duties of directors, while (b) is often equated with the common law duty of care.
1. The "Fiduciary Duty"
The Supreme Court of Canada has set out specific rules for directors to follow in order to fulfill their fiduciary duty.2 The fiduciary duty requires directors and officers to act honestly and in good faith in all dealings with the company. Directors must respect the trust and confidence that has been placed in them to manage the assets of the corporation in a manner consistent with the objects of the company. The Supreme Court of Canada set out the following principles related to the fiduciary duty of directors:
- directors must avoid conflicts of interest with the corporation;
- directors must avoid abusing their position to gain personal benefit;
- directors must maintain the confidentiality of information they acquire by virtue of their position; and
- directors must serve the company selflessly, honestly and loyally.
There are a number of circumstances in which a director can breach his or her fiduciary duties, but the overarching principle is that the directors must always act honestly and in good faith with a view to the best interests of the company.
The presence of the fiduciary duty does not mean that the directors must avoid all personal gain as a direct or indirect result of their involvement with the company. The fiduciary duty is only concerned with actions that may be in conflict with the interests of the company.
The fiduciary duty is only owed to the company. Although it is true that directors owe their fiduciary duties to the company and not to any other stakeholder, the practical reality is that in most situations, the "best interest of the corporation" will typically involve the "best interest of the shareholder".
Most provincial/territorial corporate statutes have similar sections setting out the fiduciary duty.3
2. The "Duty of Care"
As noted above, the common law "duty of care", which is generally incorporated into provincial corporate statutes, is to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.
This duty creates an objective standard to measure the director's care, diligence and skill against. The fiduciary duty involves the subjective motivation of the director, while the duty of care deals with the objective factual aspects of the circumstances surrounding the actions of the director.
Whether or not a director has breached the "duty of care" often comes down to an analysis of whether the business decisions made by the director were reasonable in light of all of the circumstances. Courts in Canada follow the "business judgment rule", which states that courts will not in hindsight second-guess business decisions which were reasonable and defensible at the time they were made, although they ended up being ultimately unsuccessful. In determining whether directors have acted in a manner that breached the duty of care, perfection is not demanded. There will be no breach of the duty of care as long as the directors can show that they acted prudently and on a reasonably informed basis.
1. In BC, this is found at section 142(1) of the BC Business Corporations Act, in Alberta at section 122(1) of the Alberta Business Corporations Act, in the NWT at s. 123(1) of the Yukon Business Corporations Act, and in Nunavut at s. 123(1) of the Nunavut Business Corporations Act.
2. Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68
3. BC: section 142(1)(a) of the BC Business Corporations Act; Alberta: section 122(1)(a) of the Alberta Business Corporations Act; Northwest Territories: section 123(1)(a) of the NWT Business Corporations Act; and Nunavut: section 123(1)(a) of the Nunavut Business Corporations Act.
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