Director & Officer Liability: Where are the risks?

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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.

David Lyons is a Business & Real Estate Lawyer practicing in the London office of Lerners LLP. He may be reached at dylons@lerners.ca or 519-672-4131.