If you are serving as a director or officer of a private corporation, you should bear in mind your duties and your potential liabilities.

Summary of directors' and officers' duties

Directors and officers have two main duties: a duty of loyalty to the corporation and a duty of care.

The duty of loyalty imposes positive obligations and a responsibility to avoid certain situations. Directors and officers must act honestly, in good faith, and in the best interests of the corporation. They cannot put personal interests ahead of the interests of the corporation. For example, by profiting personally from any dealings of the corporation or intercepting an economic opportunity of the corporation.

They also cannot use their positions at the corporation to develop or promote a competing business. When conflicts of interest arise, they must be disclosed promptly and fully. This duty of loyalty is not just limited to officers and directors but extends to all employees.

The duty of care requires directors and officers to exercise the same skill, diligence and care that a reasonably prudent person would exercise in similar circumstances. This is an objective standard. It may not be sufficient that a director or officer simply does his or her best.

Directors' and officers' liabilities

Directors and officers can be personally liable for their decisions. Such liability is imposed by corporate and other laws.

For example, the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA) provide that directors may be liable if they approve the following transactions while the corporation is insolvent (or if it would become insolvent after any of the following):

  • acquires its own shares or warrants (subject to exceptions);
  • repays loans;
  • redeems shares;
  • pays a commission on the purchase of corporation shares;
  • pays a dividend; or
  • pays under an indemnity contrary to the statute.

If such action(s) occur, then those directors who voted for the action(s) will be jointly and severally liable for amounts paid and not otherwise recovered by the corporation.

Directors are also jointly and severally liable to employees of the corporation for up to 6 months of unpaid wages and 12 months of accrued vacation pay, if the corporation cannot satisfy a legal judgment for such amounts (i.e. because the corporation is bankrupt).

Directors can also be personally liable if the corporation does not deduct and remit income tax, employment insurance, or Canada Pension Plan contributions from employees' salaries, or if the corporation fails to remit Harmonized Sales Tax. With regard to liability for unremitted taxes, a due diligence defence does exist.

Avoiding liability

To mitigate against the risk of personal liability, directors and officers should:

1. Review the articles and by-laws of the corporation.

2. Ensure that the personal indemnification agreement with the corporation is up-to-date.

3. Ensure that the corporation maintains sufficient insurance for directors and officers.

4. Insist on legal opinions where appropriate.

5. Insist on written professional opinions from specialists on whose advice the board or management is expected to act.

In particular, directors should also:

6. Attend all meetings.

7. Insist on receiving, before each meeting, all documents and reports on which there will be a vote.

8. Read all of the materials prior to each meeting.

9. Review with care all minutes of meetings and ensure the minutes clearly demonstrate the decision making process of the directors.

10. Insist on the recording of any disclosure made, or any refraining from voting or dissenting.

11. Send a letter to the corporation if your disclosure, your refraining from voting, or your dissent is not recorded in the minutes.

12. Keep your own notes of impressions of the meetings, and retain all minutes and other important documents.

13. Vote against any payment if there is any question of insolvency or breach of employment law.

14. If you are concerned that payments are not being made, make enquiries of management as to the status of payments for which you may be liable, either in writing or at board meetings (if you enquire at a meeting, have the answers recorded in the minutes).

While officers do not usually meet and vote with the same formality as a board of directors, officers can and should take similar safeguards when performing their duties.

Directors and officers play a vital role in the success of a company. With their responsibilities come significant potential liabilities. However, if directors and officers are active and vigilant in carrying out their duties they can reduce their potential personal liability and make an enduring contribution to the business.

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.