Can Director’s be Held Personally Liable for a Corporation’s Actions?
The directors of a corporation are elected by the corporation’s shareholders and are required to manage or supervise the management of the business and affairs of the corporation. This power of management can only be restricted, in whole or in part, by an unanimous Shareholder Agreement (USA).
There are two types of obligation imposed on directors in relation to their management of the corporation’s business and its affairs:
- A fiduciary duty to act honestly, in good faith and with a view to the best interest of the corporation; and
- A duty of care and diligence and to act as a reasonably prudent person in comparable circumstances.
In order to be a director of a corporation the director must be:
- An individual;
- At least 18years old;
- Of sound mind; and
- Not bankrupt.
As of August 1, 2007, at least 25% percent of the directors of every OBCA corporation, other than a “non-resident corporation”, are to be resident Canadians. Where an OBCA corporation has less than four directors, at least one director has to be a Canadian resident.
A Canadian resident is define in s.1(1) of the OBCA as an individual who is a Canadian citizen ordinarily resident in Canada, a Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons, or a permanent resident within the meaning of the Immigration and Refugee Protection Act and ordinarily resident in Canada.
Transaction of business
Directors act by passing resolutions, which is done either at a meeting of the board of directors or by way of written resolution signed by all of the directors. A resolution passed by the latter method is as valid as if it had been passed at a meeting of directors or committee of directors.
Section 137 of OBCA and s.125 of the CBCA authorize the directors to fix the remuneration of the directors, officers, and employees of the corporation. The directors’ discretion in this regard may be limited by provisions in the Articles of Incorporation, by-laws, or a USA and of course, by the director’s fiduciary duty and duty of care.
Generally speaking, a director is merely a high-ranking employee of a corporation. Its compensation is by way of salary; whereas dividends (distribution of profit) is reserved for shareholders.
Ceasing to be a director
Subsection 121(1) of the OBCA and s.108(1) of the CBCA provide that a person ceases to be a director of a corporation if he or she resigns, dies, becomes disqualified, or is removed. A director’s written resignation becomes effective at the time it is received by the corporation if the resignation is to be effective immediately or at the time specified in the resignation whichever is later.
A director’s resignation cannot be effective prior to the time it is sent to the corporation.
Until the first meeting of shareholders, a first director named in the corporation’s Articles may not resign unless, at the time the resignation is to become effective, a successor is elected or appointed.
Under section 131 of the OBCA, directors of a corporation are jointly and severally liable to the employees of the corporation for all debts not exceeding six months’ wages and up to 12 months’ vacancies pay.
As well, directors may be held personally liable for certain taxes – where the corporation has failed to remit source deductions (employee income taxes, employment insurance and Canada pension plan contributions) under s.227(1) of the Income Tax Act or where the corporation has failed to remit HST collected under s.323 of the Excise Tax Act.
Directors may be held personally liable for damages arising as a result of various actions or inaction by the directors, including but not limited to acts that are illegal which would breach their fiduciary or statutory duties under the act. Additionally, directors may be held personally liable if they permit the corporation to act outside of its authority and for torts committed individually or on behalf of the corporation.
Under section 256(2) of the OBCA every person, including the directors of the corporation, who makes or assist in misrepresenting prospectuses or other public company disclosure documents is guilty of an offence and on conviction is liable to a fine of not more than $2,000.00 or to imprisonment for a term of not more than one year or to both of if such a person is a body corporate, to a fine of not more than $25,000.00.
Finally, directors can be personally liable where they engage in fraud using the corporation. This is known as piercing the corporate veil.
It is important to note that liability is not limited to legal directors. The law has imported the concept of a ‘de facto director’ into determining liability. A ‘de jure director’ is a director in accordance with the law who has been officially appointed to this position. In contradistinction, a ‘de factor director’ is a director ‘in fact’ which occurs where one acts in the capacity of a director even though they have not been formally appointed to that position. A ‘de factor director’ can be held labile under tax law and other civil statutes.
Indemnification of Directors
Several Canadian corporation statutes provide the a corporation may indemnify the director to the extent of their liability and obtain appropriate insurance to protect directors and former directors against personal liabilities incurred by reasons of them acting as directors. These allowances are subject to the fact that the director has acted reasonably under his/her duty of care and consistently with his or her fiduciary duties and on ground believing his or her actions were lawful and in the best interest of the corporation.
We Can Help
Given the liability associated with acting as a director of a corporation, it is crucial that you hire a qualified and experienced lawyer to help you navigate your rights and responsibilities under corporate law.
Interested to know more about your director’s liability? We’re Here to Help™
Ghazal Hamedani, Hons BA, LLB | Associate Lawyer
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.