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DIRECTOR’S LIABILITY

Introduction

Having regard to the wide scope of authority exercised by a company’s management (its directors and senior management officers), a broad range of duties and liabilities are  vested on them by the applicable laws. Actually, those onerous responsibilities are a measure of the complete and unquestioned trust, which the company and its owners (the shareholders) repose on such personnel. Quite a few of those duties and responsibilities of directors and senior management officers are ordained by the Canada Business Corporation Act (“CBCA”), some more are from statutes of provinces and territories, and still others are taken from court decisions.

Caring and sharing

Under the CBCA’s provisions, the duty of care is regarded as one of the most important.  It says that in the course of their day to day work, the directors and officers should display the care and diligence which any sensible person brings to bear under similar conditions. It also says that such personnel should at all times act honestly, in good faith and in the best interests of the company as opposed to their own personal interests.

Keeping informed

“I had no clue, no idea…I didn’t know what was going on…” must not be the plea of a company’s directors and officers upon charged with liability. The CBCA unequivocally maintains that within the scope of their authority, each director and officer has, at all times, an obligation to remain informed about the company’s activities and to ensure that the company’s activities are legal and are in the best interests of the company. Nevertheless, under certain circumstances, directors have to depend on expert reports, like financial statements or legal opinions, and they are not liable provided it is established that they exercised the same degree of care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances.

Avoiding conflicts of interest

According to the CBCA there should not be any conflict of interest between the company and those of the directors or officers. It is mandatory for the directors and officers of the company to inform in writing any personal interest they may have in a contract which  the company agrees upon. In the event of a failure to make such a disclosure, the lapse could result in a court setting aside the contract upon application by the company or a shareholder.

Liabilities of a specific nature

It is also within the powers vested through the CBCA to impose certain specific liabilities on directors and officers of the company. There are circumstances when the company’s directors are liable for up to six months’ worth of unpaid wages to the employees of the company as well as their unpaid source deductions, and corporate income and excise taxes.

Keeping safe from liability

Considering the various manners by which the directors of a company could be held liable, there are ways to ensure that they are not harmed. That being said, methods  have been developed to protect directors and officers of companies from certain liabilities that could be imposed upon them.  These methods are as follows:

The company, for example, could:

  1. Purchase insurance to protect directors and officers against liabilities incurred in the exercise of their duties;
  2. Agree to compensate directors and officers for losses they may suffer or costs they may incur while carrying out their duties , except where the director or officer has failed to act honestly and in the corporation’s best interests; and
  3. Under certain circumstances, offer funds to directors and officers to help them pay the costs of defending themselves in legal actions brought against them. It is, however, a pre-condition of such monetary advances that in cases where directors or officers fail to defend themselves successfully, they are required to repay the company the money advanced.

Directors should at all times remain free to assess the best interests of the corporation and to act on this assessment. In view of this reason, directors may not agree among themselves in advance how they will act in a given situation.

It is, however, up to the shareholders to enter into an unanimous shareholders agreement to transfer some or all of a specific director’s responsibilities and powers to the shareholders. In such instances, as the power or powers have been transferred away from the director, that director cannot be held responsible for not exercising that/those specific power(s).

Incidentally, when it comes to corporate debt, though a shareholder’s liability for the company’s actions is limited (up to the amount they have vested), the directors of small companies (who are frequently also shareholders) are often required to stand as personal guarantors of the company’s debts to the lenders. They will then be liable for those debts if and when the company is not in a position to pay. Naturally, the other shareholders will not be so liable. Hence, there is some concern that such practices favour large companies but leave the small ones at considerable risk for their directors and shareholders.

Incorporating your business is one thing, limiting your true risk as a director and shareholder is another.  To truly understand and hedge your risk, call the lawyers at Levy Zavet PC.

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