So, you’re going to be a director of a corporation? Make sure you understand the liability that you may expose yourself to, personally.
Directors manage and supervise the business and affairs of a corporation. As part of this duty, a director has a fiduciary duty to act in the best interests of the corporation, and a duty of care to carry out his or her duties honestly, in good faith and with care, diligence and skill. Failure to do so may result in personal liability. In addition, directors may be held personally liable under a myriad of federal and provincial statutes – from the Securities Act (Ontario), to The Income Tax Act, to The Employment Standards Act (Ontario) – as well as under common law. This applies to all decisions and actions that directors make, or fail to make, if obligated to do so (i.e. failing to collect and remit GST or failure to pay employee wages and vacation pay).
What can you do?
- Ensure that you understand your obligations as a director under various statutes and under common law.
- Protect yourself. The corporation may obtain a policy of insurance that insures a director against certain liability. Coverage varies, so review the policy thoroughly.
- Protect yourself some more. Ask the corporation for an indemnity in your favour.
- Use business judgement. No matter what type of insurance or indemnities are in place, a director may not be fully protected if he or she does not act honestly, in good faith and in the best interests of the corporation or engages in unlawful activity. Insurance and indemnities typically include these exclusions as well.
So, what does it mean to use reasonable business judgement? Well, circumstances matter. Decisions should be reasonable, not perfect, and subsequent events will generally not cast doubt on previous decisions of a board. Selecting one of several reasonable options is generally appropriate. This means that directors must be informed. Obtaining regular and detailed management reports is paramount. If this isn’t enough, engage professionals and experts where required (think – accountants, engineers, lawyers, valuators, etc.).
If still in doubt, and officers of the corporation can’t provide enough information for you, as a director, to make an informed decision, resign.
This blog post merely scratches the surface of directors’ liability. And as you are probably thinking (again), circumstances matter. If you have questions, contact someone from our team.
From shareholder agreements and mergers and acquisitions to commercial lending and corporate law, John assists his clients with all their legal needs. His knack for analyzing and investigating complex legal issues and providing timely, practical solutions in plain language has won him the trust and loyalty of many business owners.