Due to commonplace public misinformation, it can come as a surprise when I inform my clients that the corporation for which they are a director and/or officer of is not an absolute shield against personal liability. Several federal and provincial statutes impose personal monetary liability upon corporate principals, and some go so far as to impose quasi-criminal liability, which can result in fines and/or imprisonment.
In Ontario, the statutory role of directors is to “manage or supervise the management of the business and affairs of the corporation.” To this end, there are several pieces of provincial and federal legislation that place liability directly upon the directors (and in some cases officers) for the actions of the corporation that they govern. This article will briefly discuss some of those liabilities, highlight the pieces of legislation they arise from, and offer some personal protective measures directors can take.
Common law (law created by courts, and not codified in legislation) also places fiduciary obligations upon directors to act in the best interests of the corporation, which includes a prohibition on diverting or usurping opportunities from the corporation for their personal gain. In certain circumstances (not covered herein), directors may also be personally liable to third parties (i.e. creditors and stakeholders of the corporation) for misrepresentations, even if made unknowingly or negligently.
This article is not an exhaustive discussion of all instances in which the directors of a corporation may encounter personal liability. This article is for information purposes only and should NOT be considered legal advice. Contact a lawyer for a full understanding or application of the principles below to a specific circumstance that may be applicable to you.
Business Corporations Act (Ontario) R.S.O. 1990, c B.16 (the “OBCA”)
Shares Issued at Under Value
As a rule of thumb, a director is liable to the corporation for any improper issuance of shares for consideration below market value.
Section 130 (1) states that directors that vote or consent to a resolution authorizing the issuance of shares for consideration other than money (i.e. past services rendered to the corporation) are jointly and severally liable to the corporation for any amount of consideration received that is less than the fair equivalent of money that the corporation would have received if the shares had been issued for money.
Improper Payments and Indemnities
Section 130 (2) states that directors who authorize or consent to a resolution with respect to the following are jointly and severally liable to the corporation:
- a purchase, redemption or other acquisition of shares; the payment of a dividend; a payment to a dissenting shareholder under s. 185; or a payment to an oppressed shareholder under subsection 248 (3) (f) and (g), if there are reasonable grounds to believe that the corporation is or, after the payment, would be unable to pay its liabilities as they become due, or after the payment, the realizable value of the corporation’s assets would be less than the aggregate of its liabilities and its stated capital of all share classes;
- the authorization of the corporation to pay an unreasonable commission to a person for procuring or agreeing to procure purchasers for shares from the corporation or from any other person; and
- indemnifying a former or present director or officer of the corporation that did not act honestly and in good faith with a view to the best interests of the corporation, or if the matter is a criminal or administrative enforcement of a monetary penalty, the corporation shall not indemnify that individual unless the individual had reasonable grounds to believe that their actions were lawful.
To an extent, the directors of a corporation can become liable to personally pay employee wages.
Section 131 states that the directors of a corporation are jointly and severally liable to the employees of a corporation for six months of wages that become payable while they are a director and for twelve months of accrued vacation pay (there are limitations to this liability, such as the employee must first pursue the corporation for the debt, as long as the corporation has not entered into bankruptcy proceedings).
Disclosure of a Conflict of Interest
Section 132 demands that a director or officer of a corporation that is a party to a material contract or transaction or is a director or officer of another entity with a material interest in a material contract or transaction must disclose that interest to the corporation, if a director, at the first meeting of directors when the proposed contract or transaction is being considered, or if an officer, forthwith after becoming aware of the proposed contract or transaction. Furthermore, a director shall not attend at or vote at any meeting where the said material contract or transaction is being discussed.
Duty to Act Honestly and in Good Faith
Section 134 places a standard of care upon every officer and director of a corporation to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This includes a duty to comply with the OBCA, the regulations thereunder, the corporation’s articles, by-laws and any unanimous shareholder agreement.
Knowledge of Errors in Financial Statements
Section 153 (2) obliges a director or officer to forthwith notify the audit committee and the auditor or the former auditor of any error or misstatement of which the director or officer is aware in the financial statements if the error or misstatement in all the circumstances appears to be significant.
Income Tax Act, R.S.C. 1985, c 1 (5th Supp)
Section 227.1 places broad liability upon directors, jointly and severally, with respect to a failure to deduct, withhold, remit or pay an amount of tax for a taxation year to pay that amount and any interest or penalties thereon. These amounts include, but are not limited to:
- source deductions (income tax withholdings, employment insurance contributions, Canada Pension Plan contributions, etc.) that become due upon salaries, wages, pension benefits and retiring allowances paid to employees;
- payments to non-residents of Canada that are subject to withholding taxes; and
- net HST collected on behalf of the Canada Revenue Agency (the “CRA”) (the responsibility to collect and remit HST arises from the Excise Tax Act, R.S.C. 1985, c E-15).
Before the CRA can assess directors for the liabilities of the corporation, the CRA must demonstrate that it is unable to collect the amounts from the corporation.
Directors should also demand that management of the corporation obtain a clearance certificate before liquidating or distributing the assets of the corporation. In these circumstances, a director may become liable for any unpaid tax liabilities to the extent of the value of the distributed assets.
Directors may also be held liable if a corporation fails to deliver a return for a taxation year.
Occupational Health and Safety Act, R.S.O. 1990, c O.1 (the “OHSA”)
The OHSA casts a wide net of obligations over directors and officers with respect to workers’ (as defined by the OHSA) health, safety and other well-being rights.
Section 32 requires every officer and director of a corporation to take all reasonable care to ensure that the corporation complies with the Act and regulations as well as with any orders and requirements of Ministry of Labour inspectors, Directors and the Minister. Principal points in the OHSA include:
- instructing, informing and supervising workers to protect their health and safety – ss. 25(2)(a);
- appointing competent persons as supervisors – ss. 25(2)(c);
- not employing or permitting persons, who are under the prescribed age for the employer’s workplace to be in or near the workplace – ss. 25(2)(f) and (g);
- taking every precaution reasonable in the circumstances for the protection of a worker – ss. 25(2)(h);
- posting in the workplace a copy of the OHSA, as well as explanatory material prepared by the Ministry of Labour that outlines the rights, responsibilities and duties of workers. This material must be in English and the majority language in the workplace – ss. 25(2)(i)
- in workplaces in which more than five workers are regularly employed, preparing a written occupational health and safety policy, reviewing that policy at least once a year and setting up and maintaining a program to implement it – ss. 25(2)(j);
- posting a copy of the occupational health and safety policy in the workplace, where workers will be most likely to see it – ss. 25 (2)(k);
- preparing policies with respect to workplace violence and workplace harassment and reviewing them at least once a year – ss. 32.0.1(1); and
- regardless of how many workers they employ, developing programs supporting workplace harassment and workplace violence policies and including measures and procedures for workers to report incidents of workplace harassment and workplace violence, and setting out how the employer will investigate and deal with incidents or complaints.
Several other statutes that impose liability upon directors and officers, include but are not limited to:
- the Pension Benefits Act, R.S.O. 1990, c P.8 – a director may find themselves liable under the PBA for failing to make required contributions under a pension plan or if the fund is not being administered in accordance with the PBA;
- the Environmental Protection Act, R.S.O. 1990, c E.19 – a director or officer may become liable for discharging or causing the discharge of a contaminant, failing to notify the Ministry of Environment of the discharge of a contaminant, and, among other things, failing to do everything practicable to prevent, eliminate or ameliorate the adverse effect of a spill and to restore the natural environment;
- the Canadian Environmental Protection Act, 1999, S.C. 1999, c 33 – particular significance and director liability can be found here for companies importing and exporting hazardous materials;
- the Consumer Protection Act, 2002, S.O. 2002, c 30, Sch A – various provisions impose director and officer liability, most notably, an officer or director of a corporation is guilty of an offence if the officer or director fails to take reasonable care to prevent the corporation from committing an offence under ss. 116 (1) or (2) of the Act (which are broad provisions that state a person is guilty of an offence if the person fails to comply an order, direction or other requirement of the Act; contravenes or fails to comply with specific provisions of the Act; or fails to comply with a regulation made under the Act); and
- the Construction Lien Act, R.S.O. 1990, c C.30 – directors and officers (and any other person who has effective control of a corporation or its relevant activities) may become jointly and severally liable if that person assents to or acquiesces in conduct that they know or reasonably ought to know amounts to a breach of trust by the corporation of amounts owing to a contractor or subcontractor, whether or not is due or payable or received by a contractor or subcontractor on account of the contract or subcontract price of an improvement (as defined by the Act).
As we can see, in Ontario, in addition to the common law obligations placed upon directors, there are various provincial and federal statutory obligations (not exhaustively covered above) that directors and officers need to be cognizant of in order to ensure corporate compliance and to avoid personal liability. In order to manage these risks, one should first consider whether acting as a director is appropriate for them in their circumstances. Generally, being a director is not a figurehead position that can be satisfied by attending one annual meeting; rather, active oversight of the management of the corporation is required.
At each board meeting, a director should prepare by reviewing materials provided by management beforehand in detail; vote on resolutions considered (and ensure that a dissenting vote is recorded); receive a certificate of a senior officer with respect to statutory payments (HST, source deductions, etc.), payment of employee wages, payment of insurance premiums, and the absence of any existing or pending litigation, claims or regulatory proceedings; and rely on professional advice, when appropriate (i.e. accounting, legal, engineering, etc.).
A director should also obtain an express written indemnity from the corporation (or the corporation’s parent) for liability incurred as a result of them acting as a director and a director should consider requesting the corporation secure a director and officer liability insurance policy in their favour.
Finally, the guiding principle for directors and officers should always be to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Information herein is NOT legal advice. Should you have questions with respect to director and officer liability, please contact Lemke Law Professional Corporation.