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Directors’ and Officers’ Liabilities

Introduction

Many individuals who succeed in business or maintain a high profile will be asked during their lifetime to act as a director or officer of a corporation or a community organization.

In the old days, it was common for people to accept these positions without considering what some of the adverse consequences might be.

In today’s world, it is important to understand the scope of potential liabilities before accepting such a position. The purpose of this article is to provide information about some, but not necessarily all, of the potential liabilities a director or officer may face, and some information about ways to minimize or eliminate that exposure. In this way, one being asked to provide his or her time as a director or officer can make an informed decision about the risks he or she might be facing.

Corporate Statutes

In British Columbia, corporations are usually incorporated under the British Columbia Business Corporations Act, but may have been incorporated under legislation from different jurisdictions. It is important to review the legislation under which a corporation was created to determine if there are any statutory liabilities imposed on directors or officers by that legislation. Under both the British Columbia Business Corporations Act and the Canada Business Corporations Act, there are a variety of acts or omissions which could cause directors or officers to be liable for corporate activities.

Many of the statutory liabilities under the British Columbia Business Corporations Act relate to a breach of the legislative rules regarding improper share transactions, the failure to properly pay for shares that have been issued to shareholders, or the creation of financial obligations for the corporation that are made in a situation where the corporation may not be financially solvent. Under the British Columbia Business Corporations Act, there are many sections that impose liabilities on corporate principals and we have not exhaustively listed each of the situations in this article.

For certain financial transactions of the corporation, it is important to note that a liability imposed on the directors will be joint and several amongst all of the directors who have consented to a resolution which is made improperly. A director is deemed to have consented to a corporate activity in regards to certain financial transactions, if they have not had their dissent to such resolution entered in the minutes of that directors meeting, they have not delivered their written dissent to the secretary of the meeting before the end of the meeting, or they have not delivered their written dissent to the registered office of the corporation immediately after adjournment of the meeting. Any director that was absent from a meeting where an improper transaction was authorized will be deemed to have consented to that resolution if they have not within seven days after becoming aware of it, delivered their written dissent to the registered office of the corporation.

Liability for Employment Debts

Under the Employment Standards Act in British Columbia directors and officers are potentially liable for wages due, vacation pay or unpaid over-time to a maximum of two months wages for each employee. This may also extend to severance pay that is due and owing but has yet to be paid.

Income Tax Act Source Deductions

The Income Tax Act provides that a director or officer may be jointly and severally liable with other directors and officers of a corporation where that corporation has failed to deduct or remit to Revenue Canada source deductions relating to salaries, wages, or other taxable benefits of employees. This corporate liability may be for any amounts that remain outstanding up to the point in time that an individual ceases to be a director or officer of the corporation. This will also extend to penalties and interest on such payments that may be assessed in the future.

Other Statutory Remittance Liabilities

In addition to the statutory liabilities created under the Income Tax Act, there are a number of other statutes that apply to corporations which may impose liability on directors or officers for unpaid remittances of the corporation. This includes items such as unpaid Goods and Services Tax, unpaid Provincial Sales Tax, unpaid Workers’ Compensation Board remittances, and unpaid CPP or EI premiums.

Environmental Legislation

In 1997 the British Columbia Government implemented the Waste Management Act which makes corporations liable for environmental breaches and clean-up costs. It is possible that a director or officer of a corporation will be considered to be in the class of “responsible persons” who are jointly and severally liable under the Waste Management Act. This potential liability can be enormous when compared to the potential risk of some of the other director or officer liabilities. Anchor

Insider Trading

Most people are aware that a corporation which is publicly traded on a stock exchange has certain prohibitions regarding the ability of directors or officers to trade shares in that corporation on the basis of information that they acquired in their position as an insider of the corporation. There are harsh and specific penalties that will apply to a director or officer acting on insider information which can be things such as being prohibited from being involved in publicly traded companies, costs associated with discipline hearings, the return of profits made on any improper transactions, and making good the losses of other shareholders who did not get the advantage of the insider information.

Most people are not aware that the British Columbia Business Corporations Act puts insiders of companies that are not publicly traded on a similar footing. Where a director or officer of a closely held corporation acts on information that is not generally known to the other shareholders, he or she can be held liable for the consequences of his or her actions. This can lead a director or officer to be liable to any other shareholders of the corporation that have been harmed by the failure to disclose information, and the offending director or officer may be liable to account to such shareholders for all profits made as a result of trading on the secret knowledge.

Statutory and Fiduciary Duty

Every director has a fiduciary duty to act in the best interests of the corporation when making decisions in his or her capacity as a director. This common-law fiduciary duty is also echoed in the statutory code of conduct contained in the British Columbia Business Corporations Act.

Where it can be shown that a director has breached either his or her common-law or statutory duty to the corporation, the courts may take a variety of positions with regards to that conduct, including the possibility of the director being personally liable for the consequences to the corporation and its shareholders of the improper activity.

Statutory Due Diligence Defenses

Many of the statutes that impose liability on a director or officer of a corporation for failure to remit or pay monies due under such statutes also contain due diligence defenses to such liabilities imposed. This means that a director will not be liable under the statute where he or she has exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. This means that if a director or officer can show that he or she did not participate in the offensive action of the corporation, or did not turn a wilfully blind eye to the corporation taking such action, then he or she will not be held liable for the failure to remit monies required under the statute.

With certain corporate transactions under the British Columbia Business Corporations Act, the ability to dissent from a resolution of the corporation creates an additional chance for the director or officer to eliminate potential liability.

Even if a director has not dissented to an improper resolution of the board regarding certain transactions, he or she may be exempted from liability for actions that he or she did not know or could not have reasonably known were contrary to the British Columbia Business Corporations Act, or he or she has relied and acted in good faith upon statements of fact represented to that director by an officer of the corporation, or upon statements contained in a written report of the auditor of the corporation. While this due diligence defense may act to prevent liability in circumstances where the director has acted in good faith in reliance upon the state of knowledge, it does not remove director’s liability for actions that the director has been aware were taken by the board of directors but has not dissented to.

In situations where the statute creates liability on a director or officer, but does not provide a specific dissent exemption, it would still be prudent for any director or officer to provide evidence of his or her dissent as it may be something considered by a Court in assessing exposure to monetary damages.

Indemnification of Directors

The British Columbia Business Corporations Act provides a mechanism that a corporation may, with Court approval, indemnify a director for all costs, charges and expenses incurred by the director, including monies that may be paid to settle a civil, criminal or administrative action or proceeding, including an action that might be brought against the director by the corporation. The Court may approve an indemnification where the director has acted honestly and in good faith with a view to the best interests of the corporation, and the director has reasonable grounds for believing that his or her conduct was lawful. This appears to allow indemnification for many actions that result from a directors’ failure to exercise the care, diligence and skill of a reasonably prudent business person, but does not extend to those things for which a director has liability from his or her dishonesty, bad faith or breach of trust.

The application to Court to approve an indemnification of a director by a corporation, can be made by either the corporation or a director who is seeking indemnification. The Court is then free to make any order it considers appropriate in the circumstances.

Directors’ Liability Insurance
The British Columbia Business Corporations Act allows a corporation to purchase insurance to cover any potential liability of a director or officer of the corporation. The authorizing sections of the Act are quite broad and appear to provide almost no limitation to the activities of a director for which indemnity insurance can be brought. It is common in today’s environment to have a requirement for the corporation or community organization to provide such insurance to prospective directors or officers prior to them joining the board.

Summary

As can be seen from the foregoing discussion, there are a significant number of situations where liability can be imposed on a director or an officer. Before agreeing to undertake a director or officer position, it would be prudent to ensure the financial stability of the entity that is being joined as well as ensuring that the activities of the management and of the board of directors have been and are continuing to be run properly. The potential liabilities are quite extensive and it may be too late to ask these questions once one has joined the organization already.

The opinions set out in this article reflect generally on this area of law. The impact of the law on any given situation depends upon each individual’s circumstances and the opinions contained in this article should not be relied on for assessing anyone’s legal position. Advice should be obtained directly from our business law lawyers regarding your particular situation.