Duties, Responsibilities, and Liabilities of Corporate Directors

You have just become a director of a corporation, an exciting new beginning. However, you can’t help but wonder, or at least you should wonder, what the role of a corporate director entails. This article will offer a brief overview of the responsibilities, duties, and potential liabilities of corporate directors in Alberta.[1]

What are directors responsible for?

Directors are elected by the owners of the corporation, namely the shareholders, and are responsible for managing and overseeing the business and affairs of the corporation. To assist them in doing so, they may appoint and supervise officers, such as a President, Secretary and/or Treasurer who would be responsible for the day-to-day operation.

What are the duties of directors?

Because of their broad authority, the law imposes two overarching duties on directors: a fiduciary duty and a duty of care.[2]

(1) Fiduciary Duty

Firstly, directors owe a fiduciary duty to the corporation. As fiduciaries, they are expected to act honestly and in good faith when exercising their management role, and to do so with a view to the best interests of the corporation. They must also be loyal to the corporation, and avoid any potential conflicts of interest that may arise. The Supreme Court of Canada clarified that directors “owe a fiduciary duty to the corporation, and only to the corporation”[3], and that such duty will prevail over the interests of any other stakeholders.

(2) Duty of Care

Secondly, directors owe a broad duty of care that extends to both the corporation and other stakeholders. This duty of care, diligence, and skill can be broken down into several sub-categories and explained as follows:

1. Duty of Care – Directors must carry out their responsibilities with an amount of care that commensurate with that of a prudent person in comparable circumstances.
2. Duty of Diligence – Directors must be diligent in their involvement in the corporation, meaning that they must attend directors’ meetings, examine minutes, stay apprised of the day-to-day business and management of the corporation, ask questions, and stay informed.
3. Duty of Skill – Directors are expected to exercise their role with the same level of skill as a reasonably prudent person would, in similar circumstances.
4. Duty of Prudence – Lastly, they must exercise their role in a deliberate, but careful way, attempting to foresee any potential consequences of their decisions.

The Supreme Court of Canada emphasized that unlike the fiduciary duty, which is owed solely to the corporation, the duty of care is also owed to other stakeholders and “may be the basis for liability to other stakeholders”[4].

As for the level of care expected from directors, the Supreme Court clarified that it’s not perfection that is expected, but rather, being able to show that they have acted prudently and diligently in their decision-making process, and that their decisions are reasonable business decisions in light of all of the surrounding circumstances.[5]

What are some areas of potential liability for directors?

Because the scope of a director’s authority is so broad, courts have at times, found them to be the “directing minds” or the “alter ego” of the corporation. In view of this extensive power, both common law and legislation have developed ways of holding directors personally liable for the corporation’s wrongdoings.

Some, but not all, of the potential ways a director may be found to be liable for actions of the corporation include:

(a) Liability for Corporate Financial Actions

Pursuant to the Business Corporations Act (Alberta), a corporation must meet certain financial tests before it can undertake to repurchase its issued shares, pay dividends, provide certain types of financial assistance, make payments under an indemnity agreement, or buy out a dissenting shareholder.

If a director authorized any of these transactions without reasonable grounds for believing that the financial tests have been satisfied, the transaction may be set aside and the directors who did not dissent may be held personally liable for any losses suffered by the corporation.

(b) Liability for other breaches of the Business Corporations Act (Alberta)

The Act also contemplates several instances in which directors may be held liable, such as:

(a)   Failure to send proxy to a shareholder entitled to receive notice of meeting of shareholders for corporations with greater than 15 directors (s. 149).

(b)   Failure to send management proxy circular in the prescribed form to the auditor and each shareholder whose proxy is solicited (s. 150).

(c)   Failure to file reports, returns, notices or other documents required to be sent, or filing such documents known to contain an omission or error (s. 251).

Moreover, section 118 of the Act states that if they vote for or consent to a resolution in respect of the following, directors are jointly and severally liable for:

(a)   Amount by which consideration received for shares is less than fair monetary equivalent.

(b)   Funds authorized for purchase, redemption, or acquisition of shares contrary to s. 34, 35 or 36.

(c)   Funds authorized to pay commission for sale of shares contrary to s. 42.

(d)   Funds for payment of dividends contrary to s. 43.

(e)   Funds to provide financial assistance contrary to s. 45.

(f)    Payment of an indemnity contrary to s. 124.

(g)   Payments to shareholders which are contrary to ss. 191, 242.

(c) Liability for Employee Wages

Pursuant to the Employment Standards Code (s. 112), directors are jointly and severally liable for all debts to the employees of the Corporation not exceeding 6 months’ wages payable to each employee for services performed for the corporation while they were directors.

Furthermore, in a recent Alberta decision, Wisser v CEM International Management Consultants Ltd.[6], the Court of King’s Bench found the directors of CEM jointly and severally liable to a former employee, Mr. Wisser, for avoiding paying proper severance. In short, Mr. Wisser’s employer, CEM, was wound down by its shareholders who then proceeded to incorporate a new entity, almost identical to CEM, and appointed themselves as directors and officers of the same. The Court found that the sole reason for incorporating the new entity was to avoid paying Mr. Wisser’s severance. It found such conduct to be oppressive and held the corporation and the directors personally liable for damages.

(d) Liability under Environmental Legislation

Directors may also be liable for offenses under the Dangerous Goods Transportation and Handling Act (s. 26), Canadian Environmental Protection Act (s. 280), and the Alberta Environmental Protection and Enhancement Act (s. 232) which imposes upon directors and officers a duty of care to prevent commission of an offence under the Act.

(e) Liability under the Income Tax Act (Canada) and other tax legislation

Directors in office at the time a payment was required are jointly and severally liable for failure to withhold amounts required pursuant to the Income Tax Act such as non-resident withholding and employees’ payroll withholding (s. 227.1). Directors may be liable where the corporation is guilty of an offence under the Income Tax Act’s Criminal Evasion Provision, (s. 242).

They are also jointly and severally liable for CPP or EI amounts owed pursuant to the Canada Pension Plan Act and the Employment Insurance Act and GST pursuant to the Excise Tax Act.

Similarly, directors may be liable if the Corporation has committed an offence under the Alberta Corporate Tax Act (s. 80). Offenses include false statements or omissions in a return (ss. 37 and 37.1), evasion of tax (ss. 74 and 75), failure to file a return, failure to provide information required under the Act, and failure to comply with any other provisions of the Act (s. 76).

(f) Tort Liability

Where the director plays an active role in day-to-day activities of the corporation, the director owes a personal duty of care for the common law duties of the corporation. If they neglect this duty, they may be held liable for negligence. Directors may also be held liable for negligence if they fail to take reasonable precautions to prevent any negligent acts or omissions on the part of the corporation.

(g) Personal Liability by lifting/piercing the corporate veil

In rare instances, where a court finds that a director is the “controlling mind” of the corporation, and that they have used such control to commit fraud or other wrongdoings, they will be held personally liable through the common law doctrine of “piercing the corporate veil”. This is more common in instances where the same individual holds the position of director, officer, and sole shareholder of the corporation. The “controlling mind” of a corporation is someone who exercises complete control over the corporation’s finances, its policy, and business practices. In Alberta, the following instances have been identified as justifying piercing of the corporate veil:

1. Where a corporation is formed specifically to do a wrongful act;
2. Where those in control specifically direct the doing of a wrongful act;
3. Where fraud is committed;
4. Where the corporation is the mere agent of another legal entity;
5. Where two separate entities are in fact one enterprise or operation; and
6. Where the corporation is a mere “alter ego” of the controlling shareholder.[7]

Takeaway

The old adage holds true. Indeed, with great power comes great responsibility … and an even greater potential for personal liability. Overall, it is important to remember that first and foremost, a director owes a broad fiduciary duty to the corporation, and must conduct themselves with honesty, loyalty and good faith, with a view to the best interest of the corporation. Secondly, there is an overarching duty of care that is owed to both the corporation and other stakeholders. Finally, there are numerous statutes that may make directors personally liable for the corporations’ debts, most notably to the CRA, employees and the environment.

If you have any questions regarding your obligations and potential liabilities as a director, any of the members of our McLennan Ross Corporate Commercial Law team would be happy to discuss.