This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
Book a telephone consultation here: https://wrightbusinesslaw.cliogrow.com/book
_______________________________________________________________________________________
Directors of corporations in Ontario play a critical role in guiding the strategy and operations of the company, ensuring compliance with laws and regulations, and protecting the interests of shareholders, employees, and other stakeholders. While directors enjoy broad powers to manage a company’s affairs, their role also comes with significant legal responsibilities and potential liabilities.
This blog post explores the key duties and liabilities of directors under Ontario’s corporate law, providing an overview of the legal framework, the standards directors must adhere to, and the potential risks they face.
- Understanding Directors’ Duties in Ontario
Directors of a corporation in Ontario owe various duties to the corporation and its stakeholders. These duties are governed primarily by the Ontario Business Corporations Act (OBCA) (or, for federal Corporations, the Canada Business Corporations Act), which outlines the key responsibilities of directors. In addition to the OBCA, directors must also comply with other legislation such as the Income Tax Act (Canada), Environmental Protection Act, and Employment Standards Act.
A. Duty of Care
The duty of care requires directors to act with the same level of competence and diligence that a reasonable person would exercise in similar circumstances. This duty obligates directors to:
• Make informed decisions based on appropriate research and consideration of relevant facts.
• Stay updated on the company’s financial condition and business activities.
• Act in a way that reflects their knowledge, skills, and experience.
The standard of care under the OBCA is often described as the “business judgment rule,” which protects directors from liability as long as their decisions are made in good faith and with reasonable care. However, directors must not be reckless, and their actions must be consistent with their obligations to the corporation and its shareholders.
B. Duty of Loyalty
The duty of loyalty requires directors to act in the best interests of the corporation, placing the company’s interests above their own personal interests. Directors must avoid situations where their personal interests conflict with those of the corporation. Key elements of this duty include:
• Avoiding conflicts of interest: Directors must disclose any potential conflicts and refrain from using their position for personal gain.
• Not competing with the corporation: Directors should not personally engage in business activities that compete with the corporation or exploit corporate opportunities for their own benefit.
If a director has a conflict of interest, they are generally required to disclose it to the board and abstain from voting on related matters.
C. Duty of Good Faith
The duty of good faith requires directors to act honestly and with integrity in their dealings on behalf of the corporation. This includes:
• Making decisions with a genuine belief that the decision is in the best interest of the corporation.
• Acting transparently and with a focus on fairness to all stakeholders, including shareholders, employees, and creditors.
Directors are expected to exercise their powers in good faith and avoid decisions that would harm the corporation or its reputation.
- Liabilities of Directors in Ontario
While directors enjoy certain protections, they also face significant liabilities for breaches of their duties. These liabilities are outlined in several key pieces of legislation.
A. Liability for Breach of Fiduciary Duty
If a director breaches their fiduciary duties, they can be personally liable for the resulting damages. Breaches of fiduciary duties include acting in a conflict of interest without disclosure, failing to act in good faith, or making decisions that are not in the best interests of the corporation.
For example, a director who approves a self-dealing transaction that harms the corporation may be required to compensate the corporation for any financial losses.
B. Liability for Unpaid Wages and Benefits
Under the Ontario Business Corporations Act, directors may be held personally liable for the corporation’s failure to pay wages and certain employee benefits (e.g., pension plan contributions, vacation pay, etc.). If the corporation is unable to pay these amounts, the director may be personally liable for up to six months’ worth of wages and benefits owed to employees.
This liability extends to directors who were in office at the time the obligation arose, and it can apply even if the director was not directly responsible for the financial difficulties that led to the unpaid wages.
C. Environmental and Regulatory Liabilities
Directors may be held liable for breaches of environmental regulations if the corporation fails to comply with environmental laws. For example, directors could be held personally responsible under the Environmental Protection Act if they knowingly fail to prevent or report environmental damage caused by the corporation’s activities.
Similarly, directors can be held accountable for failing to comply with regulations governing the health and safety of employees under the Occupational Health and Safety Act (OHSA).
D. Liability for Tax Obligations
Directors have a responsibility to ensure that the corporation meets its tax obligations. If a corporation fails to remit taxes owed to the Canada Revenue Agency (CRA), including employee income tax withholdings (e.g., payroll tax), directors can be personally liable for the amount of unpaid tax, interest, and penalties.
This liability extends to directors who were in office at the time the failure occurred, regardless of whether the director was personally involved in the tax-related decisions.
E. Derivative Actions
Shareholders and sometimes employees can bring a derivative action on behalf of the corporation if they believe that directors have failed in their duties. A derivative action allows the shareholder to sue directors on behalf of the corporation, seeking to recover damages for harm caused by the directors’ misconduct or negligence.
- Defenses Available to Directors
Despite the significant responsibilities and liabilities, directors are afforded some protections under the law. These defenses include:
A. Indemnification by the Corporation
Corporations can indemnify directors against personal liability for acts or omissions taken in good faith, provided these actions were undertaken in their role as directors of the corporation. The corporation may cover legal expenses and any damages or settlements resulting from lawsuits brought against directors.
B. Insurance
Corporations may also obtain directors’ and officers’ liability insurance (D&O insurance) to cover legal costs and liabilities arising from their actions as directors. D&O insurance typically covers claims related to breaches of fiduciary duty, negligence, and mismanagement, though it may not cover intentional misconduct or criminal actions.
C. Business Judgment Rule
Directors are protected by the business judgment rule, which generally shields directors from liability for decisions made in good faith, on a rational basis, and with the belief that their decision is in the best interest of the corporation. The key is that the decision must be made after careful consideration and due diligence.
- Best Practices for Directors
To minimize risks and ensure compliance with their legal duties, directors should:
• Keep accurate records: Regularly review financial statements and key operational data to stay informed about the corporation’s performance.
• Ensure compliance: Actively ensure that the corporation adheres to applicable laws and regulations, including employment, tax, environmental, and safety laws.
• Establish clear policies: Implement corporate governance policies that address conflicts of interest, board meetings, and director responsibilities.
• Seek professional advice: Directors should consult legal, financial, and accounting professionals regularly to ensure they make informed decisions.
- Conclusion
Directors in Ontario have substantial responsibilities and liabilities. By understanding their legal duties and taking proactive steps to comply with corporate law, directors can protect themselves and the corporation while contributing to its success. It is crucial for directors to act with diligence, transparency, and good faith, while avoiding conflicts of interest and ensuring that they adhere to legal and ethical standards.
For directors who are unsure about their obligations, it is always advisable to consult with legal professionals to ensure they are meeting their duties and mitigating the risks of personal liability.
Sources:
Ontario Business Corporations Act (OBCA), RSO 1990, c B.16.
Occupational Health and Safety Act, RSO 1990, c O.1.
Environmental Protection Act, RSO 1990, c E.19.
Government of Canada. “IC89-2R3 Directors’ Liability”.