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(Monday, December 28, 2009)
Director’s Liability
Summary
When an individual acts as the director of a corporation or other entity such as a society or charity, they often do not realize what liabilities they have assumed. Directors are liable for the acts and omissions of the corporation or the society under a variety of legislation. In some cases it is possible to reduce or eliminate liability through indemnities of the corporation or through insurance, however, a director’s best defence is to perform due diligence.
Article
The Income Tax Act and the Excise Tax Act makes directors of a corporation or other organization (such as a charity) liable for a failure to deduct or remit amounts required, like payroll deductions, GST collected, income tax instalments, non resident tax and other withholdings.
The various Federal and Provincial Companies Acts impose similar director’s liability for a variety of acts or failures to act, mostly involving issuing and redeeming shares and allowing a corporation to engage in activities contrary to legislation.
Provincial Securities Acts have stringent penalties for directors who engage in inside trading, and for certain actions or lack of action regarding listing and selling shares on the exchange.
Various Employment Standards Acts may hold directors liable for unpaid wages, and in some jurisdictions directors may be liable for environmental damage done by the company’s operations.
Other legislations that impose liabilities on directors are the Bankruptcy and Insolvency Act, Bank Act, and Workers’ Compensation Acts. Finally, a director has liability under common law for their actions or lack of actions.
It may be possible for the company to obtain insurance to cover director’s liability; however, it may also be expensive. Professional liability insurance that a director may have on their own usually doesn’t cover director’s liability except in the case of not for profit organizations. A company may indemnify the directors against liability in some cases, but this indemnification is only available when the director has exercised due diligence.
Due diligence is the only real defence a director has. As long as a director has exercised the care and attention to duty reasonable in the circumstances, they are usually not liable under the various acts that govern their action, or under common law. Due diligence can be a rather nebulous concept, and is not rigidly defined in legislation. Instead, case law over many years has identified required elements.
In general, due diligence requires that a director carry out their duties with the best interests of the organization in mind, and exercise the prudence and attention to duty that would be expected of a competent, careful person in their position. The concept of due diligence takes into account both what a director should have known and what they actually knew. If a director should have inquired about matters that they were responsible for and did not, due diligence has not been done and they will be liable. Similarly, a director who is an accountant, lawyer or other professional will be held to a higher standard in areas involving their professional competence than a non-professional would.
The Income Tax Act and Excise Act can, in some circumstances, hold directors to a very high standard in regard to due diligence. It is therefore important for directors to make sure that they document that they have performed all the expected and required steps for complying with legislation.
Before taking on the role of director of a corporation or other organization, especially a publicly traded company, you should consider seeking advice on exactly what liability you may be incurring. Your accountant can help you to determine what your risk will be.
