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Directors and officers of companies are expected to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

This duty of care is codified in the Ontario Business Corporations Act (“OBCA”),section 134(1)(b), which applies to corporations incorporated in Ontario, and the Canada Business Corporation Act (“CBCA”), section 122(1)(b), for Federally incorporated corporations.

The Courts have developed the “business judgment rule”, which provides that a director or officer will generally not be liable where the process used by the director or officer in reaching a decision was either rational or employed in a good faith effort to advance corporate interests.

Fiduciary Duty

In addition to the duty of care, directors and officers also owe the corporation a fiduciary duty. The fiduciary duty of officers and directors requires them to act honestly, in good faith and with a view to the best interests of the corporation.  This duty of care is codified in the OBCA, section 134(1)(a) and the CBCA, section 122(1)(a).

Statutory Liabilities

Directors and officers may also face liability under various statutes, such as:

• The OBCA and CBCA for conduct which unfairly prejudicial to the interests of, or unfairly disregards the interests of certain parties ( known as “oppression”);
• Employment issues, such as severance pay, vacation pay and wages, arising from the OBCA or the CBCA, and the Employment Standards Act, Canada Pension Planand Employment Insurance Act;
• Taxation issues, under the Income Tax Act and the Excise Tax Act; and
• Pension issues, under the Pension Benefits Act and the Pension Benefits Standards Act.

Shareholder Liability for Director and Officer Duties

Certain director and officer rights and liabilities can be delegated to shareholders through a Unanimous Shareholders Agreement (“USA”).

Types of Claims

Generally, the corporation’s separate legal personality – the “corporate veil” – will protect directors and officers for liability arising from actions ostensibly carried out in the corporate name.  However, under the common law, directors and officers have can be found liable, for example, for:

• Claims arising from actions which were in the director’s or officer’s interests, rather than the interests of the corporation, such as misappropriation of corporate opportunities, assets or funds
• Claims arising from actions which are independently tortious or “exhibit a separate identity or interest from that of the company
• White Collar Fraud

Directors and officers can also be found liable under various statutes, for example, for:

• Claims for deductions and remittances due under taxation and employment statutes, particularly where the corporation is insolvent
• Oppression claims in the context of small, closely-held companies, where a director is the sole directing mind of the corporation and where the director personally benefits from the conduct

Director and Officer Liability Insurance

Director and officer liability insurance (“D&O Liability Insurance”) can be purchased to cover defence costs and indemnification of some director and officer liability claims.  However, most D&O Liability Insurance policies contain exceptions to coverage for claims between insureds, such as litigation that arises between the corporation and the directors and officers.  D&O Liability Insurance claims also typically exclude coverage for claims arising from bodily injury, property damage, and intentional torts, such as invasion of privacy, libel or slander.

Gilbertson Davis LLP has lawyers with experience in addressing the issue of director’s and officer’s liability.

If you have an issue concerning the conduct of officers or directors of a company, please contact Gilbertson Davis LLP for an initial consultation.