How corporate directors may be subject to personal liability and how best to avoid it.
By Anna Cook, Cox & Palmer
Legally, corporations are considered separate legal persons: they can sue and be sued; they pay taxes; they can enter into contracts; they can do things (or fail to do things) – just the same as an individual person can.
The corporation’s board of directors acts on its behalf. Essentially, the board is the corporation’s directing mind, which makes high-level decisions about the business and affairs of the corporation on its behalf.
Being a member of a board of directors can be both challenging and rewarding. The business’s success, in many ways, is a reflection of the board’s strength and leadership abilities. Therefore, agreeing to serve as a board member is not a decision that anyone should take lightly. As a member of a board you
— (i) are expected to act with a reasonable level of care, diligence, and skill
— (ii) owe a duty of loyalty to the corporation you serve
— (iii) have an obligation to act honestly, in good faith, and in the best interests of the
corporation
As a general rule, directors who meet these expectations, take their position seriously, strive to do their best, and approach their role with an appropriate level of rigour and prudence will probably not be personally faulted when things go awry with the business. In law, such directors are protected from personal liability in circumstances when a business may incur liabilities. In other words, those corporate liabilities are not passed on to the directors.
In contrast, recklessness, fraud, dishonesty, negligence, or a lack of candour can have serious personal implications for board members – up to and including personal liability. A director who acts outside of the scope of her authority and goes on a “frolic of her own” cannot reasonably expect to hide behind the corporate veil when her flawed actions are the source of the problem that the business is facing. Some might say that such a director is the author of her own misfortune and should suffer the consequences of the situation she has created.
But even good behaviour cannot completely protect a director in all cases. For social policy reasons, Canadian law imposes a number of statutory liabilities on directors for actions or inactions of the corporations they serve. Specifically, directors can be held statutorily liable for such things as
— (i) unpaid wages (including vacation pay), source deductions (e.g., CPP and EI) for
employees and workers compensation remittances
— (ii) some tax remittances and reporting
— (iii) certain environmental matters
The consequences can be severe, ranging from fines and penalties to imprisonment.
But don’t let this scare you off the opportunity to be on a board! There is a lot to be gained, and the benefit outweighs the risk. Rather, be smart about it. Here’s how:
Consider having the corporation obtain director and officer insurance. Such policies typically protect against claims arising out of board decisions or omissions, or out of actions or activities performed directly under the auspices of the board of directors.
With the assistance of the corporation’s legal counsel, familiarize yourself with corporate procedure and corporate governance.
Familiarize yourself with the corporation’s articles and bylaws, its budget, its financial statements, its policies, and its strategic plan.
Ensure that the board meets regularly. Attend those meetings, and be engaged in them. Come prepared, ask questions, read everything, and inform yourself about what is going on. Senior management should expect to answer to the board with respect to any ongoing operational matters.
Exercise independent judgement when voting in all corporate decisions and excuse yourself from a vote in the case of a conflict of interest. Ensure that meeting minutes accurately reflect the events of the meeting.
Plan for the succession and diversity of the board. Fresh minds and different perspectives will ensure that the board and the business will not grow stale.
Anna Cook, Cox & Palmer
Anna Cook is a partner at Cox & Palmer, St. John’s, where her practice focuses primarily on corporate and commercial, employment and labour, and privacy law. She handles matters including commercial financings, commercial real estate purchases, financing and leasing, share sales, asset sales, mergers and acquisitions, and joint ventures. She has extensive experience acting for clients ranging from small-business start-ups to large multinational and international corporations and has advised businesses at every stage of the business cycle. A strong supporter of women in business, Anna is an active NLOWE member and a presenter for the NLOWE Entrepreneur of the Year Awards.
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