What You Need to Know as a Director of a Private Corporation

If you are a director of a private company incorporated under the Ontario Business Corporations Act (OBCA), here are a few things you should know about some of directors’ roles, duties and liabilities in Ontario. Please note that this article is not an extensive or complete description of director’s roles, duties or liabilities.

Subject to any unanimous shareholder agreement, the directors of a corporation are responsible for the management and supervision of the business and affairs of the corporation.¹ This includes, appointing the senior managers of the company, e.g. the president, CEO, COO, secretary, treasurer. 

With qualification, directors may delegate their powers to a committee of directors or to a managing director.² Nonetheless, only a director can, among other things, declare dividends; or issue, purchase, redeem or otherwise acquire shares issued by the corporation³.

Directors have two main obligations in exercising their duties:

(a) a fiduciary duty to act honestly and in good faithin the best interest of the corporation and not that of its stakeholders; and 

(b) a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.⁴ Directors cannot contract outside of these duties and can be held personally liable for breach of their duties.

The Fiduciary Duty

The Supreme Court of Canada in Peoples Department Stores Inc. (Trustees of) v. Wise5, confirmed that to act honestly and in good faith means a director, “…must avoid conflicts of interest with the corporation…They must avoid abusing their power for personal benefit… They must serve the corporation selflessly, honestly and loyally.”⁶ Therefore, if the interest of any stakeholder of the corporation conflicts with that of the best interest of the corporation, the director’s duty is to advance the best interest of the corporation. In determining whether they are acting in the best interest of the corporation⁷, it may be legitimate to consider, among other things, the interest and impact on the shareholders, employees, creditors, the environment, etc. and other statutes that impact the decision being made. This does not diminish their obligation to the corporation, e.g. ensuring the decision made does not result in civil or criminal liability against the corporation. 

Directors must also be diligent in ensuring they recognize and avoid personal conflict of interest between themselves and the corporation. Therefore, they must disclose to the corporation any material interest they may have, whether directly or indirectly, in any material contract or proposed material contract or transaction with the corporation.⁸ The disclosure must be made in writing to the corporation or disclosed at the meeting in which the contract or transaction is first considered at the meeting of the directors. This means the director cannot (a) participate in any part of a directors meeting during which the contract or transaction is being discussed, or (b) vote on any resolution to approve such contract or transaction, unless it relates:

1. primarily to his/her remuneration as a director of the corporation or an affiliate;
2. to director’s indemnity or insurance under s.136 of the OBCA; or
3. to a contract or transaction with an affiliate.⁹

There is some protection for directors who comply with the disclosure requirements under either Act. The director will not be accountable to the corporation or its shareholders for any profit or gain realized from the contract or transaction, and the contract will not be void or voidable, by virtue of their conflicted relationship or being present at the directors meeting that authorized the contract or transaction provided the contract or transaction was reasonable and fair to the corporation at the time it was approved.¹⁰

Breach of a director’s fiduciary duty is a matter of fact.¹¹ The Courts have held directors liable in the various instances¹² including, without limitation, the following instances:

1. disposing of corporation’s assets at a discount or under-value to a related company of the director in question;
2. making a corporate loan to a related entity with no material benefit to the lending corporation;
3. forgiving a debt owed to the corporation by another entity in which the director has an interest amounting to a gift of corporate assets to the other entity and depleting the corporation’s assets to whom the duty is owed by an equivalent amount; and
4. appropriation by the director or an entity of an opportunity, the director has an interest in, which was or should have been made available to the corporation of which he or she is a director.

Directors are prevented from obtaining for him/herself, secretly or without the corporation’s approval, any property or business advantage either belonging to the corporation or which it has been negotiating. This obligation continues even after the director resigns, if such resignation was influenced by the desire to obtain the opportunity for oneself.¹³ This obligation is not removed, even if a third-party wishes it to be that way. The director in question will be liable to the corporation for the value of the benefit received.¹⁴

The Duty of Care

As mentioned above, directors have a duty of care to the corporation. In interpreting s. 134 (1) (b) OBCA, the court has stated that in determining whether directors exercised their duty of care in a matter, they are not looking to see whether the decision made was perfect but that it was a reasonable one in light of the circumstance. “As long as the directors have selected one of the several alternatives, deference is accorded to the board’s decision”.¹⁵ Therefore, where the decision was made “prudently and on a reasonably informed basis”, the court will not interfere with the decision made.¹⁶ Examples of breach of duty of care¹⁷ include but are not limited to:

1. Failure to obtain adequate insurance coverage for the corporation’s key assets.
2. Turning a blind eye to fraud or serious misconduct of a co-director.
3. Failure of independent directors to prevent the transfer of corporate assets to another corporate entity.

Other liabilities for which a director can be personally liable:

1. Employees of the Corporation - for up to 6 months’ wages for services an employee performs and vacation pay while he or she was a director.¹⁸
2. Tax & Duties – for the corporation’s unremitted source deductions, including employee payroll deductions, unremitted HST, and for any interest and/or penalty amounts assessed on a corporation’s tax liability and unremitted income tax under the relevant provincial or federal statute.
3. Environmental – Under the environmental statute, a director can be held liable for any prohibited act defined therein.¹⁹

Please note this is not an exhaustive list of all liabilities that a director may be liable.

The corporation may indemnify a director, provided (a) the director acted honestly and in good faith in the best interest of the corporation; and (b) there is reasonable grounds for believing, regarding any liability arising from criminal or administrative action or proceeding, that the conduct in question was lawful.

Maxwell v R (2015) TCC 74, is a typical example of what not to do as a director. This was a matter before the tax court which involved a sole director and controlling mind of three related companies. The companies were involved in a condominium development and the developer refused to pay its bills on a timely basis, resulting in a cashflow problem for the three companies. In an effort to manage the cashflow, the sole director decided to prioritize certain payments over others. He ensured the companies paid the employees’ wages and key suppliers but not the employees source deductions and GST. The court held that the sole director was personally liable for the unremitted source deduction and GST and was not entitled to rely upon the due diligence defence under the Income Tax Act and the GSTAct.

If you have any questions or concerns in your role as, or about your liabilities and obligations as, a director, speak with a lawyer to ensure that you are on the right side of the law.

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¹ s.115 (1) Consolidated OBCA
² s.127 Consolidated OBCA
³ s.127 (3) Ibid
⁴ s.134 (1) Consolidated OBCA)
⁵ [2004] S.C.C. 68 (CanLII) [2004] 3 SCR 461
⁶ Ibid, para. 35
⁷ Directors’ and Officers’ Liability in Canada, Helen A. Daley & Simon Bieber, LexisNexis Canada Inc. 2015, p.3
⁸ s.132 (1) Consolidated OBCA)
⁹  s.132(5) Ibid
¹⁰ s.132(7) Ibid
¹¹ Weber Feeds Ltd (Trustee of) v Weber [1979] O.J. No. 4247, 24 O.R. (2d) 752 (Ont. C.A)
¹² Note 8 at p.5
¹³ Note 8 at p. 5-6 and Canadian Aero Service Ltd v O’Malley [1973] S.C.J. No. 97, [1974] S.C.R. 592 (S.C.C.)
¹⁴ Note 8 at p. 6; Abbey Glen Property Corp. v Stumborg [1978] B.C.J. No. 46, 5 B.L.R. 58 (B.C.S.C)
¹⁵ Peoples [2004] SCC 68, [2004] 3 R.C.S. para. 65
¹⁶ Ibid at para.67
¹⁷ Note 8 at p.9
¹⁸ s. 131(1) OBCA & Employment Standards Act
¹⁹ The Canadian or the Ontario Environmental Protection Act

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The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.