What are the liabilities of being a director in Canada?

What are the liabilities of being a director in Canada?

Being at the helm of a startup brings both excitement and responsibility. As a director, your decisions shape the path of the company. However, the entrepreneurial journey isn’t just about opportunities, it also involves understanding corporate legal responsibilities. In Canada, startup directors may face potential personal liability that adds complexity to their roles. Below, we discuss some of the specifics of directorial duties, legal obligations, and the intricacies of personal liability for directors.

What fiduciary duty does a director hold in Canada?

In Canada, directors owe a fiduciary duty to the corporation they serve. This duty requires them to act honestly, in good faith, and in the best interests of the corporation. The fiduciary duty demands loyalty, conflict avoidance, and prioritizing the corporation’s well-being. It prevails over other stakeholders’ interests, emphasizing the exclusive commitment directors owe to the corporation.

Notably, the Supreme Court of Canada underscored a crucial distinction between fiduciary duty and the duty of care. While the fiduciary duty is exclusively owed to the corporation, the duty of care extends to other stakeholders and can form the basis for liability to these stakeholders.

What is the duty of care for directors in Canada?

Directors in Canada are bound by a duty of care that extends to both the corporation and other stakeholders. This duty encompasses acting with care, diligence, skill, and prudence. The standard is not perfection but expects directors to demonstrate prudence, diligence, and reasonableness in their decision-making process. The duty of care is owed not only to the corporation but also to other stakeholders, reinforcing the responsibility directors bear in their roles.

The Supreme Court of Canada, in Peoples Department Stores Inc. (Trustee of) v Wise,  provided clarity regarding the expected level of care from directors. The Court emphasized that directors and officers must act prudently and on a reasonably informed basis in order to avoid liability. Directors are expected to make reasonable business decisions considering all surrounding circumstances, acknowledging that a certain degree of diligence and prudence suffices to meet the duty of care.

Can directors be personally liable for corporate financial actions?

Yes, directors can be personally liable for corporate financial actions under the Business Corporations Act (Alberta) (“ABCA”). Voting for or consenting to resolutions authorizing actions such as share acquisition, dividend payments, and indemnities contrary to legislation can result in joint and several liability. Directors must ensure these transactions have reasonable grounds, or they risk personal liability for losses incurred by the corporation.

Notably, the Alberta Court of Queen’s Bench (as it then was), in Wisser v CEM International Management Consultants Ltd., has shed light on a significant legal principle concerning the oppression remedy under the ABCA. This ruling suggests the possible extension of the oppression remedy to hold directors and their newly formed company accountable for wrongful dismissal damages. 

What breaches could make directors personally liable under the Business Corporations Act (Alberta)?

Directors face potential liability for various breaches under the ABCA. The ABCA outlines instances where directors may be held accountable, including failures related to proxies, management proxy circulars, and the filing of necessary documents.

Moreover, section 118(1)of the ABCA holds directors responsible if they approve the issuance of shares for non-monetary consideration. In such cases, directors become jointly and severally liable to the corporation. This means each director can be individually held accountable for any shortfall in the value received compared to a traditional monetary issuance. The directors are obligated to compensate the corporation by making up the difference, ensuring the corporation isn’t deprived of the monetary value it would have received in a standard share issuance for money.

Additionally, as per section 119 (1) of the ABCA, directors of a corporation share joint and several liability for debts owed to employees, capped at six months’ wages per employee. This liability extends to wages for services rendered during the directors’ tenure with the corporation. In essence, directors can be held collectively and individually responsible for ensuring payment of employees’ wages, up to a maximum of six months’ worth of compensation per employee.

Directors may also incur liability under environmental legislation, tax legislation (Income Tax Act, Canada Pension Plan Act, Employment Insurance Act, Excise Tax Act), and the Alberta Corporate Tax Act. These liabilities can arise from various offenses, including false statements, tax evasion, and non-compliance with tax laws. It’s crucial for directors to understand and navigate these potential liabilities to fulfill their roles responsibly.

Embarking on the journey of startup leadership comes with its challenges, and understanding the legal landscape is crucial. At Shory Law LLP LLP, our corporate lawyers are here to assist and guide directors through the complexities of their roles. If you have questions, need legal advice, or seek support to ensure your startup’s success, connect with Shory Law LLP at 403-216-1199.

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