PERSONAL LIABILITY OF DIRECTORS AND OFFICERS WHO ARE DIRECTORS AND OFFICERS? A director is a person appointed to manage business affairs of a corporation. There may be different types of directors, for example, a director may be passive and not actively involved in the management of the corporation. Nevertheless, it is important to recognize that all directors have liabilities and duties regardless of whether they are passive directors or whether they delegate their responsibilities to others within a corporation. An officer is any person who acts as the "directing mind" of a corporation. Whether a person is a directing mind of a corporation depends upon the degree of control which they exert on the corporation. An officer is a directing mind if they issue orders and supervise a particular operation within the corporation. Typically, officers will include a Chair of the Board, a Chief Executive Officer, a Vice-President, Corporate Secretary, a Treasurer, and a General Manager. SOURCES OF LIABILITY A fiduciary duty is a trust-like duty of the highest standard requiring a director and officer to act with honesty, loyalty and good faith with a view to the best interests of the corporation. At common law, the duties of a director and officer are described as fiduciary in nature. A fiduciary duty is a trust-like duty of the highest standard requiring a director and officer to act with honesty, loyalty and good faith with a view to the best interest of the corporation. Directors who breach their fiduciary duties are held strictly liable. This means that the director s intent to cause harm to the corporation is irrelevant when determining liability. Fiduciary duties are primarily to the corporation, but in some circumstances a director and officer may also hold fiduciary duties to shareholders, fellow directors, creditors or the public. In addition, directors and officers retain their fiduciary duties even after they have resigned or retired. In addition to the common law duties of directors and officers, a variety of obligations arise under statutes. Both the Canada Business Corporations and the Alberta Business Corporations describe A prudent and diligent director and officer will seek legal and other professional advice where appropriate. the general duty of a director and officer to act honestly and in good faith. However, this general statement of the duties of a director and officer is only the beginning of the myriad of obligations and duties imposed under federally and provincially enacted statutes. Our preliminary research has shown that no less than 56 statutory enactments of the Province of Alberta alone impose specific duties on directors and officers. A list of federally and provincially enacted legislation is included in Appendix 1 of this document. THE NATURE OF THE LIABILITY A director may be subject to a specific liability under an enactment of federal parliament or the provincial legislature. An example of a specific liability appears in Alberta's Environmental Protection and Enhancement. A breach of the may result in personal liability of the director and officer for a maximum penalty of a fine not exceeding $100,000 per day in addition to or in lieu of two years imprisonment plus the cost of loss to the property damaged! Other legislation provides for other specific liabilities of directors and officers. The nature and extent of liabilities imposed under legislation should never be assumed. In each case, the legislation must be consulted to determine the specific liability. 1
In addition to the specific liabilities imposed by statutes, a director and officer also has a general liability which flows from the characterization of a director and officer as a fiduciary of the corporation. A director and officer may be generally liable to pay damages. For example, a director and officer may be required to account for profits they have made in breach of their fiduciary duties. An accounting means that the director and officer must reimburse the corporation for losses if the breach has caused damages. Intent to harm the corporation is irrelevant. However, where a director or officer has acted in bad faith, then he or she may also be liable for punitive or exemplary damages. These are damages which are ordered by a court to punish the wrongdoer. AVOIDING AND PREVENTING LIABILITY Statutes imposing specific liabilities on directors and officers also provide for a variety of defences. In most cases the legislation provides a defence of due diligence. A director and officer is duly diligent if they have taken all reasonable steps to prevent the occurrence of an event. What, in fact, amounts to due diligence will depend on a number of factors. These will include the type of offence, the specific industry involved and the individual circumstances. A director and officer may avoid becoming generally liable by observing duties of care, diligence and skill. We have included as Appendix 2 to this document a list of the basic steps an officer A director and officer is duly diligent if they have taken all reasonable steps to prevent the occurrence of an event. and director should take to discharge his or her duties and minimize the risk of liability. RISK MANAGEMENT Though every director and officer should discharge their duties prudently and responsibly, it is also important that directors and officers manage the risks to which they are exposed. Two methods of risk management available to directors and officers are indemnification and insurance. A corporation may provide in its bylaws for indemnification of directors. This means that the corporation will pay to the director any amount which the director himself or herself is required to pay as a result of his or her position. Directors and officers liability insurance means coverage within policy amounts that an insurance corporation will pay to cover amounts that directors and officers are legally required to pay as a result of claims brought against them resulting from their wrongful acts. In most circumstances, the insurance coverage will include damages, judgments, settlements and defence costs. However, insurance will generally not include fines, penalties and other charges which are considered uninsurable. It is important that directors and officers carefully review the insurance policy. It is particularly important that directors and officers review the discovery clause of the policy. Discovery clauses will determine coverage where an act is committed during the term of the policy but which is not discovered until after the termination or cancellation of the policy. It is important to remember that the checklist which forms Appendix 2 and the discussion with regard to indemnities and insurance provide only a minimum standard for the duties, obligations and risk management of directors and officers. A prudent and diligent director and officer will seek legal and other professional advice where appropriate. 2
NON PROFIT ORGANIZATIONS Directors and officers of non profit organizations generally have the same duties and liabilities as directors and officers of for profit corporations. There are some exceptions. For example, personal liability for wages under Alberta's Employment Standards does not apply to directors and officers of societies incorporated under the Societies or companies incorporated under Part 9 of the Companies. However, the director and officer of a non profit organization should not necessarily rely on these exceptions. Such directors and officers should assume their liability as equal to that of a director and officer of a for profit corporation and conduct themselves accordingly. Personal Liability of Directors and Officers has been prepared by Ackroyd LLP, Barristers and Solicitors for educational and general information purposes only. The resolution of all legal problems depends on a consideration of the facts and relevant circumstances. The material set out in this document is not legal advice. 1500 First Edmonton Place 10665 Jasper Avenue Edmonton, Alberta T5J 3S9 Telephone (780) 423-8905 Fax: (780) 423-8946 http://www.ackroydlaw.com info@ackroydlaw.com 3
Canada Agricultural Products Board Agricultural Stabilization Atomic Energy Control Bank Bankruptcy and Insolvency Canada Business Corporations Canada Cooperatives Associations Canada Corporations Canada Pension Plan Canada Water Canadian Environmental Assessment Canadian Environmental Protection Canadian Ownership and Control Administration Canadian Wheat Board Citizenship Competition Consumer Packaging and Labelling Cultural Property Export and Import Defence Production Electricity and Inspection Energy Administration Energy Monitoring Excise Tax Export and Import Permits Fisheries Fishing and Recreational Harbours Immigration Income Tax Labour Code, Canada Livestock Feed Assistance Motor Vehicle Fuel Consumption Standards APPENDIX 1 National Energy Board Transportation of Dangerous Goods Unemployment Insurance Veterans Land Weather Modification Information Weights and Measures Alberta Alberta Bill of Rights Alberta Corporate Tax Alberta Health Care Insurance Alberta Income Tax Boilers and Pressure Vessels Builders Lien Business Corporations Coal Mines Safety Collection Practices Companies Consumer Credit Transactions Co-operatives Associations Credit Union Crop Liens Priorities Dairy Industry Department of the Environment Direct Sales Cancellation Electric Energy Marketing Employment Pension Plans Employment Standards Code Environmental Protection and Enhancement Forests Fuel Tax Gas Protection Gas Resources Preservation Hotel Room Tax Individual=s Rights Protection Innkeepers Labour Relations Code Liquor Control Loan and Trust Corporations Mine and Minerals Mortgage Brokers Regulation Natural Gas Marketing Occupational Health and Safety Off-highway Vehicle Oil and Gas Conservation Petroleum Incentives Program Pipeline Private Investigators and Security Safety Codes Securities Societies Soil Conservation Small Business Equity Corporations Special Waste Management Corporation Surface Rights Tobacco Tax Transportation of Dangerous Goods Control Trust Companies Unfair Trade Practices Uniform Building Standards Water Resources Weed Control Wilderness Areas, Ecological Reserves and Natural Areas Workers= Compensation 4
APPENDIX 2 1. Always attend meetings. 2. Insist that all material be available well in advance of meeting especially when there will be a vote on a particular issue. 3. Obtain written advice on all legislation and guidelines that are relevant to the activities or the organization. 4. Always review and read documents, legislation and so forth prior to meetings. 5. Insist on written opinions from legal and other professionals on any important decision. 6. Periodically or on major issues where regular counsel or advisors have provided advice, insist on independent outside counsel or advisors for a fresh perspective. 7. Review all opinions given by professional consultants. 8. Review the minutes of all meetings and insist that they be accurate. 9. Keep your own notes. 10. Ensure that your dissent is recorded even if this means sending a registered letter to the board. 11. Review the corporation=s objects and bylaws. 12. Review all internal controls especially with respect to cheque signing and contract execution. 13. Encourage the development of a director=s manual. 14. Know what trust property or accounts the corporation holds. 15. Keep information about the corporation confidential. 16. Avoid even the appearance of a conflict of interest. 17. Ensure that the bylaws provide for the indemnification of directors. 18. Monitor tax credit receipts and payment of employee deductions and sales taxes. 19. Ensure that the committees and management report to the board. 20. Ensure that the corporation acquires and maintains officers and directors indemnity insurance coverage. 5