It can be an exciting opportunity to join a corporation as a director or an officer. It might be appealing to put a prestigious role on your resume, to take on a new learning experience, to be compensated for your contributions to a company, to build connections with others in the business community, and to help a company whose business is near and dear to you. Indeed, becoming a director or an officer of a corporation can come with many benefits, but it also comes with risks.
Before you jump headfirst into a new and exciting role as a director or an officer of an Ontario corporation, it is important to be aware of the duties you will have and the liabilities you may face. Many people assume that because a corporation is its own legal person under the law, that its directors and officers cannot be held personally liable for its losses, but the truth is, they can. As a director or officer, you may be held personally liable for:
a) losses the corporation incurs as a result of you breaching your duty of loyalty or duty of care to the corporation;
b) transactions you approve on behalf of the corporation while it is insolvent or that could result in the corporation becoming insolvent (e.g. paying dividends, redeeming shares, or repaying loans);
c) up to 6 months of unpaid wages and 12 months of unpaid vacation pay for employees of the corporation;
d) employment insurance, income tax, or CPP contributions that the corporation has not properly deducted from its employees’ pay;
e) HST unpaid by the corporation; and
f) losses the corporation incurs as a result of you acting outside of the scope of your duties.
What is meant by “duty of loyalty” and “duty of care”?
Duty of loyalty
As a director or an officer, you will be required to act honestly, in good faith, and in the best interests of the corporation as a whole. This means putting the corporation’s interests above your own, which involves:
a) keeping the corporation’s information confidential;
b) not using your position in the corporation to develop a competing business or to profit personally from the corporation’s dealings (e.g. not setting up a business deal with the corporation that will benefit someone related to you);
c) not serving on a board of another corporation with a competing business at the same time; and
d) disclosing all potential and actual conflicts of interest (e.g. information about agreements or transactions you intend to enter or will be involved in that are potentially relevant to the company).
As a director or an officer, you must not share the corporation’s confidential information, like its trade secrets or client lists. This duty of confidentiality continues even after you leave the company. For as long as the information remains the property of the company, you must keep it confidential.
Unless you have signed a non-competition agreement, you may start, join, or sit on the board of a competing business after you resign, but you cannot use the company’s confidential information or take advantage of your former director or officer roles to solicit the company’s customers.
You must avoid situations where your obligations to the company and your personal interests may conflict. If, as a director or officer, you may be involved in a conflict of interest with the corporation, you must disclose the conflict of interest to the board of directors as soon as you become aware of it. If you do not disclose a potential or actual conflict of interest with the corporation, the corporation or its shareholders may apply to a court to cancel your conflicting contract or transaction and force you to repay any profits or gains you realized from it. Be aware that disclosing a conflict of interest will not relieve you from any of your duties, like putting the company’s interests before your own.
In addition, if you are a director or officer AND a shareholder of the same company, you must put your obligations as a director or officer ahead of your interests as a shareholder. If you are a director of more than one company at the same time, you must ensure that you are carrying out all of your obligations to each of those corporations.
Be aware that your general duty of loyalty to the company will continue for a reasonable period after you resign from your position as a director or officer. The more important you were to the company and the longer you served in your capacity as director or officer, the longer your duty of loyalty will last.
Duty of care
In carrying out your role as a director or an officer, you will be required to exercise the same care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances. You will be held to the standard of a person with your skills, training, or accreditation. Part of this duty of care is ensuring that the corporation is compliant with all applicable laws and regulations and its own by-laws (e.g. the Ontario Business Corporations Act and any tax, environmental, and employment legislation), and you must report any non-compliance immediately.
What does it mean to act outside the scope of my duties?
Subject to any shareholder agreement that says otherwise, as a director, you will be responsible for managing and supervising the corporation’s affairs, and as an officer, you will be responsible for the management powers and duties delegated to you by the directors. Officer titles and their descriptions vary from corporation to corporation. You can generally locate information about the board of directors and its obligations, your officer role, and information about who can sign documents on behalf of the corporation in the corporation’s by-laws. If you act outside of your role as either a director or an officer (including signing a contract you did not have authority to sign), you may be held personally liable for any damages the company incurs as a result of your actions.
How can I defend myself if I am accused of not fulfilling my duties?
If you have been accused of failing to carry out your director or officer duties, you may have a defence if you can prove to a court that you acted in good faith and on reliable information. However, to relieve you of liability, a judge will expect you to have applied a certain degree of diligence, prudence, and/or sound business judgment in doing what you did. Ignorance is not a defence, so it is paramount that, from the day you step into your role as a director or an officer, you keep yourself well-informed of your duties and of the business’ affairs, activities, goals, and finances. If you are a director, be proactive by attending all board meetings and reviewing all minutes, and, as a director or an officer, keep detailed records of how you are carrying out your duties.
Other modes of protection
Before you consent to becoming a director or an officer of a corporation find out:
a) if the corporation has directors and officers (D&O) liability insurance and ask to see the policy. This type of insurance coverage is intended to protect you from personal liability. Be aware, though, that D&O insurance typically only protects you in instances where you have acted within your capacity as a director or officer and usually excludes fraud and criminal offences; and
b) if the corporation indemnifies its directors and officers against personal liability when they have acted at the corporation’s request. Typically, this type of indemnity can be found in the corporation’s by-laws. Be aware that the corporation legally cannot indemnify you unless you have acted “honestly and in good faith with a view to the best interests of the corporation”.
Conclusion
Serving as a director or an officer of a corporation can be a great way to get involved in a business if you understand your obligations and protect yourself from the get-go. When in doubt, contact a business lawyer who can arm you with the information you need before you say, “yes”.
