If you are acting as, or asked to be, the director of a corporation, it is important to understand your duties in that role and how you can manage the potential risks of acting as a director. The role of a director is to supervise the management of the business and affairs of the corporation, rather than simply the day to day activities. Canadian corporate statutes have set out a number of obligations that a director must adhere to, especially in order to avoid exposure to personal liabilities from their actions as director.
The following are five main points to consider when acting as a director:
- Directors have a fiduciary duty to act honestly, in good faith and in the best interests of the corporation. This is a statutory duty set out in the Ontario Business Corporations Act and Canada Business Corporations Act. This requires that a director put aside his/her own interest (to the extent it conflicts with the corporation’s interest) and to act solely in the best interests of the corporation.
- Directors have a duty to exercise care, skill and diligence of a reasonably prudent person. Like the fiduciary duty, this is also a statutory obligation. This duty is measured by an objective standard: to exercise the degree of care of a reasonably prudent person in comparable circumstances without reference to his/her own particular qualifications or abilities. This duty of care is not only owed to the corporation but to all shareholders.
- Directors have a duty to avoid conflicts of interest. For example, a director that is a party to a contract (or a potential party), in which they have a material interest in, is required to disclose such interest. Specifically the corporate statutes state that a director must:
- Disclose the conflict;
- The board must approve the contract in a vote in which the interested director does not take part; and
- The contract must be reasonable and fair to the corporation;
- Directors may find themselves personally liable for actions of the corporation. There are several statutes that look to directors personally to fulfill the obligation of the corporation if the corporation fails to do so. For example, directors may be held liable for unpaid employee wages and vacation pay, or if a corporation is obligated to pay health insurance premiums into the provincial universal health insurance plan and if the corporation becomes insolvent, directors may be required to pay the premiums in default. It is important that each of the statutes which could potentially attract a personal obligation by a director be examined in detail.
- If you are going to act as a director, you should consider requesting the corporation to indemnify you against liabilities incurred by reason of your position. Canadian corporate statutes permit corporations to purchase directors’ and officers’ insurance for the benefit of directors and officers for any statutory liability incurred by them in their capacity as directors or officers of the corporation, except where that liability relates to a failure to act honestly and in good faith with a view to the best interest of the corporation.
It is important that anyone entering into the position of director of a corporation understands the duties and possible risks which accompany the role. If you are currently the director of a corporation, or you are entering into that position, and you have any concerns about the issues mentioned above, please don’t hesitate to contact me directly for further discussion.
Associate with Corporate/ Commercial Department
Disclaimer: This article is provided as an information resource. This article should not be relied upon to make decisions and is not intended to replace advice from a qualified legal professional. In all cases, contact a legal professional for advice on any matter referenced in this document before making any decisions. Any use of this document does not constitute a lawyer-client relationship. Please note that this information is current only to the date of posting. The law is constantly changing and always evolving.