Directors’ Duties in Canada

>> Powers and Duties in Canada

In exercising your powers as a director, you must comply with the CBCA and its associated regulations, the Articles, by-laws, shareholder resolutions, and any unanimous shareholders’ agreement or the corporation.

Duties – Skill and Care

Directors have two principal duties under the CBCA; the fiduciary duty and the duty of care. In discharging both of these duties, directors have the benefit of the business judgment rule. The business judgment rule focuses more on the decision-making process rather than the decision itself. So long as you devote reasonable time and attention to the affairs of the corporation and make informed decisions, the court will be reluctant to interfere with the decision.

Fiduciary Duty

As a director, you must act honestly and in good faith with a view to the best interests of the Corporation. As a fiduciary, you owe a duty  of loyalty to the Corporation and must act in a way that you think is the best interest of the corporation.

Your fiduciary duty is owed exclusively to the corporation; however, the interests of various other stakeholders (shareholders, employees, creditors, etc.) are co-extensive with the interests of the corporation. Where the interests of other stakeholders conflict with the interests of the corporation, the duty is owed to the corporation. In such situations, you are still obliged to treat the other stakeholders fairly.

Duty of Care

In exercising your powers and discharging your duties as a director, you are required to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Again, there are no specific requirements for professional training, education or experience to be a director. However, as a director you must employ whatever training, education or experience that you possess in a manner that a reasonably prudent person would employ those skills in comparable circumstances.

Unlike a director’s fiduciary duty, the duty of care is not owed exclusively to the Corporation. The duty of care can also serve as a standard of behaviour applicable in relation to other stakeholders as well.

Duties – General

Under general common law principles, a director must ensure he or she complies with the following duties:

  • Duty to manage and supervise the corporation – Directors have a general duty to manage the affairs of the Company. The board of directors is considered the directing mind guiding the direction of the corporation. Directors, in the discharge of their duties, may (and should) delegate to officers and employees specific tasks involved with the day to day management of the corporation, provided that they retain supervision and ultimate responsibility for such personnel. Directors may also rely on reports of professionals and experts (such as accountants, lawyers etc.) in the discharge of their duties
  • Duty to comply – Directors have a general duty to comply with the Articles of Incorporation and the CBCA and associated regulations
  • Duty to call annual general meeting – Directors shall call an annual meeting of the shareholders
  • not later than eighteen months after the corporation comes into existence
  • subsequently, not later than fifteen months after holding the last preceding annual meeting, but no later than six months after the end of the corporation’s preceding financial year
  • Duty to keep records – Directors have a duty to ensure that the records of the corporation, including registers of directors, officers and shareholders, and of minutes of meetings of directors and shareholders (or written resolutions in lieu of meetings), are regularly and properly kept. The directors shall cause proper books of account to be kept of the amounts received and expended by the corporation, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the corporation, and the assets, credits and liabilities of the corporation
  • Duty to refer items to the shareholders – The responsibilities of directors is limited in circumstances where shareholder approval is required under the CBCA and in the Articles. For example, fundamental changes like selling substantially all of the assets of the corporation, or an amendment to the Articles, must be approved by a special resolution of the shareholders (which means a resolution passed by not less than 2/3 thirds of the votes cast by the shareholders)

Duties – Other

There are many other areas of law that impose duties on the directors and officers of a corporation.  The areas of law that are most likely to be of particular relevance will vary depending on the nature of the entity and its activities. As subsidiary directors, some areas that may be of importance in Canada are set out below.

  • you must comply with anti-bribery and anticorruption laws, including the Corruption of Foreign Public Officials Act (“CFPO”) in Canada, the UK Bribery Act and the US Foreign Corrupt Practices Act, and must understand, follow and promote the Company’s internal policies and procedures.
  • corporations must maintain proper books, records and accounts under the CBCA. Generally our corporate secretarial provider will maintain these statutorily required records; however, you still have a duty as a director to ensure that these requirements are satisfied. Failure to do so can result in fines up to CAD$5,000 and/or imprisonment for up to six months.

Health and Safety

You have a duty to take all reasonable care to ensure a company complies with the provincial health and safety legislation.  Examples of duties include:

  • ensuring that equipment, material and protective devices are provided and maintained
  • preparing and reviewing occupational health and safety policy and maintaining programs to implement such policy
  • ensuring policies are in place with respect to workplace violence and harassment, and reviewing such policies

Civil and criminal liability can apply for breaches of occupational health and safety statutes and regulations.  This can include a fine of up to CA$25,000 and/or imprisonment for a term not exceeding 12 months.

Environment

You have a duty to ensure the regulations of the provincial environmental requirements are met.  Such duties include:

  • not importing or exporting prohibited substances
  • complying with regulations on not releasing toxic substances

Directors are exposed to a significant risk of personal liability for regulatory offences committed by the corporation they serve. You have a duty to “take all reasonable care” to ensure the Corporation complies with all applicable federal and provincial environmental laws and regulations. As a director, you may be liable if you “directed, authorized, assented to, acquiesced or participated in the commission of the offence.”

Upon conviction, you may face up to three years in prison and/or fines ranging up to CAD$2 million depending on the severity of the offence and other factors like the deliberateness of the action and the speed and efficiency of rectification efforts.

Directors are also exposed to potential criminal liability in relation to certain environmental offences in addition to the administrative monetary fines which can be imposed by environmental statues.

Bankruptcy

You have a duty to comply with the law on insolvency, combined with acting to promote the success of the company.  Should you be found to have made a fraudulent disposition of the bankrupt’s property of making false statements in the accounting of the company, you may face fines of up to CA$10,000 and/or imprisonment for a term not exceeding 3 years.

Should the corporation be approaching insolvency you must comply with relevant bankruptcy and insolvency laws.  As a director, you must be aware that conveyances can be voided and set aside by the courts in certain circumstances. For example, a conveyance made within twelve months of bankruptcy and with the intent to hinder creditors or with the intent to give a preference to one creditor over others, otherwise known as a “fraudulent conveyance,” can be found void and expose a director to liability.

A corporation is prohibited from paying a dividend or redeeming or repurchasing or otherwise acquiring the outstanding shares of the corporation if there are reasonable grounds for believing that the Corporation cannot meet the solvency test prescribed in the CBCA, namely that: (i) the corporation is, or following the payment would be, unable to pay its liabilities as they become due; or (ii) the realisable value of the corporation’s assets would after the payment be less than its liabilities. Directors who are found to have authorized a dividend or redemption or repurchase of shares in such circumstances may be found jointly and severally liable to the corporation in the amount of the dividend, redemption or repurchase, plus interest. The directors then have a right to recover any such amount from the shareholders who received the dividend or payment.

Competition Rules

The Competition Act prohibits conspiracies, agreements or arrangements between competitors that substantially lessen competition. Anyone who commits such an offence is liable upon conviction for a fine up to CAD$25million and/or up to 14 years in prison.

If a corporation commits an offence under the Competition Act, directors may be held liable if they are considered to be in a position to direct or influence the policies of the corporation in respect of the prohibited conduct.

Some examples of offences under the

Competition Act include price fixing, artificially controlling the supply of a product, and territorial agreements.

Tax

Corporate employers have an obligation to withhold relevant taxes and contributions to the Canada Pension Plan (“CPP”) and the Employment Insurance (“EI”) fund from employees’ wages and remit those funds to the government. Corporations are also obligated to remit employer CPP and EI contributions. Directors may be held jointly and severally liable for any deficiency in the amount of the remittance obligation plus interest and penalties, for both of the employer and employee portions of these remittances. Corporations must also collect and remit all applicable taxes (such as GST/HST) and directors can be held personally liable should the corporation fail to remit these amounts.

A director of a corporation that fails to file or make a required tax return is guilty of an offence under the federal Income Tax Act and may be liable to pay a fine up to CAD$25,000 and/or imprisonment for up to one year.


Latest version updated 22nd March 2018

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