II. DUTIES AND LIABILITIES OF DIRECTORS AND OFFICERS

The basic duty of a director is stated in s. 142(1) of the Company Act:

142(1) Every director of a company, in exercising his powers and performing his functions shall:

(a) act honestly and in good faith and in the best interest of the company; and

(b) exercise the care, diligence and skill of a reasonably prudent person.

What does this really mean?

Honesty- this word generally speaks for itself. It means basically that there should be no secret profits or benefits that go to a director.

Good faith and in the Best Interests of the Company - Directors must exercise their powers in the best interests of the company as a whole and not for any individual or outside or collateral benefit.

A director cannot hide information that affects the company or give special consideration to a particular party - even if the director was elected or chosen by that particular party.

This is a difficult area to judge. One should err very much on the side of caution. That is, if there is ever a suggestion by an adverse party that the director is taking a personal benefit, then he or she should be sure to come clean, disclose everything and, if necessary, abstain from any participation in the decision-making procedure. Each case is special and has to be judged in light of what is happening at the time.

This, one may imagine, is a subjective area of law and very much open to interpretation.

Even though the company is a separate legal person and the directors generally are not personally liable for the debts and obligations of the company, if the directors lacked bona fides or were promoting their own personal interests, the courts sometimes become very inventive in extending liability to the directors personally for faults of the company; especially if the company has no money left. For example, when a company breached a contract and the court felt that the directors had acted in a high-handed manner, the court said the directors committed the tort (civil wrong) of inducing the breach of the contract and therefore they were personally liable. Similar approaches have found directors liable for breach of trust where monies that were supposed to be held in trust by the company were mixed with other funds and were spent on general company expenses.

Care, Diligence and Skill of a Reasonably Prudent Person - Each individual director should be careful of what the other directors do with the company. That is, each director must keep in touch with the business of the company and attend board meetings. There is a section of the Company Act (151(6)) that says that if a director was not present at a meeting at which certain prohibited actions were approved (there are six - some of which are: purchasing shares if the company is insolvent, paying dividends if the company is insolvent, giving financial assistance to certain people, etc.) then when the director finds out about it, he or she must actively dissent by filing a notice with the company or else be deemed to have agreed to the action. If a director was present at the meeting and disagreed with the action taken, the director must have the dissent entered in the minutes of the meeting.

A director is allowed to rely on the advice of the company officers or on experts such as lawyers and accountants. However, the cases say that a director still must exercise reasonable judgment in selecting the experts and in interpreting their work and, if there is any cause for suspicion, must follow up on it.

With respect to "skill", in the past a director was not held to a very high level of skill. The director only had to be honest, not smart. However, in today's world, a director must be at least as good as "the reasonable person in that situation" and if the director has some special expertise such as by virtue of being an engineer, lawyer, accountant, business person etc., the director will be held to the standard of the reasonable person with that skill.

Remember too that a director cannot avoid the duties by trying to be a "nominee" or "part-time" or "accommodation" director. You are either a director or you are not, and if you are, you cannot avoid liability by keeping a low profile or by standing back from the company's affairs.

If a person is going to be a director, he or she must be active and stay informed about the company's affairs. That is the only way to protect yourself.

Statutory Liabilities

Although it is usually the shareholders of the company who complain if they feel the directors are not operating the company as they would like, there are also other groups who may be able to complain and hold the directors personally liable if some wrong has been committed. The courts are showing increasing inventiveness in pushing aside the corporate veil and are sometimes allowing other parties (such as creditors, employees, etc.) who have suffered from the unscrupulous conduct of the directors to be given a remedy against the directors personally. However, the big growth area in directors' liability is caused by the government itself - through statutes. Almost every statute provides for some type of penalty if the statute is breached. If it is a director of a company who actually does the misdeed such as by failing to be licensed under the Mortgage Brokers Act or by publishing false information under the Securities Act or by committing a criminal offence or by not paying income tax, etc., then of course he or she would be subject to the penalties provided. But - many statutes now go on to include words (such as are in the Waste Management Act) that say the following:

34(10) Where a corporation commits an offence under this act, an employee, officer, director or agent of the corporation who authorized, permitted or acquiesced in the offence commits the offence notwithstanding that the corporation is convicted.

In addition, the severity of the offences provided for a corporation are usually much higher than if a director alone committed the offence.

The following are only a few examples:

(1) Employees - a big danger for directors is the section in the B.C. Employment Standards Act that says:

96(1) A person who was a director or officer of a corporation at the time wages of an employee of the corporation were earned or should have been paid is personally liable for up to 2 months' unpaid wages for each employee.

If the company is failing, make sure that the employees continue to be paid or you as a director or officer will be held personally liable for any shortfall.

(2) Withholding Tax- If the company has withheld moneys for income tax, sales tax, G.S.T., etc., and has not remitted it to the government, the directors will be personally liable for it if the company does not pay.

(3) Environmental Problems- An area of increasing concern for directors is their personal liability for environmental damage arising out of sections like 34(10) of the Waste Management Act referred to above. The way for directors to protect themselves in these circumstances is to be diligent in watching over the employees who actually run the business.

One of the leading cases in Canada is the Bata Industries decision from Ontario where two directors were found personally liable for allowing some pollution to occur. The judge in Bata said:

"I asked myself the following questions in assessing the defence of due diligence:

A. Did the Board of Directors establish a pollution prevention "system: i.e. was there supervision or inspection? Was there improvement in business methods? Did he exhort those he controlled or influenced?

B. Did each director ensure that the corporate officers had been instructed to set up a system sufficient within the terms and practices of its industry of ensuring compliance with environmental laws, to ensure that the officers report back periodically to the Board on the operation of the system, and to ensure that the officers are instructed to report any substantial non-compliance to the Board in a timely manner?"

It is important for the directors to be duly diligent in instituting a system such as referred to here in order to be able to avoid liability if there is an environmental problem for which the director was not personally responsible.

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