- Directors owe a fiduciary duty to the corporation and a duty of care.
- The duty is owed to the corporation, not to any particular shareholder.
- Specific statutory liabilities attach personally, including unremitted deductions and unpaid wages.
- Resigning does not eliminate liability for the period served.
The two duties
The fiduciary duty requires a director to act honestly and in good faith with a view to the best interests of the corporation. That means avoiding conflicts, not taking corporate opportunities for personal benefit, and not preferring one constituency over the corporation itself.
The duty of care requires the care, diligence and skill of a reasonably prudent person in comparable circumstances. It is an objective standard: good intentions do not excuse a failure to inform oneself.
Both are owed to the corporation. A director does not owe the duty to a particular shareholder, which is why shareholder complaints are usually framed as oppression rather than breach of duty.
What the duty of care requires in practice
Attend meetings and read the material beforehand. A director who does not attend is not thereby protected; they are less informed and equally responsible.
Ask questions, particularly about matters that look unusual, and record dissent where a decision is opposed.
Rely reasonably on professional advice and on management-prepared reports, which the legislation permits, but reliance must be reasonable, accepting a report that is obviously incomplete is not.
Courts apply a business judgment approach: a decision made on an informed basis, in good faith, within a range of reasonable alternatives, will not be second-guessed simply because it turned out badly. The protection attaches to the process, which is why the process matters.
Statutory personal liabilities
These are the exposures that catch directors of small corporations, because they exist regardless of any breach of duty.
Source deductions and HST. Directors can be personally liable for amounts a corporation failed to withhold and remit, with interest and penalties. This is the most common and most serious.
Unpaid wages and vacation pay. Directors can be liable for defined amounts owed to employees.
Improper distributions. Directors who authorise a dividend or a share redemption when the corporation fails the applicable solvency tests can be liable to restore the amount.
A due diligence defence is available for some of these, but it requires showing that the director took positive steps to prevent the failure, not merely that they were unaware of it.
Conflicts
A director with a material interest in a contract or transaction must disclose it and generally must not vote on it.
Disclosure and abstention, properly recorded, protect both the director and the transaction. Failing to disclose can render the transaction voidable and expose the director to an accounting for profits.
Corporate opportunity is the related trap: a director who takes for themselves an opportunity that came to them in their capacity as director may have to account for the profit even if the corporation could not have pursued it.
Insolvency
As a corporation approaches insolvency the risk rises sharply, because unpaid remittances and wages accumulate exactly when there is no money.
Directors continue to owe duties to the corporation and must weigh the interests of creditors more heavily as insolvency nears.
Directors of a struggling company should take advice early. The window in which resignation and remedial steps are useful closes quickly, and by the time the liabilities are apparent they have usually already been incurred.
Protection
Indemnification by the corporation is permitted within statutory limits, and directors’ and officers’ insurance covers much of what indemnification cannot. Both are worth having and neither covers everything, notably not dishonesty, and often not unremitted taxes.
Resignation must be in writing and takes effect when delivered. It ends exposure for the future; it does not remove liability for the period served.
Common questions
Am I liable if I was a director in name only?
The duties attach to the office. A director who does not participate is generally in a worse position, not a better one.
Does D&O insurance cover unremitted source deductions?
Commonly not. Policies vary and this is worth confirming specifically rather than assuming.
How do I resign?
By written resignation delivered to the corporation, and the corporate records and public filings should be updated to reflect it.
Can shareholders sue directors directly?
Usually through a derivative action on the corporation’s behalf, with leave, or through the oppression remedy where their own interests were unfairly affected.
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