Are Directors Personally Liable For a Corporation's Actions?
Updated: Jan 11, 2022
Directors can be held liable for a wide range of corporate activities. In many businesses, a few select people play various roles like being the shareholders, directors, and officers all in one. As a result, it's important to understand the function of each role and the liability that can be incurred.
Today's blog post will give you all the information you need about corporate directors.
BECOMING A DIRECTOR
The shareholders of the corporation elect the directors and each director must:
Be an individual
Be an adult (at least 18 years old in Quebec)
Not be under tutorship or curatorship
Not be declared incapable by a court
Not be bankrupt
Directors supervise and make decisions about the company’s activities. The directors, among other things:
Establish the by-laws
Monitor and control the business activities
Act as the mandatary
Recruit, nominate, and supervise the officers
Directors have two main duties:
to act with prudence and diligence;
to act with honesty and loyalty in the interest of the corporation.
This means directors must avoid conflicts of interest. Among their responsibilities is avoiding mixing their personal property with the corporation's, or using the company's property for their benefit.
Directors act through resolutions of the corporation. These are then inserted into the minute book. (Read all about minute books here). Resolutions are passed during meetings or written resolutions are signed by the directors. This second method is as valid as if the resolution was passed in a meeting.
Directors can be liable for many reasons, notably for:
Breach of duty
Infractions under various legislations
During their mandate, directors are personally and solidarily liable for an employee’s unpaid wages (up to a maximum of six months of unpaid wages).
Director's actions and inactions are also sources of liability. For example, a director can be liable for remaining silent after finding out that an officer is committing fraud. Other types of liability arise from breaches:
to their duty as mandataries;
to their statutory duty, and;
if they engage in illegal acts.
Directors may also face penal sanctions with liability ranging from fines to imprisonment. These include declarations made under the Act respecting the legal publicity of enterprises, and minute book and corporate register-related infractions.
Taxes are another source of liability. This includes the corporation's failure to withhold taxes at source and remit them (QST and GST) to the tax authorities. Another source is employer contributions required by various tax legislations. These include the Act respecting the Québec Pension Plan, the Employment Insurance Act, the Act respecting Labour Standards, the Act respecting Industrial Accidents and Occupational Diseases, and the Act respecting Parental Insurance. Directors are liable for these taxes, and the interests and penalties incurred on them. However, they won’t be liable if they can show that they took reasonable precautions against this.
The company may purchase insurance to protect against liability directors may incur in their role if they acted in that capacity at the corporation’s request.
CEASING TO BE A DIRECTOR
The articles of incorporation set out the number of directors. That number of directors is then usually elected to serve three-year terms. But, they will remain in office at the end of their term if no new director is elected. Their mandate ending when they become disqualified, resign, or are removed.
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This post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.