Directors & Officers Liability
In years long gone by it was commonplace for individuals to accept positions on business and not-for-profit boards of directors with little concern about any directors’ liability. In recent decades Federal and Provincial legislation have legislated a broad range of directors’ liability, and sometimes officers’ liability, to stem perceived or actual corporate abuses, and impose accountability on directors, sometimes officers and more rarely anyone actually involved in a particular act or Omission. Usually just being a director is all it takes to prove liability. This is in addition of a growing body of common law (Judge made law) establishing non-statutory directors and officers liability Accordingly, being a member of a board of directors, or a sole director, has become a necessary evil, better avoided if possible.
Directors liability can include civil and criminal liability, often with no cap on civil liability. Criminal penalties usually are subject to maximum penalties.
Examples of directors liabilities include:
1. unpaid actual wages of employees;
2. breach of trust for unpaid construction sub-contractors and material suppliers;
3. unremitted employee source deductions;
4. unremitted GST or HST;
5. specialty taxes (sales tax, tobacco tax, fuel taxes);
6. failure to file tax returns even if no liability for actual tax;
7. environmental liability;
8. occupational health and safety liability;
9. failure to obtain export permits;
10. unauthorized spending on behalf of charities and not-for-profit organizations;
11. potential liability on corporate insolvency and/or bankruptcy;
Practically what does this mean? THAT
You should not agree to be on a board of directors, even a closely held or family corporation, unless you are prepared to monitor the business operations of the corporation and ensure that transgressions for which directors are personally liable do not take place and attend all board meetings. Situations may arise in which you may need to have recorded in the minutes your disagreement on a particular point and where necessary record that you have voted against a particular proposition, or leased abstained. Things which are not being done, or not be done properly, will need to be addressed with the officers and/or directors of the corporation, and in some cases if immediate corrective action is not taken, it may be necessary to resign as a director, filling which personal liability may begin to accrue or continue.
While unrelated business owners of a small corporation may well practically have no alternative but to have a seat on the board of directors in order to protect their investment, but small family-run corporations usually have more flexibility.
Many small family businesses are often structured with both spouses being directors of a corporation or both parent and child both being directors. In many cases adequate knowledge of the ongoing operations of the business exists without being on the board of directors and there is a significantly higher level of trust than between unrelated business “partners”. Protection against any significant changes being made without unanimous shareholder approval can generally be achieved by the signing of unanimous shareholder agreement between all shareholders, whether or not any of them are on the board of directors or not.
Accordingly in very small family-run companies, for example between spouses, is often recommended that only one of the spouses comprise the board of directors as there is generally no need to expose both spouses, and potentially the entire personal assets of both spouses, to personal liability for directors liabilities. In some cases risky businesses are structured such that one of the spouses will be the sole director of a business corporation and the other spouse may be the sole owner of most if not all of the significant assets, most notably the family residence. The directorship of a corporation can generally be changed without incurring government expenses and generally a couple’s family residence can be transferred from both spouses to one spouse without incurring capital gains tax or land transfer tax, although the usual legal fees and expenses relating to the conveyancing of real property would apply. The same considerations apply to corporations run by parents and children, albeit adult children.
However every situation is different and the best balance should be considered by an experienced corporate lawyer. Please feel free to contact us in order to review the current or proposed structure of your small business corporation and what would best achieve all or most of your risk management and strategic goals.