What is a Director? Duties, Liabilities and Protections
Agreeing to be a director is a serious legal commitment. Directors owe duties to the corporation and can face significant personal liability if they breach them even in a small private company.
What is a Director?
A director is a person elected or appointed to the board of directors the governing body of the corporation responsible for its management and supervision. Directors are legally distinct from officers (who manage day-to-day operations) and shareholders (who own shares). In small private corporations, the same person often holds all three roles simultaneously but the legal obligations of each remain separate.
The Director's Legal Duties
1. Fiduciary Duty (Duty of Loyalty)
Directors must act honestly and in good faith with a view to the best interests of the corporation not their own interests, and not a particular shareholder's interests. This means avoiding conflicts of interest, disclosing any material interest in a corporate transaction, and not using corporate information or opportunities for personal gain.
2. Duty of Care
Directors must exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances. This means attending and preparing for board meetings, reviewing financial statements, asking questions when something seems wrong, and engaging professional advisors when needed.
Personal Liability Exposure
Despite the corporate veil, directors face direct personal liability in specific circumstances:
Key personal liability areas for Ontario directors:
- Unremitted payroll source deductions CPP, EI, and income tax withheld from employees; directors are jointly and severally liable with the corporation to the CRA
- Unremitted HST/GST same personal liability regime
- Unpaid wages (up to 6 months per employee) under the OBCA
- Environmental violations under provincial and federal environmental statutes
- Oppression remedy courts can order directors personally liable for oppressive conduct
Protections Available
- Due diligence defence: For CRA source deduction liability, a director who took reasonable steps to prevent the failure may have a defence
- Reliance on professional advice: Acting in good faith on legal or financial advice provides protection
- Corporate indemnification: The corporation should indemnify directors for costs of defending claims where the director acted honestly and in good faith
- D&O insurance: Directors' and Officers' insurance is essential protection for any corporation with outside investors or employees