Directors’ Liability: Welcome on Board

Chances are that if you are a professional person, at some point you will be asked to sit on the board of directors of a company.  You may already be a director.  In practical terms, many board members take on a passive role: attending sporadic meetings, reviewing financial statements, and signing off on “routine” resolutions.  Little may be asked of you on a regular basis, but the risk of personal liability is present, however, by being familiar with your duties as a director and ensuring that you fulfill them, you can generally avoid trouble.

Directors are charged with running the management of the company and owe that company fiduciary duty.  Section 136(1) of the B.C. Business Corporations Act states:

The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.”

Section 142(1) of the BCA states that a director of a company must “act honestly and in good faith with a view to the best interests of the company”, “exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances”, and act in accordance with the company’s articles and the BCA.

Practically, but generally, speaking the duties owed to the company include disclosing any conflicts of interest, acting in the best interests of the company, staying involved and informed, acting prudently, and relying on experts and officers with caution and common sense.

I am making the assumption that you are not a rogue director bent on embezzlement, fraud, or becoming the next Madoff.  That sort of activity will definitely get you in to trouble and you shouldn’t need me to explain why.

Failure to uphold your directorial duties could result in personal liability if the company runs afoul of the BCA, the Securities Act, the Environmental Management Act, the Employment Standards Act, or fails to pay its HST.  In these and other instances, the “corporate veil” may be lifted and the directors found personally liable.

There are generally defenses against findings of director liability — we recently and successfully protected a director client from a seven figure judgment brought against him personally when the company was unable to pay its employees’ termination pay — but it is preferable to avoid liability to begin with.

Ensure that you are familiar with the company and its principals before you get on board, know what is going on with the company’s operations and finances, review documents, attend meetings, and ask questions.  Find out (before becoming a director) what kind of directors’ insurance the company has and what the amount of the insurance is.  Review this regularly.

If, as a director, you become aware of activities of the board of directors that are prohibited, do not remain silent.  If you learn that other directors are involved in illegal or improper activities, and you do not actively dissent, you may later be found to have consented.  In other words, get your concerns and objections on the record and in the minutes of those board meetings.

The end result is: sitting on a board of directors comes with a degree of prestige and can be a great way to network or enhance your business and governance skills, but it is also a role that comes with a great deal of responsibility and potential liability.  Directorships are not things to collect and then ignore, like tropical fish.  With great power comes great responsibility.  Be an active, informed director and ensure that you are upholding your fiduciary duties, and you and the company will experience mutual benefits with a greatly reduced chance of personal risk to you.

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