Directors And Officers Liability
Many directors and officers assume that the corporate structure protects them from personal liability. In practice, directors liability is real, well-established in law, and arises more often than most people expect. Whether you are a director or officer facing a claim, or an organization or shareholder seeking to hold one personally accountable, understanding the full scope of director and officer liability is the starting point. We act for both sides of these disputes in Ontario and British Columbia.
Speak With a Directors Liability LawyerWhen Can a Director or Officer Be Personally Liable?
The general principle of corporate law is that a corporation is a separate legal entity from its shareholders and directors. That separation means that, as a default, the corporation's debts and liabilities are the corporation's alone. However, that protection is not absolute. Directors and officers can become personally liable in a significant number of circumstances, and the personal liability of directors and officers is one of the most practically important areas of corporate litigation.
Personal liability arises from two broad sources. The first is conduct-based: a director or officer who breaches their fiduciary duty, acts negligently, commits a tort, or engages in fraud can be held personally accountable for the consequences of that conduct regardless of the corporate structure. The second is statutory: corporate and employment legislation in Ontario and BC imposes direct personal liability on directors for certain corporate obligations, regardless of whether the director was personally at fault.
Understanding which category applies to your situation determines both the strength of the claim and the defences available. Our lawyers advise on both.
Sources of Director and Officer Liability
Breach of Fiduciary Duty
Directors and officers owe a fiduciary duty to the corporation requiring them to act honestly and in good faith with a view to its best interests. A director who diverts corporate opportunities, engages in self-dealing, competes with the corporation without consent, or uses their position for personal gain at the corporation's expense can be held personally liable for the consequences. The remedies available include an account of profits, constructive trust over assets acquired through the breach, and equitable compensation for losses suffered. For a full analysis of fiduciary duties and the remedies available for their breach, see our breach of fiduciary duty page.
Director and Officer Negligence
Director and officer negligence arises when a director or officer fails to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. This duty of care is distinct from the fiduciary duty: it is about competence rather than loyalty. A director who fails to oversee the corporation's affairs adequately, ignores clear warning signs of financial or legal problems, or approves significant transactions without proper consideration may face personal liability for losses that result from that negligence.
Courts apply the business judgment rule to protect directors who make informed decisions in good faith, even where those decisions turn out to be wrong. But that protection does not extend to directors who simply abdicate their responsibilities or who fail to take reasonable steps to inform themselves before acting.
Statutory Liability for Unpaid Wages
Under the Ontario Employment Standards Act and BC's Employment Standards Act, directors of corporations can be held personally liable for up to six months of unpaid wages owed to employees where the corporation fails to pay. This statutory directors liability applies regardless of whether the director was personally involved in the decision not to pay wages, and it can catch directors who were not actively involved in the day-to-day management of the corporation. Due diligence defences are available in limited circumstances.
Liability for Tax Remittances
The Income Tax Act and the Excise Tax Act impose personal liability on directors for unremitted source deductions and HST where the corporation has failed to make those remittances. The Canada Revenue Agency can assess directors personally for these amounts, and director liability for tax remittances is one of the most common forms of statutory directors liability encountered in practice. A due diligence defence is available where the director exercised reasonable care to prevent the failure.
Environmental Liability
Directors and officers can be personally liable under environmental legislation for contraventions of environmental laws committed by the corporation. Ontario's Environmental Protection Act and BC's Environmental Management Act both contain provisions that can make directors and officers personally liable where they directed, authorized, assented to, or acquiesced in a corporate contravention. These provisions reflect the legislature's intention to hold individuals in positions of control accountable for corporate environmental harm.
Oppression Liability
Under corporate legislation in Ontario and BC, courts can make orders against directors personally as part of an oppression remedy where the director's own conduct was oppressive or unfairly prejudicial to shareholders or other stakeholders. Personal liability under the oppression remedy is not confined to cases where the director acted dishonestly: conduct that was simply unfair in the circumstances can be sufficient where the director was the one responsible for it.
Directors liability is broader than most people realize. Whether you are at risk or pursuing a claim, the time to get advice is before the situation escalates further.
1-800-771-7882 Talk to a Director and Officer Liability LawyerDirectors and Officers Insurance in Ontario and BC
Directors and officers insurance, commonly called D&O insurance, is designed to protect directors and officers from the personal financial consequences of claims arising from their roles. It is one of the most important risk management tools available to people who serve in these positions, and understanding what it covers and what it does not is essential both for directors managing their own exposure and for claimants assessing the practical recoverability of a claim.
What D&O Insurance Typically Covers
D&O insurance generally covers the costs of defending a claim against a director or officer arising from a wrongful act committed in their corporate capacity, as well as any damages or settlement amounts that result. It typically covers claims for breach of duty, neglect, error, misstatement, misleading statements, and omissions. Most policies have separate insuring agreements covering the director personally where the corporation cannot indemnify, covering the corporation where it has indemnified the director, and in some cases covering the corporation itself for certain securities claims.
What D&O Insurance Does Not Cover
D&O policies contain important exclusions. Fraudulent or dishonest conduct, personal profit from transactions to which the director was not entitled, and claims by one insured against another are commonly excluded. Criminal fines and penalties are also typically not covered. Where the exclusions apply, the director may face the full financial consequences of a claim personally, which makes early legal advice critical when a claim is first threatened or made.
Directors and Officers Insurance in Ontario
The market for D&O insurance in Ontario has evolved significantly in recent years, with premiums increasing and underwriting becoming more selective. Organizations that do not carry D&O coverage expose their directors and officers to uninsured personal liability, which can affect the ability to attract qualified people to serve on boards. We advise directors who are assessing their coverage and assist in navigating D&O claims where insurance is engaged.
Indemnification by the Corporation
Corporate legislation in Ontario and BC permits, and in some cases requires, corporations to indemnify directors and officers against liability arising from their roles, provided the director acted honestly and in good faith. Where indemnification is available, it operates alongside D&O insurance to protect directors from personal financial exposure. Understanding the scope of available indemnification is an important early step when a director faces a claim.
Defences Available to Directors and Officers
The Business Judgment Rule
Courts in Ontario and BC apply the business judgment rule to decisions made by directors acting in good faith on an informed basis. Where a director has genuinely considered the relevant information, sought appropriate advice, and made a decision that fell within a reasonable range of business judgment, courts will not substitute their own assessment of what the right decision was. The business judgment rule is the most important protection available to directors facing negligence or duty of care claims.
Due Diligence
For statutory directors liability, including liability for unpaid wages and tax remittances, a due diligence defence is available where the director exercised reasonable care to prevent the failure. What constitutes reasonable care depends on the circumstances, including the size of the corporation, the director's role in its management, and what steps were available to prevent the non-compliance. Directors who were actively engaged in the corporation's affairs and took concrete steps to address compliance issues are better positioned to raise this defence than those who were passive or absent.
Consent and Authorization
Many acts that would otherwise constitute a breach of fiduciary duty are permissible with the informed consent of the corporation or its shareholders. Proper disclosure and approval processes at the board level are the most effective protection against future personal liability for transactions in which a director has a personal interest.
Limitation Periods
Claims against directors and officers are subject to limitation periods in both Ontario and BC. The applicable period and when it begins to run depends on the nature of the claim. Limitation arguments can be a complete answer to a claim that is brought too late and should be identified and assessed early in every matter.
Directors and Officers Liability in Ontario and British Columbia
Ontario
Directors of Ontario corporations are governed by the Ontario Business Corporations Act, which codifies the fiduciary duty and duty of care and sets out the indemnification framework. Federal corporations operating in Ontario are governed by the Canada Business Corporations Act. The Ontario Employment Standards Act imposes personal wage liability on directors. Revenue Canada assessments for unremitted source deductions and HST are governed by the Income Tax Act and Excise Tax Act. Claims proceed in the Superior Court of Justice, and the Commercial List in Toronto is the appropriate forum for complex corporate liability disputes.
British Columbia
Directors of BC corporations are governed by the BC Business Corporations Act, which contains its own fiduciary duty and duty of care provisions and indemnification framework. The BC Employment Standards Act imposes wage liability on directors. Environmental liability arises under the BC Environmental Management Act. Disputes proceed in the BC Supreme Court. We practice in both provinces and advise on how the applicable legislation in each jurisdiction affects the analysis and the available remedies.
Directors and Officers Liability: Frequently Asked Questions
Can a director be personally liable for a corporation's debts?
Generally, the corporate structure protects directors from personal liability for the corporation's debts. However, directors can be personally liable for specific statutory obligations including unpaid employee wages under employment standards legislation and unremitted source deductions and HST. Directors can also be personally liable where they have provided personal guarantees of corporate debt, where they have engaged in conduct that constitutes a separate tort, or where a court lifts the corporate veil in exceptional circumstances.
What is the business judgment rule and how does it protect directors?
The business judgment rule is a legal principle that protects directors from personal liability for business decisions that turn out to be wrong, provided those decisions were made honestly, in good faith, and on an informed basis. Courts applying the business judgment rule will not substitute their own assessment of what the right decision was, as long as the decision fell within a reasonable range of options available to a director acting prudently. The rule does not protect directors who acted dishonestly, who failed to inform themselves adequately, or who had a personal interest in the outcome they did not disclose.
What does directors and officers insurance cover in Ontario?
D&O insurance in Ontario typically covers the costs of defending claims against directors and officers for wrongful acts committed in their corporate capacity, along with any resulting damages or settlement amounts. It generally covers claims for breach of duty, negligence, errors, and omissions. It does not typically cover fraudulent or dishonest conduct, personal profits to which the director was not entitled, or criminal fines. The specific coverage depends on the terms of the policy, and reviewing the policy carefully when a claim arises is an important early step.
I am a director of a corporation that has not paid its employees. Am I personally liable?
Potentially, yes. Under Ontario's Employment Standards Act and BC's Employment Standards Act, directors can be held personally liable for up to six months of unpaid wages where the corporation fails to pay. This liability applies regardless of whether you were personally involved in the decision not to pay. A due diligence defence is available in limited circumstances where you took reasonable steps to prevent the failure, but the threshold is demanding. You should get legal advice promptly if this situation has arisen.
What is the difference between directors liability and officer liability?
Directors are elected by shareholders to oversee the management of the corporation and are subject to both common law and statutory duties. Officers are appointed by directors to manage the day-to-day operations of the corporation and owe similar fiduciary and duty of care obligations. In practice, the liability analysis for officers is similar to that for directors, though statutory liability provisions sometimes apply specifically to directors rather than officers. The analysis depends on the specific role, responsibilities, and conduct involved.
Can I resign as a director to avoid personal liability?
Resignation can limit future liability but does not eliminate liability for obligations or conduct that arose before the resignation. For statutory liabilities such as unpaid wages and tax remittances, the timing of the director's involvement and resignation is relevant to the assessment of liability. Resignation does not protect a director from liability for breaches of fiduciary duty or negligence that occurred during their tenure. In some cases, how and when a director resigns can affect the availability of defences, so taking legal advice before resigning in a distressed situation is important.
We want to sue a director personally for damages caused to our corporation. What do we need to establish?
The answer depends on the basis for the claim. For a breach of fiduciary duty claim, you need to establish that a fiduciary duty existed, that it was breached, and that the breach caused a loss or that the director profited from it. For a negligence claim, you need to establish that the director failed to meet the standard of care, that the failure caused a loss, and that the loss was not protected by the business judgment rule. For statutory liability claims, the applicable statute sets out the specific elements. See our breach of fiduciary duty page for more detail on the fiduciary duty analysis.
Do you act for both directors facing claims and parties suing directors?
Yes. We act for directors and officers defending liability claims and for corporations, shareholders, and other parties pursuing claims against them. We cannot act for both sides in the same matter, but our experience on both sides of these disputes makes us more effective advocates on either one.
Speak With a Directors and Officers Liability Lawyer
Tell us about your situation. We will follow up promptly to discuss your options. You can also reach us directly at 1-800-771-7882.