Corporate Liability: Directors

​Corporate Liability for Directors 

The General Approach
​Corporations are a separate entity from its directors and officers; therefore directors and officers are not normally personally liable for a corporate action, [1] whether in contract, fiduciary duty or tort[2]. Unless the plaintiff (the corporation) can establish that a duty of care was personally owed by the directors, it cannot bring a case of negligence or breach of statutory duty against the directors[3]. However, if a director was personally a party to the commission of the tort, he/she will be personally liable.
 
Exceptions
There are many statutory sources of liability for directors such as under corporation legislation, employment obligations, workplace safety legislations and tax legislations. Of all liabilities that directors face, those relating to tax remittance are more likely to happen.
 
According to section 227.1(1) of the Canada’s Income Tax Act (ITA), when a corporation fails to deduct, withhold, remit or pay tax as required, directors are jointly and severally, or solitarily, liable with the corporation to pay. Also in the ITA, section 242 provides that where a corporation commits an offence under this act, any director of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission is a party to and guilty of the offence. These offences can include failing to file tax returns, failing to remit taxes, failing to keep carry out compliance offers, making false statements on tax returns, and failing to keep records and documentation.
 
Defences 
There are two significant defences available. The business judgement rule provides that courts generally do not second-guess the business decisions of directors and officers. A court will not substitute its business judgements[4]. Director’s decisions only needs to have been reasonable in the circumstances which they were made. The decisions do not have to be the best course of action.
 
The due diligence defence is usually given by legislation imposing liability. The defence requires the director to show that he/she gave good effort to prevent the harm that occurred[5]. This defence protects a director from liability if he/she can show that they were actively engaged in activities designed to prevent the harm in question. 
 
Kara Cao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.

REFERENCES
[1] Blacklaws v. 470433 Alta. Ltd., [2000] A.J. No. 725, 7 B.L.R. (3d) 204 (Alta. C.A.)
[2] Mentmore Manufacturing Co. v. National Merchandise Manufacturing Co., [1978] F.C.J. No. 521, 40 C.P.R. (2d) 164 at 171 (F.C.A.), per Le Dain J.
[3] Montreal Trust Co. of Canada v. ScotiaMcLeod Inc., [1994] O.J. No. 2194, 15 B.L.R. (2d) 160 (Ont. Gen. Div.)
[4] Bryce C Tingle, Start up and Growth Companies in Canada: A Guide to Legal and Business Practice, 1st ed (Canada: LexisNexis Canada, 2005) at 192 [Tingle, Start Up & Growth Companies].
[5] Ibid., at 193.