Me Mélissa Pelletier
Most directors of legal entities are not aware of the actual extent of their liability, all the more since such liability may arise from many sources.
Indeed, directors are submitted to legal obligations, such as acting prudently and diligently in the best interest of the legal entity. The director’s liability with respect to this obligation may even arise from his inaction, given the circumstances. For example, he may not choose to ignore a situation or refuse to unveil a fraudulent act. He must enquire and take all appropriate measures in the interest of the legal entity. Directors must also act fairly and honestly, which implies that they must divulge any conflict of interest in relation with the accomplishment of their duties, and refrain from voting or participating in debates when their position comes into conflict with the subject of discussion. Failing to comply with this obligation of divulgation may result in the annulment of a decision, and even in the restitution of any profit arising from said decision, if such is the case. In order to avoid engaging their liability, directors must ascertain that they respect each and every terms and conditions stipulated in the status, regulations and constitutive laws of the legal entity. This could be the case, notably, in matters of capital stabilization, dividend allowances, loans to shareholders, etc.
Furthermore, certain laws expressly provide for cases involving the civil liability of a director where, for example, a legal entity would not assume its duties and obligations. It is the case with the payment of salary arrears, for which directors may be held liable for an amount representing up to six months salary, of sums deducted at source by employers (income tax, RRQ, employment insurance) and of sums collected relatively to GST and QST. Other particular laws may also add to director’s’ liability.
Directors may also be held criminally liable, be fined, and, in the worse of cases, be imprisoned. These sanctions arise from various laws, notably laws pertaining to environment.
To this may be added the director’s contractual liability. Indeed, directors often endorse some of the company’s obligations. If some of these contracts limit the validity of certain stipulations to the duration of the director’s functions, other contracts may bond directors for a longer period.
This does not mean that directors should reconsider their employment. However, in order to avoid being put in a difficult position, they should inquire further as to the extent of their liability and adjust their conduct accordingly. A director who wishes to protect himself better may subscribe a professional liability insurance policy fit to his needs.
One must not forget that these rules apply equally to large and small companies and non profit organizations as well.
Finally, it is important to note that resignation is not always the appropriate solution. Indeed, in risky situations, loss of control is without a doubt the director’s worse enemy, as his liability is not always extinguished on the day he leaves his position…
The present article is not a legal opinion and is published for information purposes only. For more information concerning this subject or any related subject, please do not hesitate to contact the writer or one of our professionals.