Bank director legal liability in Canada: How does it work?

Banks and other large corporations are typically headed by a group of people called directors. Their role involves making big decisions, often covering policy matters, budgets, and the overall operation of the bank. Functioning as a group, the board of directors usually vote on matters for the general direction of a bank. 

Note though that the board of directors does not have absolute control. Every decision made should be compliant with governing laws such as the Bank Act, OSFI regulations, FINTRAC regulations, and the bank’s own by-laws. They also have responsibilities and obligations that open them to liabilities in case of unlawful acts. 

Official capacity of bank directors 

An important thing to understand about bank director legal liability in Canada is that the bank is a different entity from the directors. The director can act in an official capacity as an officer of the bank or in a personal capacity. To illustrate, imagine that the bank took out a loan from another financial institution. 

The loan contract is approved by the directors acting as borrowers on behalf of the bank. For purposes of repayment, the borrower is the bank and not the director. The director is not personally liable for the debt taken by the bank, provided that the loan is really for the benefit of the bank. 

The lines can become blurred if the loan was used by the director for personal purposes. Or perhaps the loan was taken out without going through the proper process. In these cases, the bank director legal liability in Canada may be viewed as personal liability. Hence, the director must pay the loan using his personal assets. 

Responsibilities of a bank director 

Distinguishing between official acts and personal acts is critical when deciding whether a bank director has legal liability in Canada. Note though that just because a director acted in his official capacity does not mean there’s zero liability. The nature of the penalty or liability involved merely changes. 

Before talking about penalties, however, it’s important to first talk about the legal responsibilities of directors. 

Governing laws 

Since banks are filled with public interest, there are numerous laws designed to control their operation. Here are just some of the laws involved and their primary functions: 

• Bank Act, which deals with the economic and financial welfare of Canada through banks. Implementing agencies include the Office of the Superintendent of Financial Institutions (OSFI) 

• Canada Business Corporations Act (CBCA), which governs the incorporation of businesses in the country 

• Canada Deposit Insurance Corporation Act (CDIC) 

• Canadian Payments Act (CPA) 

• Proceeds of Crime (Money Laundering) and Terrorist Financing Act administered through the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) 

• Ethics Code 

Implementing agencies routinely release regulations according to their powers. The responsibilities of bank directors are further limited by provincial laws, territorial laws, and the internal policies of the bank. Here's a little explainer about corporate directors: 

Learn more about how bank director legal liability works by consulting with the best banking law firms in Canada as ranked by Lexpert. 

Key obligations of bank directors 

Directors have a legal duty to the bank and by extension, to the stakeholders of the bank. This usually means the depositors or other entities that transact with the bank. The specifics of director responsibilities can be broken down into several categories: 

Fiduciary duty 

This refers to the director’s obligation to act in the best interests of the company. Directors are supposed to act honestly and in good faith. All decisions must be made for the benefit of the bank instead of just a few shareholders. 

Conflicts of interest are a concern that every director must watch for. This can be instances when decisions overlap with other interests. A good example is if the bank extends a large loan to another business owned by the director. This is a conflict of interest because the director must decide on a matter that directly or indirectly benefits them. 

Duty of care 

Duty of care refers to the obligation of bank directors to stay informed about all transactions involving the bank. Of course, routine day-to-day activities are not part of this duty. Directors do not have to approve every single person who wants to open an account with the bank. 

Instead, directors have a duty of care for the bigger picture. This means attending board meetings and reviewing critical documents. They are also involved in drafting and approval of policies in compliance with bank laws. For example, while directors do not approve of each depositor, they approve the policies that set out the requirements for a new account. 

Since directors have the ultimate responsibility of compliance, it is also the bank director’s legal liability in Canada if those responsibilities are not met. 

Official and personal liability of bank directors 

Bank director legal liability in Canada happens if the director does anything that violates their key obligations. A director could be liable together with the corporation, with other directors, or just by himself. 

When can a director be held personally liable in Canada? 

Directors become personally liable if their actions are in violation of their fiduciary duty and duty of care. The degree of negligence is often high so that it becomes obvious that the director is acting in his best interest only. If this is the case, then the director is the only one liable for any violations. This determination is often left to the court. 

Liability in their official capacity can happen if the director neglects their duty of care. That is, if they acted negligently, causing damage to the corporation or shareholders. In these situations, the director could be jointly and severally liable to the bank.  Common examples of this include: 

• Unpaid taxes by the bank to the State or if there is insufficient remittance. This includes payroll deductions for employees and the payment of Goods and Services Tax (GST) and Harmonized Sales Tax (HST) 

• Unpaid wages of employees covering six months and vacation pay in case of insolvency of the corporation 

• Violation of environmental laws. Unlawful activities related to natural resources can carry high penalties to a corporation and its directors. This is because of the high value placed by Canada on the environment 

• Other wrongful acts 

How long can a bank director be held liable? 

A director can be liable even if they resign from the board. If the alleged violations happened during the tenure of the director, then they may still be involved in any suit. Of course, directors can always defend themselves and make the case that they were acting in the best interest of the bank. 

How do you protect a bank director from legal liability? 

Determination of bank director legal liability in Canada is subjective. It takes into consideration the acts of the director in relation to the corporation. There are ways directors can mitigate chances of personal liability by understanding the following concepts: 

Business judgement rule 

The business judgment rule refers to the discretionary power to make decisions for the corporation. Directors aren’t expected to be perfect. If the decision was informed and made in good faith, then there may be no liability. The test is whether directors made the best possible decision in light of the information available at the time. 

Of course, the information used as the basis of the decision must be borne out of a high degree of diligence. Simply put, the decision must be based on information that was thoroughly researched, checked, and verified. Acting on unverified information cannot be excused under the business judgement rule. 

Disclosure of conflict of interest 

Generally, directors are also required to inform the board of a possible conflict of interest. In a previous example, conflict happens when a bank director has to decide about granting a loan to a business that he owns or co-owns. Does that mean a bank director can never borrow from a bank where he sits on the board? Of course not! 

The fiduciary responsibility is met if the director informs others about the conflict of interest. In these cases, the bank’s internal rules typically have policies on how to handle the matter. For example, the director in conflict can abstain from voting so that they would not sway the vote in their favor. 

Staying informed 

Part of their duty of care means staying on top of all the developments within the organization. This means reviewing contracts, understanding policies, and applying the letter of law. Bank director legal liability in Canada may be mitigated by showing that all decisions made were done in good faith and based on verified information. 

Developing internal policies 

Directors aren’t expected to control every single transaction in the bank. Instead, they are mandated to create policies that will help guide the day-to-day operations of the organization. Small matters such as requirements for opening an account or manner of filing reports can be left to others upon the creation of policies. 

Internal policies should include having a compliance program that’s faithful to its source law. Having a policy in place helps distribute the work and offers directors a layer of protection in case bank employees deliberately ignore the policies. 

Get insurance 

Bank director legal liability in Canada may be diffused by director’s liability insurance. This is something the corporation can secure for itself, ensuring that it's covered in case of problems. Insurance often covers legal fees, settlements, and judgements against directors. 

Piercing the corporate veil 

As a rule, the bank director is a separate person from the bank. The bank is another person but because it is created by law, it must act through its directors. This is why even if a bank does something wrong, the bank directors aren’t always considered liable. 

In Canada and in most jurisdictions, however, there is a legal concept called “piercing the veil of corporate entity.” Under this concept, the law penetrates through the personality of the bank and goes straight to the directors. Essentially, the law disregards the bank so that the directors become liable for the actions of the bank. 

Whether or not the corporate veil should be pierced is a decision made by the court. Circumstances necessitating piercing of the veil can, therefore, change from time to time. A classic example though is when there is a single director with high voting power so that their decision is always the final decision. 

Here’s a good explainer about the concept of piercing the corporate veil: 

Want to find out more about legal doctrines? Check out Legal FAQs page for more information about banking. 

Penalties in case of bank director legal liability in Canada 

Financial penalties are just one aspect of liability that bank directors may have in case of lawful violations. Depending on the nature of the law violated, bank director legal liability in Canada can include criminal charges or administrative penalties. Specifically, a director could be made to do any of the following: 

• Pay fines, taxes, or wages of employees deducted from their personal assets 

• Imprisonment in case of involvement in criminal activities while using their official position. A good example is if directors facilitate activities in violation of the anti-money laundering laws 

• Directors may also be forbidden from holding future office as a director 

Of course, that’s not counting damage to the reputation that often comes with these lawsuits. 

Protecting the corporation 

Directors can make numerous mistakes in their capacity as directors. This is why having a team dedicated to protecting the corporation is critical. This team is often composed of expert financial institution lawyers whose jobs are to update, inform, and advise directors about any developments that could impact the bank. 

Need more information about the role of bank directors in Canada? Get targeted help from Lexpert-ranked best banking lawyers in Canada.