Directors' & Officers' Liability and corporate litigation lawyers comprise the provision of advice and representation, whether by way of counsel, negotiation, judicial proceedings, or various forms of alternative dispute resolution, to corporations, directors and officers, and insurers on directors' and officers' liability, indemnity and insurance options, corporate governance obligations and risk management strategies.
Practitioners familiar with the statutory, common law, and ethical obligations as applied to directors and officers are especially called upon to provide advice for significant corporate events such as mergers and acquisitions, corporate restructurings and insolvencies, ongoing business operations, and litigation.
A general rule in corporate law states that a corporate director or officer (D&O) will not be held personally liable for any act of a corporation. This is based on the corporate law principle that a corporation is a juridical entity created by law which is separate from its shareholders, directors, officers, etc. However, there are a few exceptions to this general rule, especially when the corporation or a third-party suffers damages due to that act of the D&O.
When a case is filed against a director or an officer because of a crime or breach of any obligation imposed on them, a corporate litigation lawyer can either assist any of the parties – the corporation as the plaintiff, or the director or officer as a defendant. To prevent this from occurring, a corporate litigation lawyer may also provide legal advice to the corporation and their D&O so that they would be properly informed of their duties and the prohibited acts under different laws.
Some of the common circumstances for a D&O to become personally liable are the following:
A common reason for the personal liability of corporate directors and officers is when they act in their personal capacity or in their personal interests, and not in their official function as a director or officer. Here, the corporation is absolved for the personal acts of its D&O, and the latter will be solely and personally responsible for any damage, injury, or financial obligation resulting from the said act.
An example of this is when third parties are left to believe that they are transacting with the director or officer as an individual person, and not as a representative of a corporation. Another circumstance is when a D&O has exceeded their scope of authority granted to them by the corporation. In this light, when an agent of the said D&O has acted beyond the scope given by them to the said agent, the director or officer would be jointly liable for any injury caused by the act of the agent.
According to Section 112 of the Canada Business Corporations Act, directors and officers have a duty of care to the corporation in the exercise of their powers and in the discharge of their duties. It further states that they must act with honesty and in good faith, with the best interest of the corporation in mind (and not their personal interests), and exercise due diligence that of a prudent person in comparable circumstances.
In Section 112(3), it is explicitly stated that no provision on a corporation’s articles and by-laws, or any contract, can exculpate, minimise, or release the directors from liability when there’s a breach in their duty of care imposed by the Act. Hence, a director violating this duty of care will be personally liable for any loss that the corporation may suffer because of such violation.
Section 115(3) of the Act also provides for the limitations on the authority of a managing director in the exercise of his/her duties. Also, Section 118(1) and (2) provide for a director’s liability in relation to corporate shares, commissions, and payment of a dividend or indemnity that is in contravention of the standards set by the Act. If such director violates any of these provisions, he/she will be personally liable before the corporation and will be obliged to return or pay the corporation of the amount that it suffered due to that act.
In connection with the obligation of a director or officer to comply with their duty of care, they are also required to act according to their fiduciary duty to the corporation. This fiduciary duty obligates the D&Os to maintain confidentiality of any sensitive information or matter they have acquired as a result of their position. It also mandates the D&Os to avoid any conflict of interest between their personal interest and that of the corporation.
Should there be a possible conflict of interest, the D&O concerned is required to disclose it in a timely manner. Breach of this fiduciary duty puts the D&O to be personally liable for any loss the corporation suffers due to such breach.
A director or officer would also be personally liable if – deliberately or negligently – a corporation they serve has not been able to remit to the Canada Revenue Agency (CRA) its mandatory financial obligations, and the CRA is unable to recover said financial obligations from the corporation.
These financial obligations are the income taxes, goods and services tax (GST) remittances, and Employment Insurance or the Canada Pension Plan remittances, which includes the failure to deduct from its employees these insurance or pension plan payments.
A D&O may check with a corporate litigation lawyer for specific defenses depending on the circumstances of their case. But a common defense for a D&O is the exercise of good faith in the exercise of the duties imposed on them by the corporation and by law.
Under Section 124(6) of the Canada Business Corporations Act, a corporation may provide for a D&O insurance for the benefit of its directors or officers, or even for its former directors or officers, to protect said D&Os from any liability arising out of their official conduct as a corporate D&O. This insurance is used when said D&Os are being personally sued either by the corporate employees, its vendors, competitors, or even their co-D&Os.
Generally, a D&O insurance will cover trial costs, settlements, and other costs. An exception of this insurance policy are illegal acts conducted by the D&O.
When a corporation uses a D&O insurance policy, a corporate litigation lawyer may be consulted to explain such insurance policy, including its subject matter and amounts covered, especially when one is a contract of adhesion.
In need of a corporate litigation lawyer, either as a corporation to institute a court against a D&O, or as a D&O who has been held personally liable? Scroll down below to see a list of the best corporate litigation lawyers in Canada who have achieved Lexpert Ranked status.