DUTIES AND LIABILITIES OF CORPORATE DIRECTORS AND OFFICERS
Most of the duties and liabilities of British Columbia corporate Directors and Officers are codified in the relatively new Act which came into force on March 29th 2004. This new Act – named the B.C. Business Corporations Act – was the greatest reform of corporate law in British Columbia in thirty years. This Business Act made British Columbia a modern business jurisdiction.
SECTION 142(1) of the Act states:
A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must
(a) act honestly and in good faith with a view to the best interests of the company,
(b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances …
Directors and Officers have personal responsibility to act properly to the best of their ability in the interest if the corporation – with corresponding liability for any failure.
If you look carefully at the wording in section 142(1) you will note that corporate Directors and Officers MUST act honestly and MUST act in good faith. They must also act “with a VIEW to the best interests of the company”. In other words, you must make an honest sincere effort to do what is best for your corporation. The Court looks at the circumstances of the decision and determines whether the decision was reasonable at the time – the test is not a 20/20 hindsight perfection test. What is reasonable depends on many factors including what information was available at the time, how much time was available to consider the choices, what choices existed at the time, what knowledge and skill did the decision maker have at the time.
The new Act also provides some defences to the liabilities inherent in the positions of Directors and Officers. Section 157 of the Act provides that:
(1) A director of a company is not liable under s. 154 [where directors of a company vote for or consent to a resolution that authorizes the company to do something contrary to the New Act] and has complied with his or her duties under section 142(1) if the director relied, in good faith, on
(a) financial statements of the company represented to the director by an officer of the company or in a written report of the auditor of the company to fairly reflect the financial position of the company,
(b) a written report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by that person,
(a) a statement of fact represented to the director by an officer of the company to be correct,
(d) any record, information or representation that the court considers provides reasonable grounds for the actions of the director, whether or not that record was forged, fraudulently made or inaccurate.
(2) A director of a company is not liable under s. 154 if the director did not know and could not reasonably have known that the act done by the director or authorized by the resolution voted for or consented to by the director was contrary to this Act.
In summary, if you read all the documents carefully, there is no liability for making decisions based on information in the documents reasonably believed to be true but is later discovered to be false.
Another major source of liability is related to the duty to always act in the best interests of the corporation – not yourself. Directors and Officers must not make any decisions nor enter in to any transactions which materially affect the corporation. Historically Directors and Officers – since they are fiduciaries like trustees – they cannot profit from their position. Basically, if there is any possibility that the corporation should know then the Director or Officer must disclose the conflict of interest otherwise, amongst other things, a full accounting of all profits must be made.
However, in addition to providing exceptions including the commons sense position of being the sole shareholder, the Act allows for the corporation to approve of the conflict afterwards as well as before the conflict occurs. Like all major decisions and agreements, it is very important that there be written disclosure of the conflict and written approval by the corporation.
Section 160 of the new Act has increased the indemnity to be given by a corporation for its Directors and Officers and affiliates – now it can be given without court approval, and for both past and current people in those positions. Further some indemnity is mandatory. Given the liability of corporate representatives today, it is very important that written indemnities be obtained after legal advice to ensure proper coverage. Further, personal liability insurance should be obtained – at the expense of the corporation.
Please ask us if you have any questions. Email Andrew Liggett at [email protected].