Directors' Duties and Responsibilities in Ontario
**Written by Adele Zhang, Summer Student at Lee Workplace Law
A director's duties are crucial to the proper functioning of a corporation. In Ontario, directors are responsible for supervising and overseeing the management of the corporation's daily operations. Directors owe both a fiduciary duty to the corporation as well as a duty of care to the corporation and corporate stakeholders.
In addition to accepting responsibilities on behalf of the corporation, directors may also shoulder personal liabilities for the corporation. Directors may be personally liable if they fail to exercise the expected care, diligence, and skill.
In this blog post we provide an outline of the general duties and responsibilities of a director under the Ontario Business Corporations Act ("OBCA").To learn more about how an individual may become a director, check out our blog post: Becoming a Director of an Ontario Corporation.
Managing Daily Operations
As set out in section 115 (1) of the OBCA, a director must manage or supervise the management of the business and affairs of the corporation. This means that a director can act on behalf of the corporation without needing shareholder approval. Some examples of this authority include the power to buy and sell company property, enter into business contracts, and manage company accounts.
However, a director's authority may be restricted by a unanimous agreement of the shareholders. Pursuant to section 108 (3) of the OBCA, a written declaration, also known as a shareholder agreement, can restrict in whole or in part the managerial powers of a director, and instead grant decision-making powers to the shareholders. In these cases, the shareholders will hold the rights, powers, duties, and liabilities of a director to the extent set out by the terms of the shareholder agreement.
Fiduciary Duty
Directors owe fiduciary duties to the corporation. These fiduciary duties have been codified in section 134 (1) (a) of the OBCA, which requires that all directors act honestly and in good faith with a view of the best interests of the corporation. This obligation is very broad in scope, including requiring directors to avoid conflicts of interest with the corporation, and to ensure that the corporation acts in compliance with governing statutes, regulations, and laws.
The fiduciary duty is specific to the interests of the corporation. Absent special circumstances, directors do not owe fiduciary duties to shareholders or other directors.
Duty of Care
Section 134 (1) (b) of the OBCA further states that a director must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This duty of care requires the director to make informed, reasonable, and careful decisions. In this process of informed decision-making, directors often need to consider and seek input from other corporate stakeholders such as employees, the management team, and shareholders.
In Dhillon v Narayan, 2019 CanLII 110825 (ON SCSM), the court confirmed that while directors owe a fiduciary duty to the corporation specifically, they more broadly owe a duty of care to the corporation and the corporate stakeholders.
When assessing whether a director has breached their duties, the court will consider whether the director acted prudently, reasonably, and in good faith in their decision-making processes.
Liability
Both the common law and statutes impose personal liability on directors. A director may be personally liable if they fail to act with the care and diligence required of them, and as set out in section 134 (1) of the OBCA.
For example, section 131 of the OBCA states that directors of a corporation are jointly and individually liable to employees for up to 6 months of unpaid wages or 12 months of unpaid vacation pay. Directors may also be exposed to liability relating to corporate transactions, taxes, fraud, and bankruptcy.
Takeaways
It can be difficult to understand all of a director's duties, especially regarding liability and legal obligations. Directors are strongly encouraged to consult a lawyer to ensure that they understand these requirements and are properly fulfilling their duties to the corporation. Lee Workplace Law would be happy to help.
