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Introduction
In British Columbia, directors play a critical role in the governance of corporations and non-profit societies. Their responsibilities are primarily governed by the Business Corporations Act (BCA) for private companies and the Societies Act (SA) for non-profits. Directors are fiduciaries, meaning they must act in the best interests of the entity they serve while adhering to legal, ethical, and financial obligations.
Failure to meet these duties can expose directors to personal liability, regulatory penalties, and legal actions. This article provides an overview of directors’ duties under BC law, the potential liabilities they face, and strategies for mitigating legal and financial risks.
Duties of Directors in British Columbia
Directors in BC owe several fundamental duties, which can be categorized into fiduciary duties, statutory obligations, and common law responsibilities.
1. Duty of Loyalty
Directors are fiduciaries and owe a fiduciary duty to their organisations. They must act honestly, in good faith, and in the best interests of the corporation or society. This duty prevents self-dealing, conflicts of interest, and personal enrichment at the expense of the entity.
The BCA under S. 142(1)(a) requires directors to act honestly and in good faith with a view to the best interests of the company. Similarly, the Societies Act under S. 53(1) requires society directors to act honestly and in good faith with a view to the best interests of the society.
In Strother v. 3464920 Canada Inc., 2007 SCC 24 the Supreme Court of Canada addressed the fiduciary duties of lawyers, particularly concerning conflicts of interest and the obligation to provide candid advice. Directors must disclose any direct or indirect personal interest in transactions involving the corporation or society and must recuse themselves from decision-making where conflicts arise. See BCA S. 147 and Societies Act S. 56.
2. Duty of Care (Duty to Act Prudently)
Directors must act prudently, diligently and with the level of care a reasonably competent person would exercise in similar circumstances. Directors are required to exercise the care, diligence, and skill that a reasonably prudent individual would exercise in comparable circumstances. See BCA S. 142(2). The Societies Act imposes similar obligations on directors of non-profits (S. 53(2)). This duty includes regularly attending meetings and reviewing financial statements, staying informed about corporate affairs, and making informed decisions based on proper due diligence.
3. Statutory Duties
In addition to common law obligations, directors must comply with statutory requirements under BC law, such as;
- Corporate Records & Reporting Compliance: Ensuring the entity files annual reports and maintains proper corporate records (BCA S. 51).
- Financial Management: Ensuring proper financial controls and preventing unauthorized financial activities (Societies Act S. 35-39).
- Employment & Tax Compliance: Directors may be held personally liable for unpaid employee wages, source deductions, and tax obligations (Employment Standards Act S. 96 (1); Income Tax Act S. 227.1 (1)).
Liabilities of Directors in British Columbia
Failure to meet statutory or fiduciary obligations can result in personal liability, regulatory enforcement, and legal claims against the directors.
1. Personal Liability for Breach of Duty
Directors may be personally liable for financial losses caused by negligence, self-dealing, or misconduct. If a director acts outside their authority or fails to exercise due diligence, they can be sued for damages. In Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, the Supreme Court of Canada held that directors must act prudently and in good faith when making decisions.
2. Statutory Liabilities
Certain statutes impose direct financial liability on directors, including liability for unpaid employee wages as directors can be held liable for up to two months’ unpaid wages of each employee under the Employment Standards Act. Directors can also be personally liable for the company’s unmet tax obligations such as unpaid GST, PST, and payroll deductions. Directors may also face fines or criminal liability for environmental breaches and violations under the Environmental Management Act.
3. Derivative Actions and Oppression Claims
Shareholders or society members can sue directors for misconduct through derivative actions or oppression claims. BCA S. 227 allows shareholders to take legal action if directors harm the company’s interests. The Supreme Court clarified that directors must balance the interests of all stakeholders when making decisions; BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.
Mitigating Directors’ and Officers’ Liability
To minimize risk exposure, directors should adopt best practices in governance, compliance, and risk management.
1. Education and Training
Directors should attend ongoing legal and financial training to stay informed of their obligations and corporate governance best practices.
2. Implementing Strong Internal Controls
Establishing clear policies on corporate governance, financial oversight, conflict of interest disclosures, and risk management helps prevent breaches of duty.
3. Director & Officer (D&O) Liability Insurance
D&O insurance provides financial protection against legal claims, lawsuits, and regulatory penalties. Coverage typically includes:
- Legal defense costs
- Settlements or damages awarded in lawsuits
- Protection against wrongful dismissal claims
4. Seeking Legal and Financial Advice
Directors should consult legal counsel on corporate governance matters, regulatory compliance, and potential liabilities.
5. Regularly Reviewing and Updating Corporate Policies
Annual corporate policy reviews ensure compliance with new regulations, industry standards, and best practices.
Conclusion
Navigating directors’ duties and liabilities under BC law requires a deep understanding of fiduciary responsibilities, statutory obligations, and risk mitigation strategies. While directors are expected to act in good faith, with loyalty and due care, failure to meet these duties can result in personal liability and legal repercussions. By implementing strong governance practices, securing D&O insurance, and seeking ongoing legal guidance, directors can effectively fulfill their obligations while minimizing risks to themselves and their organizations.
If you require legal advice regarding director responsibilities, corporate governance, or risk management, Arcstone Law Corporation can assist. You can contact us via email at admin@arcstonelaw.com or schedule a consultation on our website. All legal services are provided by Arcstone, a law corporation.
