Directors’ duties and liabilities

A buyer who joins the board of a company they have bought takes on these duties as a director. Section 122 of the Canada Business Corporations Act (CBCA) requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Corporations Canada calls the duty of care one of the most important duties the CBCA sets for directors and officers.

Liability for improper payments

Under section 118(2), directors who vote for or consent to a resolution authorizing certain payments are jointly and severally liable to restore amounts paid out and not otherwise recovered. The list includes a purchase or redemption of shares contrary to section 34, 35 or 36, and a dividend contrary to section 42. Section 123(4) says a director is not liable under section 118 or 119 if the director exercised that care, diligence and skill, including reliance in good faith on the sources it lists. Ontario’s Business Corporations Act has its own versions in sections 130 and 134. This entry covers the CBCA and Ontario’s Act only; check the Act that governs the company.

What to ask

• Which Act governs the company, and what do its articles and any unanimous shareholder agreement require?
• Were past dividends and share redemptions approved by resolutions that met the statute’s tests?
• Which records show how the board reached recent decisions?

For wage and tax-remittance exposure, see director liability and the answer on director liability in a share purchase.