Ontario Directors' Duties: Fiduciary Duty, Duty of Care, and Personal Liability

Fiduciary Duty: Best Interests of the Corporation

Section 134(1)(a) of the Business Corporations Act (Ontario) (OBCA) and s.122(1)(a) of the Canada Business Corporations Act (CBCA) require every director and officer to act honestly and in good faith with a view to the best interests of the corporation. This is a fiduciary duty — the director owes the duty to the corporation itself, not to the shareholders, creditors, or other stakeholders.

The Supreme Court of Canada confirmed the scope of this duty in BCE Inc v 1976 Debentureholders [2008] 3 SCR 560:

• Directors owe their duty to the corporation — not to any particular group of shareholders, not to creditors, not to any class of stakeholders
• In determining what is in the best interests of the corporation, directors may and should consider the interests of shareholders, employees, creditors, consumers, governments, and the environment where those interests are relevant to the corporation's long-term wellbeing
• Directors are not required to maximize short-term shareholder value — they can take a long-term view and consider stakeholder interests, provided their ultimate focus is the best interests of the corporation
• The controlling shareholder cannot instruct a director to act against the corporation's best interests — the fiduciary duty cannot be waived by majority shareholders

Duty of Care: OBCA s.134(1)(b)

In addition to the fiduciary duty, every director and officer must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances (OBCA s.134(1)(b); CBCA s.122(1)(b)). This is a negligence-based standard rather than a fiduciary standard:

• Objective standard — compared to a reasonably prudent person in comparable circumstances; courts compare the director to a person with similar experience and background in a similar position
• Enhanced standard for experts — a director with financial expertise sitting on an audit committee is held to the standard of a reasonably prudent person with that expertise
• Reliance on experts — a director may rely in good faith on the reports of officers, lawyers, accountants, and other experts engaged by the corporation (OBCA s.135(4)); reliance must be reasonable
• Attendance and engagement — directors who consistently fail to attend board meetings, fail to read materials, or rubber-stamp management decisions without proper scrutiny may be found in breach of the duty of care

Business Judgment Rule

The business judgment rule protects directors from personal liability for business decisions that, in hindsight, turned out badly. Courts will not second-guess a director's exercise of business judgment where:

1. The decision was made in good faith (honest belief that the decision was in the corporation's best interests)
2. The director had no material conflict of interest in the decision
3. The director was reasonably informed (read the relevant materials, consulted experts where appropriate)
4. The decision fell within the range of reasonable business decisions — not so unreasonable that no reasonable director would make it

The leading Ontario authority is Maple Leaf Foods Inc v Schneider Corp (1998) 42 OR (3d) 177 (ONCA), where the court adopted a deferential approach consistent with the Delaware business judgment rule. The business judgment rule is not a blanket immunity — it does not protect:

• Decisions made in bad faith or with a conflict of interest
• Decisions made without any reasonable basis of information
• Gross negligence or willful blindness

Conflict of Interest: OBCA s.132

A director or officer who has a material interest in a contract or transaction to which the corporation is (or is proposed to be) a party must disclose the interest to the board and generally must not vote on the resolution approving the contract or transaction (OBCA s.132; CBCA s.120):

• Written disclosure requirement — disclosure must be made in writing and entered in the minutes; general notice of an interest in a company may satisfy disclosure for subsequent contracts (OBCA s.132(6))
• No vote on conflicted resolution — the conflicted director must not vote on the board resolution approving the transaction; if they vote, the transaction may be voidable
• Exceptions — minor contracts (officer remuneration, loans to directors in certain circumstances, and transactions where the interest consists only of a directorship or shareholding) may be exempt
• Effect of disclosure and approval by disinterested directors — a properly disclosed and approved related-party transaction is not automatically void; courts then assess whether it was fair to the corporation on its merits
• Oppression remedy exposure — even where OBCA s.132 procedures are followed, a related-party transaction that is unfair to minority shareholders may attract an oppression remedy application

Personal Liability for Employee Wages: OBCA s.131

Directors of an Ontario corporation are personally and jointly and severally liable for wages owing to employees up to six months' wages if the corporation fails to pay them (OBCA s.131; also ESA s.80 for employment standards amounts and the federal CBCA s.119):

• Six months maximum — the liability is capped at six months' wages per employee; vacation pay accruals may also be included
• Joint and several — each director is liable for the full amount; a director who pays has a right of contribution from co-directors (OBCA s.131(4))
• No knowledge or fault required — the liability is statutory and does not require proof that the director knew about or caused the non-payment
• Limitation period — two years from the date the director ceased to be a director (OBCA s.131(3)/(4)) — limitation does not run while the director remains a director
• Right of subrogation — a director who pays the wages claim is subrogated to the employee's claim against the corporation (OBCA s.131(5))

Personal Liability for Source Deductions and HST/GST

Directors face significant personal exposure for the corporation's failure to remit tax amounts under federal legislation:

• Source deductions (ITA s.227.1) — directors are jointly and severally liable with the corporation for amounts the corporation was required to deduct at source (income tax, CPP, EI) from employee remuneration and failed to remit to the CRA
• HST/GST (ETA s.323) — directors are jointly and severally liable for HST/GST collected or collectible by the corporation but not remitted
• Limitation period — CRA must assess a director within two years of the director ceasing to be a director (ITA s.227.1(4); ETA s.323(5))
• Due diligence defence — a director is not liable if they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances (ITA s.227.1(3); ETA s.323(3))

Director Resignation: Protecting Against Continuing Liability

Resignation as a director is the primary way to stop the accrual of personal liability for future obligations. Key points:

• Resignation in writing — always resign in writing with a clear date; verbal resignations may be ineffective; file the resignation with the corporate records and send written notice to the corporation
• Update corporate registers — ensure the corporate register of directors (maintained at the registered office) is updated and that a Notice of Change is filed under the Corporations Information Act (Ontario) within 15 days
• Liability for amounts accruing before resignation — resignation does not eliminate liability for wages, source deductions, or HST that accrued before the resignation date; it only stops the limitation period from running during the period of directorship
• De facto directorship — a person who acts as a director after resignation (signing contracts, attending board meetings as a director) may be treated as a de facto director for liability purposes
• Indemnification and D&O insurance — corporate indemnification by-laws and directors' and officers' liability insurance provide important protection; review coverage carefully before accepting a directorship

Frequently Asked Questions