A director and/or officer of a corporation can have many duties, ranging from overseeing a corporation, to ensuring that things are running smoothly on a day-to-day basis.
When directors perform their duties, they owe a duty of care to the corporation and have a fiduciary duty to act honestly and in good faith. These duties involve putting the corporation’s needs first before any personal or other needs, and acting in the best interest of the corporation. Examples include avoiding conflicts of interest and acting prudently when making business decisions.
Because directors are accountable to the corporations they are in control of, being a director may sometimes attract liability. These liabilities can range from being personally responsible for the unpaid wages of a former employee of the corporation, to being liable for the corporation’s failure to follow a regulation.
This article outlines some of the ways that directors and officers can better position themselves and the corporation, to reduce any breaches of fiduciary duties with due diligence.
Breach of Fiduciary Duties and Due Diligence
When it is alleged that a director or officer is personally responsible for the corporation’s failure to follow a statutory or regulatory requirement, the director or officer can raise the defence of due diligence. In a nutshell, a director can claim they took steps to ensure the corporation complied with any statutory or regulatory requirements that were alleged to be violated by the corporation, and that the director should not be personally liable as a result.
Directors who are able to show they took steps to prevent an issue from occurring, may also demonstrate they upheld their fiduciary duty to act honestly and in good faith.
The consequences of being found personally liable can include paying fines and even receiving jail time, particularly if the offence in question is of a criminal nature. Because of this, it is essential for corporations, directors, and officers to take steps to prevent offences from happening in the first place.
Although due diligence might have a universal meaning, it is important to note that different offences may be regulated by different statutes, and each statute may have its own interpretation of due diligence.
For example, a tax-related offence could fall under the Income Tax Act, RSC 1985, while a failure to pay wages could fall under the Employment Standards Act, 2000. Each statute can cover a different area of law and should be treated differently, even if due diligence might have one meaning.
Each statute may also have specific exceptions to due diligence that exist. For this reason, it makes sense to seek legal advice should any of the above issues come up.
Establishing practices and internal processes allows for accountability through a checks-and-balance approach, and may foster a working environment that reduces the likelihood of a breach of fiduciary duties. Some of the ways that employers can achieve this is by:
- Implementing a policy for fiduciary employees to act honestly and in good faith;
- Including a fiduciary duty clause into the agreement to ensure directors and officers have a clear understanding of what is expected;
- Conducting internal or external third-party audits at different periods of the year to ensure compliance;
- Implementing checks and balances where there is oversight by other key players in the organization, so fiduciary employees are aware that decisions and actions may be reviewed by a peer.
If you are a director or officer of a company, you should speak to a lawyer concerning the duties you have and the liabilities you may face, so you are prepared for any issues that arise.
If you are an employer, ensuring that your organization has the correct internal processes to reduce the likelihood of a breach of fiduciary duties may go a long way to demonstrate due diligence.
If you are an employer seeking to improve your internal processes, or a fiduciary employee seeking legal advice concerning your obligations, our team of experienced legal professionals at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at firstname.lastname@example.org and we would be happy to assist.
If you are a small or medium-sized company looking for full-service support, visit our CLO program page for our strategic solutions.
Disclaimer: This blog is not intended to serve as, or should be construed as legal advice, and is only to provide general information. It is in no way particular to your case and should not be relied on in any way. No portion or use of this blog will establish a lawyer-client relationship with the author or any related party. Should you require legal advice for your particular situation, fill out the contact form, call 1-(800)771-7882, or email email@example.com.
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