What are the benefits of following the rules? Can they be quantified? For one director, following the rules saved him over $3.3 million. For another, not following the rules cost him tens of thousands of dollars.
Two recent cases demonstrate the importance of directors resigning properly. In each case, the individual argued that he was no a longer a director at the time that the corporation incurred various liabilities. If those individuals were seen as directors, they would have been personally responsible for the liabilities. In one case, the individual was successful in escaping liability; in the other case, he was not. The two situations provide valuable lessons for directors seeking to terminate their directorships.
In the case of Shier (Re) (in the Manitoba Court of Appeal), Rodney Shier was a director, Vice-President of Finance and Chief Financial Officer of Bissett Gold Mining Company Limited (“Bissett”), a mining company operating in Manitoba. When the company had difficulty securing financing that would allow continued operation of the mine, the directors decided to cease operations. Shier tendered his written resignation as a director of Bissett to the solicitor for Bissett’s corporate parent. A half-hour later, the local mine manager was instructed to shut down the mine, but for safety reasons, the miners were not told until more than five hours later. The resignation letter that was given to the solicitor for Bissett’s corporate parent was brought to Bissett’s corporate office after the manager was instructed to shut down the mine, but before the miners were told.
Under the law of British Columbia, where Bissett was incorporated, Shier’s resignation as a corporate director was only effective when delivered to the registered office of the company. As a result, Shier’s resignation only became effective after instructions were given to close down the mine. The implications of these few hours were very serious for Shier. If the employees were laid off before he resigned, he would be personally liable, as a director, for unpaid wages of over $3.3 million.
On the specific facts of this case, which the Manitoba Court of Appeal ruled could not be appealed, Shier was not held liable. However, the court observed that, despite his resignation, Shier may have been liable had he acted as a director after his resignation, and that, where directors continue involvement in a company as directors, they may still be liable under the law. In Shier’s case, his post-resignation activities on behalf of the company were clearly in his capacity as an officer, and the title under his signature noted him as an officer. In large part, this notation saved him from being liable for unpaid wages.
The case of Leger v. The Queen (in the Tax Court of Canada) provides some contrast. Gabriel Leger was a shareholder and director of a privately held security company incorporated in New Brunswick. Whereas Shier was an officer of Bissett and knowledgeable about company matters, Leger, due to his busy medical practice, was unable to pay close attention to the company’s operations. When the other directors resigned, Leger remained as the sole director, but delegated supervision of the company to his accountant and the company’s senior managers. The corporation was dissolved by the government of New Brunswick for failure to file returns, but Leger claimed that he had no knowledge of the dissolution, nor of the company’s subsequent revival.
The Minister of Revenue pursued Leger personally for unpaid GST, income tax and source deductions. Leger argued that, as the company had been dissolved years earlier – and beyond the limitations periods in the relevant legislation – he was not liable for the amounts owing since he ceased to be a director of the corporation upon dissolution. Unfortunately for Leger, the legislation provided that where companies are dissolved and subsequently revived, the revival is retroactive so that it is as if the corporation was never dissolved. As a result, Leger was found to have continued as a director during the dissolution period, and continued to be personally liable for various taxes owing. (However, the Tax Court found that since Leger had done “due diligence” in checking the backgrounds of those he tasked to run the company, his tax liability would be decreased.)
In each of these cases, directors faced potentially enormous personal liability in their capacity as directors. One director managed to escape liability and one was unable to do so. While these cases were each decided largely on the basis of particular fact situations and statutes, they raise issues that corporate directors would be well-advised to consider:
- Ensure that they are resigning in accordance with the appropriate law in their jurisdiction;
- Check their directors’ and officers’ liability insurance policies (if any) for exclusions of coverage, and pay special attention to their actions with respect to these exclusions;
- Keep a paper trail of dates and times that resignation steps are taken, including board meetings attended and presentations made;
- After resigning, refrain from doing anything that is “director-like,” such as attending board meetings, or signing documents as a director;
- Where they are resigning due to a disagreement with the direction of the board, have their objections noted either in meeting minutes, or in a letter to all other board directors that is attached to meeting minutes; and
- Consult with a lawyer to ensure that they are protected to the extent possible.