In our last article, entitled “Beyond the Duties of Care and Loyalty … the Civil Liability of Directors”1, we dealt with the civil liability regime that sanctions civil faults2 committed by directors. When damage ensues from such a fault, the victim is entitled to claim compensation.

Statutory liabilities are of a different nature. We touched on them very briefly in our article entitled “Duties and Obligations of Directors: a Brief Overview”3. In this article, we will deal with them in more detail.4

1. Statutory liabilities that pose risks for directors

The word “statutory” comes from the word “statute”, which means an act of a legislature, whether federal or provincial. Statutory liability thus derives from a specific piece of legislation, as opposed to liability under the Civil Code of Québec, Article 1457 of which refers to “rules of conduct” without specifically defining them, thus leaving it to the courts to determine if an instance of conduct runs afoul of that provision.

The scope of the statutory regime5 applicable to an organization and its members varies with the nature of the organization and its activities. While some statutory liabilities concern the majority of corporations, others will affect only a small number of them. By way of example, virtually all legal persons are subject to tax legislation6, whereas the Cultural Heritage Act7 affects only a limited number of them.

These statutory norms have a protective function and are aimed at preventing reprehensible conduct that may harm society as a whole or certain of its members8. Identifying such statutory norms can allow to mark the risk areas specific to an organization and, consequently, its directors. It is therefore very important to be aware of these norms, not only to avoid being punished for contravening them, but also in order to educate oneself on the standards of conduct to be adopted within the organization, thus encouraging the embedment of a culture of compliance that will result in better day-to-day management of the organization9.

To make it easier to understand statutory liabilities, here are a few concrete examples in various areas of the law:

i) Legislation to recover money owed to the government

  • Compelling directors to personally pay amounts due and unpaid by the corporation on account of withholdings and deductions at source;10
  • Compelling directors to personally pay amounts due by the corporation on account of excise taxes;11

ii) Legislation to protect workers

  • Compelling directors to personally pay unpaid wages;12
  • Sanctioning directors personally for offences under the Occupational Health and Safety Act committed by or on behalf of the corporation;13

iii) Legislation to protect investors

  • Sanctioning directors personally for an offence committed by or on behalf of the corporation under the Securities Act;14
  • Facilitating civil actions by investors against directors, pursuant to the Securities Act;15

iv) Legislation to protect the environment

  • Sanctioning directors personally for an offence committed by or on behalf of the corporation under the Canadian Environmental Protection Act;16
  • Creating a presumption of a director having committed an offence under the Environment Quality Act;17
  • Making directors solidarily liable for unpaid amounts pursuant to the Environment Quality Act;18

v) Legislation to protect personal information and to prevent the sending of unsolicited electronic messages (often associated with the term “spam”)

  • Sanctioning directors personally for an offence committed by or on behalf of the corporation involving a breach of personal information;19
  • Sanctioning directors personally for an offence committed by or on behalf of the corporation involving a breach of anti-spam rules20.

vi) Legislation to protect consumers

  • Making directors solidarily liable for unpaid amounts pursuant to the Consumer Protection Act21.
  • Sanctioning directors personally for an offence committed by or on behalf of the corporation involving a contravention of consumer protection legislation22.

vii) Legislation to counter anticompetitive practices

  • Sanctioning directors by imprisonment or fines for offences committed by or on behalf of the corporation involving a contravention of certain provisions of the Competition Act23.
  • Facilitating civil actions against directors of corporations that have taken part in a fraud or fraudulent tactics in connection with the tendering, awarding or management of a public contract – for example by rigging a bid pursuant to a call for tenders24.

2. Means of dissuading delinquent behaviours

Provincial and federal legislatures have enacted statutory provisions making directors personally liable for offences committed by the organization (i.e. by its employees or representatives) or for damages the organization caused to third parties. Statutory liability provisions may lead to purely civil consequences (monetary compensation to the injured party), or instead penal sanctions (fines, restrictions on activities), or even criminal ones (imprisonment).

Thus, in order to protect society at large and dissuade delinquent behaviours, the State sometimes directly sanctions the persons at the heart of the decision-making process of corporate entities. Legislative and regulatory policy, based on the premise of the separate legal personality of legal persons, long tended to refrain from holding directors personally liable for acts of the corporation. However, with the emergence of major corporate scandals25, many began to consider it inadequate to sanction only the corporation, and to allow the individuals who participated in the decision-making process to be free from liability. In cases involving allegations of offences or fault against corporations, the evidence is often complex, particularly when trying to prove the intention of someone in a position of authority to commit an act that potentially could result in breaking the law. Thus, since the 1990s there has been a progressive shift in legislative approach towards directly targeting the individuals through whom corporate decisions are made, namely the corporation’s directors and officers26. This realignment affected not only the criminal liability of corporate entities27 (aiming at a host of sectors involved in economic activity, such as occupational health and safety, competition or the environment) but also led to the statutory liability of directors as briefly described above.

In certain cases, a director’s liability will be presumed. Thus, even if a director did not commit a fault or an offence in the performance of his/her duties, he/she can nevertheless be found liable for damages. It will then usually be possible to rebut that presumption with a defence of reasonable diligence. For example, Quebec’s Environment Quality Act28 creates a presumption of liability on the part of the directors of a corporation when the statute is contravened, but that presumption is rebuttable:

115.40. If a legal person or an agent, mandatary or employee of a legal person, partnership or association without legal personality commits an offence under this Act or the regulations, its director or officer is presumed to have committed the offence unless it is established that the director or officer exercised due diligence and took all necessary precautions to prevent the offence.

(emphasis added)

We should point out that compliance with statutory norms will not necessarily defeat a civil lawsuit, and that non-compliance does not automatically constitute a civil fault29.

Conclusion

To summarize, it is incumbent on directors to fully understand the legal context in which they serve and be familiar with the internal rules specific to the corporation they manage. Directors must also be cognizant of the public statutes and regulations that may have an impact on their liability. And because there are a variety of situations where a decision made by directors may render them statutorily liable, individual directors in such situations would be well advised to insist on a legal opinion from a lawyer who specializes in this area.

Moreover, in order to be fully protected, directors should ensure they are covered by adequate D&O insurance, and even an indemnification agreement with the corporation, in the event they are sued or prosecuted. For more information on such insurance and indemnification protection, we encourage you to read our next article in that regard.30