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Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Directors have both statutory and common law duties and may be held liable if their conduct falls below the standard required in the relevant circumstances. These duties are not limited to the insolvency period, but allegations that such duties were not met are more likely to arise when a company is insolvent. Important duties to consider are directors’ fiduciary duty and duty of care.
Directors’ fiduciary duty is a duty to the company itself and not to its creditors or shareholders or other stakeholders. Case law has confirmed that during an insolvency, the emphasis remains on the company’s best interests. In order to meet this duty, directors must act honestly and in good faith with a view to the company’s best interests. The interests of other stakeholders, such as creditors, may be considered as part of the directors’ effort to satisfy their duty to the company.
Directors’ duty of care requires directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. In order to escape related liability, directors must be able to demonstrate, among other things, that they:
- kept themselves apprised of relevant information;
- sought expert opinions where necessary;
- considered reasonable alternatives; and
- made informed decisions.
A ‘complainant’, as defined in the federal and provincial corporate statutes, may commence an oppression remedy claim against directors acting in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, a security holder, creditor, director or officer. The court has broad discretion in such cases to grant any order that it finds appropriate, including holding the director personally liable for damages.
Directors may face personal liability for their company’s failure to meet its obligations under various statutory provisions. For example, corporate statutes impose personal liability when directors approve the issuance of dividends while the company is insolvent or when the company fails to pay certain government remittances. Directors may also be personally liable for endangering employees or failing to comply with environmental standards.
Further, directors may mitigate the financial burden of personal liability by seeking indemnification by the company, contractual indemnification and directors’ and officers’ insurance.
What defences are available to a liable director or parent company?
Directors may use the due diligence defence to guard against personal liability with respect to statutory offences. To be successful in this regard, a director must demonstrate that they acted in the same manner in which a reasonably prudent person would have acted in the circumstances. The courts invoke the business judgment rule when considering the merits of certain business decisions. This rule provides that a court will not review the business decisions of directors who performed their duties in good faith with reasonable care and in a manner that they believed to be in the company’s best interests.
Parent companies may be found liable for their subsidiary’s conduct when it can be established that the parent exercised a great degree of control over the subsidiary. A parent under scrutiny for liability may defend itself by demonstrating that:
- the two entities were sufficiently distinct; and
- the subsidiary operated independently from the parent, particularly in its actions regarding the alleged offence.
What due diligence should be conducted to limit liability?
Directors and parent companies should be apprised of their duties and responsibilities under the various statutory frameworks for which potential liability may be imposed. It is prudent to establish plans, procedures and courses of action to address potential areas of liability. Steps should be taken to implement the plans and procedures and reviews should take place as necessary. Directors and parent companies should take reasonable care by assessing their conduct against relevant laws. Conferring with counsel and understanding what the industry norms are in the circumstances are important steps in conducting due diligence with respect to potential areas of liability.
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