Statutory Liabilities of Directors: Marking the Risk Areas to Avoid Sliding out of Control
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.
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.
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
|About the authors
Danielle Ferron, Ad. E., is a partner at Langlois lawyers specializing in civil and commercial litigation, an area she has worked in for over 25 years. She has special expertise in matters involving fraud, theft of trade secrets, signal piracy and cybercrimes. In addition, her professional career path and experience as member of various boards of directors and governance committees have made her a trusted advisor on corporate governance. In addition to being co-chair of the board of directors of Langlois lawyers and a member of its executive committee, Danielle also sits on the board of La Financière agricole du Québec and on its governance, ethics, and human and information resources committee. She is also a member of the board of directors and corporate secretary of the Fondation Marie-Vincent and sits on its governance committee. Previously Danielle served for ten years on the board of directors of the Association of Quebec Women in Finance, and for several of those years was vice-chair of its executive committee.
Tommy Tremblay is a partner at Langlois lawyers. His practice encompasses every aspect of commercial litigation but is focussed more specifically on the business governance sector (in particular, on matters related to directors’ and officers’ liability), competition law, securities and white-collar defence, including administrative investigations and interactions with regulatory agencies on these matters. Tommy advises directors and officers regarding ethical corporate governance practices, specifically with respect to their duties and obligations towards various groups impacted by their decisions (shareholders, creditors, employees) and the obligations imposed on them by law. Tommy also helps develop compliance programs that make it possible for companies to verify whether their employees and management are respecting statutory rules and exercising due diligence in regards to their organization’s activities. He frequently assists clients in connection with investigations led by regulatory agencies and helps to set up internal investigation protocols. Tommy has for several years acted as a trainer in the university certification program in corporate governance offered by the Collège des administrateurs de sociétés. He sits on the Executive Committee of the Canadian Bar Association – Québec Branch as Treasurer and was recently elected Chair of the National Executive Committee of the CBA’s Business Law Section. He also serves as president and a director of the not-for-profit organization Avenir Parc La Fontaine.
1 Beyond the Duties of Care and Loyalty … the Civil Liability of Directors
2 A natural or legal person commits a fault when he/she/it fails to act in accordance with the “duty to abide by the rules of conduct incumbent on him, according to the circumstances, usage or law” (art. 1457 CCQ).
3 Duties and Obligations of Directors: a Brief Overview
4 The authors would like to thank Caroline Dunberry, an associate at Langlois lawyers LLP, for her assistance in researching examples of statutory liabilities.
5 By statutory regime we mean the various statutory liabilities under the applicable legislation.
6 E.g. the Income Tax Act, R.S.C. (1985) c. 1 (5th Supp); ss. 227.1 and 242 of the Taxation Act, R.S.Q., c. I-3, s. 1129.32
7 R.S.Q., c. P-9.002, s. 189
8 See in particular Jean-Louis Baudouin, Patrice DesLauriers and Benoit Moore, La responsabilité civile, Baudoin, 8th ed., vol. 1, Principes généraux, Cowansville, Yvon Blais, 2014, para. 1-9.
9 We will deal with this aspect of corporate governance in a forthcoming article.
10 Income Tax Act, RSC 1985, c. 1 (5th Supp.), s. 227.1(1); Tax Administration Act, RSQ, c. A-6.002, s. 24.0.1; Employment Insurance Act, SC 1996, c. 23, s. 83(1)
11 Excise Tax Act, RSC 1985, c. E-15, s. 323(1)
12 Canada Labour Code, RSC 1985, c. L-2, s. 251.18; Canada Business Corporations Act, RSC 1985, c. C-44, s. 119(1)
13 Act respecting occupational health and safety, CQLR, c. S-2.1, s. 241
14 Securities Act, CQLR, c. V-1.1, s. 205
15 Securities Act, CQLR, c. V-1.1, ss. 213.1, 214 to 216, 217 to 225.0.2, 225.2 to 225.33 and 226 to 233
16 Canadian Environmental Protection Act, LC 1999, c. 33, s. 280(1)
17 Environment Quality Act, CQLR, c. Q-2, s. 115.40
18 Environment Quality Act, CQLR, c. Q-2, s. 115.50
19 Act respecting the protection of personal information in the private sector, CQLR, c. P-39.1, s. 93
20 An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, S.C. 2010, c. 23, ss. 31 and 52 [also known as CASL, i.e. “Canada’s Anti-Spam Legislation”]
21 Consumer Protection Act, CQLR, c. P-40.1, s. 260
22 Consumer Protection Act, CQLR, c. P-40.1, s. 282; Real Estate Brokerage Act, CQLR, c. C-73.2, s. 125; Food Products Act, CQLR, c. P-29, s. 46
23 Competition Act, RSC 1985, c. C-34, ss. 49(1), 51.2(8), 53(5), 65(4)
24 Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R-184.108.40.206.3, s. 10 [hereinafter, the “Recovery of Amounts Improperly Paid Act”]
25 Examples are the accounting and financial scandals during the last 20 years (such as Enron, Worldcom and, in Canada, Livent and Cinar) and also those involving occupational health and safety, such as the 1992 Westray mine explosion in Nova Scotia.
26 However, some directors’ statutory liabilities existed well before the 1990s, such as that found in section 241 of the Act respecting occupational health and safety where the wording is the same today as it was when it came into force on January 1, 1980. The subsequent amendments were terminological only.
27 Pierre-Christian Collins Hoffman and Guy Pinsonnault, “The Criminal Liability of Organizations for Economic Crimes”, Canadian Competition Law Review, Vol. 27, No. 1 (Spring, 2014). See also the Act to amend the Criminal Code (criminal liability of organizations), SC 2003, c. 21.
28 CQLR, c Q-2
29 “Legislative standards are relevant to the common law standard of care, but the two are not necessarily co-extensive. The fact that a statute prescribes or prohibits certain activities may constitute evidence of reasonable conduct in a given situation, but it does not extinguish the underlying obligation of reasonableness. … Thus, a statutory breach does not automatically give rise to civil liability; it is merely some evidence of negligence. … By the same token, mere compliance with a statute does not, in and of itself, preclude a finding of civil liability … Statutory standards can, however, be highly relevant to the assessment of reasonable conduct in a particular case, and in fact may render reasonable an act or omission which would otherwise appear to be negligent. This allows courts to consider the legislative framework in which people and companies must operate, while at the same time recognizing that one cannot avoid the underlying obligation of reasonable care simply by discharging statutory duties.” Ryan v. Victoria (City),  1 SCR 201, 1999 CanLII 706 (SCC) at para. 29; see also Morin v. Blais,  1 SCR 570, at pages 579 and 580; and St. Lawrence Cement Inc. v. Barrette, 2008 SCC 64,  3 SCR 39.
30 Directors’ Liability: Get the Means to Defend Yourself!