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It is surprising how many people agree to become directors of corporations (often with nominal or no compensation) without realizing the extent to which they are putting their own personal financial well-being in jeopardy.
By law, directors must adhere to a high standard of conduct in carrying out their duties. They have a personal duty to exercise their functions with diligence and skill. This duty is owed to the shareholders, fellow directors, creditors and the public. The director also has a duty to act in an honest, loyal and faithful manner, always placing the interest of the corporation ahead of his own.
Other than remuneration for services rendered, directors are not entitled to profit from their directorship unless the shareholders have given their prior approval. If a director enters into an arrangement in which his interests conflict with the interests of the corporation, the director must account to the corporation for any personal gain.
The Business Corporations Act of Alberta imposes the following liability on directors:
- Liability for any losses the corporation may suffer by virtue of the director voting in favour of the issuance of shares for any consideration other than money;
- Liability for any moneys paid by the corporation for the purchase of its own shares, the redemption of shares, the payment of dividends, the purchase of the shares of a dissenting shareholder, the giving of financial assistance to a shareholder, director (or any associate thereof) or to any person for the purchase of shares in the corporation, if such payment would result in the corporation having liabilities in excess of its assets or becoming unable to pay it liabilities as they became due (called the liquidity and solvency tests);
- Liability for any money paid by the corporation to indemnify any director when such indemnification is contrary to the Act;
- Liability to employees for salary and other debts to a maximum of 6 months salary;
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Liability for losses suffered by the corporation resulting from the failure of the director to act honestly and in good faith with a view to the best interests of the corporation or from a director’s failure to use the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Directors have a duty to review the financial statements of the corporation and to otherwise inform themselves as to the financial condition of the corporation. Such review must be made before voting on any matter to ensure that the matter being voted on does not contravene the law and that the action of the board of directors is in the best interest of the corporation.
If a director wishes to abstain from a vote or disagrees with an action being taken by the board, the director has a duty to make his dissent known. This must be done by requesting that his abstention or dissent is recorded in the minutes, or sending a written dissent to the Secretary before the meeting is adjourned, or delivering or mailing, by registered mail, his dissent to the corporation’s registered office immediately following he meeting. If the director does not make his dissent known, he will be deemed to have consented to the resolution notwithstanding he did not vote.
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Liability is imposed upon directors of a corporation under the provisions of many provincial and federal statutes including:
- Employment Standards Act (6 months salary);
- Occupational Health and Safety Act;
- Environmental Protection and Enhancement Act (fines up to $100,000);
- Transportation of Dangerous Goods Control Act (fines up to $100,000);
- Mines & Minerals Act (fines to $100,000);
- Natural Gas Marketing Act;
- Oil and Gas Conservation Act;
- Pipeline Act;
- Securities Act;
- Income Tax Act;
- Excise Tax Act (GST);
- Canada Pension Plan Act;
- Employment Insurance Act;
- Alberta Income Tax Act.
A person can insist that the shareholders and the corporation enter into an indemnity agreement and carry directors’ liability insurance prior to giving consent to act as a director. However, these precautions will not relieve directors of the duty to exercise their functions with care and skill nor of the duty to act in an honest, loyal and faithful manner.