PERSONAL LIABILITY OF DIRECTORS AND OFFICERS by accinent

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									                                                   PERSONAL LIABILITY OF
                                                 DIRECTORS AND OFFICERS

WHO ARE DIRECTORS AND                                         some circumstances a director and officer may
                                                              also hold fiduciary duties to shareholders, fellow
OFFICERS?                                                     directors, creditors or the public. In addition,
                                                              directors and officers retain their fiduciary duties
A director is a person appointed to manage                    even after they have resigned or retired.
business affairs of a corporation. There may be
different types of directors, for example, a                  In addition to the common
director may be passive and not actively                      law duties of directors and A prudent and diligent
involved in the management of the corporation.                officers, a variety of director and officer will
Nevertheless, it is important to recognize that               obligations arise under seek legal and other
                                                                                            professional advice
all directors have liabilities and duties                     statutes. Both the Canada where appropriate.
regardless of whether they are passive                        Business Corporations Act
directors or whether they delegate their                      and the Alberta Business
responsibilities to others                                    Corporations Act describe
within a corporation.                                         the general duty of a director and officer to act
                              A fiduciary duty is a           honestly and in good faith. However, this
An officer is any person trust-like duty of the               general statement of the duties of a director and
who      acts   as    the highest standard                    officer is only the beginning of the myriad of
"directing mind" of a requiring a director                    obligations and duties imposed under federally
corporation. Whether a and officer to actand
                             honesty, loyalty
                                              with
                                                              and provincially enacted statutes. Our
person is a directing good faith with a view                  preliminary research has shown that no less
mind of a corporation to the best interests of                than 56 statutory enactments of the Province of
depends       upon    the the corporation.                    Alberta alone impose specific duties on
degree of control which                                       directors and officers. A list of federally and
they exert on the                                             provincially enacted legislation is included in
corporation. An officer is                                    Appendix 1 of this document.
a directing mind if they issue orders and
supervise a particular operation within the                   THE NATURE OF THE LIABILITY
corporation. Typically, officers will include a
Chair of the Board, a Chief Executive Officer, a
                                                              A director may be subject to a specific liability
Vice-President,    Corporate      Secretary,       a
                                                              under an enactment of federal parliament or the
Treasurer, and a General Manager.
                                                              provincial legislature. An example of a specific
                                                              liability appears in Alberta's Environmental
SOURCES OF LIABILITY                                          Protection and Enhancement Act. A breach of
                                                              the Act may result in personal liability of the
At common law, the duties of a director and                   director and officer for a maximum penalty of a
officer are described as fiduciary in nature. A               fine not exceeding $100,000 per day in addition
fiduciary duty is a trust-like duty of the highest            to or in lieu of two years imprisonment plus the
standard requiring a director and officer to act              cost of loss to the property damaged! Other
with honesty, loyalty and good faith with a view              legislation provides for other specific liabilities
to the best interest of the corporation. Directors            of directors and officers. The nature and extent
who breach their fiduciary duties are held                    of liabilities imposed under legislation should
strictly liable. This means that the director’s               never be assumed. In each case, the legislation
intent to cause harm to the corporation is                    must be consulted to determine the specific
irrelevant when determining liability. Fiduciary              liability.
duties are primarily to the corporation, but in

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In addition to the specific liabilities imposed by     RISK MANAGEMENT
statutes, a director and officer also has a
general liability which flows from the                 Though every director and officer should
characterization of a director and officer as a        discharge     their   duties   prudently    and
fiduciary of the corporation. A director and           responsibly, it is also important that directors
officer may be generally liable to pay damages.        and officers manage the risks to which they are
For example, a director and officer may be             exposed. Two methods of risk management
required to account for profits they have made         available to directors and officers are
in breach of their fiduciary duties. An                indemnification and insurance.
accounting means that the director and officer
must reimburse the corporation for losses if the       A corporation may provide in its bylaws for
breach has caused damages. Intent to harm the          indemnification of directors. This means that
corporation is irrelevant. However, where a            the corporation will pay to the director any
director or officer has acted in bad faith, then he    amount which the director himself or herself is
or she may also be liable for punitive or              required to pay as a result of his or her position.
exemplary damages. These are damages
which are ordered by a court to punish the             Directors and officers liability insurance means
wrongdoer.                                             coverage within policy amounts that an
                                                       insurance corporation will pay to cover amounts
AVOIDING AND PREVENTING                                that directors and officers are legally required to
LIABILITY                                              pay as a result of claims brought against them
                                                       resulting from their wrongful acts.
Statutes imposing specific liabilities on directors
and officers also provide for a variety of             In most circumstances, the insurance coverage
defences. In most cases the legislation provides       will include damages, judgments, settlements
a defence of due diligence. A director and             and defence costs. However, insurance will
officer is duly diligent if they have taken all        generally not include fines, penalties and other
reasonable steps to prevent the occurrence of          charges which are considered uninsurable.
an event. What, in fact, amounts to due
diligence will depend on a number of factors.          It is important that directors and officers
These will include the type of offence, the            carefully review the insurance policy. It is
specific industry involved and the individual          particularly important that directors and officers
circumstances.                                         review the discovery clause of the policy.
                                                       Discovery clauses will determine coverage
A director and officer                                 where an act is committed during the term of
may avoid becoming A director and officer              the policy but which is not discovered until after
generally     liable   by is duly diligent if they     the termination or cancellation of the policy.
                            have taken all
observing duties of care, reasonable steps to
diligence and skill. We prevent the                    It is important to remember that the checklist
have     included      as occurrence of an             which forms Appendix 2 and the discussion with
Appendix 2 to this event.                              regard to indemnities and insurance provide
document a list of the                                 only a minimum standard for the duties,
basic steps an officer                                 obligations and risk management of directors
and director should take to discharge his or her       and officers. A prudent and diligent director and
duties and minimize the risk of liability.             officer will seek legal and other professional
                                                       advice where appropriate.

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NON PROFIT ORGANIZATIONS
                                                            Personal Liability of Directors and Officers
                                                            has been prepared by Ackroyd LLP,
Directors and officers of non profit organizations          Barristers and Solicitors for educational and
generally have the same duties and liabilities as           general information purposes only. The
directors and officers of for profit corporations.          resolution of all legal problems depends on a
There are some exceptions. For example,                     consideration of the facts and relevant
                                                            circumstances. The material set out in this
personal liability for wages under Alberta's                document is not legal advice.
Employment Standards Act does not apply to
directors and officers of societies incorporated
under the Societies Act or companies
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incorporated under Part 9 of the Companies
                                                                   1500 First Edmonton Place
Act. However, the director and officer of a non                      10665 Jasper Avenue
profit organization should not necessarily rely                       Edmonton, Alberta
on these exceptions. Such directors and                                     T5J 3S9
officers should assume their liability as equal to
                                                                   Telephone (780) 423-8905
that of a director and officer of a for profit                        Fax: (780) 423-8946
corporation      and     conduct       themselves
accordingly.                                                        http://www.ackroydlaw.com
                                                                       info@ackroydlaw.com




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                                            APPENDIX 1

Canada                              National Energy Board Act           Hotel Room Tax Act
Agricultural Products Board Act     Transportation of Dangerous         Individual=s Rights Protection Act
Agricultural Stabilization Act      Goods Act                           Innkeepers Act
Atomic Energy Control Act           Unemployment Insurance Act          Labour Relations Code
Bank Act                            Veterans Land Act                   Liquor Control Act
Bankruptcy and Insolvency Act       Weather Modification Information    Loan and Trust Corporations Act
Canada Business Corporations Act    Act                                 Mine and Minerals Act
Canada Cooperatives Associations    Weights and Measures Act            Mortgage Brokers Regulation Act
Act                                                                     Natural Gas Marketing Act
Canada Corporations Act             Alberta                             Occupational Health and Safety
Canada Pension Plan Act             Alberta Bill of Rights              Act
Canada Water Act                    Alberta Corporate Tax Act           Off-highway Vehicle Act
Canadian Environmental              Alberta Health Care Insurance Act   Oil and Gas Conservation Act
Assessment Act                      Alberta Income Tax Act              Petroleum Incentives Program Act
Canadian Environmental              Boilers and Pressure Vessels Act    Pipeline Act
Protection Act                      Builders Lien Act                   Private Investigators and Security
Canadian Ownership and Control      Business Corporations Act           Act
Administration Act                  Coal Mines Safety Act               Safety Codes Act
Canadian Wheat Board Act            Collection Practices Act            Securities Act
Citizenship Act                     Companies Act                       Societies Act
Competition Act                     Consumer Credit Transactions Act    Soil Conservation Act
Consumer Packaging and              Co-operatives Associations Act      Small Business Equity
Labelling Act                       Credit Union Act                    Corporations Act
Cultural Property Export and        Crop Liens Priorities Act           Special Waste Management
Import Act                          Dairy Industry Act                  Corporation Act
Defence Production Act              Department of the Environment       Surface Rights Act
Electricity and Inspection Act      Act                                 Tobacco Tax Act
Energy Administration Act           Direct Sales Cancellation Act       Transportation of Dangerous
Energy Monitoring Act               Electric Energy Marketing Act       Goods Control Act
Excise Tax Act                      Employment Pension Plans Act        Trust Companies Act
Export and Import Permits Act       Employment Standards Code           Unfair Trade Practices Act
Fisheries Act                       Environmental Protection and        Uniform Building Standards Act
Fishing and Recreational Harbours   Enhancement Act                     Water Resources Act
Act                                 Forests Act                         Weed Control Act
Immigration Act                     Fuel Tax Act                        Wilderness Areas, Ecological
Income Tax Act                      Gas Protection Act                  Reserves and Natural Areas Act
Labour Code, Canada                 Gas Resources Preservation Act      Workers= Compensation Act
Livestock Feed Assistance Act
Motor Vehicle Fuel Consumption
Standards Act




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                                           APPENDIX 2

1.    Always attend meetings.
2.    Insist that all material be available well in advance of meeting especially when there will be a
      vote on a particular issue.
3.    Obtain written advice on all legislation and guidelines that are relevant to the activities or the
      organization.
4.    Always review and read documents, legislation and so forth prior to meetings.
5.    Insist on written opinions from legal and other professionals on any important decision.
6.    Periodically or on major issues where regular counsel or advisors have provided advice, insist
      on independent outside counsel or advisors for a fresh perspective.
7.    Review all opinions given by professional consultants.
8.    Review the minutes of all meetings and insist that they be accurate.
9.    Keep your own notes.
10.   Ensure that your dissent is recorded even if this means sending a registered letter to the board.
11.   Review the corporation=s objects and bylaws.
12.   Review all internal controls especially with respect to cheque signing and contract execution.
13.   Encourage the development of a director=s manual.
14.   Know what trust property or accounts the corporation holds.
15.   Keep information about the corporation confidential.
16.   Avoid even the appearance of a conflict of interest.
17.   Ensure that the bylaws provide for the indemnification of directors.
18.   Monitor tax credit receipts and payment of employee deductions and sales taxes.
19.   Ensure that the committees and management report to the board.
20.   Ensure that the corporation acquires and maintains officers and directors indemnity insurance
      coverage.




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