Directors & Officers Liability

Serving as a director or officer in a corporation is serious business with potentially serious implications. As a director or officer, you may agree to take on a significant role in the management of the company, and that means that if things go badly, not only is the corporation liable but directors and officers may be personally liable themselves.

This liability is risky, and it can be broad reaching depending on the circumstances. Directors and officers may in some situations be personally liable for the debts of the corporation if the corporation runs into financial trouble. They can also be held personally responsible in some cases for tax debts, employment issues involving termination and severance pay, and even pension issues. Directors and officers can also be held liable for acting outside the scope of their authority, acting against the best interests of the corporation, and putting their own personal gain ahead of the best interests of the corporation. 

Even beyond finances, there are additional personal liabilities that directors and officers carry with them. If a shareholder makes a claim for an oppression remedy, for example, stating that the corporation acted in a way that unfairly disregarded their interests, directors and officers may be personally liable in such cases as well. This is particularly the case when a director or officer has committed the acts that are complained of.

The short answer is yes, but not always. Businesses usually incorporate because that corporation creates a separate legal entity separate and apart from themselves as individuals. Not only can a corporate entity borrow money, carry debt, and pay taxes at a different rate than individuals, but in the event of legal claims, having a corporation can shield its owners, directors, and officers. The corporation’s liabilities are not necessarily theirs as well.

However, if the corporation was set up specifically to cover up fraud or illegal activity, or if the directors or officers are ‘hiding’ behind the corporation to try and get away with things, the law can take a heavy hand against directors and officers personally. Courts have the power to ‘pierce the corporate veil,’ meaning to make an award against a director or officer personally notwithstanding the general corporate ‘separateness’. In doing so, courts can hold those in charge of the corporation personally responsible when it is very clear that the corporation is being used for fraud or was set up as a sham. 

Serving as a director or officer is a bit like serving as the parent of a corporation in the sense that you have a duty to put the corporation’s interests ahead of your own. This is known as a ‘fiduciary duty,’ where you have a legal obligation to act honestly and in good faith, and in the best interests of the corporation, even if doing so on certain occasions may be against your personal interests.

This means that you are a representative of the corporation and thus have an obligation to behave responsibly in that role. You have a duty to disclose conflicts of interest, or to reveal when they arise and disqualify yourself from any voting where you may not be impartial. Similarly, you will come into significant confidential information about the organization’s finances, staff salaries, etc. As a fiduciary, you are responsible for maintaining that confidentiality and protecting the corporation’s interests. Breaches of fiduciary duty often arise when a director or officer has taken personal advantage of a corporate opportunity, has re-directed business to another corporation that the director or officer has an interest in, has misappropriated corporate money, or has taken steps that devalue shares.