Personal Liability of Directors

June 29, 2021

By Brian Babcock

Directors and officers of corporations have many potential liabilities. About a decade ago, a client asked us to assemble a collection of all the provisions on director’s liability that we could find. It was over an inch thick. If we updated it, no doubt it would be thicker.

However, this liability is not open ended, a point emphasized by the Ontario Court of Appeal in Abbasbayli v. Fiera Foods Company. That case dealt, in part, with a claim for unpaid wages under section 81 of the Employment Standards Act.

Section 81 makes directors and officers personally responsible for unpaid wages, in certain limited situations.

It is obviously uncomfortable for directors to find themselves dragged into the corporation’s disputes. Though the corporation may indemnify them for liability and costs, in some situations, it is still inconvenient and embarrassing. There is also a limit on indemnification, so allegations such as bad faith might leave directors personally exposed.

The courts recognize that if this liability was allowed to expand unchecked, no one would be willing to serve as a director. So the courts act as a gate keeper by striking out claims that have no prospect of success at an early stage – sometimes even before the directors are required to file a defence.

In the Abbasbayli case, the statement of claim failed to set out the facts to support the section 81 claim against the directors, so it was simple for the court to strike these claims. It is somewhat more surprising that the claims were struck without leave to amend. On motions to strike, where there is even a glimmer of hope that there might be an arguable case, the courts typically give the Plaintiff a second chance to fix their claim. In Abbasbayli, other claims against the directors under the Ontario Business Corporations Act were struck with leave to amend.

Although this illustrates how hard it is for an employee to make a frivolous claim under section 81, it is also a reminder that a properly pled claim may be advanced.

So, though the first takeaway from this case might be to tell directors who ARE named in a law suit not to panic, the better lesson is to avoid any possibility of a claim with any glimmer of hope being advanced against the directors in the first place.

If you are a director or officer of a corporation, or are asked to serve in that role, you should:

  • only act in the role if the corporation has a state of the art indemnification policy;
  • the corporation maintains proper director and officer’s liability insurance to back up the policy; and
  • ensure that all earned wages and vacation pay are paid to any departing employee, whether they quit or are fired.

All of which is just a tiny first step toward limiting the exposure that directors and officers have under that fat book we once assembled.

However, the business world would grind to a halt without directors to set policy and officers to carry out those policies, so if you do step into those roles, you may do so knowing that the courts will at least protect you from frivolous claims. It should be some modest comfort to you.

The better protection, however, is seeking out legal advice whenever you have concerns that corporate acts, or your own involvement, may create liability. A few dollars spent on prevention may save many thousands of dollars later, not to mention avoiding sleepless nights.