Strategies to Limit a Director's Personal Liability

Strategies to Limit a Director’s Personal Liability

Directors have significant responsibilities when overseeing a corporation. It is crucial for directors to prioritize the company’s interests and adhere to their fiduciary duties and legal obligations. Failure to do so can result in personal liability for their actions or omissions. To safeguard themselves and limit personal liability, directors must steer clear of certain actions and behaviours. 

In this article, we will explore the top important actions directors should avoid to minimize personal liability.

What is Personal Liability

In the context of business and corporate governance, personal liability often pertains to directors, officers, and other individuals in positions of authority within an organization. These individuals may be personally liable for their decisions or actions if they breach their fiduciary duties, engage in wrongful acts, or fail to meet their legal obligations. Personal liability in this context means that these individuals may be held personally responsible for financial damages or legal consequences arising from their actions within the organization.

Breach of Statutory and Fiduciary Duties

Directors and officers of Canadian and Ontario companies are bound by two main duties:

  • Fiduciary Duty of Loyalty: Directors and officers are required to act honestly and in good faith while considering the best interests of the corporation; and 
  • Duty of Care: Directors and officers are obligated to “exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances”. 

To prevent breaching their fiduciary duty of loyalty and duty of care, directors must avoid engaging in the following actions and behaviours:

  • Conflicts of Interest: Directors should avoid situations where their personal interests clash with those of the corporation;  
  • Self-Dealing: Directors should refrain from participating in transactions that prioritize personal interests or those of related parties over the company’s interests; and 
  • Negligence or Incompetence: Directors must exercise reasonable care, skill, and diligence in carrying out their responsibilities. 

Failure to fulfil statutory or fiduciary duties can lead to significant consequences for directors in Ontario. They may face legal liability and assume personal financial responsibility for any damages or losses suffered by the company or its shareholders due to their breach.

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In response to such breaches, shareholders or the company, as its own legal entity, may initiate derivative actions to seek remedies and hold the director accountable for their misconduct. The court may even order the removal of the director from their position, however, this is usually a last resort.

Misappropriating Company Funds and Assets

Directors must ensure proper and legitimate use of the corporation’s funds, acting in good faith for the benefit of the company. Misuse or misappropriation of corporate funds can result in personal liability for directors.

Directors should avoid these common types of asset misappropriation: 

  • Invoice falsification;
  • Making fraudulent expense claims;
  • Payroll fraud;
  • Intellectual property and data theft;
  • Conversion of company property; and
  • Transferring company funds to private accounts.

Activities involving asset and funds misappropriation violate a director’s fiduciary duties and cause significant harm to the company and its stakeholders.

Directors hold a critical role in managing a corporation and its finances. However, taking part in misrepresentation or fraudulent activities can lead to severe consequences for the directors. 

To protect themselves and uphold their fiduciary duties, directors should be mindful of the following actions to avoid:

  • Fraudulent Activities: Engaging in activities like embezzlement, falsifying financial statements, or misleading investors for personal gain.
  • False Representation: Directors should not make false representations about the company’s financial health, business prospects, or other material facts to deceive and manipulate others for their own personal benefit.
  • Insider Trading: Directors must strictly adhere to insider trading regulations and avoid trading based on non-public information. Engaging in insider trading can result in being fined and possible imprisonment.

If you are a director with questions regarding your obligations, contact an experienced corporate litigation lawyer today.

A corporate litigation lawyer can assist your corporation ensure compliance, advise regarding all options, and pursue any claims available to protect your corporation.

In Summary

Directors carry substantial responsibilities and face potential legal liabilities in their roles. To minimize personal liability, directors need to steer clear of specific actions and behaviours. The three key areas to avoid include violating statutory and fiduciary duties, misusing company funds and assets, and engaging in fraudulent activities.

To prevent personal liability, directors should uphold the highest ethical standards, prioritize compliance, and emphasize transparency and accountability. By avoiding breaches of duties, misappropriation of funds, and fraudulent conduct, directors can protect themselves and contribute to the long-term success and sustainability of the corporation they serve.

Contact Us

Whether you are pursuing a claim for or defending against personal liability for allegations of illegal, fraudulent or improper conduct, our team of commercial litigation lawyers are eager to help.  Contact us at  1-(800) 771-7882 or email [email protected] and we would be happy to assist.

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