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Potential Defenses to a Corporate Director’s Liability in British Columbia

Serving as a director of a company in British Columbia carries significant responsibility and potential personal liability. Directors are expected to act honestly, in good faith, and in the best interests of the company. If these duties are breached, directors may be held personally liable under various statutes, including the Business Corporations Act, the Income Tax Act, the Employment Standards Act, and the Environmental Management Act.

Examples of Director Liability

Directors may be personally liable under several statutes. Examples include:

  • Income Tax Act, s. 227.1(1)
    Directors of a corporation that fails to deduct, withhold, remit, or pay amounts required under the Act may be held jointly and severally liable, along with the corporation, for the amount and any related interest or penalties.
  • Excise Tax Act, s. 323(1)
    Directors can be held liable if the corporation fails to remit net tax or pay amounts received as refunds or credits, including related interest or penalties.
  • Employment Insurance Act, s. 46.1(1)
    Directors may be personally liable for penalties imposed on the corporation due to acts or omissions under sections 38 or 39.
  • Employment Standards Act, s. 96(1)
    A director or officer can be held personally liable for up to two months’ unpaid wages per employee.
  • Environmental Management Act, s. 121(1)
    A director who authorized, permitted, or acquiesced in an offence committed by the corporation may be personally liable, whether or not the corporation is convicted.
  • Business Corporations Act, s. 142(1)
    Directors must act honestly, in good faith, with the care, diligence, and skill of a reasonably prudent person. This duty exists in addition to any other legal or equitable obligations.

Key Defenses to Director Liability

Despite these potential exposures, several statutory and common law defenses may protect directors from personal liability.

1. Due Diligence Defense

Under both federal and provincial legislation, a director may avoid liability by demonstrating that they exercised the care, diligence, and skill that a reasonably prudent person would in similar circumstances.

Examples:

  • Tax remittances: Courts have found that directors may escape liability under the Income Tax Act if they can prove they took all reasonable steps to ensure compliance.
  • Environmental matters: Section 120 of the Environmental Management Act provides a due diligence defense to directors charged with offences.

Evidence supporting this defense may include:

  • Regular oversight of financials and compliance
  • Implementation of internal controls and policies
  • Engagement of qualified professionals
  • Attendance at board meetings
  • Active inquiry and record-keeping

2. Reasonable Reliance on Experts

Section 157 of the Business Corporations Act allows directors to rely in good faith on reports, statements, and advice from qualified individuals, including company officers, legal counsel, and accountants.

This defense acknowledges that directors cannot personally verify every detail. So long as the reliance is reasonable and made in good faith, it may shield a director from liability.

3. Business Judgment Rule

The common law business judgment rule offers directors protection for decisions made:

  • In good faith
  • With a view to the best interests of the company
  • With appropriate prudence and diligence

As affirmed in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, courts will generally not second-guess the outcomes of sound decision-making processes, even if the results are poor in hindsight. The focus is on process, not perfection.

4. Indemnity and Insurance

Directors may benefit from indemnification clauses found in:

  • The company’s articles
  • Shareholders' agreements
  • Separate indemnity agreements

Under the Business Corporations Act, companies may indemnify directors for legal costs and liabilities if they acted honestly and in good faith.

In addition, directors’ and officers’ (D&O) liability insurance may provide coverage for legal expenses and settlements. However, exclusions often apply, particularly for intentional misconduct or fraud.

5. Resignation or Lack of Involvement

A director may also raise the defense that:

  • They resigned before the relevant events occurred, or
  • They were not involved in the wrongful conduct

Many statutes also impose limitation periods on director liability. For example:

  • Income Tax Act: No action may be commenced more than two years after a person ceases to be a director.
  • Employment Standards Act: Directors are not liable for amounts in an employee's time bank after their resignation.

That said, resignation alone is not always a complete defense, especially where the director was aware of misconduct or failed to act when action was required. Courts will assess the timing of the resignation and the individual’s prior involvement.

Final Thoughts

Directors are not expected to be perfect, but they are expected to be diligent, honest, and informed. By actively engaging in governance, maintaining proper oversight, and seeking professional advice when needed, directors can reduce their personal risk and preserve the availability of important legal defenses.

If you are a director facing potential liability, or if you're considering incorporation and want to understand your obligations—our team can help. The business law team at Johnston Franklin Bishop Lawyers advises private companies throughout British Columbia, including Vancouver Island and Vancouver.

Call us today at 250-756-3823 or email ar@jfblaw.ca to learn how we can assist.

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