Responsibilities and Liabilities of Directors in Manitoba
By Kristen Wittman on 2014/06/09
What follows are highlights of the more important duties, responsibilities and liabilities imposed on directors of a privately-held, for profit corporation incorporated pursuant to The Corporations Act of Manitoba (the “MCA”) under the provincial and federal laws applicable in Manitoba. This is not a comprehensive statement of the law applicable in Manitoba nor an exhaustive review of potential director liability and is current only to the date above.
General Duties and Liabilities under the Manitoba Corporations Act
Section 117 of the MCA states that directors shall manage, or supervise the management of, the business and affairs of a corporation. The scope of a director’s power is subject to any unanimous shareholder agreement, the MCA, its regulations, and the corporation’s articles and by-laws. Directors may not delegate their duties, although they can create committees to report to them. A director’s duties may be fettered by unanimous agreement of the shareholders of the corporation who then take on the liabilities associated with those duties. Although a director’s capacity to act can be restricted by the constating documents of the corporation, or by the shareholders themselves, directors are not relieved from the duty to act in accordance with the MCA and regulations or relieved from liability.
Directors, in undertaking their duties, are subject to a certain standard of care, and owe a fiduciary duty to the corporation. The fiduciary duty and duty of care are owed to the corporation rather than the shareholders directly. Directors are under a general obligation to maximize the value of shareholder investment. Directors must consider the interests of the corporation’s employees, customers, creditors, and other stakeholders, and not just the interests of the shareholders.
1) Fiduciary Duty
Directors are subject to a fiduciary duty enshrined in section 117(1) of the MCA:
Every director and officer of a corporation in exercising his powers and discharging his duties shall…(a) act honestly and in good faith with a view to the best interests of the corporation
A fiduciary relationship, broadly interpreted by the case law, is a relationship between parties where one party is considered to be in a special relation of trust, confidence, or responsibility to the other. Therefore, as a director, you have a duty to act in every circumstance in the way in which you honestly believe to be in the best interest of the corporation. The role of the director is likened to that of a trustee so that, just as a trustee owes the fiduciary duties of loyalty and good faith to the beneficiaries of a trust, a director owes those duties to the corporation.
The duty of loyalty has several features. First, corporate management must avoid conflicts of interest, except with the company’s knowledge and consent. Second, directors and officers are prohibited from taking secret rewards. Last, director and officers must protect the corporation’s confidential information.
Directors must exercise their powers for a proper purpose. As long as a director’s primary motive is the best interests of the company, his or her actions are not necessarily improper simply because the director also benefits from the matter. Directors who breach their fiduciary duty will be held strictly liable, even if there is no evidence of loss or damage to the corporation.
2) Duty to Act Honestly
The duty to act honestly as set out in section 117(1) of the MCA, prohibits directors from taking any fraudulent action or other action intended to deprive the corporation of some asset or benefit to which the corporation is entitled for the director’s personal gain. Put another way, a director’s personal interests and a director’s duty to the corporation should not be brought into conflict. As noted, directors must act in the best interests of the corporation. What is in the best interests of the corporation will depend on the relevant circumstances.
3) Duty of Care
The duty of care is outlined in section 117(1) of the MCA:
Every director and officer of a corporation in exercising their powers and discharging their duties shall…b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The duty of care owed by a director is dependent on the circumstances. However, directors must adhere to an objective minimum standard by practicing the “care, diligence, and skill of a reasonably prudent person.”
The common law has established a subjective test for the duty of care. The precise standard to be met will depend upon the personal knowledge, experience, and position of the director. A director with significant knowledge or experience may be held to a higher standard of care.
Directors must be reasonably diligent when managing the corporation. A director will have to keep himself or herself informed about the business and affairs of the corporation through a broad monitoring of the corporation’s policies and affairs as well as attending board meetings regularly. Directors with less skill, knowledge or experience who seek expert and independent advice in order to discharge their duty to exercise care, diligence and skill will be looked upon favorably by the courts. However, directors cannot completely delegate their duties and responsibilities. Directors cannot blindly rely on the reports or opinions of experts without informing themselves of the material facts and the consequences of their actions.
The actions of directors will not be judged using hindsight but against the facts as they existed at the time the decision was made. Directors are required only to make a reasonable decision in the circumstances. It must be shown that they made reasonable efforts to ensure that they had the information and advice necessary to make the decision. If the decision results in a negative outcome for the corporation, the directors will not be held liable so long as they have exhibited the care, diligence and skill which could be reasonably expected in the circumstances, taking into account their skills, knowledge and expertise.
4) Conflict of Interest
Directors owe a duty to the corporation not to put themselves into a position of conflict with the corporation. Therefore, they are not entitled to take part in any contract or transaction where their personal interests conflict with those of the corporation. This includes, but is not limited to: transacting with the corporation in a personal capacity; taking corporate opportunities; or competing with the corporation. The courts will look at the circumstances to determine whether a business opportunity belonged to the corporation and what relationship the director had with the opportunity. Such circumstances include whether the corporation has done anything to develop the opportunity, whether the opportunity was in an area of the director’s responsibility, and whether the director acquired knowledge of the opportunity through his or her position and used that position in the appropriation of the opportunity.
Directors are obligated to avoid both actual conflicts of interest and potential conflicts of interest. The fact that a conflict could have arisen, but did not, does not excuse the director. Courts have held that the potential for conflict itself violates the corporation’s right to utmost loyalty and avoidance of conflict.
Directors must give sufficient disclosure of his or her interest in order to allow the shareholders and other directors to enter into a contract in which the director has an interest. A director cannot merely mention that he or she has an interest. Instead, it is necessary to state the interest and how far it goes.
The MCA contains specific provisions relating to situations where a director is required to disclose a conflict of interest with the corporation. A director of a corporation who is party to a material or a proposed contract with the corporation, or has a material interest in any party to any such proposed contract with the corporation, must disclose, in writing, to the corporation the nature and extent of his or her interest. Adequate disclosure can also be achieved by making a request to have the nature and extent of his or her interest entered into the minutes of the meeting of directors.
“Material” is not defined in the Canada Business and Corporations Act (“CBCA”) or the MCA. In determining materiality, the courts have looked to whether the interest is such that there is any reasonable basis for a concern that it may affect the director’s ability to perform his or her duties as director to the standards of care required by law.
Subject to some exceptions, directors may not vote on any contract in which they have an interest. A breach of this duty may result in the contract being found to be voidable. That being said, the director can be present at the meeting of directors called to approve the contract and may be counted into the quorum. A director with a material interest may vote on a resolution to approve the contract where the contract is: an arrangement by way of security for money lent to or obligations undertaken by him or her for the benefit of the corporation or an affiliate; a contract relating primarily to his or her remuneration as a director; a contract for indemnity or insurance; a contract with an affiliate; or any contract other than one previously mentioned. However, if it is a contract other than one of the aforementioned agreements, the resolution will only be valid if it is approved by not less than 2/3 of the votes of all the shareholders of the corporation to whom disclosure has been given.
A contract in which a director has a material interest may still be enforceable if adequate disclosure is made, the contract is approved by the other directors or shareholders and it is found to have been reasonable and fair to the corporation at the time.
Failure by directors to satisfactorily discharge their fiduciary duty or duty of care may render them liable for any profit or gain realized by them or for any loss suffered by the corporation. In addition, failure to discharge their fiduciary duty and duty of care may result in the directors being unable to protect themselves from liability even though they relied in good faith on the financial statements of the corporation made by an officer, a written report of an auditor of the financial statements of the corporation, or upon a report from a person whose profession lends credibility to statements made in such report.
In addition to the general duties discussed above, the MCA and other legislation provide for various specific duties and liabilities. Some of these are set out below.
A. Business Management
Liability under the Manitoba Corporations Act
Directors are personally liable where they vote for or consent to a resolution authorizing a purchase, redemption or other acquisition of the corporation’s own shares, payment of a commission, payment of a dividend, payment of an indemnity, payment to a shareholder, or any investment or financial assistance if the transaction results in the insolvency or capital impairment of the corporation. Directors are prohibited from authorizing payments where there are reasonable grounds to believe that the following solvency or capital impairment tests would be breached:
(a) where the corporation is unable to pay its liabilities as they become due; or
(b) where the realizable value of the assets of the corporation are less than the aggregate of its liabilities and stated capital of all classes.
In each case, directors are jointly and severally liable and responsible to repay the corporation any amounts that were paid out. However, directors are entitled to contribution from other directors who voted for or consented to the unlawful act.
Proceedings against a director must be brought within two years from the date of the resolution authorizing the action complained of.
Directors will not be liable under the MCA for any unlawful acts of an insolvent corporation if they have complied with their fiduciary duty or duty of care and if the director relied in good faith on the financial statements or a report prepared by an officer, auditor or professional person.
If the corporation becomes bankrupt within 12 months of a dividend payment or share acquisition, directors may be liable under the Bankruptcy and Insolvency Act (Canada)(“BIA”) to restore those payments unless they can show that the corporation was solvent at the time or that they actively dissented from such action. The BIA does not provide for a due diligence or reliance defence to this liability. Furthermore, every director of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to the offence and is liable for the penalty, whether or not the corporation has been prosecuted or convicted. Penalties under the BIA includes imprisonment for up to three years.
2) Issue of Shares
Subject to the constating documents and any unanimous shareholder agreement, directors have a broad discretion to issue shares. However, shares cannot be issued until the consideration for the share is fully paid in money, property, or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money. Directors of a corporation who vote for or consent to a resolution authorizing the issue of a share for a consideration other than money can be jointly and severally liable to the corporation to make good on any amount by which the consideration is less than the fair equivalent of the money the corporation could have received. The right to contribution, the limitation period on actions to enforce liability and the reasonable diligence defence apply to the director’s liability relating to the issuance of shares.
Pursuant to the MCA, a director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken unless he or she requests that their dissent be entered into the minutes of the meeting, he or she sends a written dissent to the secretary of the meeting before the meeting is adjourned, or he or she sends their dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned.
Directors are not absolved of liability if they are absent from a board meeting. In fact, directors who were not present at a meeting where a resolution was passed or an action was taken are deemed to have consented to it unless within seven days after they become aware of the resolution they cause their dissent to be placed with the minutes of the meeting or send their dissent by registered mail or deliver it to the registered office of the corporation.
Liability under other Provincial Statutes
1) The Consumer Protection Act (Manitoba)
The Consumer Protection Act (“CPA”) provides protection in consumer related transactions only. The CPA imposes liability on the part of a seller to the buyer for all obligations and warranties applicable to a sale or hire purchase by the CPA or by contract. Directors or officers of a corporation who authorized, permitted or acquiesced in the commission of an offence under the CPA are also guilty of the offence.
A person who is found guilty of an offence is liable, on summary conviction, to a fine of not more than $300,000 or three times the amount obtained by the defendant as a result of the offence depending on whichever is greater, or imprisonment for not more than three years, or both. If a person is convicted of an offence they may be ordered to pay restitution to an affected person for loss of or damage to property suffered as a result of the commission of the offence or if the court considers it to be just in the circumstances, pay an amount as restitution is the amount is readily ascertainable.
2) The Business Practices Act (Manitoba)
The Business Practices Act (“BPA”) regulates against unfair business practices occurring as a result of making false claims, deceiving or misleading a consumer or taking advantage of a consumer not able to protect his or her own interests. It provides a means by which the government can seek redress for victimized consumers and to investigate and prosecute offending businesses. Consumers may seek reparation under the BPA in the courts where they have been victimized by unfair business practices. Directors and officers of the corporation who authorized or permitted the offence are also guilty of the offence and liable to the penalties under the BPA.
Directors found guilty of an offence under the BPA may be subject to a fine of not more than $25,000 or imprisonment for a term of not more than 12 months, or both, in the case of a first offence. For a subsequent offence, the director may be subject to a fine of not more than $100,000 or imprisonment for a term of not more than 36 months, or both.
A number of statutes impose liability on the directors of corporations which fail to pay employee entitlements, such as wages, vacation pay or pension benefits and for the payment of statuary severance or termination pay.
Liability arises under the MCA and the Manitoba Employment Standards Code for unpaid wages.
1) Corporations Act (Manitoba)
Directors are jointly and severally liable to employees of the corporation for all debts not exceeding six months’ wages payable to each employee for services performed while they were a director of the corporation. A director who has satisfied a claim is entitled to contribution from the other directors who were liable for the claim.
A director’s liability for unpaid wages arises only after the employee has exhausted all remedies against the corporation. Therefore, the amount recoverable from a director is the amount remaining unsatisfied after execution. A director is not liable for unpaid wages unless:
(a) the corporation has been sued for the debt within six months after it has become due and execution has been returned unsatisfied in whole or in part; or
(b) the corporation has commenced liquidation and dissolution proceedings or has been dissolved and a claim for the debt has been proved within six months after the earlier of the date of commencement of the liquidation and dissolution proceedings and the date of dissolution; or
(c) the corporation has made an assignment, or a receiving order has been made against it under the Bankruptcy and Insolvency Act (Canada), and a claim for the debt has been proved within six months after the date of the assignment or receiving order.
An action must be commenced against the director during that person’s term as a director or within two years after he or she ceased to be a director. Where a director pays a debt that is proved in liquidation and dissolution or bankruptcy proceedings, he or she is entitled to any preference that the employee would have been entitled to. Where a judgment has been obtained, a director is entitled to an assignment of the judgment.
2) Employment Standards Code (Manitoba)
Directors will only be jointly and severally liable with the corporation to an employee or former employee of the corporation for wages that were earned or became due and payable within the last 6 months for which the person was a director, as well as vacation allowances that accrued or became due and payable within the last 22 months in which the person was a director. Liability will not extend to statutory wages in lieu of notice as required for individual or group terminations nor wages earned by an employee while the corporation’s business is under the control of a receiver-manager.
If a corporation’s directors have resigned or have been removed without replacement, someone who manages or supervises the management of a corporation’s business is deemed to be a director of the corporation for the purposes of the Employment Standards Code (“ESC”). Therefore, they will be personally liable for unpaid wages as if the person actually were a director of the corporation.
An employment standards officer who investigates a complaint and determines that wages are due and payable to an employee may issue an order requiring the employer to pay the unpaid wages of the employee. The officer may order a director or former director of the corporation to pay all or some of the unpaid wages, whether or not the corporation is ordered to pay the wages. However, a director or former director of a corporation who pays wages under an order may bring an action against the corporation for contribution or indemnification for the wages paid. A director that is required by an order to pay money must do so immediately or within such time as the order allows, whether or not the order is appealed. An application for leave to appeal must be made within thirty days after the day the order is made or within such further time as a judge may allow.
Directors are not expressly liable under the ESC for termination pay where the corporation fails to make such payments. However, this failure is an offence. Directors who directed, authorized, assented to, permitted, or participated or acquiesced in an offence under the ESC are also guilty of the offence, whether or not the corporation has been prosecuted or convicted. A director who is guilty of an offence under the ESC is liable on summary conviction to a fine of not more than $5,000. Prosecution for an offence under the ESC may be commenced within one year after the date the alleged offence occurs.
3) The Labour Relations Act (Manitoba)
The Labour Relations Act (“LRA”) contains provisions prohibiting unfair labour practices. Individuals involved in any unfair practice are treated as agents of the corporation and labour boards will exercise their powers to issue orders against such individuals, especially those who are directors and officers of the corporation, under certain circumstances. The Manitoba Labour Board and other labour boards have relied on the wording of such provisions to extend liability beyond the employer to “persons acting on behalf of the employer.” Therefore, directors cannot rely on the separate legal personality of the corporation to insulate them from liability for unfair labour practices.
Directors should be careful to avoid violating any labour relation obligation as it can lead to large cost orders. The Manitoba Labour Board has found that interest ought to be payable on the sums owed to unions for any violations of the LRA including, union dues, dental plan contributions, and education or training plan trust fund contributions.
4) The Workplace Safety and Health Act (Manitoba)
The Workplace Safety and Health Act (“WSHA”) protects workers, self-employed persons and others from risks to their safety in workplaces. It requires employers to do all that is reasonable and practicable to protect the safety, health and welfare of workers. Because employers have the greatest degree of control over the workplace, they also have the greatest degree of legal responsibility for safety and health in the workplace.
Directors who oversee the workplace safety and health of the workers employed by the corporation must take reasonable care to ensure that their corporation complies with the provisions of the WSHA.
Directors found guilty of a first offence under the WSHA are liable to a fine of not more than $250,000 and, in the case of a continuing offence, to a further fine not exceeding $25,000 for each day during which the offence continues. For a second or subsequent offence, they will be liable to a fine of not more than $500,000 and, in the case of a continuing offence, to a further fine not exceeding $50,000 for each day during which the offence continues. In addition to the aforementioned fines, directors convicted of an offence may be imprisoned for a term not exceeding six months. If a director is convicted of an offence where they were aware of an unsafe working condition but still permitted employees to do that work before the condition was remedied, they will be prohibited from working in a supervisory capacity at any workplace for a six month period after the date of conviction. Directors convicted of an offence may be ordered by the court, depending on the nature of the circumstances surrounding the offence, to pay an amount for the purpose of educating the public on matters relating to workplace safety and health. This penalty may be required in addition to any other penalty imposed under the WSHA. However, the total penalty paid must not exceed the maximum penalty for which the offender could be liable as set out above.
Prosecutions under the WSHA must be commenced not later than two years after the day the alleged offence was committed.
5) Criminal Liability for Workplace Safety and Health Violations
The Canadian Criminal Code establishes rules for attributing criminal liability to organizations, including corporations, for their acts and their representations and also creates a legal duty for all persons directing work to take “reasonable steps” to ensure the safety of workers and the public.
A corporation can only be convicted of a crime if culpability for the misconduct of individuals is attributed to the corporation. Currently, Canadian courts assign criminal liability to a company when certain senior employees, namely the “directing minds” of the corporation, commit a crime. The case law has held that the only person who can become a directing mind of the corporation are those individuals who exercise decision-making authority in matters of corporate policy. Where the crime is one of criminal negligence (i.e. wanton or reckless disregard for the safety of others that results in bodily injury or death) the failure of managerial officers who reasonably ought to have known what was happening or who were not reasonably diligent in establishing and monitoring mechanisms for compliance with corporate policies may be found to be included under corporate criminal liability. The Criminal Code creates a legal duty for directors who direct others in their work to take reasonable steps to prevent bodily harm to that person, or any other person, arising from that work.
Two things must generally occur for a successful criminal prosecution for criminal negligence: there must be a failure to perform the duty to prevent bodily harm to a person; and it must be proved beyond a reasonable doubt that the individual or corporation was reckless as to the potential consequences of their safety-related conduct. Alternatively, if their failure to attend to safety matters was so gross that they ought to have known the consequences, or that they were willfully blind to the consequences, they may be liable for criminal negligence.
If one or more directors behave in a criminally negligent manner and they did not act, or insulated themselves from obtaining the knowledge to act to correct the situation, the corporation and directors will be subject to penalty.
Directors are subject to a range of Criminal Code sentencing options from absolute discharge to a maximum penalty of life in prison for criminal negligence causing death.
6) Employment Insurance Premiums
Directors may be personally liable for the failure of their corporation to deduct, withhold, remit, or pay employee and employer premiums under the federal Employment Insurance Act (“EIA”). Directors of an employer corporation at the time when the corporation fails to deduct or remit the employment premiums under the EIA are jointly and severally liable together with the corporation to pay the required premium amounts plus any interest and penalties. The provisions set forth in 227.1(2) to (7) of the Income Tax Act apply equally to the obligations of directors under the EIA.
Directors may assert a due diligence defence to personal liabilities under the EIA.
7) Workers’ Compensation
Compensation under The Workers Compensation Act of Manitoba (“WCA”) cannot be contracted out of. Employers must make returns and pay assessments to the Workers Compensation Board (“WCB”). An employer is not entitled to directly or indirectly deduct wages to pay any part of any sum that the employer is or may become liable to pay into the accident fund or have their worker’s contribute to indemnifying the employer against any liability. Every person that contravenes this rule commits an offence. They may be subject to an administrative penalty and may also be liable to repay to the worker any sum that has been deducted from the worker’s wages or that the worker has been required or permitted to pay.
Where a corporation commits an offence under the WCA or the regulations, directors who authorized, permitted or acquiesced in the commission of the offence are also guilty of an offence and are liable, on summary conviction, to a penalty whether or not the corporation has been prosecuted or convicted. Where a corporation defaults in the payment of money to the WCB, directors of the corporation at the time the amount is due, are jointly and severally liable with the corporation to pay to the WCB any amount owing in excess of $1,000. A director who satisfies a claim is entitled to contribution from other directors liable for the claim.
Furthermore, where an offence continues for more than one day the director is guilty of a separate offence for each day the contravention continues. Prosecution for an offence under the WCA may not be commenced later than two years after the day the alleged offence was committed.
It is important to note that a director may be affirmed by the WCB as being entitled for him or herself or for his or her dependents to the same compensation as if the director were a worker. Whether or not the director is affirmed by the WCB affects the penalty the director may be liable for. If affirmed as a worker, a director who is convicted of an offence is liable, on summary conviction, to a fine of not more than $1,500; if they have not been affirmed, the director will be liable to a fine of not more than $7,500.
Offences under the WCA includes where a person who:
(a) knowingly makes a false statement to the WCB affecting the person’s entitlement to compensation;
(b) deliberately fails to inform the board of a material change in circumstances affecting the person’s entitlement to compensation, within 10 days of the commencement of the change;
(c) knowingly makes a false statement to the WCB concerning an employer’s report of payroll, or affecting the assessment of an employer;
(d) knowingly makes a false statement to the WCB affecting a worker’s entitlement to compensation; or
(e) deliberately fails to inform the WCB about a matter affecting a worker’s entitlement to compensation.
A director who has been affirmed by the WCB and commits an above offence is liable, on summary conviction, to a fine of not more than $1,500 or imprisonment for a term of not more than three months, or both; If they are not affirmed, to a fine of not more than $7,500 or imprisonment for a term of not more than three months, or both.
Where corporations act as the plan administrators of their employees’ pension plans, both federal and provincial pension legislation and common law create liability for the directors of such corporate employers. Fiduciary obligations are imposed on directors to not act in their own interests where those interests conflict with their fiduciary duty to the pension plan’s members.
1) Canada Pension Plan
Directors may be personally liable for the failure of their corporation to deduct and remit employees’ contributions, or to pay the employer’s contributions. Directors that have authorized, assented to, acquiesced in or participated in the commission of the offence are a party to and guilty of the offence and liable to pay any amounts the corporation fails to deduct or remit, together with any applicable interest or penalty. Directors of the corporation at the time the failure occurred are jointly and severally liable together with corporation to pay that amount plus any interest and related penalties.
A director may assert a due diligence defence to personal liabilities under the Canada Pension Plan (“CPP”). Therefore, a director can successfully defend a claim for unpaid CPP contributions or remittances if that director exercises the degree of care, diligence and skill to prevent the failure to pay that a reasonably prudent person would have exercised in comparable circumstances.
The CPP incorporates, by reference, the enforcement provisions of the federal Income Tax Act under subsection 227.1(2) to (7) which establish the following procedural conditions precedent to a directors’ liability where a corporate employer has failed to deduct or remit any amounts required by the CPP:
(i) the Crown must register a certificate in the Federal Court of Canada for the amount of the corporation’s liability and obtain a return of execution unsatisfied in whole or in part;
(ii) where the corporation has commenced liquidation or dissolution proceedings or has dissolved, the Crown must prove its claim against the corporation within six months or earlier of the date of commencement of the proceedings and date of dissolution; or
(iii) where the corporation has become bankrupt, the Crown must prove its claim within six months of the date of bankruptcy.
The limitation period for commencing an action against a director is two years form the date the director ceased to be a director of a corporation. The liability owed is limited to the amount remaining unsatisfied after execution against the corporation. A director is entitled to contribution from the other directors who were liable.
2) Pension Benefits Standards Act (Canada)
Every employer must ensure that all money in the pension fund is kept separate and apart from the employer’s own funds and that the employer must remit to the pension plan all the amounts that it is required to pay to the fund; failure to do so is an offence under the Act. Directors who directed, authorized, assented to, acquiesced in, or participated in the offence are a party to it and guilty of the offence, whether or not the corporation has been prosecuted or convicted. A director is liable on summary conviction to a fine not exceeding $100,000 or 12 months’ imprisonment, or both. Proceedings in respect of an offence may be commenced no later than two years after the day on which the subject-matter of the proceedings became known to the Superintendent of Pensions.
3) The Pension Benefits Act (Manitoba)
Under The Pension Benefits Act (“PBA”) directors who administer a pension plan are required to make contributions for the benefit of employees in Manitoba. Individuals who are directors of the corporation at the time of the failure to contribute will be liable for unpaid contributions.
Directors will not be liable for unpaid contributions if they have discharged their duty of care to prevent the corporation’s failure to pay contributions. The administrator of a pension plan is under that same duty to exercise the care, diligence and skill in the administration of the plan and the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.
The amount recoverable from a director liable for unpaid contributions is the amount remaining unsatisfied after execution. A director or former director of a corporation who is liable under this section is entitled to recover any amounts paid from the corporation and is entitled to contribution in relation to that amount from other directors or former directors who are liable under this section.
Directors who directed, authorized, assented to, acquiesced in, or participated in, the committing of an offence are a party to and guilty of the offence under the PBA and are liable on conviction, whether or not the corporation has been prosecuted or convicted, to a fine of not less than $2,000 and not more than $100,000. Furthermore, where a director or former director of a corporation is liable, the government has a lien on all assets of the director or former director, to secure payment of all amounts payable.
Prosecution must be brought within six years of the date the commission becomes aware of the offence.
1) The Public Health Act (Manitoba)
Directors are under a duty to protect and promote the health and well-being of their employees and the people of Manitoba under The Public Health Act of Manitoba (“PHA”). If a corporation commits an offence under the PHA, directors who authorized, permitted or acquiesced in the commission of the offence are also guilty of the offence. When an offence continues for more than one day, the director is guilty of a separate offence for each day the offence continues.
A director who is guilty of an offence under the PHA is liable on summary conviction to a fine of not more than $50,000 or imprisonment for a term of not more than one year, or both. If the offence results from a failure to comply with an emergency health hazard order the individual may be liable to a fine of not more than $100,00 or imprisonment for a term of not more than one year, or both. Prosecution for an offence under the PHA must be commenced within two years after the day the alleged offence was committed.
E. Taxation Liability
The federal Income Tax Act (“ITA”), The Income Tax Act of Manitoba (“MITA”) and The Tax Administration and Miscellaneous Taxes Act of Manitoba (“TAMTA”) impose liability on directors for amounts that the corporation has failed to deduct, withhold, remit or pay, including employees’ income tax deductions and related remittances, and deductions from payments to non-residents.
These statutes grant to directors a “due diligence” defence.
1) The Income Tax Act (Manitoba)
Every corporation that maintains a permanent establishment in Manitoba at any time in a taxation year must pay tax under the MITA. If a corporation commits an offence under the MITA, directors who authorized, permitted or acquiesced in the commission of the offence are also guilty of an offence and are liable on summary conviction to penalties, whether or not the corporation has been prosecuted or convicted.
Section 227.1 of the ITA applies for the purposes of the MITA with respect to the liability of directors of a corporation. Liabilities under 227.1(1) are only applicable to persons who were directors at the time that the obligations to deduct, withhold, or remit are required to be made. A determination as to when a person ceases to be a director is also important.
Subsection 227.1(1) provides that directors are jointly and severally liable with the corporation for the amount of tax which the corporation was required to deduct, withhold, remit, or pay together with any related interest or penalties. Directors will be liable where the corporation fails to meet its tax obligations in the following circumstances:
(a) the requirement to deduct or withhold from a payment of salary or wages, an amount determined in accordance with the regulations under ITA and the requirement to remit that amount within certain time limits prescribed by the regulations.
(b) the 25 percent withholding tax on payments or credits such as dividends, interest, rents, royalties, management fees, pension benefits, retirement allowances, deferred profit-sharing plans, registered retirement savings plans, registered income funds, and registered home ownership savings plans to nonresidents.
A person who manages the business and affairs of the corporation is deemed to be a director of that corporation where all directors have resigned or been removed and no replacements appointed or elected. The courts have held that deemed directors are liable for non-payment of amounts owing under applicable tax legislation.
2) Tax Administration and Miscellaneous Taxes Act (Manitoba)
Directors are liable for the corporation’s tax debt if the corporation fails to pay or remit when it is due any tax that it is required to collect and remit or any tax payable by it under The Retail Sales Tax Act. Individuals who are directors of the corporation at the time of the failure are liable to pay the corporation’s tax debt in respect of that failure.
However, a director will not be liable if he or she exercised the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances to prevent the corporation’s failure to pay or remit tax. A director would not be found liable unless an assessment is made against the person while he or she is still a director of the corporation or within two years after he or she ceased to be a director.
A payment by a director or former director of the corporation in respect of a tax debt of the corporation may be applied to that tax debt of the corporation or to any part of it. They are entitled to contribution from other directors or former directors who are liable or would be liable or as a debt to a person owed by the corporation.
The Goods and Services Tax (“GST”) is imposed under the federal Excise Tax Act (“ETA”). Directors of a corporation at the time the corporation is required to remit GST are jointly and severally liable together with the corporation to pay that amount and any interest or related penalty.
The ETA contains provisions substantially similar to the ITA provisions concerning the conditions precedent to directors’ liability and the availability of a “due diligence” defence to directors. These provisions are also applicable in the context of directors’ liability for unpaid GST.
The ETA provides for fines and/or imprisonment for various other statutory offences for which directors are liable, whether or not the corporation has been prosecuted or convicted, if they have directed, authorized, assented to, acquiesced in or participated in the commission of the offence. The offences include failing to file or make a return, making false or deceptive statements, evading tax by altering documents, and willful evasion or failure to pay, collect or remit the GST. Penalties for those found liable include fines of up to 200% of the GST sought to be evaded or $25,000, and/or imprisonment for up to five years.
Proceedings against a director may be commenced not more than two years after the person last ceased to be a director.
F. Environmental Matters
Directors may be personally liable for environmental harm caused by their corporation. Several environmental statutes are potential sources of personal liability for directors.
1) The Environment Act (Manitoba)
The Environment Act of Manitoba (“EA”) outlines the environmental assessment and licensing process for developments that may have potential for significant environmental impacts and prohibits the release of unauthorized pollutants into the environment. Any director, officer or agent of the corporation who directed, authorized, assented to, acquiesced in, or participated in the commission of an offence is a party to and guilty of the offence and is liable on conviction to punishment. Directors may be liable for a first offence, to a fine of not more than $50,000 or to imprisonment for not more than six months, or both. For each subsequent offence, directors may be liable to a fine of not more than $100,000 or to imprisonment for not more than one year, or both.
In addition, where, in the opinion of a judge, the party is unwilling or unable to remedy the situation or condition that gave rise to the offence, the judge may suspend or revoke all or part of the environmental licences, or permits under which the individual operates, for such a time as the judge deems fit. In such case, the party will be unable to carry on its operation until the licence, approval or permit is restored by a judge or by the minister.
2) The Canadian Environmental Protection Act (Canada)
The federal Canadian Environmental Protection Act (“CEPA”) contains rules regarding toxic and hazardous substances, ocean dumping, trans-border air emissions, and other environmental matters within the federal government’s jurisdiction. Directors who directed, authorized, assented to, acquiesced in or participated in the commission of a statutory offence by the corporation are guilty of the offence whether or not the corporation is prosecuted for, or convicted of the offence. Directors are responsible for taking all reasonable care to ensure the corporation complies with CEPA, its regulations and orders issued under CEPA. The positive duty and liability for offences under CEPA effectively imposes on directors a duty to monitor the actions of their corporation.
Upon conviction, a director may be found liable to pay a fine of up to $200,000, or to serve a term of imprisonment not exceeding six months, or both. For certain specified offences, the fines can be higher. Directors found to have recklessly caused a disaster or put human life at risk may be liable for an unlimited fine or five years imprisonment, or both.
3) Fisheries Act (Canada)
The federal Fisheries Act (“FA”) regulates fish habitat protection and pollution prevention as apply to internal waters, territorial sea and fishing zones of Canada. It is primarily concerned with the release of substances that harm fish or fish habitat. The FA prohibits works and undertakings that disrupt fish habitats or the discharge of substances that are harmful. Penalties for these offences range from maximum fines of $300,00 to $1,000,000 and/or terms of imprisonment from six months to three years.
Pursuant to the FA, directors who directed, authorized, assented to, acquiesced or participated in the commission of an offence, will be guilty of an offence regardless of whether the corporation has been prosecuted or convicted of the offence. In addition, fishers may have civil causes of action against the directors of a corporation that discharged substances that harm fish populations.
Each director and officer must exercise due diligence to prevent harmful discharges and report them promptly if they occur.
4) The Dangerous Goods Handling and Transportation Act (Manitoba)
The Dangerous Goods Handling and Transportation Act (“DGHTA”) regulates the transporting or handling or offering for transport of any dangerous goods. Directors who directed, authorized, assented to, acquiesced in, or participated in the commission of the offence, are party to and guilty of the offence and are liable, on summary conviction to the penalties under the DGHTA.
Directors who are found guilty of an offence may be liable for the same penalties as under the EA.
5) General Observations
Directors are entitled to protect themselves from conviction of environmental offences by showing that they were duly diligent or took all reasonable care to prevent the offence. As stated above, CEPA imposes a positive duty that effectively requires the directors to actively monitor the actions taken by their corporation. Directors will not be permitted to turn a blind eye to the operations of the corporation even if their authority has been delegated. Instead, it is advisable that directors keep themselves informed by periodically making reasonable inquiries as to the corporation’s compliance with environmental standards.
It is important that directors take active steps to ensure that officers of the corporation are complying with environmental legislation, and that appropriate procedures and safeguards have been implemented to ensure such compliance. Due diligence may require that formalized system of inspections and audits of operations be carried out to detect all potential risks. Once risks are detected, directors have a duty to take all reasonable steps to prevent contamination from occurring. Therefore, directors should implement thorough and understandable training programs for all those involved in this system. Courts will look favorably on programs, such as employee training, enacted by the corporation to prevent any environmental violations.
The Corporations Act permits a corporation to indemnify a director for all costs, charges and expenses including an amount paid to settle an action or satisfy a judgment, reasonably incurred in any civil, criminal or administrative proceeding by reason of being or having been a director, provided that he or she acted honestly and in good faith with a view to the best interests of the corporation. In the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, a director must show that he or she has grounds for believing that his or her conduct was lawful. Court approval is required for an indemnity from the corporation in favour of directors in respect of actions against them by the corporation or on its behalf.
If a director was substantially successful on the merits in his or her defence of the action or proceeding and fulfills the conditions set out above the director will be entitled to indemnification from the corporation as of right.
The Corporations Act permits corporations to purchase and maintain insurance for the benefit of any director against any liability incurred by him or her in his or her capacity as a director, or where he or she acts or acted in that capacity at the corporations request. A director will not be insured where the liability relates to his or her failure to act honestly and in good faith with a view to the best interests of the corporation.
3) Establishment and Evidencing of Available Defences
Directors should be aware of the reliance and various “due diligence” defences they are entitled to in respect to certain statutory liabilities. Directors should assess whether their actions and practices to date are sufficient to establish those defences and determine which, if any, additional actions and procedures should be implemented. It is advisable that directors ensure, to the extent possible, that corporate procedures and arrangements are in place to cause the applicable corporate obligations to be satisfied. Furthermore, it is important that directors ensure that records are kept of the information they receive and the steps that they take to guarantee the corporation is meeting its statutory obligations.
Resignation will not permit directors to escape civil or statutory liability for unpaid wages, employee benefits and taxes that came into existence while they were directors. However, directors will be able to avoid further liability and start the limitation period for the commencement of an action against a director for various liabilities. Resignation becomes effective at the time a written resignation is sent to the corporation, or at the time specified in the resignation, whichever is later.
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