The Board of Directors is responsible for managing the corporation or, as the case may be, overseeing the management of the corporation by the officers to whom management powers have been delegated. It is therefore up to the directors of companies and non-profit organizations to ensure that they are properly governed. In the context of the COVID-19 crisis, the governance assumed by directors must be enhanced.
The latter must ensure that the legal entity takes the additional measures required to :
- comply with public authority directives
- protect the health of its employees, customers and the public
- ensure the survival of your business
- plan the resumption of its activities when this is possible
What are the duties and responsibilities of directors?
In addition to governance, directors must also act as trustees of corporate entities, and their personal and joint liability may thus be engaged.
1 – Civil liability
The primary source of liability for directors is civil liability arising from the duties of directors under the Civil Code of Québec and the statutes constituting legal persons. These stipulate that directors must act personally, within the limits of their powers, with prudence and diligence, as well as honesty and loyalty, in the interests of the legal person.
In addition, the Quebec Business Corporations Act (R.L.R.Q. c. S-31.1), as well as the Canada Business Corporations Act (R.S.C. (1985) c. C-44), provide for the personal liability of directors in the following cases, among others C-44) provide for the personal liability of directors in the following cases, among others:
- Unpaid employee wages: Directors’ liability covers six months’ unpaid wages to company employees, including all remuneration, commissions, overtime, vacation pay, union dues, employment insurance benefits and statutory deductions from wages.
- Illegal dividends: directors may be held liable if they declare a dividend when they have reasonable grounds for believing that the company is or would be unable to pay its liabilities as they fall due.
- Loans to shareholders: directors may be held liable if the company grants loans to its shareholders when it is not solvent.
- Existing debts on dissolution: In certain circumstances, directors may be held personally liable on dissolution of a company with existing debts.
2 – Criminal liability
Several laws also provide for the personal criminal liability of directors for certain offences, such as the Act respecting occupational health and safety (R.L.R.Q. c. S-2.1). Conviction under these laws can result in a fine or even imprisonment in certain cases.
3 – Statutory liability
In general, with criteria varying from one law to another and some possibility of exemption, tax deductions or withholdings to be made by legal entities may give rise to statutory and personal liability on the part of directors.
As a result of the COVID-19 crisis, many companies now face the prospect of insolvency or bankruptcy, or have cash flow problems.
In the event of non-payment, bankruptcy of the corporation or insufficient realization following liquidation of the corporation’s assets, the director may be held personally liable for the various source deductions, as well as the goods and services tax (GST), harmonized sales tax (HST) and Quebec sales tax (QST) owed by the corporation, as described in subsection 323(1) of the Excise Tax Act (Canada) (R. S. C. 1985, c. E-15) and section 24.0.1 of the Tax Administration Act (Quebec) (R. S. Q. c. A-6.002).R.C. (1985), c. E-15) and section 24.0.1 of the Fiscal Administration Act (Quebec) (R.L.R.Q. c A-6.002).
In this regard, on March 27, 2020, the federal government announced that taxpayers will have the right to defer payment of GST and HST until June 30, 2020. The deadlines for filing QST returns, as well as related payments, have also been extended to June 30, 2020 for QST payments due between March 27, 2020 and June1, 2020.
These measures are designed to allow companies that are currently unable to meet their GST and HST payment and QST filing and payment obligations to defer fulfilling these obligations until June 30, 2020.
However, an important caveat is in order. In Ahmar v. Canada, 2020 FCA 65, handed down on March 25, 2020, the Federal Court of Appeal ruled that a director who fails to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, by allowing corporate funds to be diverted to the discharge of corporate obligations other than the payment of outstanding tax liabilities, in the hope of redressing the corporation’s financial position, would be in error. It is therefore essential that the directors ensure that the GST, HST and QST amounts collected are not used to finance the corporation’s activities during the current crisis, despite the deferral of payment to June 30, 2020.
In short, the unprecedented health crisis linked to COVID-19 accentuates the risk of directors being held personally liable. Inadequate governance and control of the legal entity’s activities by directors could constitute a breach of their duties and engage their personal liability.
Directors must monitor and guide the corporation’s management in managing the crisis. They are advised to consult professionals, and to set up or delegate to a committee the responsibility of overseeing the management of current events. It is also advisable to ensure that an assessment is made of the extent of the risks generated by COVID-19 on the corporate entity’s strategy, operations and financial health, to ensure that the required measures are put in place.
