Navigating Director And Officer Liability

Being a director or officer of a company comes with many responsibilities – responsibilities that if not met are increasingly resulting in claims directly against directors and officers. This is true worldwide. In Global Insurance Law Connect 2025 Directors' and Officers' Global Trends report, it highlighted causes such as greater expectations by shareholders and increased legislative and regulatory requirements.

Most frequently, claims against directors and officers are made concerning:

• Stakeholder litigation;
• Regulatory breaches; and
• Bankruptcy claims.

Stakeholder Litigation

Stakeholders most often allege directors and officers breached their fiduciary duties through mismanagement, oppressive conduct, fraudulent schemes, or misused corporate assets. Directors and officers owe fiduciary duty to the company because they wield significant power with limited oversight. As such, they must act honestly and in good faith with a view to the best interest of the company. For example, they must avoid conflicts of interest and maintain company confidentiality, even after they leave the organization.

As an example, the Court has held directors personally liable for the loss suffered by a shareholder where the directors prevented the shareholder from converting preferred shares into common shares. The personal liability arose because the directors knew that the shareholder had the right to convert the shares and the directors personally benefited from blocking the share conversion. The directors personally benefiting from their own actions was a key element in holding them personally liable for the shareholder's loss.

In some cases, the best interest of the company will be clear, but often it is a complex, fact-specific analysis. It can be difficult because there are multiple stakeholders within a company – shareholders, employees, creditors, etc. No one stakeholder always trumps the others. Every decision will be contextual.

In addition to putting the company first, directors and officers must perform their duties appropriately. They must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

Directors and officers must be able to show that they exercised reasonable business judgment in a responsible way. They, however, are not held to a standard of perfection. The "business judgement rule" offers protection to directors and officer. The Court will accept that directors and officers have acted in the best interest of the company and are afforded latitude, if they can show that the decision was made in good faith and on an informed basis.

Regulatory Breaches

The most common regulatory breaches resulting in personal liability for directors and officers relate to health and safety, tax obligations, construction liens, environmental protections, and cybersecurity. For instance, directors and officers can be held personally liable under the following legislation:

• The Nova Scotia Occupational Health and Safety Act – for directing, authorizing, assenting to, acquiescing or participating in the commission of any offence under the Act.
• The Canada Income Tax Act – for failing to meet tax obligations, such as not fulfilling payroll deductions.
• The Nova Scotia Builders' Lien Act – for failing to properly maintain funds impressed with a trust for contractors and subcontractors.
• The Nova Scotia Environment Act – for any corporate violations of the legislation if they directed, participated or acquiesced in the violation. For example, illegal disposal of hazardous waste, improper reporting, or failing to follow with issued permits.
• The Canada Personal Information Protection and Electronic Documents Act – for certain corporate violations related to the collection and use of personal information. For example, the accidental disclosure of personal information.

As an example, the Court has held a director personally liable for failing to maintain a builders' lien fund. Contractors sued the director of the company that owned the construction project for unpaid invoices. The company had received financing for the construction project which was deemed to constitute a trust for the contractors' benefits. When the director chose to use a portion of those funds for non-construction project related purposes, the Court found that they breached the trust resulting in personal liability.

Bankruptcy and Insolvency

In bankruptcy claims, creditors will try to recover unpaid liabilities by pursuing the directors and officers in addition to the company. For example, directors and officers may be personally liable under the Bankruptcy and Insolvency Act if they approved certain transactions while the company was insolvent or if the transaction caused the company to become insolvent. This could arise due to paying dividends, redeeming shares, or repaying loans. If the transaction resulted in a personal benefit to the director or officer, it is even more likely to result in their personal liability.

The Court held a director and officer personally liable for failing to provide contractually required notice to a lender regarding the financial status of the company. The director and officer were meant to advise the lender regarding the extent of debt from other lenders but failed to do so. When the company restructured, the lender lost approximately $2 million, which the Court permitted the lender to recover against the director and officer having found that they had acted deceitfully and fraudulently.

How to Meet Obligations

In order to meet their obligations, directors and officers should:

• Familiarize themselves with the statutory and regulatory requirements relevant to their company and ensure that those requirements are met.
• Maintain detailed records or minutes concerning compliance of both internal governance requirements and external requirements.
• Carefully review pertinent information prior to making a decision. Seek professional advice when appropriate.
• Immediately address any problems as they arise.
• Ensure that the company maintains comprehensive liability insurance, which should provide defense and indemnification for directors and officers if a claim arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.