Explosion of investments and increased complexity of residential projects
The legal framework for directors’ liability in Quebec
The Quebec Business Corporations Act (QBCA) and the Canada Business Corporations Act (CBCA) impose fundamental obligations on directors: the duty of loyalty and the duty of care. The director must act honestly, in good faith and in the best interests of the corporation. He must also exercise the care, diligence and skill that a reasonable person would exercise in comparable circumstances.
The Civil Code of Québec completes this framework by imposing extra-contractual liability. Article 1457 C.C.Q. allows any person who has suffered an injury to sue a director who has committed a fault in the performance of his or her duties, even in the absence of a direct contractual relationship.
Situations that engage personal responsibility
There are several common situations that can give rise to the personal liability of a director. The first is blatant mismanagement: decisions taken without sufficient information, without consultation with experts when necessary, or in a situation of undeclared conflict of interest. Courts assess these decisions not in hindsight, but in light of what a reasonable director would have done at the time of the decision.
The second situation concerns tax and wage obligations. Under the Quebec Taxation Act and the federal Income Tax Act, directors may be held personally liable for unremitted source deductions, unpaid payroll taxes, and certain tax debts of the corporation.
The third concerns environmental and regulatory obligations. A director who turns a blind eye to non-compliant practices is exposed to personal prosecution, including criminal lawsuits.
Risk factors specific to the Montréal context
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Lifting the corporate veil: when society no longer protects
Article 317 of the Civil Code of Québec allows the courts to lift the corporate veil when the legal personality of a company is used to hide fraud or abuse of rights. In these cases, the director loses the protection offered by the corporate structure and is personally liable for the company's obligations.
The courts use this mechanism when they find a confusion of assets between the director and the company, the lack of compliance with corporate formalities, or the use of the company as a simple screen for the personal activities of the director. A dispute between shareholders can also highlight these abuses.
Protecting yourself effectively as an administrator
The best protection is prevention. A wise director ensures that his or her decisions are documented, that any conflicts of interest are declared, that professional advice is relied upon for complex decisions, and that detailed minutes of each board meeting are maintained.
Directors' and Officers' Liability Insurance (D&O Insurance) provides an additional safety net, but it does not cover intentional misconduct or fraud. A rigorous internal compliance policy is therefore essential.
