Legal Blog

Director Liability

In a prior newsletter (November 2002), we discussed the different tests for a director or officer to be personally liable under the Construction Lien Act and to be personally liable under the common law for a fraudulent or reckless breach of trust.

New question. For a director or officer to be personally liable for a corporate breach of trust under the Act, is it sufficient to prove only that an individual is the sole director and officer of the corporation? This question was answered in Ducan Ceiling v. Vin-Bon Retail Systems, a 2007 decision of the Ontario Divisional Court.

Background 

Section 13(1) of the Act states that in addition to the persons (e.g. the corporation) actually breaching the trust, other persons are also liable for the breach. These persons are directors, officers, and anyone who has effective control of the corporation or its relevant activities. To be liable, the persons must “assent to, or acquiesce in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation.”

In Baltimore Aircoil of Canada v. ESD Industries Inc., a 2002 decision of the Ontario Superior Court of Justice, the judge held that simply because the facts indicated a breach of trust under the Act, this did not necessarily constitute a breach of trust under the common law. He found that the common law principles were much more stringent for finding liability than those under section 13 of the Act.

It is better for the aggrieved beneficiary of a trust to have a finding of common law fraud because such a finding will be more likely to withstand the subsequent bankruptcy of the director or officer.

Necessary Findings

The position of the plaintiff sub in Duncan was that the individual defendant was the sole officer and director and therefore had to have the requisite knowledge for personal liability under the Act. The trial judge disagreed. He noted that another person signed the contract on behalf of the general and that, apart from an admission that the individual defendant was the sole officer and director of the general, he was never mentioned again at the trial. That was not enough to show acquiescence.

The sub appealed. Probably, the defendant general had no money so that the only hope of collection lay in a personal judgment against the individual defendant.

The Divisional Court referred to a decision of the Court of Appeal in Zurich v. Matthews, which stated that section 13 of the Act does not declare all directors and officers liable, only those that are found to have acquiesced. The Divisional Court then noted that there was no evidence of the conduct of the individual defendant from which to infer that he must have known of the breach of trust. It dismissed the appeal. The plaintiff retains the burden of proving its case; without proof of sufficient facts to infer knowledge, the plaintiff will be unsuccessful.

Comment

Although one would think that the sole officer and director would know everything that was going on with his corporation, this is not necessarily a given. The smaller the corporation, the more likely that individual would have knowledge of everything. However, we can envisage a situation in which the general manager knows what is happening on a particular contract and the president does not.

Further, this case took place after the decision in Baltimore Aircoil. We find it difficult to understand why the sub did not present evidence to attempt to show common law liability. Had it attempted, but failed, to meet the increased standard for common law liability, it would at least have led some evidence to prove individual liability under the Act.

We doubt whether the sub (or its lawyers at trial) really understood section 13 of the Act. Our doubt is bolstered by the fact that the sub tried, unsuccessfully, to re-open its case, after the trial had concluded but before the final decision, to present further evidence regarding the knowledge of the individual defendant.