Personal liability for officers and directors- how far?

Should company directors and officers be personally liable for contamination they did not cause?

“Directors’ liability is one of the primary instruments used by policymakers to promote good corporate governance. However, … [t]he imposition of ever-increasing personal liability on directors may eventually affect the management and business efficiency of Canadian corporations.”

So concludes a research paper published by the Parliament of Canada on Directors’ Liability Under the Canada Business Corporations Act. It is easy, and appealing to regulators, to expand the personal liabilities of corporate officers and directors. Without personal liability, incorporation can encourage and reward socially harmful behaviour. But excessive personal liability can also do great harm:

 “Any expansion of statutory liabilities [of corporate directors] must balance competing interests.  The addition of personal liabilities may make corporate management more responsive to regulations designed to protect the environment, for example.  However additional liabilities may also make Canadian companies less competitive by increasing their compliance costs, and if directors face increasingly onerous personal risks, qualified directors may choose not to serve on corporate boards, and the quality of corporate management may decline…”

Are we there yet? Getting close…

Many Canadian environmental laws hold directors personally liable for pollution that occurs “on their watch”, (presumably to the profit of D&O insurance companies.) The most common statutory provision is some version of s. 232 of the Alberta Environmental Protection and Enhancement Act:

232   Where a corporation commits an offence under this Act, any officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is guilty of the offence and is liable to the punishment provided for the offence, whether or not the corporation has been prosecuted for or convicted of the offence.[1]

These common-sense provisions have been in effect for decades, and avoid the moral hazard without unfairness. They seem to be as manageable as other common directors’ liabilities, such as for income tax deductions, employee payrolls, etc. Directors can be held liable if they participate in corporate environmental offences, but can protect themselves through due diligence.

Thus, Canadian directors have been often charged and convicted of environmental offences that they caused. For example, in Alpha Manufacturing Inc. v. British Columbia, the principal of a corporate landfill operator was rightly convicted of introducing waste into the environment, by depositing waste into a sensitive bog without a permit.

There have also been a series of cases imposing personal cleanup liability on directors, through administrative orders, for contamination that they caused or negligently failed to prevent. Mining engineer and promoter Patrick Sheridan was famously held responsible for mine drainage water from his abandoned Coppercorp mine, and for failing to clean up accumulated PCB wastes at his Maybrun mine.

These fault-based cases are not the problem. What may really discourage qualified directors from serving on corporate and charitable boards, with serious impacts for Canadian businesses and civil society, is the prospect of infinite, permanent, personal liability for innocent officers and directors.

For example, Ontario’s Ministry of Infrastructure proposes to impose unlimited cleanup costs for forfeited property of dissolved corporations, on any former director or officer during its last two years, regardless of fault, no matter when the contamination occurred.[2] No limitation period was proposed; i.e. this liability would be permanent.

Such costs can be substantial. At Giant Mine, Northwest Territories, the federal government was left with 237,000 tonnes of toxic arsenic trioxide when the mine was forfeited. They budgeted $480 million of taxpayers’ money for the cleanup, which may now cost nearly $1 billion.[3] The temptation to find someone else to pay is obvious.

When the actual polluters are gone, some governments are turning on innocent directors, those who could not have prevented the contamination, and who did what they could to clean it up.

Is this fair? Or smart? How much harm will the risk of such liability do to corporate governance? And to Canada’s appeal to international investors? Where is the balance of competing interests that the Parliamentary study calls for?

This article was originally published in Hazmat Magazine.

 

 

 

 



[1] In addition, corporations are typically vicariously liable for the acts of their directors. E.g. s. 253   Alberta Environmental Protection and Enhancement Act:

For the purposes of this Act, an act or thing done or omitted to be done by a director, officer, official, employee or agent of a corporation in the course of that person’s employment or in the exercise of that person’s powers or the performance of that person’s duties is deemed also to be an act or thing done or omitted to be done by the corporation.