Originally published Summer 2007
The Ontario Ministry of Government Services Consumer Protection and Service Modernization Act, 2006 has received royal assent and will come in to force on August 1, 2007. Among other changes, the Act will amend the Ontario Business Corporations Act to clarify that corporate directors and officers owe their statutory fiduciary duty (to act honestly and in good faith) and duty of care (to exercise care, diligence and skill) only to the corporation.
This effectively overrules, for Ontario corporations, a Supreme Court of Canada decision which had held that directors also owed their statutory duty of care to other corporate stakeholders, including creditors. In that case, the corporation's trustee in bankruptcy claimed its directors breached their statutory duties to its creditors by implementing a new procurement policy that was ultimately unsuccessful. The Supreme Court held that directors do not owe their statutory fiduciary duty to a corporation's creditors. The Court held:
This makes sense, because there will be times where the interests of the corporation differ from those of its shareholders or creditors. For example, when a company is approaching bankruptcy, creditors may prefer the directors to steer a safe course, designed to maximize the value of their claims, while the corporation may prefer a higher-risk move, to attempt to revitalize the company's business.
However, the Supreme Court interpreted the statutory duty of care differently. The relevant statutory provision read:
The Court held that because this provision did not identify a specific beneficiary of the duty of care, the directors owed that duty to, in that case, the corporation's creditors, as well as to the corporation itself.
The amendment clarifies that directors owe their statutory duty of care to the corporation. As a result, after August 1, 2007 Ontario directors and officers will owe both their statutory fiduciary duty and their statutory duty of care to the corporation and not to any other stakeholders. Accordingly, where directors' business decisions are within a range of reasonable options in the best interests of the corporation, they will not be questioned or found to be in breach of their statutory obligations, even if they are not in creditors' best interests.
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.
