Civil Liability

Civil Liability in Contract

A corporation is liable for acts of its agents under the ordinary rules of agency. The indoor management rule is a specialized version of the apparent authority rule of agency law: in the absence of notice of irregularity or suspicious circumstances, everything in the operation of a corporation that appears to be properly done may be relied on by an outsider and will bind the company. However, a contracting third party who knows about a particular restriction will be bound by it.

Civil Liability in Torts

A corporation may be directly liable when a person who is a directing mind of the corporation committed the tort. A directing mind is “a person who has responsibility to establish corporate policy in the area in which the offence occurred”.140 A corporation may also be vicariously liable for torts committed by employees in the course of their employment.

Regulatory Protection of Creditors, Investors, and the Public

Protection of Creditors

Because of limited liability, a creditor's only protection is the fund of assets owned by the corporation. Therefore, two types of rules have been designed to preserve the capital of a corporation:

1. The solvency test – A corporation is prohibited from making any payment to its shareholders when it is insolvent. A corporation becomes insolvent when it has liabilities in excess of the realizable value of its assets or when it is unable to pay its debts as they come due. A corporation also cannot make any payment to its shareholders that would render the corporation's assets insufficient to pay the outstanding claims of creditors at that time.

2. The maintenance of capital test– A corporation is prohibited from "returning capital" to shareholders (e.g., by payment of excessive dividends or repurchasing corporate shares) if it depletes the capital fund made up of the assets paid into the corporation by the shareholders.

If the directors violate either of these two tests, they might become liable for debts of the corporation.

Protection of Investors

The major purposes of securities legislation are to prevent and punish fraudulent practices in the securities industry and to require full disclosure of financial information to prospective buyers of shares and bonds offered for the first time to the public. These objectives are accomplished by registering or licensing those engaged in various aspects of the securities business, by requiring the issuer of securities to the public to file a prospectus with the securities commission, and by imposing continuing disclosure requirements.

Current investors are also protected by a complicated set of statutes dealing with corporate reorganization, mergers, and winding up.

Protection of the Public Interest

Liability imposed under statutes and government regulations more closely resembles criminal liability than civil liability. “In addition to the exposure that directors face for breaching their general management duties, dozens of pieces of legislation place obligations on them.” Penalties for failure to comply include both fines and imprisonment. Statutes that impose a liability include provincial and federal revenue acts, provincial workplace health and safety legislation, the federal Competition Act, and environmental legislation.

A regulatory offence imposes a broader definition of mens rea (“guilty mind”) than under criminal law; it may be sufficient to show that the accused should have known that his or her conduct would result in the commission of the offence.

Criminal Liability

There are three broad categories of criminal offences, each of which has a different standard for corporate liability, as shown in Figure.

Figure: Categories of Criminal Offences

Lennard's Carrying Company Ltd. v. Asiatic Petroleum Company Ltd.142 first established the principle that a corporation can commit an act requiring a guilty mind. It opened the door to finding the actions of senior officers and directors to be those of the corporation itself with regard to committing acts and to the requirement of a guilty or negligent mind.

Thus, the corporation and/or its directors and senior officers may be found guilty of criminal offences. Prosecuting the latter, of course, opens up the possibility of deterrence by way of imprisonment rather than just fines.

Recent changes to the Criminal Code have increased the exposure to criminal liability in three ways:

1. The physical act and mental intent of any offence do not have to be found in the same person. Therefore, corporate criminal liability can be established in multiple employees with different responsibilities.

2. The physical act may be committed by any employee or contractor or a combination of them.

3. Corporate mens rea may be found not only in those with policy-making authority but also in those senior officers with operational responsibilities.