Liability of Officers & Directors

Paper Presented At Federation of Law Societies National Criminal Law Program St. John’s Nfld., July, 2010, Section 0.1

Author: Mark J. Sandler

Organizations, and most significantly corporations, act or omit to act through their officers, directors, agents and employees. Not surprisingly, jurisprudence exists on when such organizations bear criminal or regulatory liability under either the Criminal Code or other legislation (federal, provincial or territorial). (See Justice Wilson’s paper on Corporate Criminal Responsibility at section H.4.1)

At first blush, the liability of officers and directors might be addressed in a single sentence: an officer or director of a corporation or organization is liable (like every other individual) where he/she had both the requisite mens rea and actus reus for the offence(s) under consideration.

Put another way, under the Criminal Code, there are no special rules that attract liability to directors or officers. Their criminal liability is measured by whether their conduct has been proven to fulfill the elements of the offence either as principals or as parties.

The Criminal Code does refer to “senior officers” and “representatives” of “organizations,” in ss. 22.1 and 22.2 and defines these terms in s. 2. However, it does so solely in the context of articulating when an organization is a party to an offence based on the conduct of its representatives or senior officers. So, for example, s. 22.2 makes an organization a party to an offence requiring proof of fault other than negligence when one of its senior officers is a party to the offence, accompanied by specified conduct and a specified mental state. These provisions do not obviate the need to consider the individual liability of any officer or director based on the elements of the offence under consideration. They only contribute to an understanding of when the organization is guilty of an offence.

But none of that will constitute much of a revelation to the reader.  

The more interesting issues surrounding the liability of officers and directors arise in the context of statutes other than the Criminal Code where the conduct of organizations, and their directors and officers is more regularly scrutinized. These include tax, environmental, competition, and a wide array of regulatory provisions addressing everything from liquor licenses to pension plans, and many topics in between.

Of course, such legislation may attract liability to officers and directors without specific reference to them: again, either as principals or as parties. However, unlike the Criminal Code, such legislation often specifically articulates an additional basis for the liability of officers and directors.

For example, s. 242 of the Income Tax Act, 1985, c.1 (5th Supp.) says this:

Officers, etc., of corporations

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 a party to and guilty of the offence and is liable on conviction to the punishment provided for the offence whether or not the corporation has been prosecuted or convicted.

Similar formulations are found in many statutes.

At the outset, query whether such a provision can be relied upon by the prosecution when it is not specifically pleaded in the charging information. One view is that such a provision is no different than other party liability sections (such as s. 21 of the Criminal Code) which need not be specifically pleaded to be relied upon. For example, in R. v. Whissell-McLeod Ventures Ltd., [1994] A.J. No. 889, the Alberta Court of Appeal stated:

following points

Because the law does not distinguish between the party and the principal, there is no need to notify an accused in the indictment of the possibility of conviction as a party. When charging an accused as an aider and abettor, it is not customary to word the information to identify the accused as such. An officer, director or agent of a corporation charged with an offence under the Income Tax Act must be prepared to meet the possibility of being convicted either as a principal or as a party.

Another view is that a provision that creates special rules for party liability (beyond those generally applicable to all offences) should be specifically pleaded.  Certainly, where a provision creates a separate offence for officers and directors who authorize, permit,  participate in etc. the corporate offence (such as s. 122(3) of the Ontario Securities Act, R.S.O 1990, c. S.5), rather than refer to them as parties to the corporate offence), that provision should be specifically pleaded: R. v. Felderhof, 2007 ONCJ 345 (CanLII)

Assuming that such a provision is being relied upon by the prosecution in a particular case, there are at least three important points that inform its application.

First, such provisions generally do not require the actual prosecution or conviction of the organization (usually a corporation) in order to be utilized against an officer or director.  Section 242 is illustrative; it specifically states that officers, directors and agents may be liable whether or not the corporation has been prosecuted or convicted.

Second, that being said, the prosecution cannot successfully rely on such a provision unless it establishes, to the requisite degree of proof, that the corporation is guilty of an offence. Put another way, one cannot direct, authorize, assent to, acquiesce in or participate in the commission of an unproven corporate offence. What this means is that the charged officers and directors can rely upon all of the defences available to negate corporate liability. So, for example, if the corporate offence is one of strict liability, an individual officer or director will escape personal liability if he/she can demonstrate that the corporation exercised due diligence or operated under a reasonable mistaken belief in a set of facts which, if true, would render its conduct innocent: R. v. City of Sault Ste. Marie (1978), 40 C.C.C. (2d) 353, [1978] 2 S.C.R. 1299.

Third, such provisions superimpose additional elements that must be proven by the prosecution. The fault component or mens rea, if any, associated with these provisions is often contentious.  

As reflected above, the primary offence (meaning the offence which the corporation is allegedly guilty of) may be (and often is) a strict liability offence. The corporation would be guilty of that offence upon proof of the actus reus alone, unless it could establish on a balance of probabilities that it acted with due diligence or under a reasonable mistaken belief in a set of facts which if true, would render its conduct innocent. But where the prosecution seeks to rely upon provisions such as s. 242, it must establish not only that the officer, director or agent either directed, authorized, assented to, acquiesced in, or participated in, the commission of the offence (an additional actus reus requirement), but arguably, that the officer, director or agent did so with a subjective mens rea. In other words, the verbs “direct, authorize, assent to, acquiesce in or participate in” are arguably incompatible with negligence or a mere lack of due diligence, but import notions of subjective fault.

The situation is loosely analogous to the interplay between attempted murder and murder. Attempted murder requires proof of an intention to kill, a level of fault not required for murder itself.

I say “arguably” because the jurisprudence is, to put it charitably, confusing as to whether or when words such as “direct, authorize, assent to, acquiesce in, participate in” or “permit” (a verb found in other legislation) import subjective mens rea.

What follows are examples of cases relied upon to support the position that subjective mens rea is imported by such formulations.

In R v. Posner, [1966] 1 O.R. 388, 46 C.R. 321, 8 C.B.R. (N.S.) 102, [1965] 4 C.C.C. 312 (H.C.), Lieff J. held that proof of mens rea was required by a section of the Excise Tax Act, similar to s. 242 of the Income Tax Act. There, the controlling words were “direct, authorize, participate or condone”. At p. 326 (C.C.C.), Lieff J. said:

I would think that the state of mind of Samuel Posner at the time of the conduct giving rise to the charge is vital. Do not the very words “direct, authorize, participate or condone” imply the existence of a state of mind which can be described as intending to do some act which the accused Posner knew to be illegal, namely, as president of the company participated in its failure to pay. I therefore must say that mens rea is a necessary ingredient of the offence . . .

In R vTri-City Truck Sales Ltd. (1966), 59 W.W.R. 736, 63 D.L.R. (2d) 507 (B.C.S.C.), Gould J. said at pp. 511-12 (D.L.R.), in relation to a similar provision under the British Columbia Social Services Tax Act:

I agree with and follow Lieff, J., of the Supreme Court of Ontario in R v. Posner . . . wherein he holds that mens rea is an essential ingredient in the mind of a director of a company before he can be convicted of participating in the company’s offence.

In R v. Rogo Forming Ltd. (1980), 56 C.C.C. (2d) 31 (Ont. Prov. Ct.), Justice Vanek followed Posner, supra, stating at p. 42:

. . . I hold that the offence charged against them under s. 242 of the [Income Tax] Act as parties to the offence committed by the company is an offence requiring proof of mens rea as expressed in the governing words “who directed, authorized, assented to, acquiesced in, or participated in” the commission of the offence; or alternatively that those words form part of the actus reus of the offence; and at all events the onus of proof is upon the Crown to prove all the ingredients of the offence beyond a reasonable doubt including the elements of active or passive participation in the substantive offence within the meaning of those key words.

In R. v. Rohan’s Rockpile Ltd., (1981), 57 C.C.C. (2d) 388, the British Columbia Court of Appeal held that the offence of failing to remit monies contrary to ss. 153(1) and 238(2) of the Income Tax Act is one of strict, rather than absolute, liability. The appeal was taken by the corporate defendant. However, in setting aside the corporation’s conviction and ordering a new trial, the Court said this at p. 392:

There is a matter which should be mentioned. During argument we were informed that at the trial and on appeal in the County Court separate consideration was not given to the requirements ofconviction of the appellant Lowther under s. 242. Accordingly,

counsel for the appellants was of the view that he could not raise the matter before us. However, it ought to be considered at the new trial

which I would order. Without commenting on the correctness of the decision, I refer counsel to the judgment of Gould J. K vTri-City Truck Sales Ltd. et al. (1966), 63 D.L.R. (2d) 507, 59 W.W.R. 736. It was an appeal by way of stated case from the conviction of the individual appellant of failing to remit sales tax collected under the Social Services Tax Act, R.S.B.C. 1960, c. 361. Section 32 ofthat statute is quite comparable to s. 242. The learned Judge held that mens rea was an essential ingredient in an offence charged against a person in his capacity as a director of a company.

In R. v. Swedson, 1987 CanLII 3351 (A.B.Q.B.), the Court cited all of these cases. It noted, on appeal, the appropriateness of a heightened level of protection from liability for directors, officers and agents as compared to a corporation. It also seized on the fact that the prosecution had particularized the offence as involving “participation” and therefore confined its determination to whether the evidence supported the defendant’s “participation” in the corporate offence. That being said, there is also language contained in this decision that suggests that it may nonetheless be characterizing the offence with which the defendant was charged as one of strict liability.  

In R. v. Bodnarchuk, [2004] 4 C.T.C. 314 (B.C. Prov. Ct.), the Court summarized a number of additional decisions on this issue, concluding as follows at para. 17:

My analysis of these cases leads me to the following conclusion. If a person is charged in their capacity as a director of a corporation, the Crown must prove that they were a principal or a party pursuant to s. 242

beyond a reasonable doubt. There is clearly a certain mental element involved in that position. To be found guilty as a principal or a party as a corporate director requires mens rea, as has been settled by the law. In other words, the mental elements of s. 242 are that a person directed, authorized, assented to, acquiesced in, or participated in the commission of the offence.

On the other hand, in R. v. Felderhoffsupra, commonly referred to as the “Bre-X” prosecution, Justice Hryn concluded that s. 122(3) of the Ontario Securities Act did not import subjective mens rea. Subsection 122(3) provides that “every director or officer of a company or of a person other than an individual who authorizes, permits or acquiesces in the commission of an offence under subsection (1) by the company or person, whether or not a charge has been laid or a finding of guilt has been made against the company or person in respect of the offence under subsection (1), is guilty of an offence …” It was alleged, inter alia, that Felderhoff authorized, permitted or acquiesced in the issuance of a statutorily required press release that contained misleading or untrue statements. 

In so concluding, Justice Hryn reviewed (and often distinguished) many of the existing cases.

This paper does not purport to capture the Court’s full analysis. But the basis for his decision included the following points:

  1. s. 122(3) (unlike, for example, the various tax provisions considered in other cases) creates a separate offence, rather than simply articulate when directors, officers and others become parties to the corporate offence.  
  2. The requirement under the Criminal Code that parties to even a strict liability offence be proven to have subjective mens rea have no application to the Ontario Securities Act.
  3. the Securities Act (unlike some legislation considered in other cases) includes the verb “permits.” The Supreme Court of Canada in R. v. Sault St. Marie, supra,  stated that, in themselves, the words “cause” and “permit” fit much better into an offence of strict liability than either full mens rea or absolute liability. The often cited Posner decision preceded Sault St. Marie, meaning that full subjective mens rea or absolute liability were the only interpretative options available to that court. Further, it erroneously held that the defendant must know that the subject activities were illegal, which is incompatible with later decisions.
  4. The requirement that the defendant “authorize, permit etc” may well, as conceded [1] by the prosecution, effectively require proof that the defendant knew that the press releases were issued, but not that the press releases were misleading. In this way, the Court reconciled its conclusion that s. 122(3) creates a strict liability offence with some decisions that have held that similar or the same wording imports proof of some intention or knowledge. [2] 

The Court‘s determination in Felderhoff that s. 122(3) creates a strict liability offence was not further tested since the defendant was acquitted on all charges and no appeal followed.

In my view, several conclusions can be drawn from the existing jurisprudence:

  1. Where s. 21 of theCriminal Code is relied upon to confer liability on officers or directors for a corporate offence or the crimes of others, subjective mens rea is required, even where the primary offence is one of strict liability: See R. v. Fell 1981), 64 C.C.C. (2d) 456 (Ont. C.A.):

The trial Judge correctly held that even where the offence is one of strict liability in so far as the liability of the principal is concerned, the liability of an aider or abettor to be convicted of the offence requires the existence of mens rea on the part of the aider or abettor. Mens rea in this context means knowledge of the circumstances which make up or constitute the offence, that is, in this case, knowledge on the part of the respondent that the representations were made and knowledge of the true facts. It was, of course, not necessary for the prosecution to prove that the respondent knew that those circumstances constituted an offence: see R. v. F. W. Woolworth Co. Ltd. (1974), 16 C.P.R. (2d) 272, 46 D.L.R. (3d) 345, 18 C.C.C. (2d) 23, and particularly at pp. 280-3 C.P.R., pp. 32-4 C.C.C.   

  1. There is a compelling argument, supported by existing jurisprudence, that tax statutes that confer liability on officers or directors for corporate offences do import subjective mens rea.
  2. A determination whether other statutes which use similar language do or not import subjective mens rea will have to be evaluated on a statute-by-statute basis. That being said, at a minimum, such provisions import an additional actus reus that must be proven. Plus, it is well arguable that these verbs import, by definition, at least some subjective knowledge of the conduct that the officers or directors purportedly directed, condoned, acquiesced or participated in etc.

Plea negotiations

When officers or directors are charged with offences, particularly regulatory offences, plea negotiations often focus on whether the prosecution is content to withdraw those charges upon a guilty plea by the related corporation. Indeed, in some instances, counsel for the individuals charged might successfully negotiate the laying of a charge against the previously uncharged corporation (particularly where the individuals also control the corporation) to obtain the same result.  

Sometimes, individual officers’ or directors’ liability cannot be avoided. But the corporation may choose to indemnify its present or former officers or directors respecting any fines incurred.  

In R. v. Bata Industries (1995), 101 C.C.C. (3d) 86, the appellant company and two of its directors were convicted of provincial environmental offences. The directors were fined. The corporation received a fine together with probation. A term of its probation prohibited it from indemnifying the directors respecting the fines each was required to pay. On appeal, the Ontario Court of Appeal held that using the indemnification prohibition to deter the individual directors was improper because the Provincial Offences Act, R.S.O 1990, c. P.33 specifies that the purpose of a probation order is to deter and rehabilitate the defendant, in this case, Bata.  The order made against Bata was issued for a collateral purpose, that is, to ensure that two parties not subject to the probation order were punished by receiving no indemnification in respect of their fines.   

The Ontario Court of Appeal also noted that s.136 of the Business  

Corporations Act, R.S.O. 1990, c. B.16 establishes the circumstances under which a corporation may, with and without court approval, indemnify an officer or director, and when a corporation must indemnify an officer or director.  By implication, s. 136 also establishes the circumstances under which a corporation cannot indemnify an officer or director.  

If the corporation is to be prohibited from indemnifying the directors, it should occur by virtue of s. 36, not a probation order. On the other hand, if the Business Corporations Act permits or mandates indemnification, the probation order contradicts this legislative scheme. The Court of Appeal also noted that, in any event, indemnification could follow the expiry of the probation period, depriving it of any meaningful effect.  

It is equally doubtful whether a court, absent specific statutory authority, could dictate to the individual directors that they pay their fines out of their own resources, rather than from outside sources, such as the corporation. That being said, there is nothing prohibiting the Crown and defence from agreeing to a proposed disposition on the undertaking that the individual directors will not be indemnified from other sources.  

In addressing the liability of officers or directors, counsel should also be mindful of the availability of regulatory alternatives to Criminal Code offences. By way of illustration, statutes directed to provincial business corporations create a wide range of offences that might be applicable to directors or  officers.[3] A plea disposition to such an offence, as an alternative to convictions for fraud or uttering false documents has obvious advantages. If the penalties available for the regulatory offences are too lax, a creative plea disposition might involve  voluntary measures taken in advance of the plea or even (at the height of creativity) a consent amendment to the terms of judicial interim release pending trial to build in the functional equivalent of a conditional sentence which upon completion, forms the basis for a guilty plea to the regulatory offence. This would enable an appropriate deterrent sentence without the stigma and other implications (including restrictions on travel) associated with a criminal record for dishonesty.  

The Crown conceded that s.122(3) “requires a knowing or intentional act. In the context of this case, the knowing or intentional act is knowledge that Bre-X was issuing press releases that were required to be filed or furnished under Ontario securities law, of which there is an abundance of evidence beyond a reasonable doubt. The Crown is not required, contrary to what the Defence argues, to prove that Felderhof knew that the press releases were misleading or untrue, although this Court may find on the evidence of this case that he did.”

2 See the Court’s discussion of the following cases: Faulds v. Harper  (1886) 11 S.C.R. 639 ; R. v. Armaugh Corp. [1993] O.J. No. 4360 (Ont. Ct. J.), R..v. Boyle [2001] A.J. No. 70 (Prov. Ct. (Crim. Div.), and R. v. Peterson [2006] A.J. No. 286 (Prov. Ct. (Crim.Div.)), R. v. Gilson [1993] O.J. No. 4529 (Ont. Dist. Ct.)

3 See, for example, s. 256(2) of the Business Corporations Act, R.S.O. 1990, c. B.16.

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