The Due Diligence Defence
What is due diligence and why is it important?
“Due diligence” is a context-specific determination referring to the level of judgment, care, prudence, determination, and activity with which a person would reasonably be expected to act.
In business dealings, establishing due diligence – that you, as either an officer or a director of the corporation made adequate efforts to comply with the law – can provide you with a defense from being held personally liable if your corporation has contravened a statute or regulation.
What is the difference between due diligence and reasonable diligence?
Due diligence may be referred to in statute in slightly varied terms i.e. “reasonable diligence.” The content of the term always depends on the specific wording in the statute and judicial interpretation. A business lawyer can help you parse the contextual meaning of the phrase and its accompanying obligations.
How is the due diligence defence used in Ontario?
Directors and officers are provided with a statutory due diligence defence from personal liability under both Canada’s Business Corporations Act (“CBCA”) and Ontario’s Business Corporations Act (“OBCA”).
How do you establish due diligence?
Both the CBCA and the OBCA provide that directors and officers will not be found personally liable for the statutory and regulatory violations of their corporations if they can demonstrate that they acted with the same care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. This includes good faith reliance on documents such as: financial statements of the corporation, an auditor’s report and the reports of professionals such as lawyers, accountants and engineers.
However, as an officer or director, you should make reasonable efforts to establish that you are relying on appropriately qualified professionals, ensure that their advice and statements are provided to you in writing, and engage with their advice – not simply accepting it but reviewing and questioning it.
Can establishing due diligence be useful in other circumstances?
Yes, the CBCA and OBCA permit directors and officers of a corporation to recover from the corporation all costs, charges, and expenses reasonably incurred in civil, criminal or administrative proceedings relating to your status as a director or officer of the corporation. The standard for recovery is acting honestly, in good faith and with the best interests of the corporation in mind. Though this standard is not synonymous with due diligence, establishing due diligence will make it easier for you to assert that you acted in good faith and should be indemnified by the corporation for your expenses. For further information, seek the advice of a business lawyer who can help you navigate these standards.
Nick Wright is a Toronto business lawyer. Contact him at nick[at]wrightbusinesslaw.ca to arrange a time to discuss your legal needs.
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