CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
Directors should keep detailed and accurate records of their board and committee meeting attendance, their contributions to company oversight and any dissents on corporate votes. Much of this information is typically contained in the minutes of board meetings, which should be maintained in real time and reviewed for accuracy when received. Directors who can prove that they acted with due diligence can often insulate themselves from personal liability for a corporation’s failure to complete certain required actions. 30 DIRECTORS’ DUTIES IN TIMES OF FINANCIAL CRISIS During a time of financial crisis, directors should be aware that their responsibility is primarily, but not exclusively, to the corporation. Although directors have a fiduciary obligation to the corporation, which requires them to act honestly and in good faith for its best interests, they also may have duties to other stakeholders, which can include groups as diverse as creditors, shareholders and employees, though this duty is somewhat less robust. 31 According to the Supreme Court of Canada, while the duty owed to the corporation is mandatory, the one owed to various stakeholder groups could arise in appropriate circumstances. 32 The Court has also said that obligations to these stakeholders include a duty of care and a duty to not act oppressively against them. 33 As discussed in detail in our Davies Governance Insights 2019 , 34 these obligations have since been codified into the Canada Business Corporations Act (CBCA). In addition, courts and legislators are increasingly taking into account the evolving expectations of investors, other stakeholders, and society at large. As discussed in Chapter 8, ESG and Climate Change in the Shadow of COVID-19: “E,” “S” & G Are Here to Stay of this report, this may require directors to consider a variety of environmental, social and governance (ESG) factors and the growing (and sometimes inconsistent) expectations concerning a corporation’s purpose or its role as a good corporate citizen. The practical effect is that directors need to assess a range of competing interests in carrying out their duties and exercising their business judgment, which can be particularly challenging in times of financial distress. When these obligations conflict, as they often do, directors must prioritize the corporation’s well-being. However, in doing so, they should not favour the interests of one group of interested parties over another. 35
Due Diligence in Financial Crisis: Checklist for Directors
c Review customer/
supplier agreements
c Review cash positions/ liquidity position c Review key financing agreements
c Review insurance policies
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