Someone has sued you for something you did as a director, and the first question is not whether you will win. It is who pays the lawyer.
One section of the corporate statute sets the floor for director indemnification in Ontario, and the policy sitting behind it answers to its own fine print. Both fail in predictable ways. This guide covers what the company owes you, what it may advance, and the two exclusions that decide most private-company claims.
What Director Indemnification in Ontario Actually Covers
Director indemnification in Ontario starts at section 136 of the Business Corporations Act, which does three separate things.
Subsection 136(1) permits the corporation to indemnify a current or former director or officer against costs, charges and expenses reasonably incurred in a proceeding they face because they held the office. Those costs include amounts paid to settle an action or satisfy a judgment. The same protection reaches anyone who served as a director or officer of another entity at the corporation’s request.
Subsection 136(2) permits the corporation to advance money for those costs, and requires the individual to repay it if they do not meet the subsection 136(3) conditions.
Those conditions are the hurdle that director indemnification needs to overcome in Ontario, and they are framed as a prohibition. A corporation shall not indemnify unless the individual acted honestly and in good faith with a view to the best interests of the corporation. Under subsection 136(4), for a criminal or administrative proceeding enforced by a monetary penalty, the individual must also have had reasonable grounds for believing the conduct was lawful.
The same phrase appears federally, which matters because the leading cases were decided under the federal Act. Subsection 124(3) of the Canada Business Corporations Act provides that a corporation may not indemnify unless the individual
acted honestly and in good faith with a view to the best interests of the corporation
Director indemnification does not become a right unless a court has completely exonerated the individual.
When it becomes an entitlement
Subsection 136(4.2) converts that permission into a right to defence costs, and the trigger is narrower than most directors assume.
The entitlement arises where no court or other competent authority judged you to have committed any fault, or to have omitted anything you ought to have done, and where you also met the good-faith conditions.
Being substantially successful is not the test, and that cuts both ways. A settlement that closes a claim with no finding of fault arguably satisfies the first condition. An adverse finding on a single allegation, however, can take you outside it even if you answer the rest.
One point helps you. In Bennett v. Bennett Environmental Inc., 2009 ONCA 198, a case decided under the federal Act, the Court of Appeal placed the burden on the corporation to prove the director does not qualify on either condition. It also treated good faith as a subjective question of what the director actually believed. Legal advice is no precondition, although obtaining it will establish the reasonable grounds subsection 136(4) demands.
Advancing Defence Costs: the Weak Point in Director Indemnification in Ontario
An indemnity that arrives after trial is worth little against a bill that arrives monthly. Advancement is the part of director indemnification in Ontario that decides whether you can defend yourself at all.
In Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, the directors expected to be replaced and sued. Before resigning, they authorised the company to pay roughly $1.55 million in retainers to their own counsel. The new board then sued them over millions in restructuring awards, and the former directors sought advancement of their defence costs under their indemnity agreements.
The Court of Appeal dismissed their appeal, and the Supreme Court refused leave. A corporation must obtain court approval before advancing funds, not only in a derivative action but also in an action the corporation itself brings. Neither an indemnity agreement nor a by-law can bypass the court where the company is the plaintiff.
Directors do start with a presumption of good faith, which the corporation can rebut by showing a strong prima facie case of bad faith. Look met that standard, and the court refused the advance.
Ontario’s subsection 136(4.1) is drafted the same way, so director indemnification in Ontario likely runs through the same judicial filter.
The Policy Behind Director Indemnification in Ontario
Subsection 136(4.3) lets a corporation buy insurance for its directors and officers, and that policy is where most of the real money sits. A D&O policy is usually three coverages wearing one name, and knowing which one you are claiming on matters.
Side A responds to the individual director where the corporation cannot indemnify, typically on insolvency, or where it simply refuses. Side B reimburses the corporation for indemnities it has actually paid. Side C covers the company itself where a claim names it alongside its directors, though for public issuers that entity cover is usually confined to securities claims.
Side A is the coverage that matters when the company is insolvent or hostile, and it fills the largest gap in director indemnification in Ontario.
Many D&O policies do not impose a duty to defend at all. They reimburse or advance defence costs instead, so check the wording first.
Where the policy does carry a duty to defend, that obligation is broader than the obligation to pay. On the pleadings-based standard the Supreme Court applies to liability policies, the mere possibility that a claim within the policy may succeed triggers a defence. An insurer must then show that an exclusion clearly and unambiguously removes coverage.
Two Exclusions That Decide Private-Company Claims
Most closely held disputes over director indemnification in Ontario fail on one of these rather than on the merits.
Insured versus insured. D&O policies commonly exclude claims brought by or on behalf of the company against its own directors, which is precisely the private-company fact pattern.
The carve-outs are where coverage survives, and they matter more to director indemnification in Ontario than the exclusion itself. In Goodfellow v. CUMIS General Insurance Co., 2021 ONSC 3604, the regulator took control of a credit union as administrator and sued its former directors for the credit union’s losses. The court held that an exception to the exclusion restored coverage, and the directors kept their defence.
Without such an exception the clause is hard to argue around. In Kohanski v. St. Paul Guarantee Insurance Co., 2006 CanLII 914 (ON CA), the Court of Appeal reversed a motion judge who had found a duty to defend a former officer. It held the exclusion unambiguous and found no duty to defend.
Be cautious with commentary built on American cases that read the exclusion narrowly, because the Court of Appeal distinguished those authorities as turning on ambiguous wording.
The notice deadline that ends it
Late notice. Most D&O policies run on a claims-made and reported basis, so reporting on time forms part of the coverage rather than an administrative courtesy. In Furtado v. Lloyd’s Underwriters, 2024 ONCA 579, a director learned of a securities regulator’s investigation in 2019 but was barred by statute from disclosing it. His policy suspended the reporting duty while that bar lasted.
The bar lifted in December 2019. A regulator’s summons in February 2021 then reminded him that he could tell his insurer, yet he did not report until February 2022.
The Court of Appeal dismissed his appeal and the Supreme Court refused leave. Where a policy makes reporting a condition precedent to coverage, failing to report is non-compliance rather than imperfect compliance. Neither section 129 of the Insurance Act, which reaches only proof-of-loss conditions, nor the broader relief against forfeiture in section 98 of the Courts of Justice Act will rescue it.
What to Do Next: When to Call a Lawyer
Notify the insurer the moment you learn of a claim, or of circumstances that might become one. Furtado is the reason, because nothing else about director indemnification in Ontario helps you if you miss that step.
Read the indemnity agreement alongside the by-law, because director indemnification in Ontario rests on both. An agreement can promise more than the statute requires, subject to good-faith conditions it cannot waive.
Ask about advancement before you retain counsel, since director indemnification in Ontario is worth far less arriving only at the end. Get your own coverage advice rather than the company’s. On an insured-versus-insured claim the corporation and its insurer may both be against you.
Finally, keep the minutes. Because good faith turns on what you actually believed at the time, a contemporaneous record of what the board considered is the evidence that makes director indemnification in Ontario available at all.
Director indemnification in Ontario is only ever as good as the paperwork behind it and the policy behind that. If a claim has landed and nobody has told you who pays for your defence, contact Cowan before the notice period answers it for you.
