Director Indemnification for Unsuccessful Membership Dispute
Kate Lazier, Toronto
A recent decision of the Court of Appeal for Ontario confirms that
the directors of a charity are entitled to indemnification by the
charity for costs where indemnification is provided for in the charity's
constitution. For more information on indemnification and the
protection of directors see Hugh Kelly’s article in our September 2008
newsletter.
The Pandher v. Ontario Khalsa Darbar case began as a
dispute between two sets of directors of Sikh Temple, Ontario Khalsa
Darbar. The plaintiff directors claimed improprieties in the passage of
a new constitution, denial of voting rights to long-time members and
concerns about financial irregularities. In the original action these
directors sought an injunction to obtain access to minutes and records
and to delay the election of new directors until a ruling was made
regarding the validity of the new constitution.
After a trial in September of 2007 on the substantive issues, the
parties settled. The Ontario Superior Court of Justice then ruled that
the plaintiff directors were entitled to costs on a partial indemnity
basis. The court stated it would be unfair to look to the corporation
to pay costs because the costs arose as a result of the action of its
Board of Directors, who were unsuccessful in the settlement. Thus, the
lower court ordered the defendant directors jointly and separately
liable to pay $110,000 plus GST in legal fees, plus $93,308 inclusive of
GST in disbursement costs.
The Ontario Court of Appeal amended this order. It stated that the
directors would only be personally liable if they acted in bad faith.
The Court of Appeal noted that the lower court stated that both sides in
the dispute had acted in what they thought was the best interests of
the corporation. The Court of Appeal questioned whether the court’s
inherent jurisdiction to supervise charities gives the court the right
to bar directors from indemnification for their acts. Suggesting the
answer is no, the Court held that the corporation was liable for the
fees. The directors were not personally liable because the
corporation’s constitution specifically provided that every director is
entitled to indemnification for costs incurred in a proceeding brought
against him or her for any act done in or about the execution of the
duties of his office.
This case is a reminder of the importance of following the charity’s
by-laws and corporate statute requirements, as well as the importance of
indemnification provisions for directors in the charity’s by-laws.
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