Court Decisions Clarify Rights of Non-Profit Directors to Pay Legal Fees During Receivership

October 30, 2010

The December 2009 decision of the Ontario Court of Appeal in Peterborough (City) v. Kawartha Native Housing Society Inc. is significant in clarifying the right of the boards of directors of non-profit corporations in receivership to retain legal counsel and pay legal fees out of the corporation’s funds.  The case arose out of the contested receivership of two non-profit First Nations social housing corporations.   The Ontario Ministry of Municipal Affairs had obtained a court order appointing a receiver/manager over the housing corporations on the basis of alleged corporate mismanagement and a failure on the corporations’ part to meet their obligations under an agreement (the “Operating Agreement”) by which the City of Peterborough provided funds in support of the corporations’ housing projects.  As a result of these receivership proceedings, the corporations sought orders that certain of their legal expenses be paid by the receiver from the funds of the corporations.

At first instance, the Ontario Superior Court considered whether the Boards of the non-profit corporations were entitled to retain legal counsel for restructuring advice as well as to handle litigation related to the receivership proceeding and, if they had that right, how the legal fees would be funded.  The motions judge held that the Boards, on behalf of the corporations, did not have the legal right to retain counsel after the receivership appointment without the leave of the court or the approval of the receiver.  The judge distinguished jurisprudence which had held that boards of directors of share-capital corporations retain residual powers during receivership (and may therefore retain counsel) and held that pursuant to the terms of the Operating Agreement (which provided for the appointment of the receiver and gave broad powers to the City) and the breadth of the court order appointing the receiver, the Boards should not have retained counsel on behalf of the corporations without first obtaining court or receiver approval.

The corporations appealed the order and the Ontario Court of Appeal considered whether the Boards were entitled to retain counsel, and receive legal funding, for the purposes of the appeal.  Justice Blair reversed the decision below and held that the Boards were entitled to retain counsel on behalf of the corporations for the purposes of the appeal, and that the reasonable legal fees and expenses of counsel so retained were to be paid out of the corporations’ assets.  Justice Blair found that without the ability to retain and properly pay legal counsel, the Board would be unable to properly pursue the important issues raised on the appeal.  Furthermore, as the Boards had no access to funds other than the corporations’ assets, the legal fees incurred in pursuing the appeal were to be paid out of the corporations’ assets.

The decision of the Court of Appeal appears to confirm that the Boards of non-profit corporations can retain legal counsel on behalf of the corporation during receivership – at least for the purpose of addressing issues arising from the receivership process – and that the receiver ought not to refuse funding out of the corporation’s funds for such reasonable legal expenses.


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