Director Indemnification for Unsuccessful Membership Dispute

October 30, 2010 | Kate Lazier

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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