Control of Governance: Who are the Proper Members and Directors of a Charitable Not-For-Profit Corporation?

June 2010 | Kristina Shaw

( Disponible en anglais seulement )

In the case of Deol v. Grewal, the Ontario Superior Court of Justice reviewed the general principles regarding the appointment of members and the election of directors of non-share capital corporations. It issued strong reminders of the necessity to adhere strictly to the provisions of the Ontario Corporations Act (the “Act”) and the by-laws of an organization in respect of governance.

At issue in the case was a dispute over the governance of a charitable non-share capital corporation incorporated under the Act.  The action was commenced by a group of members following a series of meetings of the directors and members.  The meetings resulted in the defendant members taking control of, and excluding the plaintiff members from, the charity’s board of directors.  In their claim, the plaintiffs sought, among other things, an order setting aside improper resolutions passed at invalidly constituted meetings, including the election of members and the election of certain directors, and an order rectifying the registers of members and directors and the minutes of the meetings of members and directors.  The defendant members submitted that there was nothing improper in the manner in which they effectively took control of the organization.

In reaching his decision, Justice Pattillo reviewed, in detail, the notices given in respect of all board and member meetings during the period in question, the persons present at such meetings and the minutes of all such meetings.  In addition to considering the Act, the Court also reviewed the provisions of the charity’s by-laws regarding admission of members, qualifications of members and notices of meetings.

Justice Pattillo rejected the defendants’ submission that a relieving provision in the Act operated to validate the acts of the directors despite the defect discovered in their appointment.  He stated that the purpose of that provision is to protect third parties from situations where a corporation raises internal procedural defects to avoid liability to third parties; it does not apply in circumstances where there is an internal dispute between members of the corporation concerning whether or not a director has been validly appointed.

The Court ultimately issued a Declaration as to the identity of the members of the charity (effectively setting aside the appointment of numerous members), set aside the election of certain defendant directors and ordered the rectification of the registers of the charity to reflect the members and directors as found by the Court.  The charity was also ordered to hold a meeting of its members within 45 days of the order to elect directors to replace those directors whose terms were found to have expired and thereafter the directors were directed to meet to appoint the officers of the charity.

In the conclusion of his decision, Justice Pattillo specifically noted that notice of the general nature of affairs to be transacted at every board meeting must be provided to each board member in accordance with the notice requirements prescribed by the organization’s by-laws, regardless of the extra effort this will impose upon the volunteer executive committee, and that it is necessary that the organization and its members and directors adhere strictly to the provisions of the Act and the by-laws in respect of the organization’s governance.  Failure to do so will result in strong sanctions by the Court against the participants and the organization itself.

In additional reasons subsequently released after the original judgment, on the issue of costs, Justice Pattillo noted that he considered the conduct of the defendants to constitute a breach of their duty as directors and held that the plaintiffs were entitled to their costs on a partial indemnity basis.  Relying upon the indemnity provision in the charity’s by-laws and sections 80 and 133 of the Act, the defendants submitted that they were entitled to be indemnified by the charity for any costs incurred by them in the action (including costs assessed against them).

Justice Pattillo, in considering this submission, reviewed the statement of Justice Sheard in Ontario (Public Guardian & Trustee) v. Unity Church of Truth wherein he stated that a director of a charity ought to be indemnified only for those acts properly undertaken in the administration of the charity or undertaken in breach of trust under an honest and reasonable mistake.  Justice Pattillo found that the defendants did pursue their own interests over that of the charity for the purpose of taking control and such conduct constituted mala fides and did not entitle them to indemnification by the charity.

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