Director’s Liability and Lawyers on Boards Prepared For: Legal Education Society of Alberta Advising Charities and Not-for-Profit Organizations

Presented by: Peter D.E. Broder, LL.B

The Muttart Foundation Edmonton, Alberta

For Presentation In: Edmonton – February 1, 2012

Calgary – February 8, 2012

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DIRECTOR’S LIABILITY AND LAWYERS ON BOARDS

INTRODUCTION

The Canadian Abridgement1 features more than 150 pages of case summaries on liability of

directors. The vast majority of that material deals with liability issues involving share capital

corporations. Litigation in the charity and not-for-profit sector is, seemingly, less common. This may

stem from, among other reasons, the limited assets of many non-share capital corporations2

, the

fact that many directors of these corporations are volunteers and may be viewed as less accountable

by stakeholders (although there is no legal basis for doing so), or potential claimants being reluctant

to bring actions that could harm a group’s ability to deliver its public or member benefit work.

Beyond the fiduciary duties arising from legislation under which corporations are constituted,

potential liabilities of directors (and their organizations) derive from an assortment of responsibilities

imposed by statute. There are countless federal and provincial legislative provisions that may apply

based on a not-for-profit organization’s type and scope of work. As well, liability can flow from

contractual and tort claims, or be contemplated as a penalty for corporate criminal conduct.

Breach of trust is also a major concern for directors of non-share capital corporations where their

corporations hold assets subject to an express or implied trust. Where the fiduciary standard of a

trustee applies to the non-share capital corporation this has implications for the ability of the director

to act for compensation, which can be particularly important if the director is a professional and is

considering acting (or having members of the firm with which he or she is associated act) on behalf

of the corporation.

Where corporations fall under older incorporation legislation, such as the Canada Corporations Act3

(CCA) or Alberta Societies Act4

* The author wishes to thank W. Laird Hunter, Q.C., for his comments on an earlier version of this paper.

(SA), and are constituted by way of letters patent, rather than as of

right, directors may be personally liable for breach of corporate authority if activities beyond those

1 The Canadian Abridgement Case Digests, (Carswell: Toronto, undated). 2 In this paper, the term “non-share capital corporations” is used to refer to the legal form under which charities and non-profit organizations are usually constituted. In Alberta, however, such groups may be incorporated under Part 9 of the Companies Act, RSA 2000, c C-21, as a share capital corporation, so long as there is a distribution constraint on gains made by the corporation. This share method is in addition to the “incorporation by guarantee” method. The Part 9 share model is an exception to the recent trend in this area, seen in the Canada Not-for-Profit Corporations Act and similar statutes, which uses a non-share structure to advance objects or purposes and not to realize a profit. The drawback of this approach is that it does not easily accommodate the objects of purposes, which though they may be referenced are no longer subject, as they are under a Letter Patent approach, to being upheld using a breach of corporate authority action. 3 RSC 1970, c. C-32. 4 RSA 2000, c. S-14.

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contemplated in the letters patent are undertaken. However, with more modern incorporation

statutes typically moving to as of right incorporation and endowing corporations constituted under

them with all the powers of a natural person, the importance of this issue is diminishing over time.

SUMMARY

In essence director liability is treated in an equivalent fashion whether the corporation is a non-share

or share capital body. Although the boards of registered charities and non-profit organizations serve

as volunteers, this does not absolve them of their fiduciary requirements (nor from statutory

obligations). The key difference in the two circumstances is that the fiduciary standard for a non-

share capital corporation will vary, while the expectation in for-profit corporations, with rare

exceptions, is that directors meet an objective standard of care.

The focus of this paper will be, primarily, on decisions and actions most likely to be associated with

director liability – i.e.: fiduciary obligations and tax and employment-related statutory requirements.

It will also touch on risk management with respect organizational activities and operations, especially

as it pertains to certain torts and certain Income Tax Act5

Fiduciary Duties

issues.

A large portion of director liability cases concern fiduciary duties. Discrepancies in the common law

and statutory fiduciary obligations of directors of non-share and share capital corporations

complicate matters because they mean that the well-developed case law around director liability in

share capital corporations is not necessarily available when deciding matters involving non-share

capital corporations. This and the lack of extensive case law with respect to director liability in non-

share capital corporations has left many not-for-profit directors uncertain of their legal obligations.

The move to the new Canada Not-Profit Corporations Act6 (CNCA) from the century-old CCA will

potentially rectify this for organizations constituted under the principal federal statute for not-share

capital corporations. It imposes the same standard of care on directors of corporations established

under the CNCA as is typically faced by for profit directors – thus allowing CNCA directors’ liability

cases to drawn on the jurisprudence related to the Canada Business Corporations Act7

5 RSC 1985, c 1 (5th Supp), as amended.

and similar

6 SC 2009, c. 23. 7 RSC 1985, c C-44, see s. 122.