NON-SHARE CAPITAL CORPORATIONS MUST STRICTLY
ADHERE TO CORPORATE GOVERNANCE PROCEDURES
By Terrance S. Carter, B.A., LL.B., Trade-mark Agent
Assisted by Paula J. Thomas, B.A., LL.B., Student-at-Law
A. INTRODUCTION
This Charity Law Bulletin ("Bulletin")
examines Rexdale Singh Sabha Religious Centre v. Chattha,1
a recent Ontario Superior Court of Justice decision which
involved a dispute over the corporate governance procedures
of three inter-related non-share capital corporations. The
dispute was particularly rooted in the decision-making and
management of the corporations, including the process for
adding new directors, issues concerning membership, and the
failure to pass by-laws.
Despite its brevity, this ruling manages to
cover a wide range of significant issues in connection with
non-share capital corporations and demonstrates that such
entities must adhere as strictly to corporate governance procedures
as their share capital counterparts.
B. BACKGROUND
The Rexdale Singh Sabha Religious Centre ("Rexdale")
was incorporated by letters patent by five directors in 1993
to serve as a Sikh temple and was registered as a charitable
organization. The five directors were Amarjit S. Deol ("Deol"),
Narinder Singh ("Singh"), Ranjit S. Hans ("Hans"),
Harlaikjinder Chattha ("Chatta") and Surgit S. Gill
("Gill").
Three of the five directors, Chattha, Gill and
Hans, the Respondents/Applicants by cross-application (the
"Respondents"), stopped participating as directors
in 1997 or 1998 without resigning, either due to lack of time
or because the remaining directors did not keep them apprised
of the meeting dates for the board of directors.
Prior to the incorporation by letters patent
of the related Sikh Spiritual Centre ("Spiritual Centre")
in 2001 as a successor temple to Rexdale, and of the Akal
Funeral Home ("Akal") in 2002 as a not-for-profit
organization, the two directors who continued to participate,
Singh and Deol, unilaterally increased the number of directors
of Rexdale from five to fifteen, without conducting an election
by the members of Rexdale as required by the Corporations
Act (Ontario),2 the legislation
under which Rexdale had been incorporated.
As the construction of Akal was nearing completion,
a dispute arose between the ten individuals holding themselves
out as the new directors on one side, and Singh, Chattha,
Gill and Hans on the other. It was unclear about who could
be directly involved with the completion of the Akal Funeral
Home and who could continue its operation upon completion.
The new directors prevented four of the original directors
from accessing both Akal and the accounting records and cheques
for Rexdale, which exclusionary measures led to the Court's
involvement.
According to Singh, the majority of the congregants
of the two temples also appeared to be unaware that there
were three separate corporate entities. Most believed that
their charitable donations were going toward the purchase
and development of all three properties as a single entity.
Singh and Deol took it upon themselves to begin
the creation of a membership list for both Rexdale and the
Spiritual Centre by approaching those who had made donations
toward the purchase and building of the temples. In exchange
for a $5.00 fee, these people received a membership card and
number. Yet, there were no by-laws governing their membership,
no members' meetings held, and no members' vote on any matters,
including the election of the ten new directors.
C. THE APPLICANTS' SUBMISSION
Rexdale and Akal, the Applicants/Respondents
by cross-application (the "Applicants"), sought
a court order declaring:
The Applicants sought to recognize the appointment
of the ten new directors, proposing that the "manner
in which it was done was only an irregularity,"4
which the Court could remedy. They further submitted that
"non-profit organizations should not be required to adhere
rigorously to the technical requirements of corporate procedure
as long as their basic process is fair."5
The Applicants also suggested that the directors had been
appointed in a fashion that was in "the best interests
of the corporation"6 because
they were sharing in the heavy workload generated by cost
overruns and demands for accounting in connection with the
construction of the funeral home.
D. THE RESPONDENTS' SUBMISSION
By contrast, the Respondents sought a court
order:
The Respondents also cited a number of examples
of non-compliance with the law governing Ontario not-for-profit
corporations, including the following:
-
None of the three corporations had ever
held a members' meeting, not even to elect the Board of
Directors;
-
None of the original five Directors of the
corporations had ever formally resigned, so they all remained
in office;
-
The number of Directors was not legally
changed from five (as set out in the letters patent) to
fifteen;
-
No by-laws had ever been passed by the members
or the Directors of the corporations;
-
Akal was not operating properly as a corporation
because its Board of Directors had never met.
The Respondents also pointed out that, not only
were there no by-laws governing membership, the letters patent
were silent on the issue of membership. Yet, there were congregants
of the corporations who regularly worshipped at the temples,
gave financial contributions and were given membership cards
and numbers. It was the position of the Respondents that these
congregants were, in fact, the actual "members"
of the three corporations.8
E. THE LAW
The Court reviewed several relevant provisions
in the Corporations Act (Ontario):
-
Section 248(1) - First Directors - The persons
named as first Directors in the Act or instrument creating
the corporation are the Directors of the corporation until
replaced by the same number of others duly elected or appointed
in their stead.
-
Section 287(1) - Election of Directors -
The Directors shall be elected by the shareholders or members
in general meeting and the election shall be by ballot or
in such other manner as the by-laws of the corporation prescribe.
-
Section 93(1)(a) - Shareholders' Meetings
- Notice of the time and place for holding a meeting of
the shareholders [or members of a non-share capital corporation]
shall … be given … ten days' [written notice].
F. THE COURT'S DECISION
The Respondents were granted the relief sought
concerning membership, fixing the number of directors and
the future election of directors by the members by means of
a fair vote.
The Court invalidated the appointment of the
ten new directors because the process used was in contravention
of the provisions of the Corporations Act (Ontario),
even if the appointments had otherwise been in the best interests
of the corporation.
The Court acknowledged that the directors had
not called any members' meetings and had not properly passed
any by-laws, but agreed that the congregants required protection.
Thus, the Court approved the membership list as set out in
an exhibit to Narinder Singh's affidavit because at least
four of the five directors had approved the list. In this
regard, the Court was exercising "its remedial power
to make such an order as was just."9
G. COMMENTARY
Rexdale Singh Sabha Religious Centre v. Chattha10
is an important decision for charities and not-for-profit
organizations because it evidences how vital a clear decision-making
and governance process is for non-share capital corporations.
Issues concerning by-laws, membership, frequency of meetings,
notice of meetings and the election of directors are all significant
aspects in the day-to-day life of charitable and not-for-profit
corporations. In particular, this decision demonstrates that
a corporation's first directors must clearly define the corporation's
by-laws from the outset and then comply thereafter with the
applicable enabling legislation.
In addition, the following comments provide
an overview of additional statutory provisions for non-share
capital corporations, which were either referred to directly
in the Court's decision, or are relevant by analogy.
1. Notice of Members' Meetings
In determining which provisions of the Corporations Act
(Ontario) apply to non-share capital corporations, it is imperative
that subsection 133(1) be carefully reviewed. This section
identifies which provisions of Part II apply to Part III non-share
capital corporations. In the Court's analysis, it was correct
in stating that section 93 (shareholders' meetings) applied
to Rexdale and Akal, both non-share capital corporations.
Rexdale was also a registered charitable corporation, while
Akal's status was that of a not-for-profit funeral home.
However, had Rexdale, as a registered charitable
corporation, been the only Applicant, the Court could have
applied subsection 133(2), which deals with alternative notice
procedures for a members' meeting. Specifically, subsection
133(2) provides as follows:
Despite subsection (1),
in the case of a corporation to which this Part applies,
the objects of which are exclusively for charitable purposes,
it is sufficient notice of any meeting of the members of
the corporation if notice is given by publication at least
once a week for two consecutive weeks next preceding the
meeting in a newspaper or newspapers circulated in the municipality
or municipalities in which the majority of the members of
the corporation reside as shown by their addresses on the
books of the corporation[emphasis added].
2. By-laws
The Court in Rexdale Singh Sabha Religious Centre v. Chattha
acknowledged that the original directors had not properly
passed any by-laws for the proper governance of the corporations.
However, the decision does not make reference to the statutory
provisions regarding what is required. In this regard, general
operating by-laws are a vital aspect of any corporation, since
they specify "the everyday rules of management governing
the operation of a corporation. In practical terms, by-laws
effectively create a contractual relationship among the members
and directors vis-à-vis the internal regulation of
the corporation."11
As was the situation among Rexdale, Spiritual
Centre and Akal, "the complete absence of by-laws or
inadequate by-laws can inevitably cause serious problems in
any corporation. Proper drafting of the by-law is essential
since it establishes the ground rules early and provides guidance
to the board of directors in their management of the affairs
of the corporation."12
Corporations Act (Ontario)
In Ontario, the Corporations Act has "an extensive
list of matters that may be the subject of by-laws. This list
is more detailed than the federal provision [under the Canada
Corporations Act], but at the same time the items contained
therein are merely suggestions and are not required to be
dealt with as in the federal jurisdiction. The items which
may be dealt with under section 129 are:"13
a) the admission of persons and unincorporated
associations as members and as [ex officio] members,
and the qualification of and the conditions of membership;
b) the fees and dues of members;
c) the issue of membership cards and certificates;
d) the suspension and termination of memberships by the corporation
and by the member;
e) the transfer of memberships;
f) the qualification of and the remuneration of the directors
and the [ex officio] directors, if any;
g) the time for and the manner of election of directors;
h) the appointment, remuneration, functions, duties and removal
of agents, officers and employees of the corporation and the
security, if any, to be given by them to it;
i) the time and place and the notice to be given for the holding
of meetings of the members and the board of directors, the
quorum at meetings of members, the requirements as to proxies,
and the procedure in all things at members' meetings and at
meetings of the board of directors; and
j) the conduct in all other particulars of the affairs of
the corporation.14
Canada Corporations Act
The Canada Corporations Act, which governs federally
incorporated non-share capital corporations, is very specific
with regard to what the by-laws must contain. The by-laws
must accompany the application for the letters patent and
contain:
a) Conditions of membership, including societies
or companies becoming members of the corporation;
b) Mode of holding meetings, provisions for quorum, rights
of voting and of enacting by-laws;
c) Mode of repealing or amending by-laws with special provision
that the repeal or amendment of by-laws not embodied in the
letters patent shall not be enforced or acted upon until the
approval of the Minister has been obtained;
d) Appointment and removal of directors, trustees, committees
and officers and their respective powers and remuneration;
e) Audit of accounts and appointment of auditors;
f) Whether or how members may withdraw from the corporation;
and
g) Custody or the corporate seal and certifying of documents
issued by the corporation.15
3. Annual Meetings
Another problem among the inter-related non-share capital
corporations in Rexdale Singh Sabha Religious Centre v.
Chattha was that the board of directors were not calling
any members' meetings. In this regard, the following provision
is concerned with the calling of a members' meeting, and is
relevant to non-share capital corporations incorporated federally
under the Canada Corporations Act:
-
Section 102(1) - Annual Meetings - An annual
meeting of the [members] of the company shall be held at
some date not later than eighteen months after the incorporation
of the company and subsequently once at least in every calendar
year and not more than fifteen months after the holding
of the last preceding annual meeting. 16
The following provision is relevant to the calling
of a members' meeting for non-share capital corporations in
Ontario incorporated provincially under the Corporations
Act:
-
Section 293 - Annual meetings - A corporation
shall hold an annual meeting of its shareholders or members
not later than eighteen months after its incorporation and
subsequently not more than fifteen months after the holding
of the last preceding annual meeting. 17
H. CONCLUSION
This brief overview of Rexdale Singh Sabha
Religious Centre v. Chattha and the additional commentary
highlight the importance of complying with corporate governance
issues for both charitable and not-for-profit organizations.
From the outset, an organization's by-laws must be carefully
drafted and adopted on a timely basis. The by-laws and applicable
legislation must then be consistently followed by both the
board of directors and the membership of the corporation.
Basic corporate compliance in the fundamentals will assist
in averting potential disputes or at least to ensure that
they are handled in accordance with the requirements of the
applicable corporate statute.
Endnotes
1[2006] O.J. No. 328.
2 R.S.O. 1990, c. C.38.
3 Supra note 1 at par. 1.
4 Ibid. at par. 10.
5 Ibid. at par. 11.
6 Ibid.
7 Ibid. at par. 2.
8 Ibid. at par. 16.
9 Ibid. at par. 20. See also Burlington Association for the
Mentally Retarded (Re), [1981] O.J. No. 289 (H.C.) and Sobrinho
v. Oakville Portuguese Canadian Club (1982), 37 O.R. (2d)
581 (H.C.).
10 Supra note 1.
11 Burke-Robertson, Jane and Arthur C. Drache. Non-Share Capital
Corporations (Toronto: Thomson Carswell, 2002) 3-1.
12 Ibid. at 3-1 to 3-2.
13 Ibid. at 3-7 to 3-8.
14 Supra note 2 at s. 129.
15 Canada Corporations Act, R.S.C. 1970, c. C-32, s. 155(2).
16 Ibid. at s. 102(1).
17 Supra note 2 at s. 293.
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