COURT OF APPEAL UPDATE ON
CORPORATE GOVERNANCE COMPLIANCE
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 is a follow-up
to Charity Law Bulletin No. 101 entitled Non-Share
Capital Corporations Must Adhere Strictly to Corporate Governance
Procedures, dated October 27, 2006.1
B. BACKGROUND
Rexdale Singh Sabha Religious Centre v. Chattha,2
a decision released by the Ontario Superior Court of Justice
on January 24, 2006, related to a disagreement over the corporate
governance procedures of three inter-related non-share capital
corporations, including the process for adding new directors,
issues concerning membership, and the failure to pass by-laws.
The ruling covered a number of important issues pertaining
to non-share capital corporations and illustrated that non-share
capital corporations must adhere as strictly to corporate
governance procedures as for-profit corporations. The three
charitable organizations appealed the application judge's
order to fix the membership of the three corporations as set
out in an affidavit of one of the respondent directors, as
well as to require the existing directors to convene a meeting
within 30 days to elect new directors by means of a fair vote.
C. ONTARIO COURT OF APPEAL DECISION
The Ontario Court of Appeal (the "Court")
decision was released on November 27, 2006, allowing the appeal.3
Citing s. 297 of the Corporations Act (the "Act"),4
the Court of Appeal noted that "upon incorporation, each
applicant becomes a director and member of the corporation.
The Act provides that persons may be admitted to membership
thereafter by resolution of the Board of Directors."5
In the Court's opinion, there had been a failure to properly
change the members of the corporation in accordance with the
Act, and that the application judge had incorrectly concluded
that four of the five directors of Rexdale were permitted
to have approved the creation of a list of new members. As
a corrective measure, the Court held that the proper directors
and members of the three corporations were the applicants
for the letters patent of each corporation.
In addition, under s. 295(1) of the Act, there
is a provision which states that one-tenth of the members
"may request the directors to call a general meeting
of the … members for any purpose connected with the affairs
of the corporation that is not inconsistent with this Act."6
Counsel for the appellants was satisfied that this requirement
be by-passed and instead have the court order that a meeting
be called and a date fixed for a "meeting of the members
of each corporation as [the Court] was entitled to do under
s. 297 of the Act."7 In
that regard, the Court ordered that the meetings be held within
30 days.
D. COMMENTARY
Although the Ontario Court of Appeal allowed
the appeal in Rexdale Singh Sabha Religious Centre v. Chattha,
both decisions demonstrate that it is essential that charitable
and not-for-profit organizations comply with corporate governance
procedures. This is important from the outset in connection
with carefully drafted by-laws adopted on a timely basis,
as well as with basic corporate compliance on a day-to-day
basis. Adhering to the provisions of the applicable corporate
statute will help to prevent disputes or at least ensure that
those which arise are handled judiciously.
Endnotes:
1 Carters Professional Corporation,
online: http://www.carters.ca/pub/bulletin/charity/2006/chylb101.pdf.
2 [2006] O.J. No. 328.
3 [2006] O.J. No. 4698.
4 R.S.O. 1990, c. C-38.
5 Supra note 3 at para. 3.
6 Supra note 4 at subsection 295(1).
7 Supra note 3 at para. 6.
