The Regulation also permits the purchase
of insurance as an alternative to the indemnity. However,
the purchase of the insurance cannot impair the charitable
purpose of the organization, and the insurance or indemnity
cannot result in rendering the corporation insolvent.
C. THE DEOL DECISION
The Deol Decision is a costs decision
relating to a five-day trial involving a dispute over control
of the governance of the Sikh Spiritual Centre Toronto (the
“Sikh Centre”), and who were the proper members and directors
of the Sikh Centre. The main action was commenced following
a series of meetings of the board of directors and the members
which resulted in the defendants taking control of the Sikh
Centre from the plaintiffs.
In addition to seeking an order setting
aside the improper resolutions passed at the invalidly constituted
meetings, and setting aside the election of members at these
meetings, the plaintiffs sought an order requiring the defendants
to repay the $51,000.00 of the Sikh Centre’s funds paid
to the defendant’s solicitors with respect to the matters
in issue in the action.
In ruling in favour of the plaintiffs
on the main action, the court found, amongst other things,
that the defendants had fabricated a meeting and altered
the minutes of another, and breached an order of the court
by paying the $51,000.00 to their legal counsel.
In their costs submission, the plaintiffs
sought costs on a substantial indemnity basis in the amount
of over $400,000 to be paid by the individual defendants
without the benefit of indemnification by the Sikh Centre.
The defendants, on the other hand, submitted that no costs
should be awarded, but if they were that they should only
be on a partial indemnity basis of no more than $115,000.00.
The defendants also submitted that they should be indemnified
by the Sikh Centre pursuant to an indemnity provision contained
in the Sikh Centre’s By-law No. 1 (which mirrored section
80 of the Corporations Act (Ontario)), as well as
sections 80 and 133 of the Corporations Act (Ontario).
In this regard, the defendants submitted
that they were entitled to the indemnity because their acts
during the meetings at issue were undertaken to administer
and manage the Sikh Centre, in accordance with their duties
as officers and directors. They also submitted that such
actions were carried out with a view to the best interests
of the corporation and not for personal gain. However, the
plaintiffs submitted that the defendants were not entitled
to be indemnified because their impugned acts as directors
were not properly undertaken in the administration of the
Sikh Centre and were not undertaken with an honest and reasonable
view as to their validity.
The court noted that the legislative
rationale for permitting indemnification was twofold: firstly,
to provide assurance to corporate directors that they will
be reimbursed for any adverse consequences arising from
“well-intentioned entrepreneurism” undertaken on the corporation’s
behalf; and, secondly, to encourage appropriate director
conduct by prohibiting indemnification for director misconduct.
If the directors were to be indemnified, their conduct would
have to fall within the provisions of the By-law. Specifically,
the defendants’ acts would have to be shown to be “in respect
of any act, deed, matter or thing whatsoever, made, done
or permitted by him, her or it, in or about the execution
of the duties of his, her or its office.” Both parties agreed
that the applicable test to be applied in determining whether
a director or officer is entitled to indemnification in
this regard is contained in the decision of Ontario (Public
Guardian and Trustee) v. Unity Church of Truth, [1998]
O.J. No. 1291 (Gen. Div) (the “Unity Decision”). In the
Unity Decision, the court, in an obiter comment,
adopted the position of the Ontario Public Guardian and
Trustee (“PGT”) which provided that “a director of a charity
ought to be indemnified from personal liability only for
those acts properly undertaken in the administration of
the charity or undertaken in breach of trust but under an
honest and reasonable mistake.” In this regard, the PGT
indicated it would object if a charity paid legal fees to
cover a director from personal liability for acts which
he knew to be wrong. The court in the Deol Decision agreed
with this position, stating that “such a test, in my view,
permits indemnification based on reasonable good faith behaviour.
Bad faith on the part of a director or officer will not
entitle him or her to indemnification.”
On the issue as to the scale of costs,
the court held that notwithstanding the impugned conduct
of the defendants, the conduct did not constitute reprehensible,
scandalous or outrageous conduct sufficient to impose substantial
indemnity costs. However, the impugned conduct was held
by the court to be a breach of the directors’ duties. That
breach, coupled with the findings that the defendants disregarded
the provisions of the Corporations Act (Ontario)
and the By-Law in not providing proper notice to the plaintiff
directors of special meetings; the removal and appointment
of directors; and electing new members, led the court to
the conclusion that the defendants were not acting in the
best interests of the Sikh Centre. Instead, it was the view
of the court that the defendants were acting in pursuit
of their own interests to gain control of the Sikh Centre
in circumstances where they knew that if they proceeded
in accordance with the By-law and the Act, they would not
be in control. Although there were no allegations of misuse
of corporate funds or misappropriation of property, the
court further held that the impugned conduct constituted
mala fides, disentitling the defendants to indemnification.
Finally, although some defendants submitted
that they should not be personally liable for costs as they
had virtually no connection to the factual issues in dispute,
the court concluded that they would be jointly and severally
liable since there was no evidence that any of the defendants
took issue with the improper actions of the board.
The plaintiffs were awarded costs on
a partial indemnity basis, fixed at $186,000.00 inclusive
of disbursements and costs. The defendants were not entitled
to an indemnity for the costs awarded or for their own legal
costs incurred.
D. CONCLUDING COMMENTS
With regard to the issue of whether a
charity is financially able to effectively provide an indemnity
to its board of directors, the Deol Decision makes it clear
that the directors must always give careful consideration
to their actions, as their actions may disqualify them from
indemnification. This is not new law and is a standard position
for both for-profit and not-for-profit corporations, including
charitable corporations. In this regard, the Supreme Court
of Canada laid out three pre-conditions to a director receiving
an indemnity from a corporation: (1) the person must have
been made a party to the litigation by reasons of being
a director or officer of the corporation; (2) the costs
must have been reasonably incurred; and (3) the person must
have acted honestly and in good faith with a view to promoting
the best interests of the corporation.
The Deol Decision emphasizes the need
for effective risk management by directors of corporations.
This includes exercising effect due diligence in the operation
and control of the corporation, as well as establishing
and following policy statements and procedures. Effective
due diligence includes having a good knowledge of the governing
documents of the charity, ensuring ultra vires acts
are not authorized by the board of directors, ensuring effective
management access and control over the affairs of the corporation,
protection of the charity’s assets, and developing and enforcing
policies and procedures for staff, volunteers and board
members. When in doubt as to the appropriate course of action,
the board and/or individual directors should seek advice
from their legal counsel.
