"Directors of Non-Profit Organizations Can Face Personal Liability", Vancouver Sun

by Janice and George Mucalov

At this time of Christmas giving, it’s perhaps apt that we write a column for all those people who give their time to sit as directors on boards of charitable and other non-profit organizations.

According to the 2000 National Survey of Giving, Volunteering and Participating, over 40% of Canadians who volunteer hold positions on boards and committees. Many, however, are probably unaware of the possible legal liability they face as directors. While lawsuits against non-profit board members are uncommon, our society is becoming more litigious, and it behooves all directors to be informed about their legal duties and how they can minimize their risk of personal liability.

Non-profit organizations may be informally structured with no legal status, or they may be incorporated either provincially under BC’s Society Act or federally under Part II of the Canada Corporations Act. Directors of unincorporated organizations are generally responsible for the organization’s debts or liabilities; directors of incorporated non-profit organizations have more protection. But they can still be personally liable if, for example, they “breach” or fail to live up to their legal duties.

What are these duties? For one thing, volunteer directors of non-profit organizations have what are called “fiduciary” duties – broadly encompassing the duties to act honestly, carefully, in good faith and in the best interests of the organization (essentially the same as the duties directors owe to companies in the business of making money).

One specific fiduciary duty is to perform the job with diligence, care and skill. Directors are expected to know about the policies and business being transacted by the organization, to attend board meetings and to actively participate in making decisions. If you disagree with any substantial decision, ensure your dissent is recorded in the minutes.

Directors with special skills or expertise – such as lawyers and accountants – may well have the additional obligation to exercise a standard of care that corresponds to their professional abilities. A chartered accountant, for example, should apply his or her knowledge when reviewing the organization’s financial statements. If you don’t have a financial background and don’t understand the statements, it’s not good enough to rely on your lack of knowledge as protection against any claim – you have a duty to ask questions and get proper explanations.

Another fiduciary duty is the duty to act prudently and avoid taking unreasonable risks. Unlike directors of a for-profit corporation, directors of a non-profit organization have no reason to take risks with the organization’s funds; their job is not to make money but to manage the organization’s funds sensibly and carefully. So directors can be on the hook if, for example, they approve expenses when the organization is in the red or invest the organization’s funds in risky stocks instead of secure term deposits.

Another important fiduciary duty is to avoid a conflict of interest. Directors must put the interests of the organization first, ahead of their own personal interest, and report any conflict of interest that arises. Conflict of interest examples include taking friends out to dinner on the organization’s expense account or charging personal taxi rides to the organization, failing to advise the board that the beneficiary of funds is a good friend, and using the organization’s membership list for personal business. If you as a director stand to personally gain from a transaction the organization is involved in, inform the board immediately of the conflict of interest and refrain from voting or deciding on the issue.

There are other statutory duties that directors must meet as well. For example, under the Society Act, directors can be personally liable for the society’s debts if the society has less than three members for more than six months. If the organization is registered as a charity, the Income Tax Act imposes certain requirements. Directors also have many other legal responsibilities, too numerous to outline here.

Most charities, sports clubs and other non-profit organizations may be prepared to put in place an indemnification agreement, where they agree to indemnify or pay back a director sued for negligent conduct or unintentional breach of duty. However, there are limits on the protection that can be effectively provided. Depending on the organization, approval of the members or the court may also be needed. But an indemnity is of little comfort if the organization lacks sufficient financial resources. Many organizations therefore buy directors’ and officers’ (“D & O”) liability insurance, which can offer their directors some protection.

Doing what you think is a good job as a director may, in fact, not be good enough to keep you out of hot water. You need to take appropriate preventive action and, if necessary, seek and act on professional advice, which may serve to show you acted reasonably.

© Copyright by Janice and George Mucalov

A version of this column was first published in the Vancouver Sun. The column provides information only and must not be relied on for legal advice. Consult your lawyer if you need legal advice.