Q: What are the responsibilities of a board of directors? Can it be
legally liable for things the organization does? Do responsibilities
differ if the organization is non-profit or a co-operative?
A: Regardless of whether it is a company, a co-operative or a
non-profit body, directors are
required to be diligent and act in the best interests of the
organization.
Organizations include banks, publicly traded companies, private
companies like a family farming corporation, non-profit organizations
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such as the local recreation club, and co-operatives, which can include
everything from daycare to large retail and producer co-ops. The
operation of most of these bodies is regulated by federal or provincial
laws, all of which confirm a director’s responsibility is to act in the
best interest of the organization.
Directors can be personally liable for misuse of confidential
information or for authorizing the payment of dividends when the co-op
is insolvent or the payment will render the co-op insolvent.
In some cases, directors can be held liable for unpaid tax deductions.
According to the Income Tax Act, a director can be personally liable if
the organization fails to pay the necessary deductions including Canada
Pension Plan and Employment Insurance to the tax department. However,
if a director can show that she exercised due diligence to ensure that
deductions were withheld and paid, then she can escape liability. Due
diligence means being informed about the organization’s operations,
taking an active part in meetings, and making sure that you understand
and approve of financial statements.
In most provinces, directors may also be responsible for unpaid wages.
For example, Saskatchewan’s Non-Profit Corporations Act provides that
the directors are liable to an employee for unpaid wages.
There are few cases dealing with the liability of
directors of non-profit organizations or co-ops. I assume this is
because few issues of director mismanagement arise in such cases.
In Srebot Farms Ltd. vs. Bradford Co-op, the directors were sued for
non-payment of dividends. The co-op sold supplies and provided packing
and storage of farm produce to its members. In 1989, the co-op
developed a packing facility. For financial reasons, the facility was
set up as an independent business and incorporated as a for-profit
corporation as opposed to a co-operative. The co-op was the sole owner
of the company.
The plaintiffs, who were onion farmers, argued that the co-op breached
the law, as did its directors, in setting up a separate company. They
further argued that profits from the company should be included in
calculating dividends for the co-op.
The court found that the Ontario’s Co-operative Corporations Act
permitted the kind of investment made by Bradford Co-op. Further, the
court held that even if the co-op had acted against the law, the
directors could not be sued by a member. Rather, the judge ruled that
on a strict reading of the Ontario law, a member could sue the
co-operative, or the co-op itself could sue directors for ignoring
their duties. But a member could not sue the directors. As to the
dividends, the court said that the directors “may declare … and may
pay dividends” but under Ontario law, business conducted by a
subsidiary need not be including in the surplus of the co-op for
distribution. Of course, co-operative law varies from province to
province.
In some provinces the law provides that the organization will or “may”
indemnify directors for personal liability they might encounter by
being on the board. In other cases, the constitutional documents of the
organization might state directors are not liable. Such protection is
only valid if the organization is financially viable. In some
instances, organizations may choose to buy liability insurance to
protect directors.
Don Purich is a former practising lawyer who is now involved in
publishing, teaching and writing about legal issues. His columns are
intended as general advice only. Individuals are encouraged to seek
other opinions and/or personal counsel when dealing with legal matters.
