Non-Profit Directors (Societies Act FAQs)
|This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Pacific Legal Education and Outreach Society (PLEO) in May 2021.|
- 1 Eligibility to be a Director
- 2 Duties of Directors
- 3 Director Liability
- 3.1 What is meant by director’s liability?
- 3.2 What can a director be held liable for?
- 3.3 What can a non-profit be held liable for?
- 3.4 Why is a director personally liable for some things and not for others?
- 3.5 Can contracts or the non-profit’s bylaws reduce or eliminate director liability?
- 3.6 What if a director voted for or consented to a resolution based on information that turned out to be incorrect?
- 3.7 What are the consequences of being held liable?
- 3.8 What can directors do to protect themselves from liability?
- 4 Paying Directors (Remuneration)
- 5 Conflicts of Interest
- 6 Directors Employed by the Non-profit Society
- 7 Directors who are also Lawyers
Eligibility to be a Director
What are the minimum qualifications for directors?
The Societies Act lists criteria for the eligibility of directors:
- Directors have to be at least 18 years of age;
- Directors cannot have been found by any court to be:
- incapable of managing their own affairs;
- be an undischarged bankrupt;
- be convicted of an offence in connection with promotion, formation or management of a corporation or unincorporated entity, or of an offence involving fraud (subject to exceptions under section 44 of the Societies Act).
These requirements are not exhaustive and the bylaws of a non-profit may set out more requirements. If a director ceases to be qualified, the director must resign promptly.
Every non-profit should start using a Consent to Act as Director Form to ensure that every director has indicated whether or not they are qualified. For an example, see this Consent to Act as a Director Form (Note, however, that you do not need to add the requirement to sign a consent form in your bylaws).
We want to have a director who is 16 or 17 years old. How do we do this?
Non-profits wishing to have a director of 16 or 17 years of age may do so if they have a bylaw permitting them to do so. Those wishing to do so should also create a policy to guide the non-profit. Among other things, 16 and 17 year olds do not have the legal capacity to enter into contracts so it is important to consider the limits that may be operating upon them before they become directors.
What is an ex-officio director (unofficial director)?
An ex-officio director is a person who is a director “by reason of their office” rather than by being elected or appointed to the position. This means that this person’s director position is due to their power or influence. Ex-officio directors can hold the same rights as other directors. Most non-profits will not have ex-officio directors. If they do, the specific rights for ex-officio directors should be clarified by including them in the non-profit’s bylaws.
Duties of Directors
What are the duties of directors?
A director of a non-profit must:
- Act honestly and in good faith (without ulterior motives) in the best interests of the non-profit
- Act toward the purposes of the non-profit
- Exercise the care, diligence, and skill of a reasonable person in the circumstances
- Follow the bylaws of the non-profit
- Follow the law, including the Societies Act
What is meant by director’s liability?
The term liability refers to the responsibility of directors and organizations for the consequences of conduct that fails to meet a predetermined legal standard. Usually, the term consequences refers to damage or loss experienced by someone.
What can a director be held liable for?
A director can be held personally liable for:
- Failure to fulfill their duties as director
- Failure to disclose a conflict of interest
- Failure to deduct and remit employee income taxes to the CRA (including CPP and EI)
- Failure to pay wages owed to employees
- Authorizing the distribution of money or property contrary to the bylaws or the Societies Act
What can a non-profit be held liable for?
The non-profit can be held liable for, among other things:
- Failure to pay rent
- Failure to pay other creditors
- Failure to collect and remit taxes such as GST and PST
Why is a director personally liable for some things and not for others?
In Canadian law an incorporated entity such as a non-profit is treated as though it is a separate person from its directors. However, in certain circumstances, the courts and certain statutes may “pierce the corporate veil” and ignore the separate person principle. For example, s. 227 of the Income Tax Act allows the CRA to hold directors personally liable for failure to deduct and remit taxes. Most other creditors do not have the powers of the CRA.
Can contracts or the non-profit’s bylaws reduce or eliminate director liability?
No. Neither a contract nor the non-profit’s bylaws can relieve a director from their duties under the Societies Act nor from liabilities arising from the director’s negligence, default, breach of duty, or breach of trust. In addition, liabilities do not go away if the non-profit is dissolved.
What if a director voted for or consented to a resolution based on information that turned out to be incorrect?
In general, a director must ensure the information they act upon is correct. However, a director will not be held liable if they reasonably and in good faith relied on any of the following:
- The financial statements of the non-profit
- Statements about the non-profit’s financial position by the director or senior manager responsible for the preparation of financial statements
- The written report of the non-profit’s auditor
- The written report of a person whose profession lends credibility to that statement (e.g. lawyer, accountant, engineer, appraiser)
- A statement of fact by another director or a senior manager
- Any record, information, or statement the court decides was reasonable grounds for the director’s actions, even if there was forgery, fraud, or inaccuracies.
What are the consequences of being held liable?
Generally, a director who is found personally liable must return whatever money or property is owed. However, directors should be aware that certain misconduct constitutes a criminal or regulatory offense.
If liability arose from a resolution passed by the directors, each director who voted for or consented to the resolution is held responsible for the entire amount owed. However, if a director pays back more than their share of what is owed, they are entitled to contributions from the other liable directors.
What can directors do to protect themselves from liability?
The best protection is to proactively learn about directors’ duties and to always act honestly in the best interests of the non-profit using the best available information. Directors should not vote for or consent to resolutions when they are unsure about the consequences or legality of that resolution. In addition, s. 66 of the Societies Act permits a non-profit to purchase liability insurance, which can cover directors and/or senior managers of the non-profit. Persons considering becoming a director of a non-profit ought to enquire about the sort of insurance the non-profit carries, including any directors and officers policies.
Paying Directors (Remuneration)
Can we remunerate our directors?
Under s. 46 of the Societies Act, the non-profit is only allowed to remunerate directors if its bylaws permit for this and the amount is disclosed in the financial statements. However, many funders, such as BC Housing, do not permit directors to be remunerated.
What does remuneration of a director include?
Remuneration for being a director means that the non-profit is paying a fee to the director for coming to meetings and doing the duties of a director. It is common in the business context but not in the non-profit world. A non-profit can pay a director expenses arising from their duties, but most non-profits do not pay directors for being directors.
Remuneration for being a director does not include reimbursing directors for expenses arising from their duties, such as the cost of travelling to a meeting.
Remuneration for being a director also does not include remunerating a director for performing work for the non-profit unrelated to their duties as a director, such as paying a director to cater an event. However, this would require the director to declare a conflict of interest and not vote on the board consideration of the contract. The board can then decide to waive the conflict and enter into the contract for services with the director.
Conflicts of Interest
What is a conflict of interest?
A conflict of interest is a situation in which an individual or organization is involved in multiple interests that may be incompatible, where acting upon one interest could compromise another. A conflict of interest includes not only a material interest but the perception of an interest. In the legal context, this term is used to describe a situation in which a person has a duty to act in the best interests of an organization or party, yet they may have personal interests that conflict with that duty. For example, a board director voting on an increase in salary for a family member who works for the non-profit. The Societies Act requires non-profits to keep records of any conflicts of interest.
What should a director do if they have a conflict of interest?
S. 56 of the Societies Act provides guidance to non-profits on how to address conflicts of interest. A director with a conflict of interest must:
- Immediately disclose they have a conflict of interest and the full nature and extent of the conflict;
- Not vote on the matter;
- Not attempt to influence the vote or discussion on the matter;
- Leave the meeting while the matter is discussed except when they are required to be present to provide information; and,
- Leave the meeting while the rest of the board votes on the matter.
Directors Employed by the Non-profit Society
We are a church. Can the priest/minister/pastor be a member of the board?
People employed by or under contract with the non-profit can sit on a non-profit’s board as long as the majority of the directors are not employed by or under contract with the non-profit. Any non-profit with these practices should have a conflict of interest policy in place to guide directors.
Directors who are also Lawyers
What is the role of a lawyer on a board?
The willingness of lawyers to contribute their time, experience and knowledge to the not-for-profit sector by serving on boards, or committees, is laudable and rewarding. Nonetheless lawyers serving on boards must be mindful of some of the risks that flow from these activities.
Key risks, insurance coverage issues aside for a moment, go the heart of your knowledge and expertise; namely whenever a legal issue arises in a meeting, everyone will turn to you for your thoughts, your input and, more critically, your advice. The fundamental challenges as everyone awaits your response include:
- do you have the full and complete information that a lawyer, retained to provide advice, would insist upon?
- do you have time to thoughtfully consider a response?
- is the issue one that falls within your area of knowledge and expertise?
- is your advice independent, or is it clouded by loyalty to the organization, or a particular policy position you may feel strongly about?
While it will likely bring frowns to the faces of other board members, or quizzical looks, the response, “this question raises important legal issues; we need to get the advice of outside counsel” is more often than not the correct response.
This information is not provided to dissuade you from contributing your time and expertise, but rather to let you do so “eyes wide open”.
As pointed out in the Law Society of British Columbia’s guidance, having a frank discussion of the constraints on your role on accepting a position on a board, and refreshing that discussion annually, is excellent advice.
Having dealt with the risks and constraints, you still have a great deal to contribute to, and benefit from, service in the not-for-profit sector.
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