A Case of Misappropriation

In Hunjan v. Singh (released January 2015), Justice Sproat found a former director of a charitable corporation in contempt of court for paying out corporate funds despite having been removed as a director before he made the payments.

1. Facts

Nanaksar Satsang Sabha of Ontario is a charitable corporation formed under the Ontario Corporations Act that operates a Sikh temple (Gurdwara) in Brampton.  A group of members commenced proceedings against the incumbent three directors seeking to hold an annual general meeting.  During the course of the proceedings, an order was made on consent pursuant to which a new board of three directors was appointed to replace the old board.

However, the former directors proceeded to ignore the consent order and barred the new directors from the corporation's premises.  As well, in the five weeks following the change of control on the board, one former board member continued to withdraw funds totaling $135,695 from the corporate account, including about $100,000 to two law firms, one of which was representing the old directors in the proceedings.

2. Ruling

In a subsequent ruling, Justice Sproat found the former director guilty of contempt of the consent order replacing the old board with a new board and ordered him to pay a fine of $5,000.

Although the issue was not squarely before him, Justice Sproat said that "it did not sit well with him" that the director's law firm received $90,000 while "its client sits facing a contempt motion seeking to have him incarcerated or otherwise punished for misappropriating the same funds", strongly suggesting that the law firm restore the funds paid to it "subject to its right to take whatever steps it deems appropriate to collect any outstanding accounts from the corporation".

3. Key Observations

Once an individual ceases to be a director, any authority that he or she had in that capacity stops completely.  If that individual continues to withdraw corporate funds at any time after he has ceased to be a director or officer of the corporation, he commits theft under s. 322 of the Criminal Code of Canada.

It is shocking that a law firm would accept funds from a corporation after its individual client has lost his corporate authority - thereby exposing the firm's client to criminal charges.  The only thing a law firm can do is not accept the unauthorized payment or, if it already has, immediately repay the funds.  As Justice Sproat says, whether the law firm has a good claim against the corporation is an entirely separate matter and restoring the funds does not prejudice any claim that the law firm has to seek proper payment from the corporation.

Meanwhile, the first commandment of any lawyer must be observed:  keep your clients out of jail.

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