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What Happens When a Not-for-profit Corporation Operates Under Invalid By-laws?

In Bekkari v. Islamic Society of North America (released March 2014), Madam Justice Matheson addressed an issue that arises all too frequently in the affairs of various not-for-profit ("NFP") corporations:  the corporation realizes one day that it has been operating for some time (possibly years) under an invalid set of by-laws and, indeed, its current board has been elected under those by-law.  What happens?

1. Facts

The Islamic Society of North America ("ISNA") is a charitable corporation incorporated under Part II of the Canada Corporations Act ("CCA").  The issues in the case relate to the time when the corporation was governed by the CCA, as the corporation had not yet transitioned to the Canada Not-for-profit Corporations Act ("CNCA").

Under the CCA, by-law amendments required approval by the board, approval by the members and, finally, approval by the Minister of Industry Canada (now, the Minister of Innovation, Science and Economic Development).  Ministerial approval of by-law amendments is not required (or even possible) under the new CNCA.

In 2008, ISNA amended its by-law but apparently received erroneous advice that Ministerial approval was no longer required to approve the by-law under the CCA.  The board, including the former president, Bekkari, accepted that advice.  ISNA proceeded to hold an election of directors in 2009 based on the 2008 unapproved by-laws.

In 2012, ISNA received a report that raised concerns about the validity of the 2008 by-laws because they had never been submitted for approval to the Minister.

A few months later, again relying on the 2008 unapproved by-law, the members of the board purported to remove Bekkari as president.  Under the pre-2008 by-laws, only the members could remove the president.

In 2013, the 2008 by-law was submitted to the Minister for approval, but it was rejected.  One of the reasons it was rejected was that the Minister required that the power to remove the president remain with the members (rather than being shifted to the board).

2. Ruling

The court had little trouble with the issue of the invalidity of the 2008 by-laws, finding that it was clear under the CCA and the previous by-law that Ministerial approval was required before amendments to the by-laws could come into effect.  Ministerial approval of the 2008 by-laws never occurred.  It followed that the 2008 by-laws never came into effect.  Without that approval, the corporation and its members should never have acted upon the 2008 by-laws.

As the court stated, the real issue is what to do about it now, given that that ISNA in good faith but erroneously had acted upon the new by-law for almost four years.  Elections had been held under the by-law. Decisions had been made. The board's composition was affected by it.  The board purported to remove the applicant, Bekkari, from his position as president based on the effectiveness of the new by-law.

While finding that the 2008 by-laws were invalid, Justice Matheson found that it would be unjust for the board (including Bekkari) to now call into question actions taken during the period when they acted in good faith reliance on the effectiveness of the 2008 by-laws.  She invoked the doctrine of estoppel. However, that period where the parties shared an assumption that the by-laws were valid came to an end when the issue of validity was raised at the November 2012 board meeting.

While the board action to remove the applicant as president was invalid, his term would have ended under the valid by-law.  She, therefore,

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