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Limited Liability of Members of an NFP Corporation

The separate legal personality of a for-profit corporation has long been recognized as giving its shareholders limited liability.  But is this also the case for the members of not-for-profit corporations?

The separate legal personality of a for-profit corporation has long been recognized as giving its shareholders limited liability. That is, a creditor's claim against a corporation, whether sounding in debt, contract, tort or otherwise, cannot be imposed on its shareholders (even if the corporation is insolvent and even if the corporation has only one shareholder). The law recognizes a corporation as a separate legal person - the property, liabilities and contracts of which are separate and distinct from those of its shareholders. The Canada Business Corporations Act has enshrined the common-law principle of shareholder immunity from the liabilities and faults of the corporation in s. 45(1).

In the case of federal not-for-profit corporations, the Canada Not-for-profit Corporations Act has adopted substantially the same approach as the CBCA. The CNCA states that the members of a corporation are not, in that capacity, liable for any liability of the corporation, including any liability under ss. 253(3)(f) or (g), or any act or default of the corporation, except as otherwise provided in the CNCA. The carve-outs from this member-liability shield will be examined shortly.

First, however, the express exclusion of liability under s. 253(3)(g) means that a court cannot, even if it has found oppression or unfair prejudice, direct a member (M2) to pay another member (M1) all or any part of the amount that M1 paid for his or her membership. Similarly, the express exclusion of liability under s. 253(3)(h) means that a court cannot, under the oppression remedy, direct a member to purchase debt obligations held by any person. In these two respects, the member liability shield set out in the CNCA is even more robust than the shareholder liability shield under the CBCA (where shareholders can be held liable to pay members or holders of debt obligations where the shareholder has acted oppressively).

What then are the carve-outs from the member-liability shield? The few carve-outs are listed below:

1. Liability for Annual Contributions or Dues: An important exception to the membership immunity rule is that the directors of the corporation may (subject to the corporation's by-laws, articles and, if applicable, unanimous member agreement) require members to make an annual contribution or pay annual dues. However, the members as a whole can exert some control over the amount of the annual contributions or dues by providing restrictions or limits in the articles or by-laws or by electing (or replacing) board members with appropriate views of annual charges. As well, any member can simply discontinue his or her membership before the requirement to pay the annual charge becomes binding.

2. Lien on Membership Interest: The articles may provide for a lien that the corporation has on a membership for a debt of that member to the corporation. Typically, a member could become liable to the corporation for initial or annual contributions or dues. This potential lien runs only in favour of the corporation and, therefore, is not a true exception to the member immunity rule (which is directed as shielding a member from the claims of parties other than the corporation).

3. Distribution of Property or Profits to Members before Dissolution: A corporation is prohibited from, directly or indirectly, distributing any part of its profits or its property to a member. There is a limited exception where the member is an entity that is authorized to carry on activities on behalf of the corporation and the corporation distributes some or all of its money or other property to the member to carry on those activities. In effect, members cannot receive dividends from an NFP corporation. These rules are essential to preserve the integrity of the NFP concept: that an NFP corporation is meant to serve a purpose other than the generation of distributable profits for members. A corporation formed to generate dividends for investors is the economic function of a for-profit business corporation and should be incorporated under the CBCA (or cognate provincial or territorial corporate legislation).

4. Post-Dissolution Disgorgement Remedy: On dissolution, a member of a non-soliciting corporation may receive the residual net assets of the corporation after satisfying the claims of creditors.

Notwithstanding the dissolution of the corporation, any civil, criminal or administrative proceeding brought against the corporation before its dissolution may be continued as if the corporation had not been dissolved. As well, any civil, criminal or administrative proceeding may be brought against the dissolved corporation within two years after its dissolution, as if the corporation had not been dissolved. In either case, any property that would have been available to satisfy any judgment or order if the corporation had not been dissolved remains available for that purpose. This means that judgment creditors can enforce their claims against the former assets of the dissolved corporation even if those assets have been distributed to members as part of the dissolution process.

Subsection 239(5) of the CNCA provides that, despite the dissolution of a corporation, a member to whom any property has been distributed is liable to the claimant entitled to continue, or commence, a proceeding against the corporation to the extent of the amount received by that member on the distribution. There is a two-year limitation on a disgorgement action against a member, which runs from the date of dissolution. In effect, s. 239(5) simply says that the members should not receive money or other corporate property distributed to them in priority to the claims of creditors. Members stand in line behind creditors. To the extent that members have received property from the dissolving corporation ahead of the creditors, recipient members must surrender it to the creditors who otherwise would be deprived. This rule can be seen as another example of reinforcing the statutory concept of an NFP corporation, rather than as a true exception to the member-immunity rule.

5. Piercing the Corporate Veil: Notwithstanding codification of the immunity rule, courts have long recognized that there are other situations where justice requires that the corporate veil should be lifted to impose liability on shareholders. However, veil-piercing outside the four corners of the CNCA is likely to be rare in the NFP context, except where the NFP corporation has been incorporated for a fraudulent or improper purpose or is used as a shield for improper activities. Members who are themselves innocent of any wrong-doing have little cause for concern.

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