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Corporate Loan to Director Found to be Unfairly Prejudicial

In Stirr v. Romanian Canadian Cultural Club "Mihail Eminescu" (decided 1993), the Saskatchewan Court of Queen's Bench held that a loan given by a non-profit corporation in financial difficulty to one of its directors was unfairly prejudicial to the members.

1. Facts

The Romanian Canadian Cultural Club "Mihail Eminescu" was a membership corporation incorporated under The Non-Profit Corporations Act (Saskatchewan).

In the course of seeking financial information from the corporation, Nick Stirr, a member of the corporation, discovered that the board of directors had authorized a loan by the corporation to one of the directors.

2. Rulings

Justice MacLeod of the Saskatchewan Court of Queen's Bench held that a loan to a board member, when the corporation has been suffering substantial losses and is in financial difficulties, unfairly disregards the interests of the members. Accordingly, he ordered the corporation to provide full particulars of the loan, including:

● the date the loan was approved, the motion approving it and the directors who voted in support of the motion;

● the date the loan was advanced to the director;

● the name and address of the director to whom the loan was made;

● the amount of the loan;

● the purpose of the loan;

● the security taken, if any;

● the terms of the loan including the rate of interest and terms of repayment;

● whether there had been default in repayment; and

● a copy of any document evidencing the loan.

3. Key Observations

There can be no quarrel with the judgment in this case. The only quarrel is with a board that authorizes a loan to one of their fellow directors. Even for a corporation that is not operating a charity and only receives money from its members, it is unthinkable for a board of a not-for-profit (NFP) corporation to make a loan to one of their fellow directors. If a director wishes to apply for a loan from an NFP corporation on whose board he sits, he should first resign from the board to remove any odour of conflict. The remaining directors should consider making a personal loan to the individual before committing any corporate funds. If they are unwilling to advance personal funds, then they would have the nearly impossible task of explaining why they authorized the corporation to make the loan that they were not prepared to make, or guarantee, personally.

If the loan is not repaid, then the directors who authorized it would likely be held to be jointly and severally liable to make the corporation whole for its loss. In effect then, the directors approving the loan would repay the corporation and step into the shoes of the corporation as if they had personally lent the monies in the first place.

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