The Canada Not-for-profit Corporations Act ("Act") provides that a director can avoid liability for any resolution or action taken at a board meeting by having his dissent recorded. This post explores how and when such dissent must occur in order to preserve the liability shield.
1. Personal Liability of Directors
It is widely known that directors of a not-for-profit ("NFP") corporation can be held personally liable for a variety of board actions and inactions. For example, a failure to pay employees their wages, salaries, bonuses, commissions and other debts incurred in performing services for the corporation can entail personal liability for the directors if the corporation fails to pay. Similarly, directors may be held jointly and severally liable for unpaid payroll remittances, including income tax withholdings, Canada pension plan contributions and employment insurance premiums. Again, they may be liable for unremitted goods and services tax ("GST") or harmonized sales tax ("HST") remittances owed by the corporation if the corporation fails to remit.
2. The Rationale for a Director's Dissent
Generally, the board of an NFP corporation is comprised of several individuals. Board decisions are made by majority vote. A majority may make various decisions (for example, to pay some unsecured claims of creditors in priority to others) with which a minority of the board members disagree. In these circumstances, it would be highly unjust to impose liability on a director for a decision made by the majority in respect of which one or more individual directors were simply outvoted.
3. Exercise of Director's Dissent
The Canada Not-for-profit Corporations Act ("Act") provides that a director can avoid liability for any resolution or action taken at a board meeting by having his dissent recorded.
A director who votes for or consents to a resolution cannot dissent. This implies that an abstaining director (as well as a director who actually votes with the minority) is eligible to formally dissent.
If present at the meeting, the director must have her dissent recorded in the minutes of the board meeting or request that it be so recorded, send her written dissent to the secretary of the meeting before it is adjourned or send her written dissent to the registered office of the corporation immediately after the meeting is adjourned.
A director who is absent from the meeting is deemed to have consented to a resolution passed at the meeting unless, within seven days after he becomes aware of the resolution, he causes his dissent to be placed within the minutes of the meeting or sends his dissent to the registered office of the corporation.
Whether the director is present at or absent from the meeting, the critical point is that his dissent must be contemporaneously recorded. The legislative policy is to ensure both accountability and transparency. Dissent must not only be made, it must be recorded at, or immediately after, the meeting, or soon after the meeting if the director was absent. It would be too easy for a director to claim that he verbally dissented only after - perhaps long after - a claim arises. The onus is on the dissenting director to ensure that his dissent is reflected in the corporation's record at the time of the decision. Otherwise, his dissent will have no legal effect for liability purposes.
In some cases, a director is precluded from voting on a resolution - for example, if the director has a direct or indirect personal interest in the proposed contract or transaction or has a conflicting duty to the opposite contracting party.
While it seems doubtful that the requirement to dissent applies to a resolution in respect of which the director is precluded from voting, until there is guidance from the courts, the better practice is to abstain and record the dissent out of an abundance of caution.
While a director who dissents to protect herself from personal liability may be unpopular with her fellow directors (because it results in the same total potential liability being shared among a smaller pool of individuals), it is an essential element of fairness in the governance of NFP corporations. A dissenting or non-voting director ought not to be held liable for the decisions of the majority, and the majority directors on a particular resolution should understand that this provision also protects them when, on other resolutions, they are in the minority.