B.C. Court Refuses to Grant Leave to Bring a Derivative Action

In Gill v. Kalgidhar Darbar Sahib Society (released May 2018), Justice Harvey of the Supreme Court of British Columbia refused to grant leave to a former executive member authorizing him to bring a derivative action on behalf of a religious society. The court found, in the circumstances, that the petitioner was not acting in good faith and that the derivative action did not appear to be in the best interests of the society.

1. Facts

The petitioner, Gill, was a member of Kalgidhar Darbar Society, a religious organization incorporated under the British Columbia Societies Act. He was also a member of the society's executive committee.

Gill applied for leave to bring a derivative action on behalf of the society, seeking (i) a declaration that three members of the executive committee contravened provisions of the Act, and (ii) the removal of the members from the executive committee and board of directors.

One of the complaints was that the certain officers of the society had authorized payments for amounts in excess of their authority under the by-laws.

2. Rulings

Leave to bring a derivative action requires that the court be satisfied that:

● the complainant has made reasonable efforts to cause the directors to prosecute the legal proceeding;

● notice of the application for leave has been given to the society and to any other person the court may order;

● the complainant is acting in good faith; and

● it appears to be in best interests of the society for the legal proceeding to be prosecuted.

Justice Harvey found that the first two preconditions were met. It was unrealistic to expect the current directors to sanction an action against themselves. It was unnecessary for the petitioner to attempt to convene a meeting of the directors to consider the matter. A letter from his solicitor demanding that the directors take action against themselves was sufficient effort to cause the directors to prosecute the action. While not deciding the merits, Justice Harvey also stated that it appeared the allegation of spending in excess of the authorized limits had a reasonable chance of success.

Nevertheless, he found that the petitioner was not acting in good faith and that the proposed proceeding was not in the society's best interests.

The legal expenses that the petitioner complained of were largely incurred as a result of actions taken by the petitioner and his supporters. It was unrealistic to think that the individual defendants would be held liable for the expenses.

The proposed proceeding was found to be primarily motivated by the petitioner's objective of regaining control of the society. He was attempting to regain control through court proceedings rather than through the electoral process. Justice Harvey expressed the view that the proposed derivative action would lead to further political infighting and expense to the society in prosecuting a claim more properly fought in another forum.

3. Key Observations

Generally, it will be difficult for members to succeed in obtaining leave to bring a derivative action on behalf of a non-profit corporation. A derivative action is available where the wrongdoers are in control of the corporation and cannot be expected to bring an action against themselves.

Most (but not all) non-profit corporations, however, have a board comprised of individuals who are unrelated to each other. In that case, it should be possible for a subset of the board, comprised solely of independent directors who are not proposed defendants in the action, to assess the merits of a proposed action. The independent directors (or even a single independent director) can be constituted as a special committee of the corporation and can retain independent counsel to advise on the merits of the proposed action, the potential benefits, the likely costs, the chances of success and the effects of the litigation on the corporation as a whole, including its reputation and fund-raising efforts. Indemnification of the directors or former directors may also weigh against commencing an action against them.

Whether to bring an action is generally an exercise of the business judgment of the board or board committee. Courts defer to the business judgment of board members who are not conflicted and who rely in good faith on the advice of qualified independent counsel.

As well, a majority of the members has the right, at any time, to oust the whole board or any subset of the directors and replace them with a new slate of directors. The mere existence of this power within the membership as a whole makes it much more likely that the courts will let the members work out for themselves who should be in control of their corporation and whether the corporation should bring legal proceedings against any former directors. This is illustrated by the Gill v. Kalgidhar case.

If, however, the wrongdoers control both the board and a majority of the voting membership, it may be necessary for one or more minority directors or members to seek leave to bring a derivative action if there is evidence of meaningful wrongdoing by the control group.

It is generally wise for non-profit corporations to avoid entrenching a control group on the board. A board that is large and independent can police the few possible miscreants on the board and, if necessary, authorize the corporation to bring legal proceedings against them. In these circumstances there is no need for a derivative action, as the majority of the board can authorize the proceedings.

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