Link: Case Summary Document
Citation:  ONSC 3230 (Superior Court of Justice Ontario, DM Brown J.)
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.
This case was one of many which have been litigated by strife-torn Sikh religious communities in Canada in recent times. The Sikh community in this case is in Toronto. Judicial irritation with the various Sikh cases seems to be common in Canada. As His Honour said in this case (at -):
‘The Sikh Spiritual Centre Toronto is no stranger to this Court. Although servicing a congregation of up to 10,000 faithful, the Centre’s corporate membership of less than 100 people has demonstrated a singular inability to govern its affairs. Factionalism is endemic in its membership body and on its board of directors, which has resulted in members coming before this court on two previous occasions in 2005 and 2008 for the adjudication of the simple questions: Who are the members of the corporation? Who are its directors? Notwithstanding the detailed directions given by Pattillo J. in his 2008 trial decision, the members of the Centre have returned and again placed the same two questions before this court. The fundamental policy underlying the Ontario Corporations Act, R.S.O. 1990, c. C.38, under which the Centre was incorporated on May 9, 2001, is that those who come together to form the corporation will be capable of self-governance. Although the Corporations Act enables resort to the courts to call meetings of members or to wind-up the corporation, judicial intervention in the affairs of a corporation without share capital should be rare. It is not the policy of the Corporations Act that courts should baby-sit the affairs of such corporations; self-governance by the members is the operating norm. If members, such as those of the Centre, are incapable of governing the corporation, they should take a hard look in their collective mirrors and do one of three things: (i) reform their ways, which the current members seem incapable of doing; (ii) step aside and let new members who are unencumbered with the baggage of past factionalism take over the running of the corporation; or, (iii) wind-up the corporation, with the different factions parting company and setting up their own temples. Continued supervision by this Court of the affairs of the Centre through more litigation in the future is not an option.’
The Sikh Spiritual Centre Toronto (the Centre) is a charitable non-share capital corporation, incorporated pursuant to the Corporations Act, R.S.O. c. C.38 (the Act) by letters patent issued on 9 May 2001 on the application of 17 persons. The objects of the Centre, as stated in its letters patent, are, among other things, to establish, maintain and support a house of worship with services conducted in accordance with the tenets and doctrines of the Sikh faith.
In 2005, a disagreement arose concerning the membership and directors of the Centre. The litigation which followed was long and tortuous, ending with an appeal in 2008 before Patillo J who noted that the pattern of conduct within the faction-ridden governing body of the Centre was for mediation to be followed by apparent agreement, then breakdown of that agreement, and then further litigation. The factions had tried to obtain a balance on the governing board, but this tactic had failed. As His Honour said in this case (at ):
‘Balanced representation may have some practical place where both “sides” can work together. More often than not it is a recipe for disaster, simply setting the stage for a governance deadlock. More importantly, by trying to balance factional representation, a board completely ignores the fundamental duty of each and every director – to act in the best interests of the corporation, not the best interests of a faction. As my review below of the evidence in this case will reveal, most of the Centre’s present directors have lost sight of their basic fiduciary duty under corporate law – to act at all times in the best interests of the corporation.’
Nevertheless, after the 2008 decision, the affairs of the Centre were managed without incident until June 2012. The dispute in this case arose out of a series of directors’ and members’ meetings which took place from late June 2012 through to early August 2012. There were competing meetings because the factional difficulties within the Centre’s governing body had again arisen.
All the plaintiffs were members of the Centre. Seven plaintiffs were directors whose terms did not expire until this year or next. The other seven plaintiffs contended that they were properly elected as directors at one membership meeting held on 5 August 2012. The first seven defendants were elected at another (competing) 5 August 2012 special members’ meeting (the Director Defendants). The remaining 23 individual defendants were new members purportedly admitted at a 24 July directors’ meeting (the New Member Defendants).
The plaintiffs sought declarations that the admission of 23 new members at the 24 July 2012 Board meeting was invalid and, as a result, the election of the seven Director Defendants at the August 5 special members’ meeting was null and void. The plaintiffs also sought related declaratory relief identifying the officers of the Centre.
The Director Defendants counterclaimed for declarations affirming the admission of the New Member Defendants on 24 July and their election as directors on 5 August. They also sought a declaration that the election of the plaintiff directors at the other 5 August meeting was invalid. The New Member Directors asserted no counter-claim, but took the position that they were properly admitted as members of the Centre on 24 July 2012.
His Honour began by saying (at ):
‘…there is some suggestion in the case law that non-profit organizations should not be required to adhere rigorously to all of the technical requirements of corporate procedure for their meetings as long as the basic process is fair. While such an approach might have merit in certain circumstances, it does not in the present. In his 2008 reasons Pattillo J. gave fair notice to the Centre, its board and its members about the approach this Court would take to any further governance disputes[at  of his decision]:
“[G]iven the history of the dispute which has occurred between the parties, it is necessary in my view that the Sikh Centre and its members and directors adhere strictly to the provisions of the Act and the By-Law in respect the governance of the Sikh Centre. Failure to do so will only result in strong sanctions by the court not only against the participants but also against the Sikh Centre.”
Since the Centre now appears for a third time before this Court, I intend to review the evidence to ascertain whether the Centre, its board and its members have adhered strictly to the requirements of the Act and the By-Law. In light of the continued factionalism which precipitated this action, I see no need to cut those involved in the governance of the Centre any slack. To the contrary, the challenge in this case is how to impress upon the members and directors of the Centre to comply with the corporate law which governs their corporation.’
After an exhaustive review of the evidence, His Honour found for the plaintiffs, as follows:
- That the admission of the 23 New Member Defendants as new members of the Centre at the board meeting held on 24 July 2012 was null and void;
- That none of the 23 New Member Defendants were eligible to attend or to vote at the 5 August 2012 special members’ meeting. Without the presence of the New Member Defendants, no quorum was reached for the 5 August 2012 members’ meeting. Given the lack of quorum, the actions taken at that members’ meeting, including the election of the seven Defendant Directors, were null and void, and a declaration was issued to that effect;
- That the board meeting held immediately following the 5 August directors’ meeting was invalid, and a declaration was given that the appointment of officers made at that meeting was also invalid;
- A declaration was given that the members of the Centre were those persons who were members as of 9 July 2012 (i.e. immediately following the 8 July 2012 board meeting);
- A declaration was given that the directors of the Centre were those persons who were directors as of 8 July 2012;
- A declaration was given that the officers of the Centre were those persons who were appointed officers at the 8 July 2012 board meeting.
The plaintiffs had also asked for a an order, pursuant to section 297 of the Corporations Act, that the court direct the holding of a members’ meeting within 60 days to elect replacement directors, and at which only those persons who were members on 24 June 2012 could vote.
Section 297 of the Act states:
‘If for any reason it is impracticable to call a meeting of shareholders or members of the corporation in any manner in which meetings of shareholders or members may be called or to conduct the meeting in the manner prescribed by this Act, the letters patent, supplementary letters patent or by-laws, the court may, on the application of a director or a shareholder or member who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in such manner as the court thinks fit, and any meeting called, held and conducted in accordance with such an order shall for all purposes be deemed to be a meeting of shareholders or members of the corporation duly called, held and conducted.’
His Honour was underwhelmed by this request, saying (at -):
‘…if I possessed the power, I would order the winding-up of the Centre. The membership and board of the Centre is poisoned by factionalism. The directors have demonstrated that they have no practical understanding of their over-riding fiduciary duty to act in the best interests of the corporation; their loyalties appear to lie with their faction. Notwithstanding two previous proceedings before this court on the same issue – who are the members and who are the directors – the members and directors of the Centre have not changed their ways. I have significant doubts whether proper corporate governance can ever take root in the Centre given the current composition of its membership and board. That said, as the Corporations Act now stands, I have concluded that in the absence of a request by a member or the corporation, a court does not possess the power under the Act to wind-up a Part III corporation.’
However, in the circumstances of ‘corporate governance chaos’, His Honour decided that he would order a section 297 meeting, but only on four pre-condition being strictly met:
- The accounting practices of the Centre had to be regularised. To that end His Honour ordered the appointment of a monitor of the Centre’s financial affairs. The monitor had to be a licensed trustee under the Bankruptcy and Insolvency Act and independent of the Centre (i.e. not a congregant at the Centre or related to any person who was a congregant or member of the Centre). Within 90 days of the date of the order the monitor had to report to His Honour whether, with the assistance of the monitor, the Centre had put in place proper accounting books, records and procedures;
- Within 90 days of the date of the order given in this case an auditor had to prepare the reports described in section 96(2) of the Act for the 2012 financial year and the first six months of the 2013 financial year. The auditor had to be independent of the Centre as described above;
- Within 90 days of the date of the order given in this case all current members of the Board had to attend, together, at the same time and in the same room, a one-day training session on basic corporate governance conducted by a recognised corporate governance organisation;
- Within 90 days of the date of the order given in this case the board of directors had to develop an amendment to the By-Law, for consideration by the members at the special meeting, which details the process the directors were to follow when considering applications for new membership. The amendment had to address the following matters: (i) the circulation to all directors, in advance of the board meeting, of any applications for new membership, including details describing how the applicant “has worked as a volunteer or associated with the” Centre over the preceding two years; and (ii) the discussion and consideration by the board of each individual application on its merits.
His Honour said that once the four conditions had been met, he would then order the section 297 meeting on the following basis (at -):
‘The preparation for and holding of such a meeting shall be supervised and chaired by an independent person, experienced in organizing and chairing corporate meetings, who is acceptable to 17 (80%) of the current directors and approved by this Court. In the absence of such agreement by the board, I shall appoint the chairperson. The chairperson shall arrange for a further independent person to take the minutes of the meeting. The business for that meeting shall be three-fold: (i) to receive the reports of the auditor prepared pursuant to section 96(2) of the Act; (ii) to elect directors to replace those whose terms have expired; and, (iii) to consider the amendment to the By-Law developed in accordance with paragraph 122(iv) of these Reasons…I further order that until the court-directed special members’ meeting is held:
i. the Board may not admit any persons as new members of the Centre; the persons entitled to vote at the special meeting shall be those persons who were members of the Centre as of July 9, 2012; and,
ii. the Board may not approve or enter into any transaction out of the ordinary course of business, including the refinancing of any debt, or propose or approve any fundamental change in the corporate governance structure of the Centre without the approval of this Court.’
His Honour also ordered that:
- the plaintiffs and the other current directors of the Centre consult and attempt to agree on the selection of the monitor and the auditor. If they could not agree, the monitor and auditor would be selected by His Honour; and
- the Centre’s website: www.sikhspiritualcentrerexdale.com show a copy of his reasons on its Homepage no later than 5 p.m. on Wednesday, 5 June 2013, on the basis that ‘[t]ransparency is a hall-mark of good corporate governance’. The posting was to remain in place until after the holding of the special members’ meeting.
The case may be viewed at: http://www.canlii.org/en/on/onsc/doc/2013/2013onsc3230/2013onsc3230.html
His Honour made no finding as to costs on 11 October 2013:
Implications of this case
His Honour held out little hope of an agreement in this case, even after his unusually detailed orders to facilitate better corporate governance. He would have preferred to wind up the corporation (at ) but there was no power to do so, nor had either of the factional parties requested this remedy. Thus, declaratory relief was the only relief available. His Honour commented that this might be different and that the court might ‘enjoy enhanced powers’, after the coming into force of the Not-for-Profit Corporations Act, 2010, S.O. 2012, c. 15 (at ).