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Directors and the officers they appoint must act honestly and in good faith with a view to the best interests of the organization. If a director does not do this they can be become liable for harm caused by not properly performing their duties.
Unless the Articles provide otherwise directors can receive reasonable remuneration for services provided to the corporation and can be reimbursed for expenses they incur on behalf of the corporation.
Directors must exercise the care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances. This does not mean that a director must do everything possible to take care; it means that a director must do what is reasonable in the circumstances.
If a director has special skills, for example the director is an architect, the director must use those skills when making related decisions for the corporation. If it is reasonable to do so, directors can delegate to others and rely on experts such as lawyers or auditors. Directors can also rely upon the report or advice of an officer or employee of the corporation if it is reasonable to do so.
A director cannot avoid being held to the standard of reasonable care simply by not taking any action. A director who does not give adequate attention to the affairs of the corporation may also be found to have not taken reasonable care. A director who delegates their responsibilities is still responsible for how they are handled.
Directors must not put themselves in a position where their personal interests might conflict with those of the corporation.
A director's could have a conflict of interest if a decision of the board could result in the board member gaining financially. For example, if one of the companies that the board was considering hiring was owned by a board member, it would be a conflict of interest for that member to decide or to help decide who to hire.
Directors must also not put themselves in a position where their duty to the corporation and their duty to another organization or individual would be in conflict. This could happen, for example, if you served on the board of two non-profits and they were engaged in the negotiation of a contract between the two corporations.
If you have a conflict of interest you need to declare your conflict and not participate in the vote or the discussion concerning the issue. If you have a conflict of interest concerning a contract or a proposed contract you are required to notify the board of the conflict. This must be done in writing and/or recorded in the minutes of the meeting. If you fail to declare your conflict of interest a court can alter or set aside the contract on any terms it considers appropriate. The court may also require the director or officer to account to the corporation for any profit or gain realized on the contract.
Directors of non-profit corporations, like directors of business corporations, are largely shielded from personal liability. In most instances they have no obligation to pay any debt or liability incurred by a corporation. The corporation itself is a separate legal body and is responsible for the corporation’s own debts and obligations. This is one of the advantages of incorporating. Directors can become liable for an obligation if the directors themselves agree to be responsible, for example by giving something like a personal guarantee for a loan.
Directors can become liable for a debt or obligation that arose because they failed to properly exercise any of their duties as directors.
To avoid liability directors must avoid conflict of interest, exercise the care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances and act honestly and in good faith.
For example, if a director owned a construction company that bid on a building contract with the corporation and the director voted in favour of his company being hired, the director could be failing to exercise their duty to avoid being in a position of conflict of interest. A director would not be exercising the duty to act honestly and in good faith if, for example, the director took a secret payment from a landlord in exchange for voting to rent the premises in question. A director could be liable for failing to act in a way that a reasonable, prudent person would if, for example, the director allowed a daycare to rent clearly unsafe premises.
Although directors are generally shielded from personal liability, there are some exceptions and instances where directors may be personally liable for obligations that the corporation fails to perform.
A director of a non-profit corporation may be ordered to pay the wages of employees. This may occur if the wages were earned by the employees but not paid to them. This liability is for a maximum of six months' wages, which accrued during the director's term of office.
In some circumstances a director may also be liable if income tax deductions from employees' pay cheques are not forwarded to the Receiver General, or if GST is not paid by the corporation. Directors may be personally liable if the corporation does not comply with certain sections of The Non-profit Corporations Act, 2022 or with occupational health and safety regulations. Directors may also be liable if the corporation causes environmental damage.
In general directors are not personally liable for damages if someone sues because they have been harmed by something the director did or did not do.
If employees or volunteers of a non-profit corporation cause damages while acting within the scope of their duties, the corporation is liable for these damages. For example, if a person is injured as a result of a fall on a badly prepared ice surface in an outdoor arena operated by a non-profit corporation, the corporation may be sued.
A director carrying out the duties of a director in good faith when an injury happened cannot be sued for damages. Directors are not protected if they engage in criminal activity, such as fraud, that results in damages. This immunity does not affect the statutory liabilities of directors.
The non-profit corporation itself continues to be liable for damages if someone successfully sues on the basis that they were harmed, for example, by the negligent actions of an employee, volunteer or director. The damages would then be paid out of the funds of the non-profit. The non-profit itself also cannot sue the director for damages the non-profit has to pay because of something the director did or did not do.
Directors may personally arrange for the purchase and maintenance of insurance to protect themselves from liability. Corporations can also purchase and maintain insurance for the benefit of the directors. In either case, the proceeds of the policy will only be paid to a director who has acted honestly and in good faith. For example, directors cannot insure themselves against the consequences of stealing from the corporation. Directors' insurance is less common than it once was because of the dramatic increase in the premiums in recent years.
Even though directors will not be personally liable if someone sues the corporation for damages, the directors of non-profit corporations may want to seriously consider a comprehensive general liability policy of insurance for the corporation. This type of coverage could reduce the danger of financial disaster if a large judgment is made against the corporation. To assure coverage, all hazards must be reported to the insurer when the policy is drawn up and the insurer must be informed of new risks when they arise. For example, if a daycare centre operating as a non-profit corporation expands to include a playground open to the public, the insurer must be notified.
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