Thousands of British Columbians volunteer as directors of non-profit societies, community associations, sports clubs, charities, housing societies and more. Most take on the role to give back. Few realize that the position carries legal duties, and in some situations, personal liability.

This article explains, in plain terms, what the law expects of society directors in B.C. and where personal risk can arise.

The core duties

The Societies Act (B.C.) requires every director, when acting as a director, to:

• act honestly and in good faith, with a view to the best interests of the society;
• exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances;
• comply with the Societies Act and its regulations;
• follow the society’s bylaws, so long as doing so is consistent with the duties above; and
• act with a view to the society’s purposes, as set out in its constitution.

The first item is often called the fiduciary duty (a duty of loyalty). The second is the duty of care. The direction to act with a view to the society’s purposes is unique to societies and colours both.

Loyalty: whose interests come first?

A director’s loyalty is owed to the society itself, not to the members who elected them, the staff, funders, creditors or any particular group.

B.C.’s Court of Appeal has confirmed that the principles governing corporate directors apply by analogy to society directors. The Supreme Court of Canada has said that directors may and sometimes should consider how a decision affects employees, creditors, the community and other stakeholders. But that consideration informs what is best for the organization. It does not create a separate duty owed to each of those groups. There is no fixed rule that any one group’s interests must prevail.

For a society, one further point matters: the board’s view of the society’s “best interests” must line up with the society’s stated purposes. A board should not chase revenue, growth or a new direction that departs from the purposes in its constitution. If the purposes no longer fit what the society does, the proper course is to amend the constitution, not to drift away from it.

Care and diligence: perfection is not required

The duty of care asks what a reasonably prudent person would have done in the same circumstances, based on what the director knew or ought to have known at the time.

The Supreme Court of Canada has stressed that perfection is not demanded. Courts are reluctant to second-guess decisions with the benefit of hindsight. A decision is not negligent simply because it turned out badly. Under what is known as the “business judgment rule,” courts generally defer to a board’s decision if it falls within a range of reasonable choices and was made on an informed basis.

That deference has limits. It will not protect a board that failed to inform itself, nor will it excuse dishonesty, bad faith, self-dealing or an undisclosed conflict.

In practice, meeting the duty of care means:

• preparing for meetings and reading the materials;
• asking questions and following up when something seems wrong;
• taking an active part in decisions rather than deferring to others;
• getting professional advice (legal, accounting or other) when the issue calls for it; and
• making sure significant decisions, and the reasons for them, are recorded in the minutes.

Conflicts of interest: the rules are mandatory

Conflicts are one of the most common sources of trouble for society boards. Picture a director whose spouse’s company bids on a society contract, or a director who rents property to the society.

Where a director has a material interest, direct or indirect, in a contract, transaction or matter before the society that could conflict with their duty as a director, the Societies Act requires the director to:

1. disclose the nature and extent of the interest to the other directors, fully and promptly;
2. abstain from voting on it;
3. leave the meeting while it is discussed and voted on; and
4. refrain from trying to influence the discussion or vote.

The disclosure must be recorded, usually in the minutes.

These are legal requirements, not suggestions. There are narrow exceptions, including where every director has disclosed an interest in the same matter, and for routine matters such as director expense reimbursement, indemnities and insurance.

Profits must be repaid unless the transaction is properly approved. A conflicted director must pay to the society any profit made from the transaction unless they followed the disclosure rules and the transaction was then approved by the other directors, or the members approved it by special resolution after full disclosure.

A conflicted transaction is not automatically void. But if it was not properly approved, a court can stop it or set it aside if it was not reasonable and fair to the society.

Can I be personally liable?

The short answer: not simply for being a director. A society is a separate legal entity, and its debts and obligations are its own. Personal exposure arises in two main ways: under specific statutes or because of the director’s own conduct.

A few general points:

• No contracting out. Neither the bylaws nor a contract can relieve a director of the duty to comply with the Societies Act, or of liability for negligence, breach of duty or breach of trust.
• Acting like a director counts. A person who is not formally a director but performs a director’s functions may be held to the same duties.
• Breach of loyalty. A director who breaches the duty of loyalty may be ordered to compensate the society and, in appropriate cases, to give up profits made through the breach, even if the society itself suffered no loss.
• Your own wrongful acts. A director is not liable for the society’s wrongs merely because of their title. But the Court of Appeal has confirmed that people remain responsible for their own wrongful conduct, even when acting in good faith on the organization’s behalf.
• Signing documents. Make sure contracts name the society as the party and show that you are signing on its behalf. Get advice before signing any personal guarantee.

Improper distributions

Directors who vote for, or consent to, a resolution authorizing a distribution of money or property contrary to the Societies Act or the bylaws are jointly and severally liable to repay it to the society. A director has a defence if they relied in good faith and reasonably on financial statements, professional reports or similar information. Claims must be brought within two years of the resolution.

Financial difficulty and insolvency

Directors do not owe creditors a fiduciary duty, even when the society is insolvent or close to it. However, if the society goes bankrupt, the trustee can unwind certain payments made in the months before bankruptcy that preferred one creditor over others: three months for arm’s-length creditors and twelve months for related parties. Boards facing financial difficulty should get advice early.

Member complaints

A member who believes the society’s affairs have been conducted oppressively, or that a resolution is unfairly prejudicial to them, may apply to court. The court has broad powers, including removing a director, setting aside a transaction or ordering compensation. Separately, a member or director may ask the court for permission to sue in the society’s name, for example, to pursue a claim against a director on the society’s behalf.
Specific statutory liabilities

Several statutes make directors personally responsible for particular unpaid amounts. Each is limited in scope, and most offer a due diligence defence: a director who took reasonable steps to prevent the failure is not liable.

What Law Scope and limits

Unpaid wages Employment Standards Act (B.C.)

Up to two months’ unpaid wages per employee. A B.C. court has held this does not extend to wrongful dismissal damages.

Source deductions (income tax, CPP, EI) Income Tax Act (Canada) Only amounts the society failed to withhold or remit. Due diligence defence; claims barred two years after the director leaves office.

GST/HST Excise Tax Act (Canada) Only net tax the society failed to remit. Due diligence defence; two-year limit after leaving office.

WorkSafeBC assessments Workers Compensation Act (B.C.) Applies only in specified circumstances; whether it reaches a particular society should be checked. Due diligence defence.

The practical lesson: the board should regularly confirm that payroll, source deductions and GST/HST remittances are current, and should act immediately if they fall behind.

Protection: indemnities and insurance

A society may indemnify its directors and pay their legal costs if they are sued because of their role, subject to the Societies Act and any limits in the bylaws. In some cases, once a proceeding is over and the director has not been found at fault, the society must reimburse their expenses. A society may also advance legal costs during a proceeding, but only after receiving a written promise to repay them if repayment is later required.

There are firm limits. A society cannot indemnify a director who did not act honestly and in good faith in the society’s best interests. If the claim is brought by the society itself, court approval is needed before the society can indemnify.

A society may also buy directors’ and officers’ (D&O) liability insurance. Coverage depends on the policy wording, so boards should review it with their broker. Prospective directors should consider whether the society has D&O insurance before agreeing to serve.

A practical checklist for society directors

• Read the society’s constitution, bylaws and recent minutes and financial statements.
• Know the society’s purposes and keep decisions consistent with them.
• Come prepared to meetings, ask questions and insist on timely information.
• Declare conflicts early, have them minuted, and step out when required.
• Record significant decisions and the reasons for them.
• Monitor finances, especially payroll, source deductions and GST/HST remittances.
• Get professional advice when an issue is beyond the board’s expertise.
• Confirm the society has appropriate indemnity provisions and D&O insurance.
• Never sign a personal guarantee without independent advice.

Serving on a society board is rewarding, and the legal risk for a careful, engaged director is modest. Understanding the rules is the best protection.

This article provides general information only and is not legal advice.