Ontario Court Denies Request of Monitor to Manage Charity’s Affairs
November 2020 Charity & NFP Law Update
The Ontario Superior Court of Justice released its decision in Malik v Sabha on September 18, 2020, in which a faction (the “Plaintiffs”) of Hindu Sabha, a religious temple and registered charity incorporated under the Ontario Corporations Act (the “OCA”), had alleged governance and financial irregularities and sought the interim appointment of a monitor to manage Hindu Sabha’s financial affairs. The Plaintiffs submitted that the current Board of Management was improperly constituted and therefore lacked authority, and further that the directors had fundamentally mismanaged Hindu Sabha’s financial affairs. They also sought relief under section 332 of the OCA, claiming they were aggrieved by the directors’ failure to perform their duties.
In considering the matter, the court found that Hindu Sabha was also a trustee pursuant to the Charities Accounting Act, and it was therefore “answerable for its activities and the disposition of its property as though it were a trustee.” Further, it stated that the directors have a fiduciary obligation to carry out the trust for Hindu Sabha’s charitable purpose, and must act “with reasonable prudence, diligence, good faith, honesty and loyalty, [and] avoid conflicts of interest.”
The court then considered the relevant legislation and case law, and found that “judicial intervention in the affairs of a corporation without share capital is rarely done”, and that the OCA’s “fundamental policy […] is to view those who come together to form the corporation as being capable of self-governance.” It also found that courts were not to interfere unduly in the affairs of religious or non-profit organizations. It therefore considered whether it would be “just or convenient” to appoint a monitor, adopting the three-part test set out in OSPCA v Toronto Humane Society, considering evidence:
(i) to determine whether the allegations of a breach of trust made by the applicants give rise to serious questions to be tried; (ii) to assess and compare the nature and degree of the harm that would result from granting or not granting the relief sought, taking into account any need to preserve the assets, undertaking or activities of the [entity] in order to enable it to continue pursuing its charitable objectives; and (iii) to consider any other factor in the context of the court’s supervisory jurisdiction over charities.
The court found that, for the most part, there were no serious questions to be tried. It found that the Board of Management was properly constituted and had requisite authority to act. It was also not persuaded by the Plaintiffs’ allegations of improper use of Hindu Sabha’s funds to indemnify directors, as well as of unaccounted-for donations, and of inappropriately signed cheques. Instead, the court found that the Board of Management had properly complied with the governing documents. Where anomalies existed, they were not serious questions to be tried. Although some of Hindu Sabha’s donation cash count forms lacked legible names or signatures, the court could not infer serious mismanagement, since there was no evidence that funds were missing as a result of cash counts. Further, despite Hindu Sabha’s corporation profile report containing mistakes, the court found that the directors had “tried in good faith to diligently update the temple’s corporate profile, albeit with some errors that are relatively minor and likely resulted from inadvertence.”
The court did, however, find that the Board of Management did not comply with the OCA and its by-laws when it failed to provide audited financial statements for several years. Nonetheless, the court found that the directors “made good faith efforts to prepare unaudited financial statements […] in an attempt to exercise prudent management over Hindu Sabha’s financial affairs” and that they “acted honestly and in what they considered were Hindu Sabha’s best interests.” In considering the nature and harm, the court therefore saw “no useful purpose” in appointing a third-party monitor to manage Hindu Sabha’s financial affairs in order for it to continue pursuing its charitable objectives.
Finally, in considering other factors, the court stated that the irregularities could be adequately addressed by directing Hindu Sabha to (1) have audited financial statements prepared for its outstanding and future fiscal years; (2) accurately update and maintain its corporation profile report; and (3) train its volunteers on donation counting procedures. Being mindful that courts generally do not interfere in the activities of religious organizations, the court denied the Plaintiffs’ request to appoint a monitor.
Given the court’s focus on the good faith efforts of the directors in its analysis, this case is a helpful reminder of fiduciary duties placed on directors of charities and, further, of the courts’ reluctance to intervene in the affairs, particularly of religious organizations, unless there has been serious mismanagement and the court has genuine reason to do so.