Aptlaw.com

A law newsletter for charities and Not For Profits

Adam Aptowitzer

Barrister & Solicitor

Suite 203

121 Richmond St. W.

Toronto, ON

Phone 416.712.2218

Fax     416.850.6087

law@aptlaw.com

http://www.aptlaw.com

SPECIAL BULLETIN

In my last newsletter , I described the need for charity and NFP leadership to understand the legal duties that come with positions of responsibility. I then described the nature of a corporation's legal existence, the director's position within the corporation, and the standard of care to which the director is held. In this newsletter, I will expand on those concepts and describe the nature of the director's fiduciary obligations to the corporation and the practical implications of those obligations. Please feel free to forward this newsletter to anyone in a position to make use of it (or anyone else for that matter).

As in my last newsletter on the subject, I remind you that this newsletter, while a helpful information tool, is not a substitute for legal advice or proper education on the subject of director's duties, particularly as the consequences of ignorance are considerable. Therefore, I encourage you to contact me about a seminar presentation I have prepared to educate charity leadership on their responsibilities with respect to the various Canadian laws - including anti-terrorism laws, related businesses, GST, Income Tax and disbursement quotas. I am available to give this presentation and to customize this presentation for your particular organization. A sample is available on my website at www.aptlaw.com/presentation.html .

As always, please remember that this newsletter is for informative purposes only and if you have any specific questions or comments about the items below or any other aspect of charity law, please contact me.

Adam

TRUSTING THE TRUSTEE

Agatha Christie once said "where large sums of money are concerned, it is advisable to trust nobody". While probably good advice (unfortunately) it is also impractical, charities are trusted by both their donors and their beneficiaries to properly manage the funds given them for the benefit of those less able to help themselves, or other members of the public. Often, the beneficiaries are those least able to ensure that the amounts are spent properly on their behalf. To remedy this apparent power imbalance the law imposes duties on those in positions of trust over property (called trustees or fiduciaries).

Property donated to charities is generally subject to a trust. At its simplest, a trust divides the characteristics of ownership (being 1) actual legal title and 2) the use of the property) between two different owners. The holder of legal title is the trustee and the people who are to benefit from the property are called beneficiaries. By way of example, imagine a situation where Aviva owns an orange tree but the hungry in her city are entitled to the fruit (probably because Aviva has declared that the fruit will be going to the hungry). Thus, Aviva is the trustee of the property and "the hungry in her city" are the beneficiaries. If the trustee is not obligated to "manage" the tree for the benefit of the beneficiaries she could take the fruit, use it for the hungry of another city, chop down the tree, or water it improperly so that the fruit sours or the tree dies. It thus becomes easy to see why the law would impose certain obligations to ensure that the trustees manage the property for the benefit of the beneficiaries - and severe penalties if they do not.

As I described in previous newsletters, directors are the operating mind of the charity, and are often usually (if not actually) the trustees of property. They therefore have a duty to take care of the operation of the organization that is separate from the obligation to ensure the charity fulfills its mission. By way of analogy, the human brain is responsible for ensuring the lungs breathe and the heart beats as well as ensuring that the individual focuses on the job at hand. Similarly, the director must ensure that the charity files its proper yearly forms, manages its GST, Income Tax, Employment, Corporate and Real Estate Law obligations (among others), and also fulfills its charitable objects. Overall, the duty of the director is to "manage the affairs" of the organization. It is not clear what "manage the affairs" means in law but it is more than observing and likely means active participation in the running of the corporation as if it was a business. To this end, the general duty can be broken down into the following general categories.

TO ACT DILIGENTLY AND WITH REASONABLE PRUDENCE

. Directors must be careful when investing or handling charity funds or property.

. Directors must be actively involved in managing the charity.

- For example, familiarize yourself with the charity's objects how it fulfills them and its operations, attend board meetings, and take positive action to ensure legal compliance.

- Obtain appropriate professional advice where needed.

- Read this newsletter regularly and attend my seminar.

DUTY TO ACT IN GOOD FAITH, HONESTLY & LOYALLY

. Avoid impropriety (and the appearance of impropriety); do not misuse your powers.

. Work to further the objects of the charity, resign if personal beliefs or conflicts interfere with these objects.

. Work to the Golden Rule; behave to the standard you would want the directors to behave if you were a beneficiary.

DUTY TO AVOID CONFLICTS OF INTEREST

. Trustees may not receive remuneration for their position on the board either directly or indirectly.

. Directors should avoid the appearance of conflict between themselves and the charity or between different charities they are involved in.

DUTY TO EXERCISE POWER

. It is not enough merely to keep apprised of the charity's actions. Directors must also act diligently by exercising power to:

- Ensure proper management such as developing policies and directions, and supervising management and staff (see the Aptlaw.com privacy series ).

- Ensure that the charity pursues the objects and only the objects.

- Ensure that trust funds are managed properly.

- Properly maintain books, records and minutes of the corporation.

- Make decisions.

- Directors may delegate authority but the board must always supervise and has the final authority on all decisions.

DUTY OF OBEDIENCE

. Directors must comply with all applicable legislation and the corporation's governing documents.

. Directors must act to implement decisions of the board and the charity.

DUTY TO CONTINUE

. Some Director's obligations continue even after purported resignation

- Resignation ineffectual if not allowed according to bylaws.

- Resignation to avoid personal liability may be ineffectual.

In my next newsletter, I will continue this discussion by looking at some of the specific duties imposed by legislation on directors.

Adam Aptowitzer