December 1, 2012 By: Kimberley Cunnington-Taylor
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Introduction

As with many things in the world of corporations, resignations of directors are often not given much thought – until there is a dispute.

In two recent cases, the following questions were put to the court in respect of the resignations of directors of non-share capital corporations:

  • what is the effective date of the resignation of a director?
  • does the board of directors need to accept the resignation before it is effective?
  • can a director unilaterally revoke/rescind that resignation?

The above questions were answered in the cases of Adams v. Association of Professional Engineers1 (“Adams”), and Kandolo v. Kabelu2 (“Kandolo”).

The following article will review the above cases and the law relating to this important issue.

It is an interesting coincidence that these two decisions were heard closely together because not only did the court in Kandolo refer to and apply the legal analysis in Adams, both corporations were governed by different legislation and as such, provides an opportunity to compare the law on this point.

Overview of the Cases – Issues

In Adams, the issue related to the resignation of Dr. Michael Hogan, a member of the Council of the Association of Professional Engineers of Ontario (the “PEO”). Dr. Hogan resigned by sending an e-mail to the remaining members of the Council, but then continued to send further e-mails over a period of two weeks, first clarifying when his resignation would be effective, and finally, advising that he had decided to revoke his resignation. At its next scheduled meeting, the Council voted on whether or not to accept his resignation. The vote was close but the resolution to accept Dr. Hogan’s resignation did pass. As one might expect in these types of situations, there was some controversy relating to the way in which the vote was taken and whether or not the decision was valid.

In Kandolo3, the lawyer for two directors of Olangi Wosho Foundation (the “Foundation”), Jean and Deborah Kabelu, mailed resignations to the Foundation on their behalf. The resignations were in writing and were signed by Mr. and Mrs. Kabelu. The lawyer also requested that the necessary government agencies be notified of the resignations. Some time later, Mr. and Mrs. Kabelu purported to revoke or rescind their resignations and then attempted to act as directors and make decisions on behalf of the Foundation (including calling a meeting of members for the purpose of removing the other directors from the board), and commit the Foundation to legal obligations based on those decisions. As with Adams, the rest of the board of directors of the Foundation had met in the interim and had accepted the resignations of Mr. and Mrs. Kabelu. The Foundation also updated the public record to record the resignations of Mr. and Mrs. Kabelu. At trial, Mr. and Mrs. Kabelu argued that the meeting held to vote on their resignations was not valid because they were not in attendance and as such, the board did not have quorum.

Overview of the Cases – Legal Analysis

Adams

The case was initiated by the President of the PEO, J. David Adams. He brought an application for judicial review of the decision of the governing council (the “Council”) of the PEO accepting the resignation of Dr. Michael Hogan. Mr. Adams requested that the Court quash the decision of the Council declare that Dr. Hogan continued to be a member of the Council. 4

The PEO was established by the Professional Engineers Act5. Its principal purpose is to regulate the engineering profession in Ontario. The corporate structure and governance of the PEO is determined by the PEO and the regulations6 enacted under it, which includes the composition of Council, the election of members of the Council by the members of the PEO, and rules relating to the enactment, amendment and repeal of by-laws.

The PEO did enact a By-Law No. 1 which set out the procedures relating to the affairs of the PEO, including the conduct of meetings of Council, and the requirement for adherence to Wainberg’s Society Meetings in respect of the procedures for its meetings.

None of the governing documents (the Professional Engineers Act, its regulations, and the By-Law No. 1) dealt with the questions of when a resignation of a member of Council becomes effective, whether or not such resignation must be accepted before it is effective, and whether or not a resignation can be rescinded or revoked. Therefore, the court had to review the common law on the issues.

The court reviewed corporate law statutes applicable to other types of corporations incorporated in Ontario, namely share capital corporations governed by the Business Corporations Act7 (“OBCA”), non-share capital corporations governed by the Corporations Act (Ontario)8 (“OCA”), and non-share capital corporations governed by the Not-for-Profit Corporations Act, 2010 “ONCA”). In addition, it reviewed various oft-quoted texts on the subject and case law dating back to 1907.

This review revealed that the OCA does not provide guidance for the court on this point as it contains no provisions dealing with the effective dates of resignations of directors, but both the OBCA and the ONCA do. Subsection 121(2) of the OBCA and subsection 25(2) of the ONCA are almost identical in their wording and state that the effective time of a resignation of a director is when it is received by the corporation or at the time specified in the resignation, whichever is later.

Further, the texts and older case law reviewed by the court support the position that a director’s resignation does not need to be accepted by the corporation in order to be effective, and when a director resigns, that director may not be returned to the board without first having been properly elected following the procedures set out in the statute governing the corporation and its by-laws.

The court dismissed the application. It said at paragraph 54 that

… when Dr. Hogan unequivocally resigned from Council his resignation was effective at the latest as of the date of the next annual general meeting. Furthermore, having delivered such an unequivocal resignation, he could not withdraw it without the consent of Council. While Council may have had a practice of accepting resignations, there was no need for them to do so. Thus, whatever irregularities may have occurred with respect to the motion surrounding the acceptance of Dr. Hogan's resignation do not matter. Dr. Hogan had effectively resigned from Council and Council was and is entitled to act on that resignation.

As for any irregularities with the way the vote was handled by Council, given the court’s decision that the approval of Council was not required, any irregularities in respect of the process and procedure were irrelevant.

The rationale for this position relates to limitation of liability for the director in question and certainty for the corporation in question.

Directors of non-share capital corporations have exposure to personal liability in certain circumstances, just like directors of for-profit corporations do. As such, it is important for an individual to be able point to a specific date upon which such exposure to liability ends, and similarly the corporation must be able to effectively operate. If a director were able to unilaterally rescind his or her resignation, then all decisions made by the board of directors in the interim could be called into question (i.e. lack of quorum, lack of notice of meetings, etc.) and any individual subsequently elected to fill the vacancy created by such resignation would be subject to uncertainty as to the validity of his or her election and participation in all decisions of the board. Further, this type of situation would create uncertainty for funders, investors, and other stakeholders of the corporation.

Kandolo

The case was initiated by the remaining directors of the Foundation, and the Foundation.

The Foundation was incorporated pursuant to Part II of the Canada Corporations Act10 (“CCA”). However, the CCA is silent in respect of the effective date of resignation of a director, as well as whether or not a director may unilaterally revoke or rescind his or her resignation. In addition, while the by-laws of the Foundation provided for the effective date for the resignation of a member of the Foundation, it did not provide for the effective date of the resignation of a director11.

The court reviewed Adams and followed the legal reasoning in that case and concluded that a resignation need not be accepted by the board before it is effective.

It also outlined an important distinction between Ontario and federal law in this regard. While the OBCA and the ONCA state that a resignation of a director is effective when it is received by the corporation, subsection 108(2) of the Canada Business Corporations Act12 and subsection 129(2) of the Canada not-for-profit Corporations Act13 (“CNCA”) state that the resignation of a director is effective when it is sent to the corporation.

The court stated at paragraph 51 that where the governing legislation (in this case the CCA) is silent in respect of the effective date of the resignation of a director, absent a specific term in the by-law to the contrary, the provisions of the OBCA and the CBCA in this regard provide guidance on the issue.

Finally, the court did address the argument raised by Mr. and Mrs. Kabelu that because they were not at meeting at which their resignations were accepted, that meeting lacked quorum and therefore the acceptance of their resignations invalid. The court said at para. 62 that

[i]f the Board's consent was required before the resignation of a Director became effective, I find that the remaining members of the Board could accept the resignations of the Directors, effective when the resignations were irrevocably sent to the Board. This would be consistent with the intention of the Director who has resigned. Requiring the Directors, who have given notice of their immediate resignation to attend a further meeting of the Board, to form a quorum to accept their own resignations, would not be consistent with the scheme and objects of the CCA, the By-law of the Foundation or the intention of the members and Directors who approved the By-law.

What is interesting in Kandolo is that the court did not appear to review the provisions of the CNCA, which is the successor legislation to the CCA. Subsection 129(2) of the CNCA is identical in its wording to subsection 108(2) of the CBCA. As such, given that the Foundation was governed by the CCA, and that it is required to continue under the CNCA on or before October 17, 2014, in my view, it would have been helpful to make reference to the CNCA as authority on the issue of the effective date of the resignation of a director of a federally-incorporated non-share capital corporation.

Conclusion

The law in respect of the questions outlined at the beginning of this article are fairly settled in Canada. The effective date of a director’s resignation of a non-share capital corporation incorporated in Ontario and Canada is set out clearly in the ONCA and the CNCA.

The authorities make it very clear that the resignation does not need to be accepted by the board of directors before it is effective, and once given, it cannot be taken back. In such a situation, the director in question will need to follow the proper process for election of a director.

It is advisable for directors of corporations (whether for profit or not-for-profit), to carefully consider the effect of his or her resignation. Once received by the corporation, or sent to the corporation, as the case may be, it is not an easy matter to undo.


1 2012 CarswellOnt 8109, 217 A.C.W.S. (3d) 582, 111 O.R. (3d) 334, 294 O.A.C. 2112012 ONSC 3850 (CanLII). View online at: http://canlii.ca/t/frvhg
2 2012 CarswellOnt 11024, 2012, ONCS 4420, 2012 ONSC 4420 (CanLII). View online at:  http://canlii.ca/t/fskxk
3 Note that the court in Kandolo also dealt with the issue of who “owns” a non-share capital corporation. A discussion of this aspect of the case is outside the scope of this article.
4It is interesting to note that the application was commenced by J. David Adams, the President of the PEO. By the time the application was hear, Mr. Adams’ term as President had ended and there was a question about whether or not he actually had standing in the matter. Dr. Hogan was only added as a party to the application, with his consent, in order to overcome this issue. This issue and the resulting complications it created in this situation are outside the scope of this article; however, the term of the directors and officers is an important consideration to make at the outset of any court proceeding, for the very reasons identified in this case. It would also be interesting to know if Dr. Hogan would have commenced court action on his own initiative.
5 R.S.O. 1990, c. P.28.
6 R.R.O. 1990, Reg. 941.
7 R.S.O. 1990, c. B.16.
8 R.S.O. 1990, c. C.38.
9 2010, c. 15 (not yet in force.)
10 R.S.C. 1970, c. C-32.
11 Supra, note 2, at para. 54.
12 R.S.C., 1985, c. C-44.
13 S.C. 2009, c.23.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

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