We are often asked what can be done about a rogue director or about a director who acts unethically. This question sometimes comes from other directors and often from dissatisfied owners. The traditional way of removing a director is either to get elected in his/her place at the end of his/her term or to have the director removed at an owner’s meeting duly called for that purpose. At the end of the day, the exercise of democracy is the best way to have your voice heard and to get involved in the governance of your condominium corporation. Still, boards can force the removal of a director prior to the end of the term if it is shown that the director has breached the corporation’s code of ethics – provided that the corporation has a by-law allowing this.
Indeed, the Ontario Court of Appeal confirmed that a by-law allowing for the disqualification of a condominium director is reasonable and that it does not offend the democratic principles of governance enshrined in the Condominium Act.
Facts of the Case
In the Gordon v. YRCC No. 818 case, a condominium board of directors disqualified one of its directors for having repeatedly violated the Directors’ Code of Ethics. The corporation had a by-law in place allowing for such disqualification. Unsurprisingly, the disqualified director contested this in court. The application judge (hearing the first instance) concluded that the process followed by the corporation violated the principles of natural justice and of procedural fairness. Among other things, the removed director was not given reasonable notice of the ethical review. Still, while the process followed by the corporation was flawed, the judge refused to reinstate the director. Instead, the judge ordered the corporation to conduct another fresh ethics review of the director. Such a new ethics review was conducted and the corporation maintained it decision to disqualify the director.
Before the Court of Appeal, the disqualified director argued that the by-law allowing for his disqualification was unreasonable and that it was inconsistent with the democratic principles of condominium governance. He argued that an elected director cannot be removed by the other directors. The director also contested the first judge’s decision not to reinstate him.
The Court of Appeal concluded that a by-law providing for the qualification, resignation and removal of directors was valid under section 56(1) of the Act. It concluded that the ethical review process contemplated in this by-law was reasonable and that it respected the democratic principles of governance (such by-law having been voted in by the majority of owners). The Court of Appeal also concluded that the matter was now moot since the directors’ terms had expired by the time the matter was heard and since this director was permitted to run again for election. Finally, the Court of Appeal concluded that the application judge’s decision not to reinstate the director but to, instead, order a new ethic review was “fair and equitable” in the circumstances.
It is a good idea to have all of your directors sign a code of ethics and pass a well-written by-law allowing for the disqualification of directors having breached it. It is paramount, however, that the by-law provide for a fair process when conducting an ethical review. Such a by-law may allow for the proper and discrete disqualification of a director without forcing the remaining directors to call an owners meeting, which may result in the disclosure of information which would otherwise be confidential.
We have assisted many corporations in adopting a code of ethics and by-laws enforcing them. More importantly, we have also assisted corporations to get back on the road of functionality.