August 21, 2023

By Mark Mikulasik

If you control a small to medium-sized closely held private corporation and keep your corporate records up to date through annual minutes, declaration of dividends, waiver of audit requirements, and all required special resolutions, congratulations.

THE ISSUE

Unfortunately, at Weilers LLP, we are often retained by corporate clients to carry out a transaction, only to discover that their minutes are years or sometimes even decades out of date. Whether a sale of the business, a loan, or other major transaction, the party on the other side often requires that the minute books be updated.

A full reconstruction going back years can be difficult and, therefore, expensive. It may be particularly difficult or even impossible to locate former officers, directors, and shareholders to sign documents. Sometimes, we can use a set of verifying resolutions that retroactively approve prior events in corporate life, but this is not always acceptable to other parties.

And what if one shareholder officer or director refuses to sign the required documents? For instance, what if a son inherits shares in your corporation from your deceased “partner”, who never requested audited statements, but also never signed the required annual waivers?

That may be a more difficult and even more expensive proposition.

THE CASE

This makes the result in Lagana v. 2324965 Ontario Inc. et al. noteworthy. That case involved a small, closely held corporation which had not provided audited statements since 2013. In 2022, the new shareholder (son of the deceased shareholder) applied to the Superior Court for an order appointing an auditor and the preparation of audited statements back to 2013.

The controlling director objected, arguing that:

• The request could only go back at most two years due to the Limitations Act, and
• the shareholder’s agreement did not require audited statements.
• There were technical difficulties that might have prevented a proper audit.

The judge rejected these arguments and a few others that were less significant. They determined that because section 148 of the Ontario Business Corporations Act requires a signed waiver of audit requirements, nothing less than full compliance is permitted.

As to the two-year limit, the judge determined that a requirement to comply with the audit requirements is not a “claim” under the Limitations Act and, therefore, is not limited to two years.

The result was an order for audited statements back to 2013.

TAKEAWAYS

• If you want the benefits of incorporation, you must be prepared to bear the costs;
• Those costs really ought to include proper annual minutes, audit waivers and other required documents.
• You may try a “do it yourself” approach -we have a few sophisticated clients who manage this just fine- but the cost for the peace of mind in having your lawyer prepare the documents is small compared to what you can do with your focus on making money in your business.
• NOT keeping records up to date may jeopardize the sale of the business or assets or financing.
• The cost of recreating records retroactively, if that is even possible, is more than doing it right in the first place.
• Corporate records are not a good thing to spend dollars on to go to court.

WHAT WEILERS LLP CAN DO FOR YOU

Weilers LLP has a corporate team which, in addition to being trusted advisors and deal makers, is equipped to provide corporate record services at predictable and manageable costs to give you peace of mind. Whether you are already a client or were incorporated elsewhere, feel free to contact us to see if we are the right fit for you.