There is a long list of procedural requirements that any director and shareholder must be aware of with respect to the administration of a corporation, such as the requirement to appoint and carry out audits of a corporation’s financial statements. It is a statutory mandate in Ontario, and in a recent case before the Superior Court of Justice, this requirement was the subject of a dispute between equal shareholders of a house-flipping business. In this matter, the Court considered whether exemptions applied and whether there were limitations issues for the appointment of an auditor.
Statutory Audit Requirements Under the Ontario Business Corporations Act
The statutory audit requirements for a corporation in Ontario are established under the Ontario Business Corporations Act and various accounting and auditing standards. Sections 149-154 of the Ontario Business Corporations Act require a corporation to appoint an independent auditor of the corporation on an annual basis. However, section 148 allows the corporation to be exempt from these requirements if the corporation is a “non-offering” corporation and all shareholders consent to exemption for that reporting year. A non-offering corporation does not issue or offer its securities (such as stocks or bonds) to the general public or external investors.
In the case that a shareholder has not exempted the corporation from appointing an auditor, section 253(1) of the Ontario Business Corporations Act can enable a shareholder to “apply to the court for an order directing the corporation or any person to comply with, or restraining the corporation or any person from acting in breach of, any provisions thereof, and upon such application the court may so order and make further order it thinks fit.”
Applicant Requests Audit of Financial Statements from Incorporation
In the decision of Lagana v. 2324965 Ontario Inc., a shareholder brought an application under section 253(1) to compel a corporation to comply with the Ontario Business Corporations Act by appointing an auditor and providing audited financial statements.
In April 2012, Carmela Lagana Sr., the applicant’s father, and David Power, the respondent, incorporated 2324965 Ontario Inc., for the purpose of flipping houses. They also entered a shareholder agreement and were equal shareholders. Not long after this, Carmela Lagana Sr. died and the shares passed on to his wife.
Carmelo Lagana, the applicant, subsequently purchased the shares. The applicant entered into an agreement with the respondent and the corporation agreeing to be bound by the terms of the original shareholder’s agreement, which did not include any provisions regarding the appointment of an auditor.
Respondent Claims that Request for Auditor is Statute-Barred
Between 2013 to 2020, multiple properties were purchased and sold through the corporation. The division of labour was such that the applicant was responsible for the substantive house-flipping work, while the respondent was responsible for the corporation’s finances. As such, the applicant started to request financial information around 2019. None were provided, except for the 2021 fiscal year, in which the respondent claims to have provided some financial statements.
The respondent agreed that the corporation was required to produce financial statements and appoint an auditor but assumed that these obligations only begin in the fiscal year 2020. Primarily, the respondent argued that the applicant was estopped from requesting an auditor as they had not made the request before, and further, the request is statute-barred for the fiscal years before 2020 due to the operation of the Limitations Act.
The applicant argued that an auditor must be appointed to audit financial statements dating back to 2013 because the corporation is statutorily required to appoint an auditor unless the shareholders consent to non-appointment for that fiscal year.
Court Orders Appointment of Auditor
The Court ordered the corporation to comply with the Ontario Business Corporations Act and indicated that an auditor must be appointed and audited financial statements must be produced from 2013 onwards.
In its analysis, the Court first considered the exemption and estoppel argument. In doing so, the Court relied on various case law, notably Packall Packaging Inc. v. Ciszewski, and Barbour v. Jamestown Lumber Co., to reiterate the principle that a shareholder’s right to information is a “mandatory right” and it is not necessary to exercise any right under the Ontario Business Corporations Act. The Court also disagreed with the respondents on the submission that the Court had the discretion to exempt compliance with the Ontario Business Corporations Act, noting that the case law used to support this argument was determined in the context of oppression, which was irrelevant to this case.
Moving on to the limitations argument, the Court also disagreed with the respondents. The Court considered Middlesex Standard Condominium Corp. No. 643 v. Prosperity Homes Ltd., which dealt with the issue of whether a statutory entitlement under the Condominium Act could constitute a “claim” under the Limitations Act. In that case, the Court found that it was not a claim as no remedy was sought in the traditional sense; it was a requirement under the respective legislation. Therefore, in this case, the Court found that compliance with the Ontario Business Corporations Act is not a “claim”; it is an entitlement, and no broader relief was sought, so the application is not statute-barred.
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