- The Case of the Missing Records - Part 4
- December 4, 2012 | Author: Hugh M. Kelly
- Law Firm: Miller Thomson LLP - Toronto Office
This is the last in a series of articles about how to deal with deficiencies in corporate records.
Part 1 addressed the importance of conducting searches of the available records and evidence of past corporate actions and decisions. Part 2 looked generally at the process of reconstruction, rectification and ratification by which some of the gaps in the records can be filled. Part 3 addressed the particular issues that arise when a corporation has failed to maintain its membership list or has failed to elect directors properly.
This final Part will review three other issues that sometimes arise in this context:
what if the corporation has not held annual meetings or filed corporate returns?
what if the corporation has not passed Bylaws?
what if the corporation has never been organized?
What if the corporation has not held annual meetings or filed corporate returns?
Corporations are required to hold annual general meetings of the members each year, at which directors are elected, auditors are appointed and financial statements are received. Corporations are also required to file annual corporate returns following the annual meetings, confirming basic information about the corporation and its directors.
Where a corporation has not conducted these meetings or filed the necessary returns, there is only one answer to each of these problems: hold a meeting, and file the returns.
The directors need to arrange for the preparation of financial statements and any other required reports, prepare and give notice of the meeting, then hold the annual meeting as soon as possible. The directors should also be prepared for criticism from the members for the failure to hold the meeting at the proper time.
If there has been a default in filing required corporate returns (including relevant tax returns), then the solution is to prepare and file the returns as soon as possible. So long as these returns remain unfiled, the corporation is liable to consequences under the relevant corporate or tax statute.
What if the corporation has never passed a By-law or has not followed it in many years?
A by-law is a written code of internal procedures for how the operations of a corporation are to be conducted. Corporate legislation generally requires that a by?law be formally adopted with certain procedural steps: enactment by the governors (the board of directors) and approval by the governed (the members). Having said this, the “by-law” should not be attributed with greater significance that in fact it does possess. The absence of a formally passed by-law is not a fatal flaw that impairs the existence of corporation or prohibits it from acting.
Process Consistently Used
A consistent practice over time - the regular election of officers/directors (by whatever titles), the uniform process for holding meetings, the common custom for making financial and other commitments, and the like - can be the functional equivalent of an operational by-law, even though there is no articulated code prescribing procedures. Sometimes this process may have been objectively appropriate, sometimes the process may not be “fair”, or sometimes not in accordance with legislated requirements.
Ratification of directors’ actions during the previous years (a quite common occurrence) can operate as an estoppel or waiver that would make further remedial action unnecessary, and serve to overcome the defects due to a lack of a procedural by-law, or the departure from the process prescribed in an existing by-law. On the other hand, such omnibus non-specific blanket ratifications are suspect, and there could be some question as to their validity. So perhaps it would be wiser once again to undertake a review of records to individually identify actions taken, and expressly ratify at a meeting called and held in accordance with the by-law requirements, using generally the process described in Part 2 of this series.
In a case in which no operational or procedural by-law has ever been adopted, and there has been no consistent practice, the remediation should start with the development and enactment of a proper procedural by-law. And once again, the process described above in Part 2 could be used to ensure that individual previous actions are formally endorsed and included in the corporate records.
What to do when the corporation has never been organized?
“Organization” in the corporate sense describes the process undertaken, usually shortly after incorporation, to establish the basic elements necessary to function as a corporation. It typically includes appointing members, electing first directors, passing bylaws, and attending to other basic matters like fixing corporate signing authority for bank accounts.
Failure to organize usually occurs in two possible situations:
first, the corporation has not used its corporate powers, for a period of time, or perhaps ever; and
second, the corporation has simply not taken the initial corporate steps required to get up and running.
Non-Use of Corporate Powers
Both the Canada Corporations Act and the Ontario Corporations Act provide for the forfeiture of the charter or powers of the corporation if it does not use those powers for three or two years respectively. Under the Canada Corporations Act, the forfeiture is automatic, but under the Ontario Corporations Act, advance notice from and an order of the Lieutenant Governor is required before the forfeiture takes effect. In both cases, provision is made for reinstatement on such conditions as may be prescribed by, respectively, the Minister of Industry and the Lieutenant Governor. Corporations faced with forfeiture of charter should consult qualified counsel to assist in reinstating corporate status.
No Initial Corporate Steps
This situation is generally similar to that in which there is no organizational by-law. The remedial action here would follow generally the process described above in Part 2, taking and recording such steps as may be necessary to get organized. While the result is less desirable than attending to the organizational matters soon after incorporation, the adage “better late than never” generally applies.
It is hoped that this series will provide some guidance for organizations that have not been, in the maintenance of their records, as diligent as might be most desirable.