The Case of the Missing Records – Part 4

November 29, 2012

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.

Previous Ratification

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.

No By-law

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 some
provincial corporate statutes, such as the Ontario Corporations Act, provide for the forfeiture of the charter or
powers of the corporation if it does not use those powers for a certain period
of time (three years, in the case of the Canada
Corporations Act
).  In some cases, forfeiture
is automatic, while in others advance notice from and an order of the
provincial government is required before the forfeiture takes effect. In most
cases, provision is made for reinstatement. 
The new Canada Not-for-Profit
Corporations Act,
for example, provides explicitly for the revival of
corporations that have been dissolved under the predecessor Canada Corporations Act.  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.

Final Comment

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. Members of the Miller Thomson
Charities and Not-for-Profit Group are always ready to provide assistance with
particular issues and problems.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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