The Ontario Business Corporations Act (OBCA) imposes various requirements on corporations regarding their financial statements. The question recently came before the Court of Appeal of whether or not one of those obligations is subject to a limitation period set out in the Limitations Act, 2002. The case provides helpful guidance not only on the issue of limitation periods in the context of the OBCA, but also on the general legal nature of some of the obligations found in that statute.
The appellant in Lagana v. 2324965 Ontario Inc. was a shareholder in a numbered real estate development company. The company had been incorporated by his father along with the respondent. When the appellant’s father passed away, the respondent became the company’s sole director, and the appellant acquired the shares owned by his father. The appellant wanted to review the company’s financial records in 2021, and the respondent provided him with some unaudited financial statements. However, the appellant was not satisfied with this and sought a court order for the production of audited statements going back to 2013.
The Divisional Court concluded that the Limitations Act, 2002 applied to the demand for production of audited financial statements, and therefore that Court refused the request to demand production of the statements. It was this issue that came before the Court of Appeal.
Part XII of the Ontario Business Corporations Act deals with auditors and financial statements. Generally speaking, shareholders have an obligation to appoint an auditor for a company, failing which the company’s directors must do so (see section 149(1)). If a corporation does not have an auditor, a shareholder can bring an application for a court to make that appointment (see section 149(8)). It should be noted as well, however, that shareholders can exempt their non-offering corporation from the requirement to appoint an auditor if they all consent in writing to doing so (see section 148).
Section 154 of the OBCA requires that directors provide financial statements and the report of any auditor at each annual meeting of shareholders. Section 155 says that such statements shall be prepared in accordance with regulations passed pursuant to the statute. Section 40(1) of those Regulations requires that financial statements “be prepared in accordance with the standards, as they exist from time to time, outlined in the Handbook of the Canadian Institute of Chartered Accountants.” Again, shareholders may exempt the corporation from these requirements in the manner set out in section 148.
What if there is non-compliance with these provisions of the OBCA? Section 253 of the statute provides a remedy. Generally speaking, under that provision, where there is non-compliance, “a complainant or a creditor of the corporation” can apply to the court for an order requiring compliance. The word “complainant” is broadly defined to mean shareholders, directors, officers, and “any other person who, in the discretion of the court, is a proper person to make an application” (see section 245).
It was under this section that the appellant in Lagana sought an order requiring the production of audited financial statements.
The general limitation period found in section 4 of the Limitations Act, 2002 says that “a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.”
The word “claim” is defined in section 1 as “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission.”
Therefore, the question is whether the statutory obligation to produce financial audited statements found in the OBCA constitutes a “claim” under the Limitations Act, 2002.
In Lagana, the appellant argued that the obligation was statutory and did not relate to rights held by any individuals. In comparison, the purpose of the oppression remedy is to provide an individual remedy. The appellant argued that section 253 simply “corrects a breach of the legislation and brings the corporation into compliance with it, but it does nothing else.” No “legal right” exists under that section that could ground a “claim” under the Limitations Act, 2002.
In support of its argument, the appellant cited Jeffrey v. London Life Insurance Company, in which the Court of Appeal distinguished among three types of remedies found in the OBCA: derivative actions, oppression remedies, and compliance. In that case, the Court noted that the purpose of a compliance order was to “ensure corporate compliance and not to provide an individual fix.” However, the Court of Appeal in Lagana distinguished that case and observed that what the Court spoke of in Jeffrey was the difference “in the nature of the relief sought, not the party to whom the remedy is granted.”
The Court of Appeal in Lagana went on to note that legal rights are usually characterized using three terms: “(1) the rights-holder; (2) the person under a duty to the rights-holder; and (3) the thing to be done (or not done) by the duty bearer for the benefit of the rights-holder.” The Court noted that the appellant’s argument characterized a compliance order as a “two-term duty” without a rights-holder. This was incorrect. The Court stated that the obligation under the statute is not “free-floating” but is an obligation “that correlates to a right of the shareholders.” In other words, in the case before it, the obligation to provide audited financial statements was an obligation “to the shareholders.”
According to the Court, this right of the shareholders is the basis for the “claim” they could bring against the company and its directors. As such, it is properly characterized as a “claim” that is subject to the limitation period set out in the Limitations Act, 2002.
The Court also referenced the practical need for such a finding. It indicated it would be “highly prejudicial to the respondents (and perhaps impossible) to now prepare audited financial statements reaching back 13 years.” The appeal was therefore dismissed.
If you have questions about your rights or obligations under the Ontario Business Corporations Act or need advice regarding shareholder remedies and limitation periods, contact Milosevic & Associates. Our dynamic commercial litigation lawyers can help you understand your options and protect your interests in any corporate compliance or shareholder dispute. To book a consultation, please call us at (416) 916-1387 or contact us online.
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