Legal Blog

Audit

We often encounter situations in which the shareholders of a closely held corporation do not prepare any annual minutes, never have the financial statements audited, and never obtain waivers of the audit requirement from all shareholders. They just let things drift. This is all right – until it is not – and the shareholders disagree on other matters.

Often, one shareholder has all of the information and power and the other claims oppression. The first thing we do, when acting for the disgruntled shareholder, is to demand an audit of the corporation’s financials for the years for which the corporation had no audit and no waiver of the audit requirements. Yes, this is expensive, but it is necessary for a minority shareholder to understand what is happening with the corporation and it is salutary for the majority shareholder to realise that he or she will be paying the brunt of the costs for it.

The real question is how far back the audits must go. This was answered in Lagana v. 2324965 Ontario Inc., 2022 ONSC 7286.

Statute

Sections 149 to 154 of the Ontario Business Corporations Act require the shareholders of a corporation to appoint an auditor, but allow the shareholders of a closely held corporation to waive that requirement, in writing, for a particular fiscal year. Section 253(1) of the Act allows a shareholder to apply to the court to direct the corporation or any relevant person to comply with the provisions of the Act.

In Lagana, the minority shareholder commenced an application for audited statements; the majority shareholder argued that, because the minority shareholder had not requested the audit previously, he was estopped from requesting one now and, in any case, the request was barred by the Limitations Act after two years.

The judge disagreed with each contention. The Act creates a corporate duty; a corporation has to comply with it. Further the Limitation Act applies to stop stale-dated claims from being brought to remedy a loss or injury. The application was not such a “claim.” It was merely a demand for the corporation to comply with the Act.

The judge granted the remedy claimed, but recognised that, if, as it claimed, the corporation had deleted records for periods older than six years, the auditor might be limited in its ability to audit the statements for those years.

Image courtesy of 777546.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.