Legal Blog

Dead

Corporations serve a wonderful function. They allow a number of people to engage in business under a defined set of rules and to obtain possible limited liability and tax benefits. However, many people with small privately owned corporations take their corporations for granted. This can create problems, one example of which was illustrated in Cornerstone Estates Ltd. v. Polaris Restorations Inc., a 2001 Ontario Superior Court of Justice decision.

Dissolution

In the 1990s, many corporations were dissolved for failure to file a special corporate notice updating their corporate information and to pay a small fee for doing so. Additionally, the income tax branch of the Province of Ontario has always had the ability to dissolve corporations for failure to pay corporate income tax.

A corporation has an existence only because of the statute under which it is incorporated. Once the corporation is dissolved, it has no existence. It dies upon dissolution.

Unlike a human, a corporation may be brought back to life. For example, the corporation’s directors can file the special corporate notice and pay the filing fee or may pay the taxes owing. The corporation can then obtain articles of revival by which its existence is re-instated.

Rights Lost

In the Cornerstone case, a contractor registered a claim for lien and, ultimately, commenced an action to preserve that claim for lien. Unfortunately, at the time that the contractor registered its claim, it had been dissolved. The reasons for decision did not say why. The contractor then obtained articles of revival. The issue was whether the articles of revival were able to regularise the lien action that had been commenced when the corporation was legally dead.

The trial judge correctly held, based on a number of Court of Appeal cases, that the re-instatement of a corporation’s existence is effective retroactively unless the retroactive effect of the re-instatement would adversely affect the rights of others.

Once the contractor was dissolved, it could not register the claim for lien or commence its action. Just as dead people cannot register claims for lien, dead corporations cannot do so either. If the contractor were allowed retroactive existence, the owner would be prejudiced. Accordingly, the judge held that the lien was invalid.

Upshot

The judge easily disposed of the lien and ordered the return of the security that the owner had previously filed to vacate the lien from title. However, the state of the action was more problematic. There was no reason why the action was not valid. The owner could only claim lien limitations. The usual 6-year contractual limitation period had not yet passed.

The judge had the discretion either to dismiss the action and force the contractor to commence a new action or to allow the action to continue. The judge chose the latter alternative and directed that the contractor be allowed to continue the action under the usual rules of civil procedure rather than the truncated rules under the Construction Lien Act.

Nonsense

The judge ordered that the contractor pay for the costs of the owner’s motion to discharge the lien but only if the owner were successful in the action. The judge made no order for the contractor to reimburse the owner for its costs of posting security and vacating the claim for lien. Accordingly, a dead contractor registers a claim for lien, forces an owner to vacate it, forces the owner to subsequently move to have the security returned, and does not have to immediately pay the costs that the owner incurs. This, we suggest, is absurd. It allows for the improper registration of liens without sanction. Fortunately, costs are a discretionary matter and we doubt that this aspect of the decision will be followed by any other judge with a modicum of a sense of fair play.