I address here in a general way the procedures available for a shareholder or group of shareholders seeking the assistance of the court to have an auditor or inspector appointed.
Financial Statements – None or Inaccurate
Shareholders in closely-held Ontario corporations sometimes have concerns about the accuracy of the financial statements when the company does not have an auditor.
Oppressive or Unfairly Prejudicial Conduct
In other cases, a shareholder in an Ontario corporation may consider that the corporation has been carried on, or the powers of the directors are, or have been, exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of the shareholder.
Corporation and Fraud
One or more shareholders may have concerns that the corporation’s business is, or has been, carried on with the intent to defraud, that the corporation was formed or dissolved for a fraudulent or unlawful purpose, or that a person concerned with the formation or business /affairs of the corporation have acted fraudulently or dishonestly.
Appointment of Auditors and Inspectors
Instead, I provide general information here about the provisions of the Business Corporations Act in force in Ontario, that provide aid to shareholders concerned about the events and conduct described above, whether in conjunction with an ongoing proceeding for an oppression and other remedies, or as preparatory steps.
Appointment of an Auditor
Under s140(2)(a) the BCA the corporation is required to prepare and maintain “adequate accounting records”. Though s 145 of the BCA provides a shareholder with access to inspect corporate records, it does not extend to accounting records. By s148 of the BCA corporations that are not an offering corporation and where all shareholders consent to an exemption for appointment of an auditor, no auditor need be appointed. Otherwise, shareholders may, under various provisions and requirements of s149 of the BCA, appoint or remove an auditor (except a court-appointed arbitrator) at the first meeting of shareholders, special meetings or each annual meeting).
By s149(8) of the BCA, if a corporation does not have an auditor, the court may, upon the application of a shareholder or Director, appoint and fix the remuneration of an auditor to hold office until an auditor is appointed by the shareholders. Conversely, under s151(6) and s152(4) of the BCA any interested person can apply to the court for an order declaring that the auditor to be disqualified and the office of auditor vacant.
I do not describe here the other provisions of the BCA concerning auditors, auditor’s report and financial statements.
In a small or closely held corporation, the demand to appoint an auditor, followed by an application to court, may provide considerable powers of investigation, However, there may be facts and circumstances that where a court may decline the court-ordered appointment of an auditor if it would be of limited benefit and great expense.
Appointment of an Inspector
The court may order an investigation to be made of the corporation or its affiliates on the application of a shareholder, without notice, or with the notice the court requires. Special rules apply to an offering corporation. If the application is made without notice, the hearing is closed to the public and there is a publication ban.
An investigation may be ordered under s162(2) of the BCA where it appears to the court that:
(a) the business of the corporation or any of its affiliates is or has been carried on with intent to defraud any person;
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of a security holder;
(c) the corporation or any of its affiliates was formed for a fraudulent or unlawful purpose or is to be dissolved for a fraudulent or unlawful purpose; or
(d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in connection therewith acted fraudulently or dishonestly.
Order the Court Thinks Fit
In connection with an investigation, by s162(1) of the BCA, the court may make any order it thinks fit including, without limiting the generality of the foregoing:
(a) an order to investigate;
(b) an order appointing and fixing the remuneration of an inspector or replacing an inspector;
(c) an order determining the notice to be given to any interested person, or dispensing with notice to any person;
(d) an order authorizing an inspector to enter any premises in which the court is satisfied there might be relevant information, and to examine anything and make copies of any document or record found on the premises;
(e) an order requiring any person to produce documents or records to the inspector;
(f) an order authorizing an inspector to conduct a hearing, administer oaths and examine any person upon oath, and prescribing rules for the conduct of the hearing;
(g) an order requiring any person to attend a hearing conducted by an inspector and to give evidence upon oath;
(h) an order giving directions to an inspector or any interested person on any matter arising in the investigation;
(i) an order requiring an inspector to make an interim or final report to the court;(j) an order determining whether a report of an inspector should be made available for public inspection and ordering that copies be sent to any person the court designates;
(k) an order requiring an inspector to discontinue an investigation; and
(l) an order requiring the corporation to pay the costs of the investigation.
Other sections of the BCA address the the Inspector’s Report, Powers of Inspectors, Rights at Hearings, Right to Counsel, Privilege, and other matters
This is a very powerful remedy, and bringing an application for an inspection requires the potential applicant to obtain legal advice and representation.
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