COURT FILE NO.: CV-22-88673
DATE: 2022/12/23
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Carmelo Lagana, Applicant
AND
2324965 Ontario Inc. and David Power, Respondents
BEFORE: Muszynski J.
COUNSEL: Margot Pomerleau, for the Applicant
J.F. Lalonde, for the Respondents
HEARD: August 26, 2022
reasons for decision on application to appoint auditor / production of AUDITED financial statements pursuant to the [OBCA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-b16/latest/rso-1990-c-b16.html)
[1] This application was brought by Carmelo Lagana, a shareholder[^1] of 2324965 Ontario Inc. (the “Corporation”), to compel the Corporation to produce financial statements and appoint an auditor pursuant to ss. 140, 149, and 253 of the Business Corporations Act, R.S.O. 1990, c. B 16 (the “OBCA”).
[2] The respondents agree to produce financial statements, appoint an auditor, and on the remuneration for the auditor, but disagree as to the scope of the audits.
[3] The issue on this application is therefore limited to determining the fiscal years for which audits will be conducted.
POSITIONS OF THE PARTIES
[4] The applicant submits that an auditor should be appointed and audited financial statements produced for fiscal years 2013 to present. Specifically, the applicant takes the position that the Corporation is statutorily required to appoint an auditor unless there is consent in writing from all the shareholders to exempt the corporation from the requirement. In this case, there is no consent in writing to such an exemption.
[5] The respondents take the position that an auditor should be appointed and audited financial statements produced only for fiscal years 2020 to present because:
a. A request for an appointment of an auditor has never previously been made and therefore the applicant is estopped from requesting one now;
b. The applicable shareholders agreements do not contain a requirement providing for the appointment of an auditor;
c. The request for audits prior to 2020 is statute barred by virtue of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B (the “Limitations Act”); and
d. Since the OBCA only requires retention of records for six years, it is possible that financial statements required for the earlier audits are no longer available.
FACTUAL BACKGROUND
[6] The applicant’s father, Carmelo Lagana Sr., and the respondent, David Power, started a house flipping business and became equal shareholders when they incorporated the business in or about April 19, 2012. On the same day, a Shareholders Agreement was signed by Carmelo Lagana Sr., David Power, and the Corporation. The Shareholders Agreement references using a specific accountant but is silent with respect to the appointment of an auditor for the Corporation.
[7] Carmelo Lagana Sr. died on August 4, 2012. His wife, Concetta Lagana, inherited his shares in the Corporation at that time. At some point thereafter, the applicant purchased his mother’s shares in the Corporation. On April 29, 2013, the applicant, Mr. Power, and the Corporation entered into an Agreement confirming that the applicant agrees to be bound by the terms of the original Shareholders Agreement. Again, there is no reference to the appointment of an auditor for the Corporation in this subsequent Agreement.
[8] The applicant alleges that he was responsible for the renovation side of the flips and that Mr. Power was responsible for the finances in keeping with the traditional roles that Carmelo Lagana Sr. and Mr. Power held within the Corporation.
[9] Between the years 2013 and 2020, the Corporation purchased and later sold multiple investment properties.
[10] The applicant claims that he started requesting information about the Corporation’s finances from Mr. Power in or around 2019. There is no dispute that Mr. Power is the sole director of the Corporation. The applicant alleges that Mr. Power rebuffed or ignored his initial requests.
[11] Mr. Power claims that the first request for financial disclosure from the applicant occurred in or around January 2021, which was the first time the applicant had exhibited any interest in the Corporation or its financial wellbeing since 2013. Mr. Power alleges that he produced some financial statements to the applicant, agreed to produce others, and offered to meet with the applicant to show him the state of the Corporation’s finances.
[12] The parties retained lawyers. The notice of application was issued on February 28, 2022. The parties continued to negotiate through their counsel leading up to the hearing. As noted previously, the sole issue before me is determining the fiscal years for which audits will be conducted.
THE LAW / ANALYSIS
[13] This application is brought pursuant to s. 253(1) of the OBCA that provides that a shareholder of a corporation may “apply to the court for an order directing the corporation or any person to comply with, or restraining the corporation or any person from acting in breach of, any provisions thereof, and upon such application the court may so order and make any further orders it thinks fit.”
[14] The OBCA requires shareholders of a corporation to appoint an auditor to report on corporate finances on an annual basis: see OBCA, at ss. 149 – 154.
Exemption from OBCA Requirements / Estoppel / Waiver
[15] A corporation may be exempt from the requirement to appoint, and the duties associated with, an auditor if the corporation is not an offering corporation and all of the shareholders consent in writing to the exemption in respect of that year: see OBCA, at s. 148.
[16] The Corporation is not an offering corporation. Further, consent in writing by the shareholders to exempt the Corporation from appointing an auditor in any year has never been provided.
[17] In Packall Packaging Inc. v. Ciszewski, 2016 ONCA 6, 344 O.A.C. 180, at para. 28, referring to Labatt Brewing Co. v. Trilon Holdings Inc. (1998), 1998 CanLII 14697 (ON SC), 41 O.R. (3d) 384 (Gen. Div.), the Court of Appeal for Ontario confirmed:
A shareholder’s right to information or material, including audited financial statements, as granted to her under the OBCA is a clear, mandatory right, and it is not necessary for a shareholder to give any reason in exercising her directly held rights under the OBCA.
[18] The court in Packall goes on to write that the decision to exempt a corporation from the requirement of the appointment of an auditor rests solely with the corporation and, at para. 30, that: “Section 148 of the OBCA does not authorize a court to exempt a corporation from complying with the mandatory requirement to provide shareholders with annual audited statements.”
[19] The respondents rely on an oppression remedy case decided by the Newfoundland and Labrador Supreme Court, Bardour v. Jamestown Lumer Co. et al., 2008 NLTD 21, 51 B.L.R. (4th) 144. In Bardour, the court emphasized the importance of a shareholder’s right to audited financial statements but only ordered that they be completed for the most recent fiscal year. The court restricted the order to the most recent fiscal year because the applicant had not made a specific request for prior years, and the recent statements would allow the applicant to obtain a current valuation of his shares, which was his objective in the first place. In Bardour, the court’s focus was on rectification in the context of a finding of oppression. There was no discussion of estoppel.
[20] The respondents submit that Bardour stands for the principle that courts have a discretion to reject unreasonable requests for the production of audited financial statements going back a number of years. They argue that, accordingly, I have discretion to deny the applicant’s request for audited financial statements dating back to 2013 and that I should exercise that discretion in this case. I disagree.
[21] Packall is, of course binding on me, whereas Bardour is of limited assistance to the respondents’ submission that since the applicant never requested audited financial statements previously that he is now estopped from doing so, or that he implicitly waived compliance with the OBCA. Bardour did not even address the role that estoppel might play.
[22] The respondents submit that I should consider the significant cost to the Corporation of appointing an auditor to prepare financial statements dating back to 2013. Although cost is a practical consideration that the applicant may well want to consider, I reject the respondents’ submission that, in the context of this application, I have the discretion to exempt the Corporation from compliance with its obligation to provide annual audited financial statements.
Shareholders Agreement / Subsequent Agreement
[23] Neither the Shareholders Agreement nor the subsequent Agreement mention the appointment of an auditor. This fact is not material to my analysis, nor do I find that it exempts the Corporation from the annual reporting obligations set out in the relevant provisions of the OBCA.
Limitation Period
[24] In support of the position that the applicant’s request for audited financial records prior to 2019 is statute barred by virtue of the Limitations Act, the respondents rely on Cormpilas v. 1490565 Ontario Limited, 2022 ONSC 119, 73 E.T.R. (4th) 229. Cormpilas is an oppression remedy case. The request for audited financial statements arose in that context and to that extent, differs from this case, where an oppression remedy claim was not advanced.
[25] The Limitation Act, at s. 4, provides 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.” A “claim” is defined, at s. 1, as: “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission.”
[26] The case of Middlesex Standard Condominium Corporation No. 643 v. Prosperity Homes Ltd., 2014 ONSC 1406, 119 O.R. (3d) 177, considers whether a similar statutory based request, albeit in the context of the Condominium Act, 1998, S.O. 1998, c. 19, is statute barred by virtue of the Limitations Act. In Middlesex, the applicant sought an order from the court requiring the respondent condominium corporation hold a meeting of owners to elect a new board of directors. Goodman J. held, at para. 39, that the applicant’s request for a meeting under s. 152(6) of the Condominium Act:
…is not a “claim” in the legal sense as defined under the Limitations Act, 2002, despite the intended broad interpretation of s. 1. It cannot reasonably be said that Propensity’s request, to which it is entitled, is a proceeding in respect of a claim to remedy an injury, loss or damage that occurred as a result of an act or omission. There is no remedy being sought against another person in the traditional sense, despite the larger adversarial relationship between the parties.
[27] This application is based on the applicant’s statutory entitlement under the OBCA as a shareholder of the Corporation: there is no broader relief sought. I find that the applicant’s request for compliance with the OBCA is not a “claim” as defined by the Limitations Act and consequently that the request for audited financial statements prior to 2019 is not statute barred.
Availability of Records
[28] The respondents submit that since the OBCA only requires corporations to retain records for six years, the information required to produce audited financial statements for earlier years may no longer be available.
[29] The applicant seeks production of financial information that exists to allow an auditor to prepare financial statements for the fiscal years 2013 to present. I find there is a recognition by the applicant that the Corporation may not have retained records older than six years and therefore may be limited in what can be produced for the purpose of preparing audited financial statements.
CONCLUSION
[30] The parties have largely agreed to the terms of an order, aside from the period of time for which the audited financial statements will be produced. For the reasons set out above, I find it is appropriate to order the Corporation to comply with the OBCA requirements and produce audited financial statements for the years 2013 to present, unless there is consent in writing to an exemption in accordance with s. 148.
[31] Accordingly, an order shall issue as follows:
THIS COURT ORDERS that, pursuant to s. 253(1) of the Business Corporations Act, R.S.O. 1990, c. B 16, the respondents 2324965 Ontario Inc. and David Power shall comply with s. 140 of the Business Corporations Act to the extent the records exist and are available to the respondents.
THIS COURT ORDERS that Peter Barry of Welch LLP be appointed as the auditor of 2324965 Ontario Inc. (the “Auditor”) pursuant to s. 149(8) of the Business Corporations Act.
THIS COURT ORDERS that the remuneration of the Auditor be fixed pursuant to s. 149(8) of the Business Corporations Act, as follows:
Partner - $300/hr
Senior Auditor - $195/hr
Staff Accountant - $120/hr
which remuneration shall be paid by 2324965 Ontario Inc.
- THIS COURT ORDERS that the Auditor conduct an audit of 2324965 Ontario Inc. for its financial years of 2013 to present and produce its findings and audited financial statements of 2324965 Ontario Inc.
COSTS
[32] The issue of costs is reserved. If the parties are unable to reach an agreement with respect to costs, they may file cost submissions, which shall not exceed 3 pages, for my consideration in accordance with the following schedule: the applicant shall serve and file cost submissions on or before January 27, 2023; the respondents shall serve and file responding cost submission on or before February 10, 2023, after which time the issue of costs will be decided based on the material filed.
Muszynski J.
Date: December 23, 2022
COURT FILE NO.: CV-22-88673
DATE: 2022/12/23
ONTARIO
SUPERIOR COURT OF JUSTICE
RE: Carmelo Lagana, Applicant
AND
2324965 Ontario Inc. and David Power, Respondents
BEFORE: Muszynski J.
COUNSEL: Margot Pomerleau, for the Applicant
J.F. Lalonde, for the Respondents
HEARD: August 26, 2022
REASONS FOR DECISION ON APPLICATION TO APPOINT AUDITOR / PRODUCTION OF AUDITED FINANCIAL STATEMENTS PURSUANT TO THE OBCA
Muszynski J.
Released: December 23, 2022
[^1]: The applicant’s status as a shareholder is admitted, on a without prejudice basis, for the purpose of this application only.