Shareholders Have an Absolute Right to an Auditor and to Audited Financial Statements - Financial Hardship is Irrelevant, Says B.C. Court of Appeal

by Bennett Jones LLP
Contact

In a decision released on January 29, 2014, the B.C. Court of Appeal ruled that companies incorporated under the Canada Business Corporations Act must, by operation of law, appoint an auditor, and thereafter produce annual audited financial statements. The Court has no discretion in this respect, and the particular financial circumstances of the company are irrelevant.

The decision of the B.C. Court of Appeal in Li v Global Chinese Press Inc is not particularly revolutionary – lower courts in Ontario ruled in exactly this same way as recently as 2007. But it is the first appellate case in Canada standing for the proposition that shareholders have an absolute right to an auditor and audited financial statements, and therefore it is a noteworthy case.

The CBCA Provisions

Section 162 of the CBCA states in mandatory terms (“shall”) that shareholders will appoint auditors annually:

162. (1) Subject to section 163, shareholders of a corporation shall, by ordinary resolution, at the first annual meeting of shareholders and at each succeeding annual meeting, appoint an auditor to hold office until the close of the next annual meeting.

(2) An auditor appointed under section 104 is eligible for appointment under subsection (1).

(3) Notwithstanding subsection (1), if an auditor is not appointed at a meeting of shareholders, the incumbent auditor continues in office until a successor is appointed.

(4) The remuneration of an auditor may be fixed by ordinary resolution of the shareholders or, if not so fixed, may be fixed by the directors.

The only way to avoid appointing an auditor at an annual meeting is by shareholder resolution: see section 163. Under the CBCA, such a resolution had to be passed unanimously by the shareholders, and such dispensation can only be made by companies that are not “distributing corporations” (i.e., in general, only private companies can rely on this provision).

Section 155 of the CBCA, relating to annual meetings of shareholders, also speaks in mandatory terms. It says that the directors of a corporation “shall” place before shareholders at every annual meeting, comparative financial statements, “the report of the auditor, if any”, and any further information respecting the financial position of the corporation required by the corporate bylaws and related constating documents of the corporation.

“If Any”?

As noted above, the directors of a company are required to produce to shareholders the report of the auditor, “if any”. This led the respondent company, Global Chinese Press Inc. to argue that the requirement to produce audited financial results was discretionary – sometimes there would be audited financial statements, sometimes there would be none: it is all up to the business judgment of the directors.

That was argued in Ontario in Merrill v Afab Security, Chrisger Systems Inc, without success. There, Justice R. Smith found:

The fact that section 155(1)(b) of the CBCA states the directors are to place before the shareholders at every annual meeting, the report of the auditor, if any, does not remove the requirement for the shareholders appoint an auditor at the annual meeting as set out in s. 162 of the CBCA. The use of the words “if any” in s. 155(b), would apply to the situation where all of the shareholders consented to dispense with the appointment of an auditor, pursuant to s. 163 of the CBCA and therefore a report of the auditor would not be one of the documents that was required to be placed before the shareholders in this situation. This interpretation is consistent with the two possibilities, firstly the requirement for production of audited financial statements and a report of the auditor where all of the shareholders have not waived the appointment of the auditor, and secondly the possibility that there is no auditor’s report, if all of the shareholders have consented to dispense with the requirement to appoint an auditor. As a result I do not find that the use of the words “if any” in s. 155(1)(b) removes the requirement for the shareholders to appoint an auditor at the annual meeting as set out in section 162 of the CBCA.

When the responding company argued this same point, the B.C. Court of Appeal in Li v Global Chinese agreed with Justice R. Smith’s position without reservation. It held:

I agree with that analysis. It is a complete answer to the company’s submission. The words “if any” found in s. 155(1)(b) only apply when the shareholders have by resolution consented to dispense with the appointment of an auditor.

Financial Position is Irrelevant

The Court also considered Global Chinese’s claim that its financial circumstances were such that it was unreasonably cost prohibitive to engage an auditor and obtain audited financial statements. This claim was similarly raised in Merrill. In both cases, the Court found that the financial circumstances of the company were simply irrelevant, given the lack of discretion conferred on the Court. The shareholders have a remedy in such a situation, which is to pass a resolution. As stated in Merrill, “The additional costs involved in requiring the appointment of an auditor is a reason that shareholders may choose to dispense with the requirement of having audited financial statements produced”. The B.C. Court of Appeal similarly found that financial circumstances were irrelevant in Li v Global Chinese.

The Bottom Line

The B.C. Court of Appeal set out the law as follows in concluding its judgment:

The CBCA sets out a comprehensive legislative scheme to provide financial information to shareholders. The scheme requires the appointment of an auditor and the production of audited financial statements unless the shareholders of a company unanimously determine otherwise. If a Company fails to comply with the statutory requirements, the legislation empowers the Court to appoint an auditor and order production of the required documentation.

While this case was decided under the CBCA, the principle would be equally applicable for companies incorporated under the Ontario Business Corporations Act. There, section 149 requires auditors to be appointed, and the only dispensation from such a requirement is if “all” of the shareholders of the (privately held) company agree to dispense with the requirements for the year following the resolution. This reasoning accords with the practical reality that a key element of the business conducted at an annual general meeting of shareholders is the consideration of the financial statements and auditors’ reports – indeed, Ontario courts have repeatedly allowed annual general meetings to be delayed pending the completion of an auditor’s report (see Re Imax Corp. (2007), 41 B.L.R. (4th) 289).

Of course, where a company is insolvent and has filed for insolvency protection, it will often not file audited financial statements during the insolvency proceedings, even where the company is a public company. The cash flow disclosure requirements of a company subject to the Companies’ Creditors Arrangement Act tend to be more current and detailed, at least as it relates to cash flow, than anything found in an audited financial statement.

Short of insolvency, the courts, now including the B.C. Court of Appeal, have stated somewhat categorically that if a company wishes to dispense with the auditor requirements, it can only do so by a unanimous shareholder resolution.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bennett Jones LLP | Attorney Advertising

Written by:

Bennett Jones LLP
Contact
more
less

Bennett Jones LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.