Documents matter

It pays to maintain proper corporate records

ARE YOU THINKING OF SELLING or financing your business? Are you involved in shareholders’ dispute? Or, perhaps worse yet, is your business being audited by the taxing authorities or involved in a litigation? If you answered yes to any of these questions, you will likely find that maintaining proper corporate records matters — a great deal!

Unfortunately, maintaining proper corporate records is often overlooked or otherwise given a low priority by business owners. Too often, this leads to unnecessary problems, delays, costs and sometimes unanticipated results.

Louis Vouloukos

In this column, we canvass the corporate records that must be prepared and maintained by a corporation, and some practical and legal implications for failing to maintain proper corporate records.

LEGAL REQUIREMENTS

Regardless of your corporation’s jurisdiction of incorporation, whether your corporation is incorporated federally or provincially, the law requires corporations to prepare and maintain certain records.

Generally speaking these records include:
• the articles and by-laws of the corporation and any amendments thereto
• a copy of any shareholder agreement
• minutes the meetings of the board of directors or shareholders
• a register of all directors of the corporation, past and present
• a security register containing, among other things, the names of all the shareholders of the corporation
• a register of transfers recording all share transfers that have taken place, and
• adequate accounting records

PROVINCIAL LAWS may also include additional record keeping requirements. For example, it has come as a surprise to many Ontario businesses that Ontario corporations must now also maintain a register of ownership interest in land. This register must not only identify each property owned by the corporation, the date the corporation acquired or disposed of the property, but also include a copy of any deeds, transfers or similar documents with respect to each property containing certain other prescribed information.

Additionally, no matter how large or small a corporation, any transactions out the corporation’s ordinary course of business must also be documented either by minutes of a meeting or, in lieu of a meeting, by written resolution signed by all the corporation’s directors or shareholders. In addition, the corporation’s directors and shareholders are required to hold annual meetings.

“Annual minutes” will include items such as:
• election of directors for the ensuing year
• approval of a material contract or transaction (e.g. a loan or security agreements)
• declaration of any dividends or bonuses by the corporation’s directors
• appointment of officers of the corporation • director and shareholder approval of annual financial statements, and
• the appointment of an auditor of a corporation/or dispensing with same

Sure, some paper work is involved in properly maintaining your corporation’s records, but what if you fail to complete this paper work? Let’s examine some practical and legal implications with references to the examples provided in the opening paragraph of this column.

PRACTICAL AND LEGAL IMPLICATIONS

If you are thinking of selling the shares or assets of your business or financing your business by borrowing money from a bank, neglect of your corporate records may cause major problems, delays and even result in you losing an opportunity. Such transactions often require corporate buyers or lenders to provide legal opinions on the corporation or the authority of the individuals that purport to speak on its behalf. If the corporation’s records are incomplete or out-of-date, considerable time, expense and delay may ensue while the corporation attempts to bring its corporate records current. This may lead to a loss of a business opportunity.

Other times, updating records may not be possible, and a deal fails for want of a proper legal opinion. Other times, required signatures from individuals formerly involved in the corporation are not readily available because they have moved or, worse yet, died. Other times, individuals whose signatures are required may become opportunistic and make excessive demands, financial or otherwise, in exchange for their cooperation.

For example, speaking from personal experience, in one case a shareholder who recognized the importance of his cooperation demanded an all-expenses paid trip and a large sum of money in exchange for his signature.

Without proper documentation, a corporation may also find itself being scrutinized by the courts, a disgruntled shareholder of the corporation, or by the taxing authorities.

If your corporation is being audited by the CRA, for example, such an audit will typically include a review of the corporation’s minute book to verify how monies have been removed from the corporation by dividends, bonuses, or otherwise as may be reflected in the tax returns of the corporation or its shareholders. A transaction that has not been documented appropriately in the corporate records (regardless of what’s reflected in the tax returns), may not have occurred as far as the CRA is concerned. This could, and often does, lead to a corporation or its shareholders having to pay more tax and/or penalties.

A disgruntled shareholder may, and often does, scrutinize deficient corporate records. If a certain decision of the corporation is not properly documented, a disgruntled shareholder may claim that he or she never agreed to the course of action undertaken by the corporation and, therefore, such action was not properly authorized. The same type of scrutiny of deficient corporate records is also seen in numerous litigious matters involving corporations, such as with internal corporate disputes involving shareholders or directors and officers of the corporation.

LEGALLY SPEAKING, corporate laws generally impose penalties upon the corporation and/or its directors and officers for failure to comply with a corporation’s record keeping requirements. For example, in Ontario, a corporation that, without reasonable cause, fails to comply with the record keeping requirements is guilty of an offence and on conviction is liable to pay a fine of up to $25,000. Also, every director or officer who, without reasonable cause, authorized, permitted or acquiesced in such an offence may also be guilty of offence and, upon conviction, may be liable to a fine of up to $2,000, or to imprisonment for a term of not more than one year, or to both.

Maintaining proper corporate records is essential to avoid or minimize the possibility of the forgoing problems arising. All business owners, or directors officers or managers would be well served by ensuring that their corporation is in compliance with its record keeping requirements.

Louis Vouloukos of Brampton, Ont.- based Lawrences, specializes in corporate, commercial and franchise law.

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