The importance of proper authority in bringing a corporate action
On December 16, 2019, the Superior Court of Justice released a decision confirming that actions commenced on behalf of a corporation such as suing for breach of contract, or in this case, bringing a lien for the non-payment of labour and materials, must be brought with the proper authority. In Bond Design Build Inc. v Wellings of Stittsville Inc. et al, 2019 ONSC 6774, Master Fortier, stayed an action in a matter where the plaintiff corporation had never appointed a Board of Directors and therefore their lien action had not been brought in a manner that was compliant with the corporation’s Unanimous Shareholder’s Agreement. The plaintiff corporation’s Unanimous Shareholders Agreement (USA) provided that the corporation be governed by a Board of Directors, consisting of three directors. The agreement further provided that Board decisions required approval by a majority of votes cast at a meeting, or by written resolution signed by all three directors of the corporation.
In this case, the director of the plaintiff corporation owned all of its common shares and had never called a shareholders meeting, as a result, a Board of Directors had never been appointed for the plaintiff corporation. The defendant argued that since no Board of Directors had been appointed, the director did not have the authority to bring the action.
The defendant corporations were seeking a stay, pending the ability of the plaintiff corporation to bring the action with the proper authority required. Practically speaking, this was a challenge for the plaintiff corporation as one of the directors of the defendant corporations was also the director of another corporation, which owned a significant number of preferred shares in the plaintiff corporation (the shareholder corporation). The USA provided that the shareholder corporation could nominate a director to the Board of the plaintiff corporation, and that the nominee, as director, would have to agree to the appointment of the third director. In essence, the plaintiff corporation required Board approval from a Board of Directors comprised of directors that would be tied, in some way, to the defendant corporations.
The plaintiff claimed that this is the first, and only, time that his authority to make decisions with respect to the plaintiff corporation had been challenged and that he had previously entered into legal agreements on behalf of the plaintiff corporation with the defendant corporations without question. The plaintiff claimed that the indoor management rule gave him the authority to bring an action as a matter within the ordinary course of business.
Master Fortier disagreed and stayed the action, finding that the dispute was “beyond the genre of a simple collection matter” and that the indoor management rule did not apply because of the relationship between the shareholder corporation and the plaintiff corporation. Master Fortier found that the relationship between the plaintiff corporation and the defendant corporation made the dispute a matter that was more complex than simply collecting monies owed to the plaintiff corporation. The indoor management rule simply did not apply in the circumstances.
This important decision acts as warning for corporations to ensure that corporate governance has been appointed. If an action is commenced without proper authority, as defined under the by-laws and constitution of the corporation, the action may be stayed or dismissed by the Court. The business and corporate lawyers at Soloway Wright are here to help Ottawa, Kingston and Eastern Ontario businesses with corporate structure, governance, and transactions at every stage.