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Failed Attempt to Convert Unincorporated Association into NFP Corporation

In Cedarwoods Park Association Inc. v. Tolentino (decided August 2017), Justice Boswell of the Ontario Superior Court of Justice held that an unincorporated summer recreational park for trailer and cottage use had not been validly converted into a not-for-profit corporation and, further, that the association was not required to have an audit of its financial statements.

1. Facts

Cedarwoods Park is a summer recreational park for trailer and cottage use located in Northumberland County, Ontario. Created in 1983, it consists of a single parcel of land along the Crowe River, which has been divided into 288 lots. Each co-ownership interest entitles the owner to exclusive possession of one of the 288 lots in the Park.

The unincorporated association was created under a constitution dated July 1, 1983, which provided, in material part, as follows:

● The Park would operate as an association under the name "The Cedarwoods Park Association".

● It had a nine-member board of directors to be elected by the tenants-in-common (or members).

● The board had authority to administer the affairs of the Park and to enter into contracts on behalf of the Park.

The constitution could be amended by a two-thirds majority vote of the members at two consecutive general meetings to be held at least 30 days apart, one of which was to be an annual meeting.

The Cedarwoods Park Association Inc. was incorporated by letters patent as a not-for-profit ("NFP") corporation in August 2010. The board of the association purported to approve the incorporation.

A dispute arose as to whether the corporation succeeded the unincorporated association and whether the members of the association were now members of the corporation. A secondary issue was whether the association's financial statements should be audited.

2. Rulings

(a) Whether the Unincorporated Association Had Been Converted into a Corporation

Justice Boswell applied general principles of contract interpretation to resolve of the issue of whether the 2010 NFP corporation had succeeded the 1983 unincorporated association, finding that the incorporation had not been approved as an amendment of the constitution. The decision to incorporate the association would require an amendment to the constitution. Without a valid amendment, the board of the association did not have authority to incorporate the association.

He was not satisfied that the members had ever approved the incorporation by the necessary two-thirds vote on two separate occasions. Therefore, he found that the original constitution remained in force and governed the association until amended in accordance with its terms. The corporation does not represent the members of the association.

(b) Audit

Justice Boswell refused to require an independent audit of the association's financial statements. A motion for an audit had been presented to the 2017 annual general meeting of the association. The majority of the members present voted against having an audit.

Justice Boswell added further reasons for refusing to order an audit in the face of the expression of the will of the majority. There was no reliable evidence of what the cost of the audit was likely to be or how it would be paid for. The association was small and democratically run. If the respondents had concerns about how the association is being run or how its finances are being handled, they should engage in the democratic process by running for a seat on the board or a position on the independent audit committee.

3. Key Observations

Decisions on unincorporated associations are few and, therefore, all decisions dealing with the affairs of unincorporated associations have magnified importance.

The rulings of Justice Boswell in this case are particularly welcome. He correctly applied general principles of contract interpretation to the 1983 constitution of the association, finding that it had never been validly amended to authorize its conversion into a corporation. Therefore, the 1983 constitution remained intact and the 2010 incorporation meant nothing.

Unlike NFP corporations, which generally require audits unless all or, in some cases a supermajority of members approve a waiver of the audit requirement annually, no statute or common law requires an unincorporated association to audit its financial statements. In the absence of a different requirement in the constituting documents of the unincorporated association, it is for a simple majority of the voting members present at a meeting to decide on the cost/benefit of auditing the association's financial statements. Unless the constituting documents or a majority of the members require it, no audit is required. In the absence of evidence of financial or other mismanagement, the courts will respect the decision of the members as reflected in the constituting documents or a vote at a meeting of members. Stated otherwise, the courts will not superimpose their judgment for the business judgment of the members.

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