In Sobrinho v. Oakville Portuguese Canadian Club (decided 1982), an Ontario trial court ordered the winding up of a corporation without share capital because of deep and irreconcilable differences between two almost equally divided factions. A winding up is a rarely used remedy of last resort.
In 1963, a group of religious, hard-working people of Portuguese descent banded together for social and recreational purposes. They acquired a valuable piece of land in Oakville, Ontario on which they intended to build a clubhouse. At first, the club was unincorporated. In 1974, a corporation without share capital was formed under the Ontario Corporations Act.
Two factions developed within the club. The Sobrinho faction wanted to greatly enlarge the club's activities and expand its membership. The Garcia faction seemed more content with existing conditions.
The corporation had a dysfunctional set of by-laws but, in practice, members were admitted and elections were held, not in accordance with the provisions of the by-laws. In 1977, there appeared to be about 110 undisputed members and another 87 persons whose proper admission as members was not universally accepted. At a meeting of members in late 1977, the Pereira slate was declared elected; however, the Garcia faction refused to accept the result and retained the club's possessions.
A court-ordered meeting was held in 1978 that dissolved into violence, with chairs thrown during the discussion of the approval for membership of seven individuals. The police had to intervene. This time, without the seven individuals voting, the Pereira slate lost the election, 82 to 80.
In predecessor proceedings in 1979, a judge warned that no further intervention by the court into the affairs of the corporation should be sought other than by way of an application to wind up.
The by-laws clearly required that applicants for membership be admitted by the board of directors (as does the Act). However, there was no documentary evidence that this requirement was followed, and evidence of past practice was mixed.
On these facts, Justice Cromarty held that it was just and equitable that the club be wound up, with the appointment of a permanent liquidator and the residual assets distributed to the members. That said, Cromarty J. expressed dismay that the Portuguese community in Oakville should lose all that they have worked for, for so long. He gave time (almost 12 weeks) for the factions to try to reconcile their differences before the order would become effective.
Further, he strongly recommended to the board that it reinstate as members all 191 individuals named in the agreed list of 1978 and that any demand for a penalty from members be dropped. Since none of these individuals or their families had enjoyed the club's amenities during the protracted litigation, no monthly dues should be demanded from these members until the first day of the month at least 21 days after they received notice of their reinstatement.
Finally, Justice Cromarty recommended that new by-laws be prepared that were more apt for the club's purposes and that would be in compliance with the Act.
3. Key Observations
At the time of this decision, the court did not have the alternative of ordering one faction to buy out the other - a typical remedy in a closely held business corporations where there is a fundamental breakdown in the relationship between the quasi-partners. Had the club been governed by the Canada Not-for-profit Corporations Act, the court would have had more flexible alternatives at its disposal, other than just the winding up remedy. Similarly, the (un-proclaimed) Ontario Not-for-Profit Corporations Act, 2010 would give the court wide discretion to make any order it thinks fit, rather than confining it to a winding up.
The members of the corporation had been warned in 1979 to get along without further court intervention. Avoiding violence carries much greater weight with the court than preserving a club in which the parties have a history of mutual distrust and unjustified exclusion of members based on their affiliation with one faction or the other.
Still, the court gave the parties one last chance to change their ways before the club would be wound up and dissolved by judicial fiat. It also gave the board strong recommendations on reinstating members, waiving penalties on membership fees and the commencement date for new membership dues.