In Kay v Nipissing Twin Lakes Rod & Gun Club (decided 1993), an Ontario trial court ordered the winding up of a corporation without share capital that had outlived the original intentions of its founders. A winding up is a rarely used remedy of last resort.
In the late 1940s, 14 young men, the majority of whom had graduated from Mimico High School, met regularly to play cards for small amounts of money. They discovered that they had a common interest in fishing and hunting and investigated the possibility of buying their own property.
In August 1956, they pooled their winnings from card-playing a bought a two-acre parcel of land on the shores of Lake Nipissing for $200. On it, they constructed a 1,200 square foot bunk house and a dock. There was water and electricity but no indoor plumbing. For many years, they used the property as a hunting and fishing camp. Members were assessed for expenses.
In September 1960, Nipissing Twin Lakes Rod & Gun Club (the "Club") was incorporated as a corporation without share capital under the Ontario Corporations Act (the "Act"). Shortly after, the property was transferred to the Club. There were 13 members at the time, as one member had been expelled for failing to pay dues.
In 1966, an offer to purchase the property was received. A majority of the members voted to accept the offer. However, five members did not want to sell and they agreed to buy out the eight members. No new members were ever admitted to the Club.
The remaining five members continued to share the expenses equally. The expenses were limited to property taxes, electricity and insurance. In later years, each member was contributing about $500 a year to the property.
In 1985, one of the remaining members died. Another, the plaintiff, Mr. Kay, had Parkinson's disease, which had become increasingly debilitating to him. The result was that, over time, the use of the property as a fishing and hunting camp had changed significantly. The property had become a cottage used primarily by the family and friends of the two remaining active members, Dr. Ridley and Mr. Crawford.
Kay proposed that the property be sold and the proceeds be divided equally among the remaining three members. If Kay died before the property was liquidated, his membership would terminate and his estate would have no claim to the property. The remaining two members were uninterested. No meetings were held to discuss the management and use of the property. Kay found it difficult to make arrangements with the remaining members to use the property, although he continued to share equally in the expenses.
On these extraordinary facts, Justice Caswell found that the relationship among the remaining members was akin to that of a partnership. After the death of one member in 1985 and the onset of Kay's illness, the relationship of mutual respect and understanding broke down. Management of the property was taken over by the remaining two members and Kay was treated as a minority shareholder, which he was.
While the court recognized that the winding up of a corporation is a drastic measure, it was, in this case, just and equitable that the Club be wound up. However, he allowed 30 days to enable the parties to agree on the appropriate disposition of the property. The 30-day deadline could be extended.
3. Key Observations
At the time of this decision, the court did not have the power to order one side to buy out the other - a typical remedy in a closely held business where there is 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 than just the winding-up remedy. Similarly, the un-proclaimed Ontario Not-for-Profit Corporations Act, 2010 would give the court the court wide discretion to make any order it thinks fit, rather than a winding up.
In any case, the two controlling members were in a position to buy out Kay. They were the members still making active use of the property and had the option to forestall any sale of the property to a third party by completing the buy-out of Kay before the property was listed for sale or making the highest offer to purchase the property, once listed.