In Dalpadado v. North Bend Land Society (released May 2018), the Supreme Court of British Columbia held that the failure of a non-profit corporation to have an annual audit, although not compliant with its legal obligations, was not in itself oppressive to its members.
North Bend Land Society ("NBLS") was a non-profit society incorporated in 1994 for the purpose of purchasing lands in North Bend, B.C., a small, unincorporated community in the Fraser Canyon. The intention was that the lands of NBLS would be subdivided into fee simple estates for each of its leasehold members. The plan had long been delayed by the need for assessment of the risk from debris flow in nearby creeks, and additional funding for the subdivision. Meanwhile, each voting member of NBLS enjoyed exclusive use of a particular plot of land from NBLS as part of his or her membership.
Initially, NBLS had 17 members and contemplated 12 single-family dwellings, a school and various other commercial and community facilities.
More recently, some members had raised complaints about the admittedly imperfect way that NBLS had been run. In particular, the by-laws of NBLS required it to have an auditor but, in fact, no auditor had ever been appointed.
Justice Brundrett of the Supreme Court of British Columbia found that, although no audited financial statements had ever been prepared, the members of the society had long had access to unaudited financial statements and bank records prepared at little or no cost to the society. There were no allegations of financial impropriety in the records and no complaints of suspicious transactions.
He found that the failure of the society to appoint an auditor or prepare audited financial statements could not, in itself, support a finding of oppressive or unfairly prejudicial conduct toward the complainant members. Generally, the actions of a society do not necessarily amount to oppression or unfair prejudice merely because they fall afoul of applicable legal formalities. More is required - in particular, the additional element of inequity or unfairness.
At this stage, Justice Brundrett could see no benefit to the society or the parties in requiring the society to obtain historical audits. However, since the Societies Act (British Columbia) did not mandate an audit, he gave the members the option to decide whether to remove the mandatory audit requirement set out in the by-laws by special resolution.
3. Key Observations
The rulings in this case are sensible. The problem was that the by-laws included a mandatory audit that had long been ignored or neglected until some members seized on it to bring a broader oppression action - with the failure to adhere to the by-law requirement for an audit as the centrepiece of the complaint.
However, in some cases the applicable corporate statute does not mandate an audit but makes it optional. In those cases, it is for the board and members to weigh the pros and cons of conducting an annual audit. One factor is the number of members and the extent of their active involvement in the affairs of the society. To the extent that members are actively involved in the society's affairs, they will see compliance with the audit requirement as an unnecessarily expensive formality - the cost of which is easily avoided. Another is the nature of financial information that is provided to members. Annual, unaudited financial statements and access to bank records may be sufficient for the members. Finally, there is the incremental cost which, in a society like NBLS, must be borne directly or indirectly by the members.
Where the statute does not mandate an audit, it is therefore wise to let the members decide the question for themselves at a meeting. However, as the court determined in this case, there is no value to offset or justify the cost of preparing missing audits from past years - particularly where there are no allegations or evidence of financial improprieties or suspicious transactions.