Court-Ordered Liquidation

When the Canada Not-for-profit Corporations Act came into force in 2011, it carried forward the statutory power of the court to order the liquidation of a not-for-profit corporation but, at the same time, introduced a much wider range of remedies open to the court through the oppression remedy. Given the less draconian alternatives under the oppression remedy, courts will generally be reluctant to order the liquidation of an NFP corporation, except as a last resort.

Indeed, in Lash v. Lash Point Assn. Corp., a case involving a family-owned resort property in which some members wished to monetize and exit while others wished to keep the property, Justice Penny of the Ontario Superior Court of Justice discussed in detail the application of the power to order liquidation under the Act. He stated that the following four conditions must be satisfied to make a liquidation order:

● there must be rights, expectations and obligations between the members that are not submerged in the corporate structure;

● these rights, expectations and obligations must not have been satisfied or discharged;

● the resulting circumstances must result in an unfairness or prejudice to one or more of the members; and

● this unfairness or prejudice must be sufficiently serious that it can only be rectified by liquidation or dissolution.

It is the last condition (only a liquidation order is sufficient to rectify the unfairness) that is particularly hard to satisfy. In Lash, the court stated that liquidation is the remedy of last resort. It instead fashioned a buy-out remedy so that the "leave" camp could monetize their interests while the "remain" camp could continue to enjoy the family resort.

Courts in Alberta have also recently affirmed that liquidation is too drastic a remedy and that an NFP corporation will not be liquidated merely because a minority is dissatisfied with the majority's decision. The will of the majority must prevail.

An example of a liquidation order being granted in the context of an NFP corporation is Kay v. Nipissing Twin Lakes Rod & Gun Club, the circumstances of which were unusual. A small club had been formed among friends and operated for several decades. Some members passed away and others were in failing health. One member took over management of the club's hunting and fishing lodge. The court found that the applicant's concerns were ignored. No meetings of members were held. The court found the actions and attitudes of the remaining member created a deadlock. However, had the court had other less draconian remedies available to it (as it had in Lash), it could instead have ordered a buy-out of the applicant's interest in the corporation by the remaining members, or by the corporation itself.

A second example of a liquidation order in the context of an NFP corporation occurred in Sobrinho v. Oakville Portuguese Canadian Club. There, a group of 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. Two factions within the club developed. One faction wanted to greatly enlarge the club's activities and expand its membership. The other 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, but not in accordance with the provisions of the by-laws. 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, one slate was declared elected; however, the other faction refused to accept the result and retained the club's possessions. A court-ordered meeting was held in 1978 that dissolved into violence. The police had to intervene.

On these facts, the court held that it was just and equitable that the club be wound up. That said, the court gave time (almost 12 weeks) for the factions to try to reconcile their differences before the order would become effective.

At the time of this decision in Sobrihno, the court did not have the alternative of ordering one side to buy out the other. If the same facts had arisen under the CNCA, the court would have had more flexible alternatives at its disposal, rather than just the winding-up remedy.

The court had warned members of the club in 1979 to get along without further court intervention. Avoiding violence carries much greater weight with the court than preserving a club where 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 - a signal that the court would have preferred to have another solution at its disposal.

It is worth noting that both cases where liquidation orders were granted involved private clubs (one with few surviving members). None involved the liquidation of a charitable corporation. In the case of a charitable corporation, the balance is tipped even more heavily in favour of finding a solution that avoids liquidation. A liquidation results in a loss of the amenities that the corporation is providing to the community. Members have no off-setting financial interest in the property of the corporation. In these circumstances, even if there is deadlock and hostile factions, it ought to be possible for the court to fashion a remedy that fairly breaks the deadlock and allows the majority to prevail. The minority either has to accept majority rule or set up a new, independent charitable corporation under their own control.

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