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Corporate Mistakes (Section 229 of the Business Corporations Act)

October 30, 2021

British Columbia

,

Canada

Issue

Can improperly issued preferred shares be cancelled?

Conclusion

Section 229 of the Business Corporations Act allows the Court on application to remedy corporate mistakes. A "corporate mistake" means an omission, defect, error, or irregularity that has occurred in the conduct of the business or affairs of a company as a result of which

(a) a breach of a provision of the Act, a former Companies Act or the regulations under any of them has occurred,

(b) there has been default in compliance with the memorandum, notice of articles or articles of the company,

(c) proceedings at or in connection with any of the following have been rendered ineffective:

(i) a meeting of shareholders;

(ii) a meeting of the directors or of a committee of directors;

(iii) any assembly purporting to be a meeting referred to in subparagraph (i) or (ii), or

(d) a consent resolution or records purporting to be a consent resolution have been rendered ineffective. (s.229(1)) (Business Corporations Act)

Section 230 of the Business Corporations Act allows for the correction of "basic records" which includes the central securities register. (s.230(1)) Section 230 allows for an order compensating a party who has incurred a loss as a result of the information being wrongly entered into the records. (s.230(3)(d)) (Business Corporations Act)

Subsection 229(2) of the Business Corporations Act provides the Supreme Court with the discretion to make an order to negative or to modify or cause to be modified the consequences in law of a corporate mistake. Corporate mistake is defined in subsection 229(1) of the Business Corporations Act to include an omission, defect, error, or irregularity that has occurred in the conduct of the business or affairs of a company as a result of which one or more of the events set out in sub-subsection (a) through (d) above has occurred. That is, a corporate mistake is not every mistake, but rather is a mistake which results in an event described within ss.(1)(a) through (d). Subsection 229(2) of the Business Corporations Act, provides this Court with the discretion to correct a corporate mistake but the class of corporate mistakes is constrained by subsection 229(1)(a) through (d). (Greither Estate v Canada (Attorney General))

There are hundreds and perhaps thousands of corporations in British Columbia, large and small, public and private, active and passive, with an infinite variety of assets and liabilities and objectives. Not all are efficiently administered by persons cognizant of all of the nuances of the articles or all of the provisions of the statute. Mistakes in compliance are inevitable. By empowering the court to remedy omissions, defects, errors or irregularities, s. 229 of the Business Corporations Act represents tacit recognition that there will be mistakes and that a simple method of correcting the mistakes or alleviating adverse consequences flowing therefrom is a necessary and integral part of a sensible and workable system of corporate law. Further that when the omission, defect, error or irregularity is what is commonly called "technical", as is the case here, the court ought not to be reluctant to rectify it. (United States Gold Corp. v. Atlanta Gold Corp.)

Section 229 is not limited to errors of a “technical nature”. Rather, s. 229 provides “broad remedial powers”. (Re Razzaq Holdings Ltd.)

No cases were identified that considered these sections in the context of improperly issued preferred shares.

Section 82 of the Business Corporations Act states that a company that has redeemed, purchased, or otherwise acquired, by surrender or otherwise, any of its shares, may cancel the shares. (s.82(1)(b)) A share is cancelled for the purposes of the Act if the company's securities registers are altered to reflect that the share is no longer an issued share. (s.82(2)) (Business Corporations Act)

However, no cases were identified that considered s.82 in the context of improperly issued preferred shares. No cases were identified that cited this section or its predecessor at all.

No other circumstances or mechanisms were identified that would allow for the cancellation of improperly issued preferred shares in British Columbia.

Law

Section 229 of the Business Corporations Act, SBC 2002, c 57 states:

Remedying corporate mistakes

229 (1)In this section, "corporate mistake" means an omission, defect, error or irregularity that has occurred in the conduct of the business or affairs of a company as a result of which

(a) a breach of a provision of this Act, a former Companies Act or the regulations under any of them has occurred,

(b) there has been default in compliance with the memorandum, notice of articles or articles of the company,

(c) proceedings at or in connection with any of the following have been rendered ineffective:

(i) a meeting of shareholders;

(ii) a meeting of the directors or of a committee of directors;

(iii) any assembly purporting to be a meeting referred to in subparagraph (i) or (ii), or

(d) a consent resolution or records purporting to be a consent resolution have been rendered ineffective.

(2) Despite any other provision of this Act, the court, either on its own motion or on the application of any interested person, may make an order to correct or cause to be corrected, to negative or to modify or cause to be modified the consequences in law of a corporate mistake or to validate any act, matter or thing rendered or alleged to have been rendered invalid by or as a result of the corporate mistake, and may give ancillary or consequential directions it considers necessary.

(3) The court must, before making an order under this section, consider the effect that the order might have on the company and on its directors, officers, creditors and shareholders and on the beneficial owners of its shares.

(4) Unless the court orders otherwise, an order made under subsection (2) does not prejudice the rights of any third party who acquired those rights

(a) for valuable consideration, and

(b) without notice of the corporate mistake that is the subject of the order.

Section 230 allows for the correction of the securities register on application to the court. The section contemplates the payment of compensation to a party who has incurred a loss as a result:

230 (1)In this section, "basic records" means, in relation to a company,

(a) its articles,

(b) its notice of articles or memorandum, as the case may be,

(c) the minutes of any meeting of shareholders or directors,

(d) any resolution passed by shareholders or directors, if not included in the records referred to in paragraph (c),

(e) its register of directors,

(f) its central securities register, its branch securities register and any other register created by the company under a former Companies Act, and

(g) if the company is a private company within the meaning of section 119.1, the company's transparency register.

(2) If information, other than information in respect of which a court application may be made under section 129, is alleged to be or to have been wrongly entered or retained in, or wrongly deleted or omitted from, a company's basic records, the company, a shareholder of the company or any aggrieved person may apply to the court for an order that the basic records be corrected.

(3) In connection with an application under this section, the court may make any order it considers appropriate, including

(a) an order requiring the company to correct one or more of its basic records,

(b) an order restraining the company from calling or holding a meeting of shareholders or paying a dividend before the correction is made,

(c) an order determining the right of a party to the application to have his or her name entered or retained in, or deleted or omitted from, basic records of the company, whether or not the issue arises between 2 or more shareholders or alleged shareholders, or between the company and any shareholders or alleged shareholders, and

(d) an order compensating a party who has incurred a loss as a result of a matter referred to in subsection (2).

Section 82 deals with the cancellation and retention of shares:

82 (1) A company that has redeemed, purchased or otherwise acquired, by surrender or otherwise, any of its shares

(a) must cancel the shares if required to do so by its memorandum or articles or by a resolution of the directors,

(b) if not so required, may cancel the shares, or

(c) must, if the shares are not cancelled under paragraph (a) or (b), retain the shares.

(2) A share is cancelled for the purposes of this Act if the company's securities registers are altered to reflect that the share is no longer an issued share.

(3) The company must mark the share certificate, if any, representing a cancelled share in a manner that indicates that the share is no longer an issued share.

(4) A company that retains a share under subsection (1) (c) must alter its securities registers to reflect that the company is the shareholder of that share.

(5) A company may, unless its memorandum or articles provide otherwise,

(a) reissue a share that it has cancelled under subsection (1) (a) or (b), and

(b) sell, gift or otherwise dispose of a share that it has retained under subsection (1) (c).

(6) If a company retains a share under subsection (1) (c), the company

(a) is not entitled to vote the share at a meeting of its shareholders,

(b) must not pay a dividend in respect of the share, and

(c) must not make any other distribution in respect of the share.

However, no authority was located which considered section 82 or its predecessor.

In Greither Estate v Canada (Attorney General), 2017 BCSC 994 (CanLII), the Court summarized the application of s.229:

[24] Subsection 229(2) of the BCA provides this Court with the discretion to make an order to negative or to modify or cause to be modified the consequences in law of a corporate mistake.

[25] Corporate mistake is defined in subsection 229(1) of the BCA to include an omission, defect, error or irregularity that has occurred in the conduct of the business or affairs of a company as a result of which one or more of the events set out in sub-subsection (a) through (d) has occurred. (emphasis added)

[26] That is, a corporate mistake is not every mistake, but rather is a mistake which results in an event described within ss.(1)(a) through (d).

[27] Subsection 229(2) of the BCA, provides this Court with the discretion to correct a corporate mistake but in my view the class of corporate mistakes is constrained by subsection 229(1)(a) through (d).

In United States Gold Corp. v. Atlanta Gold Corp., 1989 CarswellBC 254, [1989] B.C.J. No. 2237, the Court of Appeal explained that s.229 [then s.230] was necessary to provide a remedy for the numerous mistakes that inevitably arise during the administration of corporations:

[13] There are hundreds and perhaps thousands of corporations in this province, large and small, public and private, active and passive, with an infinite variety of assets and liabilities and objectives. Not all are efficiently administered by persons cognizant of all of the nuances of the articles or all of the provisions of the statute. Mistakes in compliance are inevitable. It seems to me that by empowering the court to remedy omissions, defects, errors or irregularities, s. 230 represents tacit recognition that there will be mistakes and that a simple method of correcting the mistakes or alleviating adverse consequences flowing therefrom is a necessary and integral part of a sensible and workable system of corporate law.

[14] It seems to me further that when the omission, defect, error or irregularity is what is commonly called "technical", as is the case here, the court ought not to be reluctant to rectify it

In Re Razzaq Holdings Ltd., 2000 BCSC 1829 (CanLII), Messrs Ahamed, as shareholders of Razzaq Holdings Ltd. (“Razzaq”), implemented a re-organization of the share capital of Razzaq with the intention of transferring all of the shares owned by Messrs. Ahamed to their separate holding companies, being 420670 B.C. Ltd. (“420670”) and 420671 B.C. Ltd. (“420671”). This re-organization was implemented so that these brothers could separate their business interests. As not all of the shares beneficially owned by Messrs. Ahamed had been correctly recorded in the records maintained for Razzaq, an error was made in the re-organization documents. As a result, not all of the shares actually owned by Messrs. Ahamed were transferred to the two companies and some shares that had not previously been allotted were erroneously transferred to the two companies. As a result of the transfers which were undertaken, Razzaq also allotted shares to 420670 and 410671 without first offering the shares pro-rata to all members of Razzaq in violation of s.41 of the Company Act and the Articles of Razzaq. The petitioners sougth to have the court remedy the mistake under s.206 of the Company Act, [now s.229]. The Court explained that s.206 is not limited to technical mistakes:

[11] While a number of decisions in British Columbia have dealt with s.206 of the Company Act, no previous decisions have dealt with a situation where the error, omission or irregularity was made in the course of transfer of shares or the issuance of share certificates pursuant to Directors’ Resolutions. Blank v. Drummond Financial (B.C.) Ltd. 2000 BCCA 207 concerned the validity of a dissent notice with respect to the purchase and sale of bonds. Trader Resource Corp. v. Van Woolen and Mathews, [1989] B.C.J. (Q.L.) No. 726 (B.C.C.A.) concerned a defect relating to a notice given to shareholders before an annual general meeting as well as the failure to file a special resolution amending the articles with the Registrar of Companies prior to a meeting which purported to elect directors pursuant to the change set out in the special resolution. In U.S. Precise Metals Inc. v. Ruskin Dev. Ltd. (1986), 1986 CanLII 816 (BC CA), 8 B.C.L.R. (2d) 258 (B.C.S.C.), the court validated notices of an annual general meeting that had been sent out two days later than prescribed by the Act. In Mehler v. Questec Imaging Inc., [1997] B.C.J. (Q.L.) No. 2749 (B.C.S.C.) where it was alleged that the notice of a meeting had not been forwarded pursuant to the provisions in the Act requiring both an electronic filing as well as a mailing, the Court was prepared to invoke s. 206 of the Act.

[12] In this case, it is clear that the Directors and the Company made an “error” when the 1992 Resolution was passed. They wrongly assumed that there continued to be 100 class B shares outstanding when they purported to cause those shares to be transferred. At the same time, they transferred only 100 of the class A shares which were outstanding.

[13] The decision in U.S. Gold Corp., supra, does not limit the effect of s. 206 to errors of a “technical nature”: Ambassador Industries Ltd. v. Camfrey Resources Ltd., [1991] B.C.J. (Q.L.) 1073 (B.C.S.C.). Rather, s. 206 provides “broad remedial powers”: Fama Holdings Ltd. v. Powertech Industries Inc. (1997), 1997 CanLII 4022 (BC CA), 34 B.C.L.R. (3d) 357 (B.C.C.A.).

The Court emphasized the broad nature of the power under s.206:

[21] In the alternative, the Petitioners seek an order of rectification pursuant to the equitable jurisdiction of the Court. I am satisfied that the powers of rectification set out in s. 206 of the Company Act are as broad as if not broader than the common law remedy of rectification. However, if I am incorrect in applying the provisions of s. 206 to the errors which occurred in 1992, I am still satisfied that the Petitioners should be granted the order that they seek. The court has the equitable jurisdiction to rectify written instruments that do not reflect the true agreement of the parties where it can be said that the parties shared a common and continuing intention up to the time of signature that the provision in question stand as agreed rather than as reflected in the instrument: Bank of Montreal v. Vancouver Professional Soccer Ltd. (1987), 1987 CanLII 2588 (BC CA), 15 B.C.L.R. 34 (B.C.C.A.)).

No other circumstances or mechanisms were identified that would allow for the cancellation of improperly issued preferred shares in British Columbia.

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