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Corporations - Derivative Actions

. Sandhu v. Singh and Sikh Heritage Centre

In Sandhu v. Singh and Sikh Heritage Centre (Div Ct, 2022) the Divisional Court considered the standing of a former director for a common law derivative action under the Corporations Act:
Issue # 1: Identity of Directors and Standing of Appellant

[22] This was the central issue argued on this appeal. The appellant was one of the seven directors of the original corporation, incorporated in May 1999 pursuant to the Ontario Business Corporations Act. The appellant’s position as a shareholder/director ceased when each of the original shareholders surrendered their shares for cancellation and SHC was thereafter continued as a not-for-profit corporation pursuant to the Letters Patent of Continuation dated August 3, 2001, and pursuant to the Corporations Act.

[23] Pursuant to the decisions in Deol v. Grewal, 2008 CanLii 44699 (ONSC) and Rexdale Singh Sabha Religious Centre v. Chattha, [2006] CanLii 39456 (ONCA), the appellant is neither a director, shareholder nor member of SHC as he was not named as an applicant on the Letters Patent of Continuation.

[24] As the jurisprudence in Ontario has established, when dealing with s. 332 of the Corporations Act leave of the court is necessary in order to protect corporations from derivative actions started by inappropriate parties. The appellant did not adduce evidence to show that he was a shareholder, member or creditor of SHC as required by s.332 of the Corporations Act.

[25] There are currently three directors. The appellant is not one of them.

[26] The appellant submits that the additional four “directors” attended meetings of the new corporation. But, the evidence indicates, so did many other people. The SHC sought input from many members of the temple.

[27] The Letters Patent are clear on their face. There were only three directors listed. The appellant submits that this arose from inadvertence. He requests on Order to correct this nunc pro tunc.

[28] Counsel for the appellant submitted that there is no clear evidence regarding this, and that perhaps the Application Judge should have ordered the matter to go to trial (notwithstanding that this was not requested of him).

[29] This is an argument built on quicksand. Section 284(1) of the Corporations Act provides as follows:
284 (1) The persons named as first directors in the Act or instrument creating the corporation are the directors of the corporation until replaced by the same number of others duly elected or appointed in their stead.
[30] The Act makes clear that the first directors are those who signed the application that created the corporation. The appellant is not one of them. Only one director has since been duly elected or appointed to replace a director. That is Partap Singh Dhinota, not the appellant. It follows that the appellant is not a director. This is a matter of law. The personal belief of the appellant is not relevant. Simply believing that one is a director does not make one so.

[31] Furthermore, there is no basis in law or in fact to accede to the appellant’s request to alter the number of directors nunc pro tunc. Section 285(1) of the Act governs changes to the number of directors. It provides as follows:
285 (1) A corporation may by special resolution increase or decrease the number of its directors.
[32] No special resolution has been passed changing the number of directors from three to seven.

[33] The situation before the court is analogous to Rexdale Singh Sabha Religious Centre v. Chattha, 2006 CanLII 39456 (ON CA), 2006 CarswellOnt 7413, [2006] O.J. No. 4698 (C.A.), upon which the Application Judge relied. It also involved a dispute as to who the directors of the non-profit corporation were. The Court of Appeal ruled as follows, at paras. 3 – 5:
The Corporations Act, R.S.O. 1990, c. C.38 provides that upon incorporation, each applicant becomes a director and member of the corporation. The Act provides that persons may be admitted to membership thereafter by resolution of the Board of Directors.

No proper procedure was ever taken to change the members of these corporations in accordance with the Act. There was a total failure to comply with the Act. We cannot agree with the application judge’s conclusion that four of the five directors of Rexdale can be taken to have approved the creation of the list of the members.

It remains that the proper directors and members of the three corporations are the applicants for the letters patent of each corporation.
[34] In the case at bar, we are similarly of the view that the proper directors and members of SHC are the three applicants for the Letters Patent of the corporation, subject only to the one approved change where Sherdaljit Dhillon was replaced by Partap Singh Dhinota. It follows that the appellant is not, at law, a director.

[35] Since he is not a director, nor is he a shareholder, member or creditor as required by s. 332 of the Act, the appellant has no standing to proceed with a common law derivative action without leave of the court. The appellant did not seek leave of the court. The Application Judge did not make a palpable and overriding error in so finding.
. Wiens v. 1814047 Ontario Inc.

In Wiens v. 1814047 Ontario Inc. (Div Ct, 2020) the Divisional Court considers a statutory application for leave to commence a derivative action under s.246 of the OBCA, which is an order that a third party be allowed party status when the corporation fails to advocate for itself:
[9] The application for leave is required under section 246 of the Business Corporations Act.[1] The test that applies when such an application is made is in the legislation. It requires the Court to be satisfied that:
(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.[2]


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