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Legal Notes: Corporations must exist on paper in order to file legal actions

John Bleasby
Legal Notes: Corporations must exist on paper in order to file legal actions

It might seem obvious that a corporation should legally exist in order to file an action. The courts have generally shown little tolerance for companies that, for whatever reason, allow corporate registrations to lapse while seeking legal recourse.

Riccardo Del Vecchio and Nathan Lean of Miller Thomson LLP outline what they describe as “a precautionary tale.” In 2021, the Ontario court discharged a lien and dismissed the lien action filed by a company which had allowed its “good standing” as a corporate entity to lapse due to “oversight and inadvertence.”

Plug and Play Solutions was under subcontract with Deltro Electric Ltd. to supply solar panels for a construction project. Claiming they were not paid in full, it registered and perfected a construction lien against Deltro within the correct timelines and simultaneously brought forward a breach of trust action against Deltro and its company principals.

It might have been a relatively straight-forward proceeding.

However, a missed corporate filing fee payment, clearly an administrative oversight, meant Plug and Play had been effectively dissolved just weeks prior to taking those actions. Once discovered, they took immediate action to revive their corporate status.

When Plug and Play’s lien action came to court, the key overlapping period of lien registration timelines and corporate dissolution were revealed. Plug and Play said this should have no bearing on the status of the lien since its corporate status had been revived.

As Gowling WLG partner Sahil Shoor and articling student Michael Piaseczny write, Plug and Play’s argument was that the court should “allow the continuance of the lien on equitable grounds, with particular emphasis on protecting small businesses regarding the remedial nature of the act.”

Deltro rebutted, saying Plug and Play’s lien should not be allowed to stand since its corporate existence had expired prior to the preservation of the lien.

In the end, the court ruled against Plug and Play.

“The court acknowledged that in certain situations, discretion can be exercised in statute of limitations cases to ensure that prejudice does not fall upon an aggrieved party,” write Del Vecchio and Lean. “However, even if it did have discretion to allow the lien to survive on equitable grounds, the court found that it would not have done so given the facts of the case.”

The court also cited the importance of adhering to the strict definitions and timelines under the Construction Act.

“The court held in favour of the statutory language found within the act that a company must be a legal entity to register and perfect a construction lien,” write Shoor and Piaseczny.

Sharon Sam and Simren Sihota, associates at Margie Strub Construction Law in Toronto, note the court relied on the 2003 case between Glencoe Insulation Co. Ltd. and Urban Mechanical Contracting Ltd.. Similar to the Plug and Play situation, it surrounded the cancellation of Glencoe’s corporate charter at the time Glencoe had preserved and perfected a lien against Urban Mechanical.

“In Glencoe, the divisional court held that ‘the dissolution of a company does not render the company non-existent, but rather it is in a state of legal limbo capable of restoration by Articles of Revival which will restore for all purposes nunc pro tunc save for rights acquired by any person in the interim,’” Sam and Sihota write.

“Simply put, while a lien may be preserved and perfected while a corporation is dissolved, the claim remains in abeyance, albeit one that can be revived. However, if the statutory period for preserving and perfecting expires while the company remains dissolved, the defendant has acquired a ‘post-dissolution right’ or right to rely on the expiration of the limitation period to defeat a now statute barred claim.”

The court’s ruling should act as a warning to companies filing liens and related actions. Allowing key registration filings to lapse is sloppy and companies that fail to keep basic corporate affairs in order should not expect any special discretion to be granted.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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