The Second Opinion: Mandatory Audit Rights And The CBCA

Can a private corporation decline to provide audited financial statements to its shareholders without their unanimous consent on the ground that it is too expensive for it to do so? The British Columbia Court of Appeal recently addressed this question in Li v. Global Chinese Press Inc, 2014 BCCA 53, and held that the answer is no, at least for companies that are incorporated under the Canada Business Corporations Act ("CBCA"). The decision in Li is an important appellate clarification of this point, and is one that private corporations should bear in mind in their dealings with shareholders.

The issue arises this way. Under s. 155(1) of the CBCA, the directors of a corporation are required to provide its shareholders with financial statements at every annual meeting, together with the report of the auditor "if any". These final words suggest that the provision of audited as opposed to unaudited financial statements is a matter for the company's discretion. Further, s. 167(1) of the CBCA states that a court "may" appoint an auditor, on the application of a shareholder, where it does not have one. Since s. 167(1) does not say that the court "shall" appoint an auditor, it leaves the impression that there is no mandatory requirement for an auditor, at least in the case of private (or "non-distributing") corporations, which are expressly permitted to operate without an auditor under s. 163(1) of the CBCA.

At the same time, this interpretation of the CBCA neglects to consider s. 163(3). It states that a private corporation may only resolve not to appoint an auditor if the resolution is consented to by all shareholders, including those shareholders who are not otherwise entitled to vote. Accordingly, s. 163(3) makes unanimous shareholder consent a pre-requisite to dispensing with an auditor for private companies under the CBCA. This suggests that companies, and indeed the courts, should have no discretion in deciding to appoint an auditor if one or more shareholders refuse to agree that an auditor is unnecessary.

In Li, the Court of Appeal opted for the latter interpretation. In doing so, it affirmed a lower court ruling which...