Written by Craig R.R. Garbe
Ontario's New Corporate Forfeiture Regime and Corporate Record Keeping Requirements
On December 10, 2016 Ontario will repeal the compact and concise Escheats Act (the "Old EA") that has served the province for many years and will replace it with two much longer pieces of legislation: the Escheats Act, 2015 (the "EA") and the Forfeited Corporate Property Act, 2015 (the "FCPA"). Why? (you may ask). In the words of Ontario's esteemed legislators, to improve "the management of corporate land forfeited to the province". Personally, I wasn't aware that the management of forfeited land needed improving, but then, I'm not in charge of managing it. Time will tell whether the new acts will cause the desired improvement in management, but what the acts already tell us is that there will be an additional administrative burden on Ontario corporations as well as new risks and hurdles to vault in creditor enforcement situations.
What's an Escheat? Some Sort of Crook?
Unfortunately, the law of escheats has little to do with the criminal scandals and more to do with British feudal society. The word "escheat" comes from the Middle English and Old French verb "excheoir", meaning "to fill", and is essentially the legal principle that property returns to the party with an underlying interest in it upon the occurrence of certain events. In merry-old England, the party with the underlying interest was either a feudal lord or the Crown, and the 'certain events' were either a felonious act by, or death of, the feudal tenant. As the legal concept made its way across the sea to perhaps-equally-merry-but-certainly-much-newer Canada, the party with the underlying interest became only the Crown (thankfully, feudalism was lost en route), and the 'certain events' became (typically) the intestate death of an individual or the dissolution of a corporation.
Corporations, of course, are creatures of statute, and so affected only by the legal concept of escheat to the extent that their authorizing statute speaks to such concept. Corporations formed under the Business Corporations Act (Ontario) (the "OBCA") are subject to the concept of escheat pursuant to s. 244(1) of such act, which provides that any property of such a corporation that has not been disposed of on the date the corporation dissolves "forfeits to and vests in the Crown" (using the new language applicable later this year). While this operative provision is quite simple, the exact process by which the Crown may claim its interest, take the property, and use the property, was, and is now becoming even further, complex.
Why the Change-up? What did the Old Act Say?
The Old EA was short; it consisted of only seven sections. The Ontario legislature attempted in 2007 to quadruple its size to provide specific rights to the Crown to propose sales of escheated property, sell escheated property, and take a lien over escheated property, but the amendments were never proclaimed in force. In a nutshell, it gave the Crown the power to do the following, most of which is maintained (in an altered form) in the FCPA:
- take possession of escheated property or bring an action to recover such property (s. 1(1) and 7(1)). While title to property may vest in the Crown automatically pursuant to the OBCA, the act recognized that possession of property might impose liabilities on the Crown and was careful not to directly impose such liabilities unless the Crown took positive action;
- waive its entitlement to escheated property, and to release any rights back to the person or entity who held the property before it escheated (s. 5);
- grant escheated property to any person having a "legal or moral claim upon the person to whom it had belonged" (s. 3); and
- transfer or assign (for value) escheated property, but only escheated property the Crown had taken possession of (s. 6).
Why Two New Acts?
The primary difference is the subject matter, the EA governing property of an intestate individual or property with no known prior owner (bona vacantia) and the FCPA governing forfeited corporate property flowing from the dissolution of a corporation (see s. 2(1) and 2(2) of the EA). The government body in charge of administering the provisions of each act is also different. Under the EA, the Public Guardian and Trustee must deal with escheated property on behalf of the Crown, while under the FCPA the Minister of Economic Development, Employment and Infrastructure is empowered to act. While the acts are similar in the provisions regarding Crown liability for escheated property (see s. 9 and 10 of the EA and s. 3 and 4 of the FCPA), the acts differ in the way the Crown is entitled to take possession of and dispose of interests in such property. Generally, the EA provides for a more simplified manner of dealing with and disposing of interests in property than the more structured process set out in the FCPA.
So What's the FCPA All About?
The FCPA is the country-estate home to the basement apartment of the Old EA; they both provide the rules of engagement when it comes to Crown entitlement to escheated property, but the FCPA is bigger. The provisions of the FCPA may be of most interest to practitioners involved in security enforcement proceedings, but there are important considerations for solicitors as well. I don't propose to discuss all of the FCPA provisions in detail (it contains the expected rights of the Crown to sell property (s. 25), grant relief from forfeiture (s. 26), appoint a receiver (s. 13)), but I want to mention what I perceive as the two more troubling powers of the Crown under the FCPA.
As a real estate lawyer, registered title represents something of a sacred text to me, so the FCPA's grant to the Crown of power to unilaterally cancel encumbrances (over both real and personal property) is unsettling (see s. 18). My fear is tempered by the notification process the Crown is required to comply with (see s. 19), as well as the protected sanctity of certain registrations (see s. 18(12)), but I am left wondering exactly how the process will play out. Parties with an interest in forfeited corporate property are required to respond to notice from the Crown and indicate whether or not they "intend to act" (s. 22(2), but this doesn't alter the Crown's ability to cancel the encumbrance. Presumably if you are a secured creditor with an interest in any forfeited corporate property and you receive a notice of impending cancellation from the Crown your hand will be forced into enforcement proceedings lest your interest be erased.
Use for Crown purposes
More troubling than the Crown's power to cancel encumbrances is the Crown's power to use forfeited corporate property for Crown purposes, or rather, the speed with which the Crown can do so under the new acts. Subject to certain exceptions for property forfeited due to breach of specified acts by the corporation (see s. 241(4) of the OBCA), in the case of personal property, the Crown can elect to do so at any time (s. 24(5)), and in the case of real property, the Crown can elect to do so at any time provided it has registered a notice on title (which it can also do at any time; see s. 24(1)). Once it has begun to use such property for Crown purposes (or, in the case of real property, once the notice is registered), there are two important effects:
- the FCPA ceases to apply to the property (s. 24(9)); and
- the property is no longer available to satisfy a judgment, order or decision against the corporation or to be sold in power of sale proceedings (s. 242(1.1) of the OBCA).
The first effect is troubling to anyone who had a legal or moral claim to the property and intended to apply for relief under s. 26(1). The FCPA no longer applies and so such party's right to relief is extinguished. The second effect is troubling to secured creditors with an interest in any forfeited corporate property. There is a carve-out available to secured creditors who began a power of sale proceeding before the dissolution of a corporation (see s. 244(4) of the OBCA), but if a secured creditor begins power of sale proceedings after dissolution and the Crown subsequently registers notice on title that it intends to use real property for Crown purposes, the power of sale proceedings are useless. To make matters worse, a secured creditor who begins power of sale proceedings after dissolution of the debtor party must serve notice on the Crown under s. 242(3) of the OBCA, which will permit the Crown time to consider whether it wishes to register notice of intent to use for Crown purposes and so vitiate the secured party's ability to complete power of sale proceedings. Thankfully, neither the registration of notice nor the use of property for Crown purposes would cancel a valid and existing encumbrance against title to the forfeited corporate property, but enforcement proceedings would need to begin anew, against the Crown instead of the dissolved debtor corporation.
I'm not a Lender and I don't Intend to Let My Companies Dissolve. Anything Else I Should Care About?
Yes. The introduction of the FCPA carries with it amendments to 17 different acts. Most of these apply to government management and procedures, but in addition to the OBCA amendments discussed above, there are also important amendments to the record keeping provisions of the OBCA.
Pursuant to the amended Section 140.1 of the OBCA, each new OBCA corporation formed after December 10, 2016 must keep, at its registered office, a record of its ownership interests in land in Ontario, which records must identify the property, show the dates of acquisition and disposition, and contain supporting deeds/transfers with the property's municipal address, PIN number, legal description, and roll number (existing OBCA corporations have two years to comply with the new requirements (s. 140(4)). While compliance with the OBCA, including its record keeping provisions, is always generally advisable, these new records become particularly important when you consider the revised Section 238(1) of the OBCA, which requires the articles of dissolution of a corporation to state the corporation is no longer a registered owner of land in Ontario and that Section 239(1.1) allows refusal of the dissolution if the Director learns otherwise.
Corporate and real estate practitioners should review these amendments and discuss changes to standard record keeping requirements with clients. While existing corporations have two years to comply, it may make the most sense to update all corporate records now to establish a common practice. Practitioners should also consider the following:
- Does Section 140.1 require a register of land the corporation holds registered title to, beneficial title, or either? Consider the use of the term "registered owner" in Section 238(1).
- Does "ownership interests" (s. 140.1(1)) mean just a freehold interest? What about leasehold interests or the interest of a mortgagee?