Azam v Andrews Custom Furniture Designs Inc.
Written by Xiyuan Feng
In Azam v Andrews Custom Furniture Designs Inc.,[1] a recent judgement of the Supreme Court of British Columbia, the Court acknowledged that receiving, and, if necessary, questioning a company’s financial records is a legal right of shareholders. Hiding the true financial situation of a corporation from shareholders can be oppressive or unfairly prejudicial to shareholders pursuant to section 227 of the Business Corporation Act.[2]
In this case, Andrews was incorporated under the BCA in 2008.[3] Being in the business of manufacturing custom cabinets and furniture.[4] Prior to the transactions discussed below, Andrueth Singh (“Singh”) was the sole shareholder of Andrews.[5] Throughout, Singh was its sole director.[6] In 2015, 30% of the common shares were transferred to Azam (the petitioner) for $65,000, which made Azam a minority shareholder,[7] while Singh was the majority shareholder.[8] When purchasing the shares, parties only wrote a brief written share purchase agreement indicating the amount and price of the shares purchased.[9] There was also an employment document showing Azam would work as a custom cabinet and furniture maker.[10] Singh assured Azam, before the transaction, that Andrews was making more than $350,000 per year.[11]
When Azam demanded the financial statement (“FS”) of Andrews in order to receive his share of profits in 2016, an incorrect unaudited FS showed a loss of $11,650.[12] Azam was upset and kept asking for a real 2016 FS,[13] yet there was no answer from Singh.[14] In the late 2016, Azam believed that he could not tolerate to work with Singh, and thus he stopped working at Andrews and asked Singh to purchase all his shares.[15] The demand to repurchase was refused.[16] Throughout the whole time of being a shareholder, Azam never participated the annual general meeting (“AGM”), because there never was one.[17] Also, Azam never waived the need for audited FS.[18] On this basis, Azam petitioned against Singh and Andrews seeking a declaration that the conduct was unfairly prejudicial or oppressive to him pursuant to subsections 227(2)(a) and (b) of the BCA.[19]
To determine whether a conduct is oppressive or unfairly prejudicial, the Court applied a two-prong test: (1) whether a reasonable expectation of a shareholder exists; and (2) whether the failure to meet the reasonable expectation falls within the concepts of oppression or unfair prejudice of the claimant’s interest, within the meaning of the BCA.[20]
Firstly, the Court found that Azam has reasonable expectations to attend AGMs where he could ask any question about Andrews’ financial position and to receive accurate financial statements.[21] They are legal rights clearly vested in Azam by Andrews’ Articles of Incorporations and the BCA, and a shareholder can reasonably expect these statutory requirements to be complied with.[22]
With respect to the second prong, the Court confirmed Andrews’ failure to hold AGMs and to deliver accurate financial statements. Andrews’ financial record was chaotic; for instance, the changes in revenues and expenses in 2016 FS are unexplained even after amendment;[23] payment for the employee’s tax and benefits was not reflected in Andrews’ ledger;[24] the book for cash transaction was illegible;[25] an employee’s wages were not correctly recorded in the ledger;[26] FSs since 2016 are unaudited.[27] Thus, Azam has no confidence in the financial information produced.[28] Additionally, without any opportunity of participating AGMs, he has no means to confirm or dispel the questions raised by Andrews’ accounting practices in the past six years.[29] In this sense, the operation of Andrews lacked probity and fair dealing towards Azam, since he cannot exercise his rights to protect his interests as a shareholder.[30]
In terms of the remedy, the Court, pursuant to s 227(3) of the BCA, ordered that Singh and Andrews were jointly and severally liable for purchasing Azam’s shares for $65,000.[31] In particular with respect to imposing personal liability on Singh, the Court reasoned that Singh deliberately breached the Articles and the BCA, including knowingly misrepresenting the financial situation in 2016 and personally benefiting from the misrepresentation,[32] which was at the root of this proceeding.[33]
This case provides a useful reminder that accessing financial statements of a company is a statutory right of shareholders. However, keeping track of financial records can be easily overlooked in the operation of small companies as they may choose not to appoint an auditor who can inspect the records regularly. In this sense, their directors may need to take care of the financial documents reasonably; for instance, checking the accuracy of financial statements, delivering financial statements to shareholders, responding any concerns in terms of financial situation during the corporation’s annual general meeting.
[1] 2022 BCSC 1166 [Azam].
[2] Business Corporations Act, SBC 2002, c 57[BCA].
[3] Azam, supra note 1, at para. 14.
[4] Ibid.
[5] Ibid at paras 15 and 20.
[6] Ibid at para 15.
[7] Ibid at para 20.
[8] Ibid at para 15.
[9] Ibid at para 21.
[10] Ibid.
[11] Ibid at para 17.
[12] Ibid at para 32.
[13] Ibid.
[14] Ibid at para 72.
[15] Ibid at para 33.
[16] Ibid.
[17] Ibid at para 49.
[18] Ibid.
[19]BCA, supra note 2, s 227(2).
[20] Supra note 2 at para 10 (citing BCE Inc. v 1976 Debentureholders, 2008 SCC 69at para 68).
[21] Ibid at para 47.
[22] Ibid at paras 46-48 (citing Business Corporations Act, SBC 2002, c 57, ss 182, 198, 200(1)(a), 203 & 204 and 1043325 Ontario Ltd. v Jeck, 2014 BCSC 1197 at para 104).
[23] Ibid at paras 56-57.
[24] Ibid at para 61.
[25] Ibid at para 58.
[26] Ibid at para 62.
[27] Ibid at para 66.
[28] Ibid at para 69.
[29] Ibid.
[30] Ibid.
[31] Ibid at para 97.
[32] Ibid at para 94.
[33] Ibid at para 80.
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