Fairgreen Investments Limited v. Minister of National Revenue, [1972] CTC 2446, 72 DTC 1374

The Chairman (orally from the Bench):—This is an appeal by the taxpayer, Fairgreen Investments Limited, against an assessment levied by the Minister for the taxation years 1967 and 1968. It also involves the appeals of two other taxpayers, Santana Developments Limited and Maplevale Developments Limited, hereinafter referred to as Santana and Maplevale, respectively. The facts are brief and are not in dispute.

Messrs Arthur Agar and Gerard: C Conrad were each holders of 50% of the issued shares of the capital stock of Santana and Maplevale at all material times, and therefore at all material times those two companies were associated, a matter which is not in issue. Evidence was given by Mr Agar and by Mr Edgar Abele as to how the appellant company, in this instance Fairgreen Investments Limited, hereinafter referred to as Fairgreen, came into existence and subsequently involved a third man, the said witness Edgar Abele.

Apparently Agar and Conrad teamed up in or about 1960 to construct small neighbourhood shopping plazas. (I use the term “small” as relative to what might be thought of as “large’’ shopping plazas.) Conrad apparently was the real estate broker who located areas for construction, and Agar was the man who took care of the construction requirements. They had built about 20 of these developments over the last eleven years. It is obvious from the evidence that they usually obtained outside financial assistance in each case, or in a large majority of cases. They normally tried—I suppose as would be ultimate in the lives of small contractors—to build the project within the amount of the mortgage.

In 1963 Fairgreen was incorporated, with Agar and Conrad again [each] holding 50% of the stock. The practice appeared to be to incorporate a new company for each development, and this was to be for one of their typical projects. Abele, who had immigrated to this country from Latvia by way of England, was a carpenter all through the material time, and had met Agar when Agar was a carpenterforeman on some construction work. Abele was in business in the carpentry contracting business with another person who, in 1963, for health reasons, wished to remove himself from participation with Abele. Abele had some money available, and he approached Agar on the Fairgreen site and asked to be cut in on some project with Agar and Conrad.

Apparently there was rapport between the two people, and Agar spoke to Conrad. However, nothing was in sight at that time because Agar and Conrad had just nicely got under way with Fairgreen. Abele was persistent and, to show his good faith and sincerity, produced and delivered a cheque for $10,000 to Agar. Agar was reluctant to accept it on location, not because he did not wish to have Abele as a partner or as a fellow shareholder, but because he felt there was an undue responsibility placed on him to be possessed of this cheque in the manner in which he was. In any event, it appears that Conrad suggested that they let Abele in on the Fairgreen project for $30,000, $10,000 of which they already had, and the other $20,000 would be paid out of the proceeds of moneys to be earned by Abele as the carpenter-contractor on this and future jobs.

Abele was evidently prepared to trust these other gentlemen completely. The evidence does not indicate that he sought independent legal advice, but he did speak to a chartered accountant by the name of Wenner, who was also the accountant for Agar and Conrad. Wenner appears to have advised Abele, who says he really did not understand too much about the technicalities of it but had in effect requested that something be reduced to writing to protect him so that the other two would not be able “to squeeze him out”. He says, also, that the accountant told him about certain tax advantages which were not immediately available and some discussion about associated corporations took place. It is hard to tell whether Mr Abele really remembers that from so far back or whether it is a reconstruction of what has happened since this appeal began. However, in any event, I am satisfied that Wenner advised well, and that steps were taken by the solicitors for the company to provide certain safeguards for Abele.

I found at the outset that the manner in which these amendments were made was rather unusual, because they were made in the Original by-law in the minute book by way of erasures and retyping and initialling by the parties rather than by the passing of an amending by-law. However, although the minute book has not been submitted as an exhibit, the evidence of Mr Abele is that certainly it was all completed by the year 1964. It is not seriously contended by the Minister that there was anything improper in the amendments that took place. In fact, in his argument, counsel for the Minister quite fairly acknowledged the fact that the unanimity clauses appear to have been upheld by cases in the Supreme Court of Canada and that the Minister’s assessments stand or fall on the provisions of paragraph 22 of By-Law No 1, which is usually referred to in corporate jargon as “the general by-law” of a company.

Before referring to paragraph 22, I should note the following:

Paragraph 8, dealing with the shareholders of the company, provides that three persons present in person and each entitled to vote thereon, shall constitute a quorum for the transaction of business at any meeting of shareholders.

Paragraph 14 provides that at all meetings of shareholders every question shall, unless otherwise required by the letters patent or the by-laws of the company or by law, be decided by 100% of the votes duly cast on the question. (Let me say, in passing, that there was no evidence to show that any Act or any portion of the letters patent had been breached or in any way prevented the passage of that clause.

Paragraph 17 removes the right of the casting vote.

Paragraph 19, dealing with directors, provides that three directors shall constitute a quorum.

All of these provisions are within the powers of the directors. Since no question is raised by the respondent, I assume that these by-laws were duly passed, duly ratified and duly confirmed by the shareholders.

Paragraph 28 provides that at all meetings of the board of directors— I indicate directors because this is part of the section dealing with the directors of the company—every question shall be decided by a 100% vote cast on the question.

These are the safeguards that were requested by Abele and that were put in for his benefit with the consent and approval of all the parties. I should say that he subsequently received one-third of the issued common shares of the capital stock of the company.

In view of the admission made by counsel for the Minister, I do not think it is necessary to deal with the right and legality of the unanimity provisions that have been referred to.

I now come to paragraph 22 of By-Law No 1, on which the Minister really bases his whole assessment—at least at the date of the hearing.

Paragraph 22 provides for the removal of directors, and is in the normal phrasing that shareholders may, by resolution passed by at least a two-thirds vote cast at a general meeting of shareholders, of which notice specifying the intention to pass such resolution has been given, remove any director before the expiration of his term of office, and may, by a majority of the votes cast at that meeting, elect any person in his stead for the remainder of the term.

If there is any substance to that clause, then in my view the appellant must fail. Therefore what can Conrad and Agar do to the detriment of Abele under this clause? In my view, nothing. It is impossible for the directors to hold a meeting or for the shareholders to hold a meeting without a quorum of three. I think it is trite law to say that a meeting without a quorum is a nullity. The appellant has cited the case of Lumbers v Fretz, 62 OLR 635; (1928), 63 OLR 190; [1928] 4 DLR 269, in this connection.

So what was the situation? In order to give any substance to paragraph 22, they had to have a meeting, and in order to have a meeting, they had to have all three of them there, and if all three were there, Abele would have to consent in effect to his being deposed by the other two. He had the power to frustrate this clause by merely staying away, as they could not hold a meeting without him. I think the law is well settled and several cases have been cited on this matter, and I think a reading of the by-law itself, which I have already said contravenes no section of The Corporations Act of Ontario which was in effect at the material time, prevents paragraph 22 from having any substance.

For these reasons, therefore, I think the appeal must be allowed and the matter referred back to the Minister for reassessment on the basis that Fairgreen Investments Limited is not associated with Santana Developments Limited and Maplevale Developments Limited, and I so find.

The appeals in the other two cases will follow the event and in each case the appeal will be allowed.

Counsel for the parties relied on the provisions of the Ontario Corporations Act, RSO 1960, c 71 and amendments thereto, and the cases cited in addition to Lumbers v Fretz (supra) were: Buckerfield’s Ltd et al v MNR, [1964] CTC 504; 64 DTC 5301; [1965] 1 Ex CR 299; MNR v Dworkin Furs (Pembroke) Ltd et al, [1967] CTC 50; 67 DTC 5035; [1967] SCR 223; and Pender Enterprises Ltd v MNR, [1965] CTC 343; 65 DTC 5202; [1966] Ex CR 180.

Appeal allowed.