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Summary Part 5 establishes some of the means by which a corporation incorporated
under the Act may finance its activities. These include the ability to:
borrow money on the credit of the corporation; issue, re-issue, sell,
etc. debt obligations; give a guarantee on the security of the corporation;
and create a security interest in any or all of the property of the corporation.
The criteria for doing so are also included. The corporation may also
require its members to pay annual fees or dues. Criteria and processes
regarding the issuance of debt obligations are addressed. (Sections 28-31)
Sections 32-34 provide for the treatment of property as regards trusts
and investments.
Unless it is in furtherance of the corporation's activities or specifically
permitted by the Act, corporate profits and property may not be transferred,
directly or indirectly, to the membership. (Section 35)
The members of a corporation are not liable for any liabilities of the
corporation unless specifically identified in the Act. A membership can,
however, be subject to a lien held by the corporation for a debt owing
from the acquisition of the membership. The corporation can accept as
a gift a membership surrendered to it and can eliminate or reduce a liability
resulting from the acquisition of the membership. (Sections 36-37)
All corporations need to obtain funds to pursue their stated objectives.
This Part will provide corporations under the Act with a means of raising
such money. The focus is on borrowing and debt obligations because entities
that chose to incorporate under the Act cannot have share capital, a
common way for corporate bodies to finance their activities.
While these corporations may earn money, there is a prohibition on the
distribution of corporate revenue or assets to the membership, unless
it is permitted by the Act or in furtherance of its activities.
Briefing Book
An Act Respecting Not-for-Profit Corporations and
Other Corporations Without Share Capital
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Bill Clause No. 28
Section No. 28
Topic: Corporate Finance
Proposed Wording
28. (1) Unless the articles, the by-laws or a unanimous member
agreement otherwise provides, the directors of a corporation may, without
authorization of the members,
(a) borrow money on the credit of the corporation;
(b) issue, reissue, sell, pledge or hypothecate debt obligations of
the corporation;
(c) give a guarantee on behalf of the corporation to secure performance
of an obligation of any person; and
(d) mortgage, hypothecate, pledge or otherwise create a security interest
in all or any property of the corporation, owned or subsequently acquired, to
secure any obligation of the corporation. |
(2) Despite subsection 139(2) and paragraph 143(a), unless the articles,
the by-laws or a unanimous member agreement otherwise provides, the directors
may, by resolution, delegate the powers referred to in subsection (1) to a
director, a committee of directors or an officer.
Rationale
This section provides that directors may borrow money on the credit of the
corporation. Directors have broad powers to borrow money on behalf of the corporation,
without requiring the approval of members.
Subsection 28(1) provides that directors of a corporation may borrow funds
on the corporation's behalf through a variety of instruments subject only to
the restrictions found in the corporation's articles, by-laws or any unanimous
member agreement.
Subsection 28(2) states that, subject to the articles, by-laws and any unanimous
member agreement, the directors may delegate their borrowing powers to a committee
of directors or to a single director or officer.
Present Law
Canada Corporations Act:
65. (1) When authorized by by-law, duly passed by the directors and sanctioned
by at least two-thirds of the votes cast at a special general meeting of the
shareholders duly called for considering the by-law, the directors of a company
may from time to time
(a) borrow money upon the credit of the company;
(b) limit or increase the amount to be borrowed;
(c) issue debentures or other securities of the company;
(d) pledge or sell such debentures or other securities for such sums
and at such prices as may be deemed expedient; and
(e) secure any such debentures, or other securities, or any other present
or future borrowing or liability of the company, by mortgage, hypothec, charge
or pledge of all or any currently owned or subsequently acquired real and personal,
movable and immovable, property of the
company, and the undertaking and rights of the company. |
(2) Any such by-law
may provide for the delegation of such powers by the directors to such officers
or directors of the company to such extent and in such manner
as may be set out in the by-law.
(3) Nothing in this section limits or restricts the borrowing of money by
the company on bills of exchange or promissory notes made, drawn, accepted
or endorsed by or on behalf of the company.
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Bill Clause No. 29
Section No. 29
Topic: Corporate Finance
Proposed Wording
29. (1) Subject to the articles, the by-laws and any unanimous member agreement,
the directors may issue debt obligations for consideration consisting of money
or other property or past services. (2) The monetary value of the property or services shall not be less than
the fair equivalent of the money that the corporation would have received if
the debt obligation had been issued for money.
(3) In determining whether property or past services are the fair equivalent
of a money consideration, the directors may take into account reasonable charges
and expenses of organization and reorganization and payments for property and
past services reasonably expected to benefit the corporation.
(4) For the purposes of this section, "property" does not include
a promissory note, or a promise to pay, that is made by a person to whom a
debt obligation is issued, or a person who does not deal at arm's length, within
the meaning of that expression in the Income Tax Act, with a person
to whom a debt obligation is issued.
Rationale
This section provides that the directors have the power to issue debt obligations
when, to whom and for what consideration the directors determine. Debt obligation
can only be issued if they are fully paid in money, property or past service.
If debt obligations are issued for property or past service, the value of the
property or past service, as the case may be, cannot be less in value than
the monetary equivalent that the corporation would have received if it were
to have issued the debt obligations for money.
Subsection 29(1) provides that directors of a corporation may, subject to
the corporation's articles, by-laws and any unanimous member agreement, issue
debt obligations for consideration of money, property or past service to the
corporation.
Subsection 29(2) stipulates that if the debt obligation issued is for consideration
of property or past service, the value of the property or past service must
be equivalent to what the corporation would have received if the debt obligation
was issued for money.
Subsection 29(3) states that the directors, in determining the monetary value
of the property or past service, may take into account reasonable costs incurred
by and benefits accrued to the corporation.
Subsection 29(4) clarifies that the definition of property excludes promissary
notes or promises to pay made by the person to whom debt obligations are issued
or a person not dealing at arm's length from such person.
Present Law
None.
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Bill Clause No. 30
Section No. 30
Topic: Corporate Finance
Proposed Wording
30. (1) Debt obligations issued, pledged, hypothecated or deposited by a corporation
are not redeemed by reason only that the indebtedness evidenced by the debt
obligations or in respect of which the debt obligations are issued, pledged,
hypothecated or deposited is repaid. (2) Debt obligations issued by a corporation and purchased, redeemed or otherwise
acquired by it may be cancelled or, subject to any applicable trust indenture
or other agreement, may be reissued, pledged or hypothecated to secure any
existing or future obligation of the corporation, and such an acquisition and
reissue, pledge or hypothecation is not a cancellation of the debt obligations.
Rationale
This section reverses the common law rule that prohibits a corporation from
reissuing a debt obligation certificate which has been previously redeemed.
Corporations can acquire their own debt obligation certificates and later pledge
them a second time as security for new borrowing. In this way a new lender
can be given, quickly and efficiently, the same security as the original.
Subsections 30(1) and (2) allow a corporation to reissue a debt obligation
which has previously been redeemed (i.e., it can acquire its own debt obligations
and later pledge them again for new borrowing).
Present Law
Canada Corporations Act:
67. (1) Where either before or after the 1st day of October 1934, a company
has redeemed any debentures previously issued, then
(a) unless any provision to the contrary, whether express or
implied, is contained in the debentures or in any contract entered into
by the company; or
(b) unless the company has, by resolution of its shareholders or by
some other act, manifested its intention that the debentures shall be cancelled, |
the company shall have power to reissue the debentures, either by reissuing
the same debentures or by issuing other debentures in their place, but the
reissue of a debenture or the issue of another debenture in its place, under
the power by this section given to a company, shall not be treated as the issue
of a new debenture for the purposes of any provision limiting the amount or
number of debentures to be issued.
[...]
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Bill Clause No. 31
Section No. 31
Topic: Corporate Finance
Proposed Wording
31. Subject to the articles, the by-laws and any unanimous member agreement,
the directors may require members to make an annual contribution or pay annual
dues and may determine the manner in which the contribution is to be made or
the dues are to be paid.
Rationale
This section allows not-for-profit organizations
to require their members to pay annual fees or fulfil some annual requirement,
such as working a set
number of volunteer hours for the organization. The payment of fees by members
is most prevalent in mutual benefit organizations (e.g., curling clubs, golf
clubs, etc.) These types of organizations need the ability to charge members
annual fees so that they can continue their operations. The corporation's right
to charge members annual dues or contributions is, of course, subject to the
corporation's articles, by-laws and any unanimous member agreement in place.
Further, the directors are given the discretion to set out the manner in which
the fees are to be paid.
Present Law
None.
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Bill Clause No. 32
Section No. 32
Topic: Corporate Finance
Proposed Wording
32. A corporation owns any property of any kind that is transferred to or
otherwise vested in the corporation and does not hold any property in trust
unless that property was transferred to the corporation expressly in trust
for a specific purpose or purposes. Rationale
This section clarifies the common law by specifying that a corporation, defined
as a person under this Act, owns any property transferred to, or acquired by,
it. It does not hold the property in trust, unless a trust was specifically
contemplated in the transfer of the gift to the corporation.
Present Law
None.
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Bill Clause No. 33
Section No. 33
Topic: Corporate Finance
Proposed Wording
33. Directors are not, in that capacity, trustees for any property of the
corporation, including property held in trust by the corporation. Rationale
This section provides that no director would be deemed to be a trustee with
respect to any property held or administered by the corporation. Property may
be held in trust by the corporation, but that does not mean that the directors
will automatically become trustees of that property. This section does not
prevent directors from acting as trustees for property held in trust by the
corporations, but the trustee role for the director must be created explicitly.
It simply prohibits the involuntary assumption of that role. A director who
is explicitly made a trustee assumes that role independent of his/her role
as a director.
Present Law
None.
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Bill Clause No. 34
Section No. 34
Topic: Corporate Finance
Proposed Wording
34. Subject to the limitations accompanying any gift and the articles or by-laws,
a corporation may invest its funds as its directors think fit. Rationale
This section provides directors with the necessary flexibility so that they
can invest the corporation's funds as they deem advisable, unless there are
limitations imposed on a gift that the corporation has accepted or there are
limitations in the by-laws or articles of the corporation.
Present Law
None.
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Bill Clause No. 35
Section No. 35
Topic: Corporate Finance
Proposed Wording
35. (1) Subject to subsection (2), no part of a corporation's profits or of
its property or accretions to the value of the property may be distributed,
directly or indirectly, to a member, a director or an officer of the corporation
except in furtherance of its activities or as otherwise permitted by this Act. (2) If a member of a corporation is an entity that is authorized to carry
on activities on behalf of the corporation, the corporation may distribute
any of its money or other property to the member to carry on those activities.
Rationale
This section requires that all profits and any increases in the value of the
corporation's property be used in furthering the purposes of the corporation.
In addition, this section prohibits the corporation from distributing its profits
and property to members or directors of the corporation, except in furtherance
of its activities or as permitted by the Act. However, in the case where another
corporation is a member of the corporation, the prohibition is lifted provided
that any money or property transferred to the other corporation is used to
carry out activities on behalf of the corporation providing the money or property.
This exception is particularly important for foundations which have corporations
as members and organizations that are vertically integrated (e.g., national
organizations which have provincial organizations as members). For example,
the Act permits reasonable remuneration and indemnification of expenses for
directors, officers and employees. Also, a charity whose activities include
raising money to buy wheelchairs for members would not have a problem.
Under subsection 35(1) a corporation is required to use all profits or increases
in the value of its property to further the activities of the corporation.
It would not be allowed to distribute any of its profits or assets to a member,
director or officer of the corporation except in furtherance of its mandate
or as expressly permitted in other parts of the proposed legislation.
Subsection 35(2) provides an exception to allow a corporation to distribute
its money or property to a body corporate or entity where that body corporate
or entity is a member of the donating corporation and is authorized to carry
out activities on behalf of the donating corporation, provided that the money
or property is used for the purposes of carrying out the activities of the
donating corporation.
Present Law
None.
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Bill Clause No. 36
Section No. 36
Topic: Corporate Finance
Proposed Wording
36. A corporation may accept a membership in the corporation surrendered to
it as a gift and may extinguish or reduce a liability respecting an amount
unpaid on that membership. Rationale
This section allows members to donate their membership as a gift to the corporation.
It also allows directors of the corporation to reduce or eliminate any debts
or obligations associated with a donated membership. This provides the directors
with the flexibility to act in the best interest of the corporation.
Present Law
None.
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Bill Clause No. 37
Section No. 37
Topic: Corporate Finance
Proposed Wording
37. (1) The members of a corporation are not, in that capacity, liable for
any liability of the corporation, including any arising under paragraph 251(3)(f)
or (g), or any act or default of the corporation, except as otherwise
provided by this Act. (2) Subject to subsection 43(2), the articles may provide that the corporation
has a lien on a membership registered in the name of a member or the member's
personal representative for a debt of that member to the corporation, including
an amount unpaid in respect of a membership issued by a body corporate on the
date it was continued as a corporation under this Act.
(3) A corporation may enforce a lien referred to in subsection (2) in accordance
with its by-laws.
Rationale
This section makes it clear that members, as members, are not liable for any
act or default of the corporation. As with shareholders of business corporations,
the principle of limited liability, basic to corporate law, is expressly extended
to members of not-for-profit corporations. Moreover, the corporation's articles
may provide that if a member has a debt outstanding to the corporation, the
corporation can place a lien on the member's membership.
Subsection 37(1) limits the liability of members.
Subsection 37(2) permits a corporation, in its articles, to secure a debt
owing by a member through a lien on the membership interest of that member.
Subsection 37(3) states that the lien on a member's membership must be enforced
according to the corporation's by-laws.
Present Law
None.
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Corporate and Insolvency Law Policy
