When the talented Sam Cooke sang that “a change is gon’ come” he was not referring to Ontario’s Escheats Act. But a change did come on December 10, 2016, when the Escheats Act was repealed and replaced by two new Acts – the Escheats Act, 2015 and the Forfeited Corporate Property Act, 2015 (FCPA). These changes will impact all corporations incorporated under Ontario’s Business Corporations Act (OBCA) or Corporations Act (CA).
An escheat of property occurs automatically when there is an intestate death of an individual (that is they die without a will) or the dissolution of a corporation. For Ontario corporations, the OBCA and the CA each contain escheat provisions whereby any property of a corporation not disposed of on the date of dissolution is forfeited to and title vests in the Crown. Changes brought by the FCPA will undoubtedly bring additional administrative burdens and risks for creditors in enforcement matters.
So, What’s New?
The FCPA was enacted to implement a more comprehensive regime for the Crown’s dealings with forfeited corporate property. The types of property falling under the purview of the new legislation are:
Of all the changes being introduced with the new legislation, three in particular stand out: (1) a three-year deadline to recover forfeited corporate property from the Crown; (2) the ability of the Crown to cancel encumbrances on title; and (3) the use of forfeited corporate property for Crown purposes.
The introduction of a three (3) year timeframe to apply to recover forfeited corporate property after dissolution is a significant policy change as no timeline existed previously. Corporations dissolved prior to the FCPA coming into force have three years from December 10, 2016, to recover their forfeited property by applying to the Ministry of Economic Development, Employment and Infrastructure. A corporation may still be revived under its enabling statute for up to 20 years after dissolution, but any property that was forfeited will remain vested in the Crown and not returned. An added risk is that the Ontario Minister of Economic Development can accelerate the Crown’s disposition of forfeited property. This is accomplished by:
The cancellation of encumbrances is another new addition to the regime. The Minister will have the power to make an order cancelling encumbrances against forfeited corporate property that were enforceable and valid prior to becoming forfeited corporate property, or are deemed to be enforceable and valid under the FCPA. The order would be registered on title and would terminate the right to enforce the encumbrance. Such encumbrances could include mortgages and collateral security related to mortgages.
Ninety (90) days notice of the Crown’s intent to cancel the encumbrances must be given to: a) those with an interest on registered title to the Property; b) execution creditors; c) PPSA registrants; and d) security interest registrants. Any reply to the notice must be made in writing in accordance with the FCPA and not in the manner provided under any other statute (e.g., OBCA, CA, Mortgages Act, etc).
The last notable new addition to the regime is the use of forfeited corporate property for Crown purposes. With the new legislation the Minister may at any time register a notice on title of the Crown’s intention to use real property for Crown purposes. The Crown can take this step before the three-year timeframe post-dissolution, mentioned above, has elapsed if it gives the prior corporate owners notice of its intention to go this route. The use of forfeited personal property for Crown purposes follow the same rules as those for real property, with the exception that once a notice is registered on title for the real property the Crown may begin to use any personal property located there.
Something to Think About...
In light of these changes, lenders should consider requiring Ontario incorporated borrowers to provide evidence of their corporate existence on an annual basis, leaving ample time to take any necessary steps to protect the security if a borrower is dissolved. This could be accomplished by obtaining a Certificate of Status, which is an inexpensive search to conduct at a current cost of approximately $40 per corporation. Depending on the terms of the lending agreement, this administrative cost may be charged to the borrower. The FCPA does allow a revived prior corporate owner to make an application to have forfeited corporate property restored to it if the property was not returned at revival.
Even if a prior corporate owner is not revived, when forfeited corporate property is sold the Minister must give notice to all persons or entities the Ministry identifies as potentially being entitled to receive the proceeds of the sale, which would include the holders of a mortgage secured by such property unless it had been cancelled in accordance with the procedure described here. It may be necessary to negotiate an alternative distribution with the Ministry, but all persons or entities entitled to receive payments must be in agreement.