Without proper documentation, decisions made by a company’s officers or directors are without legal substance and therefore vulnerable to scrutiny by disgruntled shareholders, tax authorities, and the courts. For example, if the Canada Revenue Agency (“CRA”) audits a company, its audit will include a review of the company’s minute book to verify, for example, how monies have been removed from the company. Although the company’s tax returns may reflect that the monies have been removed by the occurrence of certain transactions (e.g. declaration of a dividend or bonus), if such transactions have not been documented in the minute book, as far as the CRA is concerned they have not occurred. This may lead the CRA to reassess the company, resulting in the company having to pay more tax.
Further, many corporate transactions, such as the borrowing of money, may not be completed or may be delayed, since lenders usually require a legal opinion on the company and the authority of the individuals that purport to speak on its behalf. Without properly maintain corporate records, the transaction may be delayed and additional expense incurred in bringing the company’s records up to date, if this is possible. Sometimes, formerly involved directors or shareholders are unavailable, the paper trail cannot be repaired, and the contemplated transaction fails because a proper legal opinion cannot be given.