No, they are not allowed to make decisions without a valid medical, as per the laws before one is granted permanent residence of Canada. The law states that a new immigrant must have a valid medical as at time of landing in Canada.
The last time I called CIC I was told my file looks good just the medical that needs to be extended before a decison is made and my GCMS notes corroborates what the call centre agent said. My GCMS notes shows that all the 4 assessments have been duely passesd - eligibility, criminality, security (although blank for reasons best known to CIC) and medical which is usually valid for 1 year before landing and subject to extension or redo, depending if you are an inland or outland applicant. They even requested for a new passport from us (me and my spouse) on March 26 which I sent to them almost immediately I received the email, which was duely received by their office.
There is a note on my GCMS under the "notes to file section" by the visa officer which states that "no apparent concerns evident, extend outstanding medicals" which I guess means no apparent evidence that warrants disapproval of my application. The note was made on March 5.
So the only pending thing on my file is the medical extension, atleast for now. I hope they don't come up with something else again.