Canada: Unique Provisions For Creditors Under The Alberta Business Corporations Act

Last Updated: February 22 2019
Article by David J. Ukrainetz

In Canada, corporations can be established under either federal or provincial law. The federal government and the governments of each of the provinces all have legislation that governs corporations incorporated in their respective jurisdictions. Because each jurisdiction has its own statutory framework, each jurisdiction effectively has its own set of "rules" that will impact how a corporation incorporated under a particular jurisdiction will function. Further, the differences in rules can impact the interests of various stakeholders that have dealings with corporations incorporated in a particular jurisdiction.

An example of the differences in rules for corporate stakeholders can be seen in the special protections granted to creditors of corporations incorporated under the Alberta Business Corporations Act (the "ABCA"). Creditors of ABCA incorporated corporations may be able to obtain relief that is not available in other jurisdictions in which a corporation can pay out dividends to its shareholders, leaving the corporation unable to pay its liabilities as they become due.

Generally, corporations are not permitted to pay dividends to the owners of the corporation, when such dividend payments would leave the corporation without sufficient resources to pay its creditors. For instance, Section 43 of the ABCA provides as follows:

43 A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that

(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or

(b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.

Similar provisions to the above are found in the corporate legislation of other Canadian jurisdictions.

In situations where the directors of a corporation authorize such dividend payments, the creditors will want to see to it that these payments are restored to the corporation from the shareholders so that monies are available to pay the corporation's creditors. While the path for a creditor to get legal relief for such wrongly paid dividends under Canadian corporation legislation would typically involve the creditor making an "oppression remedy" application to the Court, the ABCA contains an alternate means for a creditor to obtain legal relief.

In a provision that is unique to the ABCA, a creditor may make a direct application under Section 118 (5) and (6) of the ABCA to get a Court order for the shareholders of a corporation to restore to the corporation impugned dividend payments that breached the restrictions found in Section 43. Section 118 (5) and (6) state as follows:

118 (5) If money or property of a corporation was paid or distributed to a shareholder or other recipient contrary to section ... 43... any person who was a creditor of the corporation at the time of the payment or distribution, is entitled to apply to the Court for an order under subsection (6).

(6) On an application under subsection (5), the Court may, if it is satisfied that it is equitable to do so, do any or all of the following:

(a) order a shareholder or other recipient to restore to the corporation any money or property that was paid or distributed to the shareholder or other recipient contrary to section ... 43...;

...

(c) make any further order it thinks fit.

This provision gives the Court wide discretion to "make any further order it thinks fit" in situations where dividends have been improperly paid to shareholders of a corporation to the detriment of the corporation's creditors. This unique provision of the ABCA is not available to creditors dealing with corporations incorporated in other Canadian jurisdictions.

The legislative drafters of the ABCA clearly recognized the importance of the principle that corporations should not be permitted to put the financial interests of shareholders above the obligations that the corporation has to its creditors; they drafted Section 118(5) and (6) of the ABCA to give creditors additional protections against improperly paid dividends. This is an important principle and may be a worthwhile addition to the corporate legislation of other Canadian jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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