Can I claim indemnity if the seller already spent the sale proceeds?

The seller’s indemnity is an obligation under the purchase agreement. The seller having spent the money does not discharge it, unless the agreement says it does. The harder question is collection: a claim is only as useful as the assets behind it. That is why it matters whether anything stands behind the promise that does not depend on the seller’s goodwill, such as a holdback held by a third party. See what an escrow holdback is.

Check who gave the indemnity

If the seller is an individual, the claim is against that person. If the seller is a corporation that sold its assets, the claim is against the corporation, and the proceeds may have moved to its shareholders. Under the Canada Business Corporations Act, a corporation shall not declare or pay a dividend if there are reasonable grounds for believing it is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and stated capital of all classes (s.42). Directors who vote for or consent to a resolution authorizing a payment of a dividend contrary to s.42 are jointly and severally, or solidarily, liable to restore to the corporation the amounts paid and not otherwise recovered by it (s.118(2)), subject to a defence in s.123(4) for a director who exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. That duty runs to the corporation, and the Act applies to federally incorporated corporations. Provincial statutes govern the others.

Look for something behind the promise

Ask whether the agreement gave you a holdback, a personal guarantee from the seller’s owner or a security interest that is still in place. If an amount is still held by the lawyer or agent, check what claim notice the agreement requires and by when. If nothing stands behind the seller, ask your lawyer what the options are against a corporation that no longer holds assets and whether the people who took the money can be reached.

Mind the time limit

Under Ontario’s Limitations Act, 2002, unless the Act provides otherwise, a proceeding shall not be commenced after the second anniversary of the day the claim was discovered (s.4). British Columbia’s Limitation Act says that, subject to the Act, a court proceeding must not be commenced more than 2 years after the day the claim is discovered (s.6), and it has its own discovery rule for claims for contribution or indemnity (s.16). Each Act has exceptions, and other provinces differ. Waiting to see whether the seller will pay is not a reason to let the period run.