What happens to an indemnity if the seller dissolves the company?

An indemnity is the seller’s promise to cover certain losses after closing. If the seller is a company that later dissolves, the question is whether that promise can still be enforced. For a corporation governed by the Canada Business Corporations Act (CBCA), the Act keeps claims alive for a period after dissolution. Other corporate statutes have their own text, so the first step is to confirm which statute governs the seller.

What the CBCA keeps alive

Section 226(2) of the CBCA says that, despite dissolution under the Act, a civil, criminal or administrative action or proceeding begun before dissolution may be continued as if the corporation had not been dissolved. An action may also be brought against the corporation within two years after its dissolution as if it had not been dissolved. Property that would have been available to satisfy a judgment or order if the corporation had not been dissolved remains available for that purpose.

Claims against shareholders

Section 226(4) adds that a shareholder to whom any of the corporation’s property has been distributed is liable to a person making a claim under subsection (2), to the extent of the amount the shareholder received. An action to enforce that liability may be brought within two years after the date of dissolution. Under section 226(1), “shareholder” includes the heirs and personal representatives of a shareholder, and section 226(5) lets a court order the action against former shareholders as a class.

Why dissolution is not a clean exit

Corporations Canada’s guide says a CBCA corporation can be dissolved only when its property has been distributed and its liabilities have been discharged, and that a corporation issued a certificate of intent to dissolve must notify creditors of that intent. Whether a contingent indemnity counts as a liability to be discharged is a question for the agreement and a lawyer. Section 209 also lets an interested person, including a creditor or a person who has a contract with the dissolved corporation, apply to the Director to have it revived. Subject to any reasonable terms the Director imposes and to rights others acquired after dissolution, a revived corporation is liable for the obligations it would have had if it had not been dissolved.

What to check before closing

• Ask whether the seller is a federal or provincial corporation. Ontario’s Business Corporations Act has its own sections, 242 and 243, so read them for the periods that apply there.
• Ask who stands behind the indemnity besides the company, such as an owner’s guarantee, a holdback or money held in escrow.
• Calendar the date the indemnity period ends against the two-year window in the CBCA.

For how indemnities differ from the statements they back, see representations, warranties and indemnities.