What if the seller’s numbered company has no assets left?

If you buy the assets of a business from a numbered company, check whether your contract is with that company alone. If the company then pays out the sale proceeds and holds nothing, a later claim for a breached representation or an undisclosed debt may have no money behind it. The statutes below show where a buyer or other creditor can look instead. They are a fallback, and each has conditions.

Transfers made to defeat creditors

Ontario’s Fraudulent Conveyances Act says that every conveyance of real or personal property made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures is void as against those persons and their assigns. The same Act says that rule does not apply to property conveyed upon good consideration and in good faith to a person who did not have, at the time of the conveyance, notice or knowledge of that intent. The rule turns on that intent.

Money paid out to shareholders

Ontario’s Business Corporations Act provides in section 243(1) that, despite the dissolution of a corporation, each shareholder to whom any of its property has been distributed is liable to any person claiming under section 242 to the extent of the amount received by that shareholder upon the distribution. This applies once the company has been dissolved. The Canada Business Corporations Act has a similar rule in section 226(4) for a body corporate dissolved under that Act, and adds that an action to enforce the liability may be brought within two years after the dissolution. Other provinces and territories have their own corporate statutes, so check the one that governs the seller’s company.

What to ask for before closing

• A personal or parent-company guarantee of the seller’s obligations, signed by the people who will receive the proceeds.
• A holdback or escrow of part of the price, with the release date and claim process written into the agreement.
• A search of the company’s registered debts and a corporate profile, so you know who owns it and what it owes.
• A covenant that the company will stay in existence, or keep a stated amount of assets, for the claim period.