Director liability for improper dividends (CBCA s. 118)

A director meets this rule when the board approves a dividend before a sale. Under s. 118(2)(c), 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 distributed and not otherwise recovered.

How it works

• Section 42 has two tests, either of which bars a dividend: inability, now or after the payment, to pay liabilities as they become due, and realizable value of assets below liabilities and stated capital of all classes.
• A director who has satisfied a judgment is entitled to contribution from the other directors who voted for or consented to the act (s. 118(3)).
• A director liable under s. 118(2) may apply to a court for an order against a shareholder or other recipient of the money or property, and the court may make it if satisfied it is equitable (s. 118(4) and (5)).
• An action under s. 118 may not be commenced after two years from the date of the resolution authorizing the act complained of (s. 118(7)).

The good-faith defence

Section 123(4) says a director is not liable under s. 118 if the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including good-faith reliance on listed materials. Ask what solvency analysis supports a planned dividend. See director liability and what director liability you take on in a share purchase. This entry covers the CBCA only.