Solvency test

A seller who takes a dividend before closing, or a corporation that buys back a shareholder’s shares, meets this test. Under section 42 of the CBCA, a corporation shall not declare or pay a dividend if there are reasonable grounds for believing that 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 be less than its liabilities and stated capital of all classes. Subsection 34(2) applies the same two limbs to buying its own shares, subject to the exceptions in sections 35 and 36.

It differs by statute

• Ontario: subsection 38(3) of the Business Corporations Act repeats those two limbs for dividends and addresses the directors as well as the corporation.
• British Columbia: unless the company’s charter or an enactment provides otherwise, section 70 of its Business Corporations Act lets a company declare or pay a dividend in property, including money, and subsection 70(2) allows that unless there are reasonable grounds for believing it is insolvent or the payment would render it insolvent. For a company other than a financial institution, the Act defines insolvent as unable to pay its debts as they become due in the ordinary course of its business.
• This entry covers the CBCA, Ontario and British Columbia only; check the Act that governs the corporation.

Ask who checked the test, on what financial information, and whether the articles or a unanimous shareholder agreement affect the payment, as Ontario’s section 38(1) contemplates. See paying a dividend before selling shares and share redemption.