F. Distribution to Shareholders

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

Page 216

The BIA permits a trustee to impeach distributions to shareholders that occur when the debtor corporation is insolvent. The distribution may have taken the form of a declaration of dividends or a share repurchase or redemption. A dividend in the form of additional shares is not impeachable since the creditors are not prejudiced by the creation of additional equity claims. In order to impeach the corporate distribution, the following conditions must be satisfied:168· money has been paid to a shareholder pursuant to a declaration of dividends, a share repurchase, or share cancellation;

· the transaction occurred within a period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy;

· the transaction occurred when the corporation was insolvent; and

· the directors did not have reasonable grounds to believe that the transaction was occurring at a time when the corporation was solvent.

The onus of proving the first two elements falls upon the trustee, while the onus of disproving the last two elements falls upon the directors.169If these conditions are satisfied, the court may give judgment to the trustee against the directors in the amount of the dividend or redemption or purchase price. In making a determination that the directors knew of the insolvency, the court is directed to consider whether the directors acted as prudent and diligent persons and whether they in good faith relied on financial or other reports prepared by the officers of the corporation, the auditor, or by outside professionals.170A director is exonerated from liability if he or she protested against payment.171The court may also give judgment against a shareholder if the shareholder is related to one or more of the directors or to the corporation.172

Page 217

Business corporations legislation also provides for director’s liability in respect of corporate distributions.173Since the right of recovery is in the corporation, the trustee will acquire this right of action upon a bankruptcy of the corporation. There are two advantages of these types of provisions over the BIA provisions. The first is that a different financial test is applied. In place of the usual balance sheet test, the business corporations statutes provide that the assets must exceed the aggregate of liabilities and stated capital. The stated capital is the amount received by the corporation as consideration for the issue of the shares.174This...

To continue reading