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While often not even contemplated at the beginning of a new business endeavor, how a company ends its legal existence is often as important as how it started.
Not every incorporated entity is a success and, indeed, some corporations or the businesses operated by a particular company are not intended to continue into perpetuity. In this article we will look at the formalities to ending the legal existence of an incorporated entity. While the discussion below will focus on these matters in relation to a British Columbia incorporated company under the British Columbia Business Corporations Act ("BCBCA") much of what is outlined below is similar to options available under the Canada Business Corporations Act ("CBCA") and indeed many other provincial legislation based on the CBCA.
Failure to File
In British Columbia, a company which fails for two successive years to file an Annual Report, or any other return, notice or document as required under the BCBCA will be in default under the BCBCA. In such circumstances the British Columbia Registrar of Companies will send a notice of commencement of dissolution to the registered office of the company stating that if the Registrar is not advised within one month of the date of the Notice that steps are being taken to correct the default, the company may be dissolved. Typically, dissolution is effective after about two and a half years from the date the company went into default and during that time the company will be marked as not in good standing and the company will not be able to attend to other filings that may be required or outstanding (like a Change of Directors notice or Change of Registered or Records Office notice) cannot be filed until the company is brought into good standing by filing any outstanding Annual Report and paying any fees owing.
While this approach involves minimal action and cost on the part of the company it does require a significant amount of time before the company is actually dissolved by the Registrar of Companies and it should be further noted that by its nature this process involves committing a technical offence under the BCBCA although no penalties other than dissolution have traditionally flowed from such a violation. Once dissolved, that company’s status as a legal person with any capacity ends and the company ceases to exist for all purposes – it cannot attend to one or two missed issues like filing tax returns or selling an odd asset or two to a shareholder.
Furthermore, if seeking relief from creditors or obligations that may have accrued in the company this option may not find the safe harbor business owners had hoped as:
Any lawsuit that the company was involved in before it was dissolved continues unaffected as if the company had not been dissolved – as long as the lawsuit started before dissolution.
A dissolved company can be restored within a prescribed time by the Registrar of Companies or by a Court Order on application of a class of stakeholders including creditors. Once restored, lawsuits can be commenced against it as if it were never dissolved.
The BCBCA provides that the liability of every director, officer, liquidator and shareholder of a company that has been dissolved shall continue, and may be enforced as if the company had not been dissolved. So, for example, these stakeholders may remain liable, if applicable, for environmental liabilities, unpaid payroll taxes, employment standards obligations or WorkSafe BC obligations. Shareholders who received assets of the company can be held liable for the value of those assets at the date of receiving those assets.
Any assets that the company may possess, including not only physical assets but also rights and benefits such as intellectual property or contractual rights and tax refunds which may be due to the company will become the property of the provincial government.
While costing little to nothing, this option is not recommended for any business that has had any actual business operations – including capital raising. At the very least, entrepreneurs should seek legal advice specific to their business circumstances and determine any arrangements that can mitigate potential risk.
Voluntary Dissolution
Voluntary dissolution without liquidation is a process by which the shareholders of the company authorize the formal dissolution of the company by application to the Registrar of Companies to dissolve the company. Also known as “short-form dissolution”, a voluntary dissolution without liquidation is generally used when:
the assets of the company are relatively small and easily determined and exceed, generally, any debts and liabilities of the company which are also relatively small and easily determined; and
any debts and liabilities of a company have been paid or discharged or adequately provided for; or
in a multi-level corporate structure, when debts and liabilities of a subsidiary company have been paid or discharged and the assets of the subsidiary have been transferred to its parent.
This method allows the Registrar to dissolve the company immediately upon the filing of an application for dissolution stating, among other things, that an affidavit of a director of the company (stating that the company’s dissolution has been authorized, that the company has no assets and that the company either has no liabilities or has made adequate provision for the payment of each of its liabilities) has been obtained and deposited in the company’s records office.
The obvious advantage to a voluntary dissolution is that it is immediate, controlled and compliant with the BCBCA. While, again, existing lawsuits and liabilities survive a voluntary dissolution in the manner described in the first section, a voluntary dissolution provides in its process an opportunity to address any such liabilities. It does require some formalities, and a filing fee, but the cost for this process (as it assumes a business without significant assets and liabilities) should in most cases be nominal.
One caution to raise here is that, when considering assets and liabilities it is important to not just focus on physical assets and debts. Almost all businesses have at least one material contract – their commercial lease – which itself will contain significant covenants and potential remedies for any landlord and any business likely has accrued obligations for the payment of corporate tax, payroll withholdings, PST and/or GST. Other businesses may hold intellectual property or other contractual rights and/or be subject to other contractual obligations related to equipment leases or product warranties. Careful consideration is required to ensure these matters are addressed before any dissolution is made effective.
Voluntary Liquidation
Voluntary liquidation (also referred to as a “long-form dissolution”) is used when the company to be dissolved has extensive debts and liabilities, not all of which may be known at the commencement of proceedings, but is otherwise solvent – even if it has assets that have not been distributed or debts that have not been paid. Liquidation is the process by which a company with assets and liabilities is “wound up”, as its debts and liabilities are satisfied, and any remaining assets distributed to the shareholders, following which the company is dissolved. The liquidation process can be voluntary (where the shareholders of the company initiate a voluntary liquidation by resolution) or under a court order (on application of any one of a number of “appropriate” persons). For the most part, the process of liquidation and the powers and responsibilities of the stakeholders is the same regardless of whether the liquidation is voluntary or ordered by the court.
If pursuing a voluntary liquidation, the shareholders must resolve to dissolve the company under the applicable provisions of the BCBCA and appoint a liquidator to liquidate the company and distribute the company’s assets. The liquidator must be someone who is qualified as a receiver under the Personal Property Security Act (British Columbia).
A court-ordered liquidation may be initiated by an application made by the company, a registered or beneficial shareholder, a director, or any other person (including a creditor of the company) whom the court considers an appropriate person to make such an application. When the court makes such an order, it must, in that order, appoint one or more liquidators. The appointment of the liquidator takes effect on the commencement of the liquidation, which is the date of the liquidation court order, or the later date (and time, if any) specified in the order. The liquidator’s responsibilities under a court ordered liquidation are substantially the same as under a voluntary liquidation.
Clearly a voluntary liquidation will involve certain costs and expenses but the process does provide an opportunity for an otherwise solvent business to be properly and completely wound-up by a third party and, with respect of a court-ordered liquidation, obtain the notional finality associated with a court order.
Insolvent Companies
It should be noted that, under the BCBCA, only solvent companies may engage in dissolution and liquidation proceedings. Bankruptcy and insolvency (matters address under Canada’s Bankruptcy and Insolvency Act, Winding-up and Restructuring Act, Companies' Creditors Arrangement Act) are all beyond the scope of this article and require specialized advice and assistance. An “insolvent” company is generally any company that is unable to meet its obligations as they generally become due; has ceased paying current obligations in the ordinary course of activities as they become due, or the company’s property is not sufficient, at a fair valuation, to allow payment of all obligations (meaning that even if all of the property was to be disposed of, there would not be sufficient cash to allow payment of all obligations, whether they are due or will soon become due. A company that is bankrupt (it has made an assignment into bankruptcy or a bankruptcy order has been made against it), that has a trustee under a proposal, or that has an interim receiver under the Bankruptcy and Insolvency Act (Canada) cannot voluntarily dissolve and any dissolution proceedings commenced under the Business Corporations Act will be stayed.
After the assets of a company have been liquidated and distributed under Canada’s Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, the company will still exist and can only be dissolved by action taken in accordance with the procedures of British Columbia’s Business Corporations Act described above.
Ongoing Obligations
As noted above, the liability of every director, officer, liquidator and shareholder of a company that has been dissolved shall continue, and may be enforced as if the company had not been dissolved. However, there are a number of other obligations that must be attended to post-dissolution including:
Corporate Records. The existing corporate records of a British Columbia company must be retained for two years or until the expiration of any shorter period the court orders (for federal corporations, the period is six years). The person responsible for the records will be the person shown in the application for dissolution as having custody of the records, or if there was no application for dissolution, the person responsible will be whoever had custody of the records at the time of dissolution (typically the Records Office noted in the BC Corporate Registry). The obligation to retain the records includes the requirement that the records be made available for inspection during statutory business hours by any person who would have been entitled to inspect the company’s records before dissolution and any party entitled to inspect the records is also entitled to a copy of any of them.
Payroll Accounts; GST, HST, & PST Accounts and Tax Returns. Remittance of all outstanding payroll deductions from your employees’ wages to the Canada Revenue Agency (“CRA”), along with all outstanding pension contributions (CPP/QPP) and employment insurance (EI) premiums; remittance of all outstanding GST/HST and PST amounts; as well as the filing of the company’s final tax return, should be attended to concurrent with any effective dissolution of the company with the assistance of the company’s accountants. Any amounts due to CRA or the BC Government may be assessed against directors personally and, with respect to CRA tax debts, may be assessed against shareholders in accordance with non-arm’s length assessment to re-capture any dividends paid out while money was owing to the CRA. Other forms, closing business number accounts, should also be submitted together with a copy of the Articles of Dissolution since of company fails to complete these filings, the CRA will require corporate filings in one or more subsequent tax years, even though there is no income to declare. Finally, CRA requires all records and supporting documents to verify its tax obligations and entitlements are required to be maintained in accordance with the Income Tax Act (Canada).
Other matters or requirements may apply (for example, with respect to personal information collected and stored by any company in the course of its business), and business owners should in all cases seek legal advice before embarking on any of the options outlined above.
Endeavor Law can assist business owners, directors and/or shareholders facing potential winding-up or dissolution circumstance or decision with legal advice and services directed at compliance with these, and other, corporate regulatory matters. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.