This article has been contributed to the blog by Joshua Hurwitz and Waleed Malik. Joshua Hurwitz is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Waleed Malik is an articling student at Osler, Hoskin & Harcourt LLP.
Like its counter-parts in a number of other jurisdictions, s. 79 of British Columbia’s Business Corporations Act (the “Act”) prohibits companies from redeeming their shares if the transaction would render the company insolvent. In Fallin v OFM Holdings Ltd, 2014 BCSC 1777 (“Fallin”), the defendant corporation relied on this provision in refusing to redeem shares surrendered by a shareholder. When the shareholder applied to the British Columbia Supreme Court (the “Court”) to seek the value of the shares she had surrendered, her application was dismissed by the Court. In its decision, the Court commented on the following:
- Did the plaintiff’s notice of retraction of her shares create a claim in debt?
- Did s. 79 of the Act prohibit the company from redeeming the plaintiff’s shares and what was the nature of the defendant’s burden of proof when it relied on s. 79?
OFM Holdings Ltd. (“OFM”), the defendant, owned a multi-unit building that generated rental income. The building was OFM’s only significant asset. The plaintiff, Victoria Fallin, was a director and a common shareholder of OFM. She also owned 30,000 Class F Non-Voting Preferred shares (the “Shares”). The Shares had been valued at $3,112,500 in 2010.
On July 12, 2012, the plaintiff provided OFM with a notice of retraction and surrendered the Shares to OFM for redemption. OFM’s Articles of Incorporation (the “Articles”) provided that upon receiving notice from a holder of Class F Shares, the company would redeem the shares; however, the Articles also stipulated that “no such purchase or redemption shall be made if the Company is insolvent at the time of the proposed purchase or redemption or if the proposed purchase or redemption would render the Company insolvent.” Moreover, the Articles were subject to the terms of the Act which states at s. 79(1) that:
A company must not make a payment…to redeem any of its shares if there are reasonable grounds for believing that…
(b) making the payment…would render the company insolvent.
On May 13, 2013, with the plaintiff abstaining, OFM’s directors voted unanimously to not redeem the plaintiff’s shares. They cited the insolvency provisions in s. 79(1) of the Act and OFM’s Articles as justification for their decision. Specifically, the directors relied on OFM’s financial statements, a written opinion by an accountant indicating that the share redemption would render the company insolvent, and certain bank opinions with respect to future financing in order to conclude that a share redemption would render OFM insolvent.
Decision and Analysis
1) Did the plaintiff’s notice of retraction create a claim in debt?
The plaintiff claimed that once she had issued a notice of retraction, the value of the Shares became due and payable, creating a claim in debt. In assessing this argument, the Court cited the Ontario Court of Appeal decision in Re Central Capital Corp (1996), 27 OR (3d) 494 (“Royal Bank”). In Royal Bank, the Ontario Court of Appeal considered the effect of a solvency provision in a corporate statute on a shareholder’s right to receive payment pursuant to the company’s Articles of Incorporation. A shareholder may have a right to receive a payment under the company’s Articles of Incorporation; however, if the payment contravenes the solvency provision in a corporate statute, then the shareholder’s right is rendered unenforceable. And if there is no right to enforce payment, then the shareholder does not have a claim in debt. Moreover, there are sound policy reasons not to recognize a share redemption right as a claim in debt: the claims of creditors have always ranked ahead of shareholders ‑ permitting shareholder redemption rights to be characterized as claims in debt would subvert established repayment hierarchies.
The Court recognized the similarities between the current case and Royal Bank and concluded that if the redemption was prohibited by the Act, then the plaintiff did not have an enforceable claim in debt.
2) Did s. 79 prohibit the company from redeeming the plaintiff’s shares and what was the nature of the defendant’s burden of proof when it relied on s. 79?
The defendant had the onus of proving that the proposed redemption infringed the Act. Justice Sigurdson stated that this did not mean that the defendant needed to show that the redemption would prejudice specific creditors or a group of trade creditors. It was sufficient for the defendant to prove that the prohibition against redemption applied if s. 79, by its plain language, was applicable.
With respect to the nature of the defendant’s burden of proof, the plaintiff argued that the defendant had to prove that redeeming the Shares would leave OFM insolvent. OFM disagreed and argued that their onus was to show that it was reasonable for the directors to conclude that redeeming the Shares would render the company insolvent.
Sigurdson J. agreed with the defendants on this issue. He noted that the Act stated that a company was prohibited from redeeming any shares if there were reasonable grounds for concluding that the redemption would render the company insolvent. Therefore, the company’s burden was to show that it reasonably concluded that agreeing to the plaintiff’s demand would leave the company insolvent. Based on the evidence presented and the investigation carried out by the directors, Sigurdson J. decided that the company had concluded on reasonable grounds that redeeming the shares would render OFM insolvent.
Sigurdson J. also stated that even if the applicable burden had been the more onerous one proposed by the plaintiff, he still would have decided in OFM’s favour. Sigurdson J. noted that the plaintiff had failed to present any evidence challenging the directors’ conclusion and had failed to cross-examine the directors on their affidavits. Thus, Sigurdson J. concluded that there were reasonable grounds for him to conclude that redeeming the shares would have rendered OFM insolvent.
The Court’s decision in Fallin reiterates that when an insolvency provision in a corporate statute ‑ like s. 79 of British Columbia’s Business Corporations Act ‑ applies, a shareholder’s notice of retraction of shares will not be characterized as an enforceable claim in debt. Moreover, the Fallin decision emphasizes the latitude given to directors in assessing whether there are reasonable grounds for concluding that a share redemption will render a company insolvent for the purposes of corporate statutes like British Columbia’s Business Corporations Act. The decision also highlights the importance of evidence in disputes regarding s. 79 of the Act since, in this case, OFM’s success hinged on the fact that it was able to provide evidence to establish the reasonableness of its process and conclusion that a share redemption would render OFM insolvent.