Liquidation

How BC law treats it

The Business Corporations Act, SBC 2002, c 57 (BCBCA) provides for voluntary liquidation and court ordered liquidation. A voluntary liquidation requires a special resolution of the shareholders and the appointment of a liquidator; the directors cannot decide on their own to liquidate. The liquidator takes control of the company's affairs, gives notice to creditors, realizes assets, pays or provides for liabilities, distributes the surplus to shareholders according to their share rights and then has the company dissolved. The court can also order liquidation, for example where it is just and equitable to do so, and liquidation is one of the orders available on an oppression application. Liquidation is different from dissolution and from bankruptcy. Dissolution is the end of the company's legal existence. A company with no assets or liabilities can often be dissolved without a formal liquidation. An insolvent BC company is normally dealt with under the federal Bankruptcy and Insolvency Act, RSC 1985, c B-3, where a licensed insolvency trustee, not a liquidator, administers the estate. Larger restructurings may proceed under the Companies' Creditors Arrangement Act, RSC 1985, c C-36, and secured creditors may appoint or seek a receiver. Directors are not generally liable for a company's unpaid debts on liquidation. Personal exposure comes from specific statutes, such as unpaid wages under Employment Standards Act s. 96, unremitted source deductions under Income Tax Act s. 227.1 and unremitted GST under Excise Tax Act s. 323, and from distributions to shareholders made while the company is insolvent or before creditors are paid or provided for.

What it means for your business

For owners retiring, selling assets or ending a joint venture, liquidation is the orderly way to close a company, settle creditors and get the remaining value to shareholders. Done carelessly, it can leave directors and shareholders exposed: distributions paid before creditors are provided for can be recovered, and tax clearance issues can delay the final payout. Choosing between liquidation, simple dissolution, an asset sale or bankruptcy depends on solvency, tax and creditor risk. Example: Two retiring owners of a Nanaimo marine supply company sell its inventory and real estate, then pass a special resolution to liquidate and appoint a liquidator. The liquidator pays the bank, the landlord and CRA before distributing the remaining cash to the shareholders.

Risks and common mistakes

Having the directors resolve to wind up the company without the shareholders' special resolution and a liquidator. Distributing cash to shareholders before all creditors and tax liabilities are paid or provided for. Using liquidation for an insolvent company instead of the bankruptcy process. Dissolving a company that still owns assets, which can result in those assets passing to the Crown. Overlooking tax clearance before the final distribution.