Getting Out of Business

Business Law

Similar to an individual person, a company has its own life cycle. It is born at the time an incorporation application is filed with the Registrar of the Companies. It grows as its business expands. It dies when it no longer operates. How do we deal with companies when they are at the end of their life cycle? Can we simply transfer all of the remaining assets to ourselves and let the companies be struck by the Registrar of the Companies?

The short answer to that question is no.

There are essential steps to be taken in order to properly dissolve a company. The Business Corporations Act of British Columbia (“BCA”) gives us guidance and direction on dissolving a corporation properly. By carefully following the procedures outlined in BCA, a corporation will not only be able to determine the exact date when such corporation ceases to exist for litigation purposes, but also minimize the potential risk of being sued by Canada Revenue Agency for unfiled tax returns and unpaid taxes. The simplest way of properly dissolving a company is by way of submitting an application for voluntary dissolution to the Registrar of the Companies.

Section 314 of BCA outlines the prerequisites for submitting an application for voluntary dissolution to the Registrar of the Companies:

1. shareholders of the company have passed an ordinary resolution to support the decision to voluntarily dissolve;

2. the company has paid off all of its debts;

3. the company has distributed the remainder of its assets to its shareholders; and

4. the company confirms that is has no assets and no liabilities.

A company typically needs assistance from its lawyer and accountant. While the lawyer drafts resolutions or holds a shareholders’ meeting for the company to pass an ordinary resolution, the company’s accountant reviews the financial status of the company and confirms that the company has no assets and no liability es.

BCA defines an ordinary resolution as:

a) a resolution passed by a simple majority of votes cast by voting shareholders at a general meeting; or

b) a resolution passed by a special majority of votes cast by voting shareholders in writing.

When a company is uncertain about the amount of debt owed to its creditors, or is unable to locate any of its creditors, then under section 315 of BCA the company must make reasonable efforts to locate its creditors and to determine the amount of its debts.

Once the company has met all prerequisites, one director of the company signs an affidavit in front of the company’s lawyer (or notary) confirming that all steps have been taken according to BCA, and an application for voluntary dissolution is thereby authorized and ready to be submitted to Registrar of Companies (pursuant to section 316 of BCA).

The company’s accountant will file the final tax return to Canada Revenue Agency (“CRA”) and notify CRA and other tax authorities of such dissolution by closing all accounts that the company has with CRA or with other tax authorities. All corporate records must be kept for inspection for a period of minimum two years, pursuant to section 351(2) of BCA.

There are two reasons why a business owner should follow BCA to properly dissolve companies when the company is no longer active:

1. To satisfy statutory requirements under BCA and determine the date when a corporation ceases to exist.

Section 422 of BCA gives the Registrar of the Companies authority to dissolve or cancel registration of a company if the company fails to file its annual report for consecutive 2 years.

Consequently, if a company is struck down by the Registrar of the Companies while the company still owns assets, such as lands or real estate, these assets may be escheated to the government. A court application for restoring the company may be required in order to take back its real property (section 4 of the Escheat Act). Moreover, in British Columbia Thoroughbred Association v. Brighouse, 1922 CanLII 731 (BC CA) and in Montreal Trust Company v. Boy Scouts of Canada (Edmonton Region), 1978 CanLII 2187 (BC SC), the court ruled that any contractual rights that the company enjoys may be extinguished upon its dissolution.

On the other hand, a claimant needs to seek a court order for limited restoration of a company in order for such claimant to make a claim against the company, if the claim is made more than 2 years after the company was dissolved (section 360(2) of BCA). As a result, potential claimants may find it more difficult to sue companies that were dissolved more than 2 years ago.

2. To make adequate tax filings to the CRA

Furthermore, CRA may bring claims to court against dissolved companies for outstanding tax payments. CRA may seek a court order for limited restoration of such dissolved company. As a result, it is crucial for a company to ensure that it has made adequate tax filing to CRA prior to the dissolution.

In summary, it is always ideal to seek professional advice and follow the procedures set out in BCA when winding up a corporation. We should bid farewell to companies that have served their purposes by following procedures in BCA.

This article is intended for information purposes only and should not be taken as the provision of legal advice.