Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3)

Marginal note:Inquiry into dividends, redemption of shares or compensation

• 101 (1) When a corporation that is bankrupt has paid a dividend, other than a stock dividend, redeemed or purchased for cancellation any of the shares of the capital stock of the corporation or has paid termination pay, severance pay or incentive benefits or other benefits to a director, an officer or any person who manages or supervises the management of business and affairs of the corporation within the period beginning on the day that is one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, the court may, on the application of the trustee, inquire into the transaction to ascertain whether it occurred at a time when the corporation was insolvent or whether it rendered the corporation insolvent.

• Marginal note:Judgment against directors

  (2) If a transaction referred to in subsection (1) has occurred, the court may give judgment to the trustee against the directors of the corporation, jointly and severally, or solidarily, in the amount of the dividend or redemption or purchase price, with interest on the amount, that has not been paid to the corporation if the court finds that

  • (a) the transaction occurred at a time when the corporation was insolvent or the transaction rendered the corporation insolvent; and

  • (b) the directors did not have reasonable grounds to believe that the transaction was occurring at a time when the corporation was not insolvent or the transaction would not render the corporation insolvent.

• Marginal note:Judgment against directors — compensation

  (2.01) If a transaction referred to in subsection (1) has occurred, the court may give judgment to the trustee against the directors of the corporation, jointly and severally, or solidarily, in the amount of the termination pay, severance pay or incentive benefits or other benefits, with interest on the amount, that has not been paid to the corporation if the court finds that

  • (a) the payment

    • (i) occurred at a time when the corporation was insolvent or rendered the corporation insolvent,

    • (ii) was conspicuously over the fair market value of the consideration received by the corporation, and

    • (iii) was made outside the ordinary course of business; and

  • (b) the directors did not have reasonable grounds to believe that the payment

    • (i) occurred at a time when the corporation was not insolvent or would not render the corporation insolvent,

    • (ii) was not conspicuously over the fair market value of the consideration received by the corporation, and

    • (iii) was made in the ordinary course of business.

• Marginal note:Criteria

  (2.1) In making a determination under paragraph (2)(b) or (2.01)(b), the court shall consider whether the directors acted as prudent and diligent persons would have acted in the same circumstances and whether the directors in good faith relied on

  • (a) financial or other statements of the corporation represented to them by officers of the corporation or the auditor of the corporation, as the case may be, or by written reports of the auditor to fairly reflect the financial condition of the corporation; or

  • (b) a report relating to the corporation’s affairs prepared pursuant to a contract with the corporation by a lawyer, notary, accountant, engineer, appraiser or other person whose profession gave credibility to the statements made in the report.

• Marginal note:Judgment against shareholders

  (2.2) Where a transaction referred to in subsection (1) has occurred and the court makes a finding referred to in paragraph (2)(a), the court may give judgment to the trustee against a shareholder who is related to one or more directors or to the corporation or who is a director not liable by reason of paragraph (2)(b) or subsection (3), in the amount of the dividend or redemption or purchase price referred to in subsection (1) and the interest thereon, that was received by the shareholder and not repaid to the corporation.

• Marginal note:Directors exonerated by law

  (3) A judgment pursuant to subsection (2) shall not be entered against or be binding on a director who had, in accordance with any applicable law governing the operation of the corporation, protested against the payment of the dividend or the redemption or purchase for cancellation of the shares of the capital stock of the corporation and had thereby exonerated himself or herself under that law from any liability therefor.

• Marginal note:Directors exonerated by law — compensation

  (3.1) A judgment under subsection (2.01) shall not be entered against or be binding on a director who had, in accordance with any applicable law governing the operation of the corporation, protested against the payment of termination pay, severance pay or incentive benefits or other benefits and had exonerated himself or herself under that law from any resulting liability.

• Marginal note:Directors’ right to recover

  (4) Nothing in this section shall be construed to affect any right, under any applicable law governing the operation of the corporation, of the directors to recover from a shareholder the whole or any part of any dividend, or any redemption or purchase price, made or paid to the shareholder when the corporation was insolvent or that rendered the corporation insolvent.

• Marginal note:Onus of proof — directors

  (5) For the purposes of subsection (2), the onus of proving

  • (a) that the corporation was not insolvent at the time the transaction occurred and that the transaction did not render the corporation insolvent, or

  • (b) that the directors had reasonable grounds to believe that the transaction was occurring at a time when the corporation was not insolvent or that the transaction would not render the corporation insolvent

  lies on the directors.

• Marginal note:Onus of proof — directors

  (5.1) For the purposes of subsection (2.01), a director has the onus of proving any of the following:

  • (a) that the payment

    • (i) occurred at a time when the corporation was not insolvent or did not render the corporation insolvent,

    • (ii) was not conspicuously over the fair market value of the consideration received by the corporation, or

    • (iii) was made in the ordinary course of business; or

  • (b) that the director had reasonable grounds to believe that the payment

    • (i) occurred at a time when the corporation was not insolvent or would not render the corporation insolvent,

    • (ii) was not conspicuously over the fair market value of the consideration received by the corporation, or

    • (iii) was made in the ordinary course of business.

• Marginal note:Onus of proof — shareholder

  (6) For the purposes of subsection (2.2), the onus of proving that the corporation was not insolvent at the time the transaction occurred and that the transaction did not render the corporation insolvent lies on the shareholder.