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BCI & BIMC Ascertainment Cases ▍Canada: Issues on Corporate Dissolution

Come from:BCI&BIMC    Date:2019.05.15 Hits:26 

I. Case Facts

Liuzhou Jiahua Alloy Material Ltd. (hereinafter referred to as Liuzhou Jiahua), incorporated in the People's Republic of China, is a foreign-capital enterprise owned by Atlantic East Investment Ltd. (hereinafter referred to as Atlantic East).

January 15, 2013, with the consensus of the plaintiffs OuYang Dong, Fang Lina and Fang Guochu, Fang Guochu, on behalf of the Atlantic East, signed the Equity Transfer Agreement and the Supplementary Agreement for the Equity Transfer with the defendant Liu Jianjun. In the Equity Transfer Agreement, it is agreed that:

1. Liuzhou Jiahua's shares, owned by the Atlantic East, shall be all transferred to Liu Jianjun.

2. The price for the transfer of all the shares is ¥5,000,000.

3. In the Supplementary Agreement for the Equity Transfer ("Supplementary Agreement"), it is agreed that:

a. Payment and Time Limit. Liu Jianjun shall pay ¥4,000,000 within 30 days after the signing of the Supplementary Agreement. The remaining ¥1,000,000 will be paid in four installments, and Liu Jianjun agreed to pay the interest at an annual rate of 18%. The agreed payment shall be made by transferring the said amount to the account of Bank of China under the name of Fang Guochu.

b. Liability for Delayed Payment. If Liu Jianjun violates the provisions of the Supplementary Agreement, he will pay a penalty equal to 20% of the total amount of the transferred shares, namely 20% of the ¥5,000,000.

c. Security. Zhenye Machine and Electronic shall undertake joint liability for Liu Jianjue's debt.

d. Guarantee. The Zhenye Mechanical and Electrical Company shall assume a joint guarantee liability for Liu Jianjun's debt.

After the signing of the agreements, both parties obtained the approval from the relevant administrative authority and made change to the commercial registration of the equity transfer.

As of March 7, 2013, the amount paid by Liu Jianjun for the transfer of shares is ¥1,400,000. No payment has been made since then, thereby the amount due for equity transfer includes ¥3,600,000 of principal and ¥180,000 of interest.

It is found that the Atlantic East had been dissolved on October 11, 2005. At the time of dissolution, Atlantic East's investment, the 100% shares in LiuZhou Jiahua, had not been distributed.

The plaintiffs argued that those shares should be deemed as residual asset of the Atlantic East.

The defendant argued that the Equity Transfer Agreement and the Supplementary Agreement signed by both parties should be deemed as void because of the dissolution of the Atlantic East.

II. Issues for Ascertainment

Regarding the issue on the application of the law to the capacity of civil rights and the capacity of civil conduct of the plaintiffs and the Atlantic East, the court entrusted the Benchmark Chambers International & Benchmark International Mediation Center (BCI & BIMC) to ascertain the corporate law of Newfoundland & Labrador, upon the application of the plaintiffs.

On January 10, 2017, BCI & BIMC submitted the Ascertainment Report of Certain Legal Issues Concerning Corporation Dissolution under the Newfoundland & Labrador Corporate Law (hereinafter referred to as The Ascertainment Report).

Given the conclusion in the Ascertainment Report, the plaintiffs supplemented the Certificate of Corporation Dissolution issued by the Service NL on December 15, 2016.

Therefore, BCI & BIMC received entrustment by the court again to ascertain the corporate law of Newfoundland & Labrador, in respect of the legal effects of different forms of dissolution on the capacity of civil right and civil conduct.

On September 9, 2018, BCI & BIMC submitted the Ascertainment Report of Certain Legal Issues Concerning Corporation Dissolution under the Newfoundland & Labrador Corporate Law—Supplementary Report (hereinafter referred to as The Supplementary Ascertainment Report).

III. Ascertainment Results

1. Ascertainment Report of Certain Legal Issues Concerning Corporation Dissolution under the Newfoundland & Labrador Corporate Law (The Ascertainment Report)

Canada is a federal state. According to its Constitution, the federal government and governments of provinces have the legislative power on certain issues within the mandate set by the Constitution.

As for corporate law, Canada maintains the "dual system", meaning that both the federal government and governments of provinces have the legislative power on a series of legal issues regarding the incorporation, operation and dissolution of corporation.

The Atlantic East concerned in this case, is a corporation incorporated under the corporate law of Newfoundland & Labrador. (Corporations Act, RSNL 1990, c. C-36, hereinafter referred to as "Corporation Act of Newfoundland").

Therefore, the incorporation, operation and dissolution of Atlantic East shall be subject to the Corporation Act of Newfoundland.

According to Part XVI of Corporation Act of Newfoundland, corporation dissolution is divided into two categories: (a). voluntary dissolution of corporations that has property; (b). involuntary dissolution by the registrar.

Pursuant to the following Sections in the Corporation Act of Newfoundland:

Section 303. Extraordinary sale

(1) A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders in accordance with this section.

(2) A notice of a meeting of shareholders, complying with section 221, shall be sent in accordance with that section to each shareholder and shall

(a) include or be accompanied by a copy or summary of the agreement of sale, lease or exchange; and

(b) state that a dissenting shareholder is entitled to be paid the fair value of his or her shares in accordance with section 304, but failure to make that statement does not invalidate a sale, lease or exchange referred to in subsection (1).

(3) At the meeting referred to in subsection (2), the shareholders may authorize the sale, lease or exchange and may fix or authorize the directors to fix the terms and conditions of it.

(4) The holders of shares of a class or series of shares of the corporation are entitled to vote separately as a class or series in respect of a sale, lease or exchange referred to in subsection (1) only where the class or series is affected by the sale, lease or exchange in a manner different from the shares of another class or series.

(5) A sale, lease or exchange referred to in subsection (1) is adopted when the holders of each class or series entitled to vote on it have approved of the sale, lease or exchange by a special resolution.

(6) The directors of a corporation may, where authorized by the shareholders approving a proposed sale, lease or exchange, and subject to the rights of 3rd parties, abandon the sale, lease or exchange without further approval of the shareholders.

Section 331. Revival application

(1) Where a body corporate is dissolved under this Part and section 461 an interested person may apply to the registrar to have the body corporate revived.

(2) Articles of revival in prescribed form shall be sent to the registrar.

(3) Upon receipt of articles of revival, the registrar shall issue a certificate of revival in accordance with section 393.

(4) A body corporate is revived on the date shown on the certificate of revival, and afterward the body corporate, subject to the reasonable terms that may be imposed by the registrar and in the case of an insurance company the Superintendent of Insurance and to the rights acquired by a person after its dissolution, has the rights and privileges and is liable for the obligations that it would have had if it had not been dissolved.

Section 334. Dissolution where property disposed of

A corporation that has property or liabilities or both may be dissolved by special resolution of the shareholders or, where it has issued more than 1 class of shares, by special resolutions of the holders of each class whether or not they are otherwise entitled to vote, where

(1) by the special resolution the shareholders authorize the directors to cause the corporation to distribute property and discharge liabilities; and

(2) the corporation has distributed property and discharged liabilities or adequately provided for the payment of the liabilities before it sends articles of dissolution to the registrar under section 335.

Section 335. Articles of dissolution and effect

(1) Articles of dissolution in prescribed form shall be sent to the registrar in respect of a corporation described in section 332, 333 or 334.

(2) Upon receipt of articles of dissolution, the registrar shall issue a certificate of dissolution in accordance with section 393.

(3) The corporation stops existing on the date shown in the certificate of dissolution.

Section 341. Dissolution by registrar

(1) Where a corporation (a) has not started business within 3 years after the date shown in its certificate of incorporation; (b) has not carried on its business for 3 consecutive years; (c) fails to send a return, notice, document or prescribed fee to the registrar as required under this Act; or (d) is in default for a period of 1 year in sending to the registrar a fee, notice or document required by this Act,

the registrar may dissolve the corporation by issuing a certificate of dissolution under this section or the registrar may apply to a court for an order dissolving the corporation, in which case section 346 applies.

(2) Notwithstanding subsection (1), the registrar shall not dissolve a corporation under this section until the registrar has: (a) given to the corporation 120 days' notice of the registrar's decision to dissolve the corporation; and (b) published in the Gazette notice of the registrar's decision to dissolve the corporation.

(3) Notwithstanding subsection (1), unless cause to the contrary has been shown or an order has been made by the court under section 377 the registrar may, after expiry of the period referred to in subsection (2), issue a certificate of dissolution in prescribed form.

(4) The corporation stops existing on the date shown in the certificate of dissolution.

Section 355. Continuation of actions after dissolution

(1) In this section "shareholder" includes the heirs and legal representatives of a shareholder.

(2) Notwithstanding the dissolution of a corporation under this Act, (a) a civil, criminal or administrative action or proceeding started by or against the corporation before its dissolution may be continued as if the corporation had not been dissolved; (b) a civil, criminal or administrative action or proceeding may be brought against the corporation within 2 years after its dissolution as if the corporation had not been dissolved; and (c) notwithstanding subsection 357(1), property that would have been available to satisfy a judgment or order if the corporation had not been dissolved remains available for that purpose.

(3) Service of a document on a corporation after its dissolution may be effected by serving the document upon a person shown in the last notice filed under section 175 or 183.

(4) Notwithstanding the dissolution of a corporation, a shareholder to whom its property has been distributed is liable to a person claiming under subsection (2) to the extent of the amount received by that shareholder upon the distribution, and an action to enforce that liability may be brought within 2 years after the date of the dissolution of the corporation.

(5) A court may order an action referred to in subsection (4) to be brought against the persons who were shareholders as a class, subject to the conditions that the court thinks appropriate and, where the plaintiff establishes his or her claim, the court may refer the proceedings to a referee or other officer of the court who may (a) add as a party to the proceedings before the referee or other officer of the court each person who was a shareholder found by the plaintiff; (b) determine the amount that each person who was a shareholder should contribute towards satisfaction of the plaintiff's claim; and (c) direct payment of the amounts so determined.

Section 357 Vesting of property in Crown

(1) Property of a body corporate that has not been disposed of at the date of its dissolution vests in the Crown.

(2) The Lieutenant-Governor in Council upon the report of the Attorney General may dispose of property vested in the Crown under subsection (1).

(3) Where a body corporate is revived under section 331, property other than money that vested in the Crown under subsection (1) and that has not been disposed of shall be returned to the body corporate; and there may be paid to the body corporate out of the Consolidated Revenue Fund (a) an amount equal to money received by the Crown under subsection (1); and (b) where property other than money vested in the Crown under subsection (1) and that property has been disposed of, an amount equal to the lesser of: (i) the value of that property at the date it vested in the Crown, and (ii) the amount realized by the Crown from the disposition of that property.

(4) This section applies to bodies corporate whether incorporated or registered in Newfoundland and Labrador or the Province of Newfoundland and Labrador or not, dissolved before as well as to those dissolved after January 1, 1987.

(5) The property of a body corporate which was dissolved before January 1, 1987 and which has not come into the ownership of another person is considered to have vested in the Crown on January 1, 1987.

Conclusions can be drawn are:

In respect of the issues on corporation dissolution and qualification of the corporation as a body corporate, the general principle in the statutory and case law of Newfoundland & Labrador is that:

(a) a corporation may be voluntarily dissolved, and by the time of dissolution, the corporation should have appropriately disposed of its property and debts, and should have submitted relevant documents in accordance with the procedural requirements;

(b) a corporation may be involuntarily dissolved by the registrar in accordance with the procedures in law;

(c) on the date of dissolution, a corporation stops existing and it no longer possesses the qualification as a body corporate; but a legal action or proceeding started by or against the corporation before its dissolution may be continued as if the corporation had not been dissolved; a shareholder to whom the corporation's property has been distributed is liable for the corporation's liabilities to the extent of the amount received by that shareholder upon the distribution;

(d) corporation's property that has not been disposed of shall vest in the Crown on the date of dissolution; where the body corporate is revived, the state shall return the property of body corporation;

(e) an interested person may have the body corporate revived through procedures in law;

(f) once the body corporation is revived, the body corporate has the rights and is liable for the obligations that it would have had as if it had not been dissolved.

In the present case, the Certificate of October 10, 2014 cannot prove that Atlantic East was voluntarily dissolved. Instead, Atlantic East was involuntarily dissolved, and was denied status as corporate body, and shall not engage in any civil activities in the name of corporation, and shall not dispose of any property of the corporation before its revival.

After dissolution, the corporation may be revived through revival application in accordance with the procedures required by law. After revival, the corporation is considered as it had never been dissolved or liquidated; the property vested in the Crown shall be returned; the civil acts that the corporation had made after its dissolution shall be deemed as effective.

Before bringing lawsuit in the name of corporation, Atlantic East must be revived and resume the status of corporate body in compliance with the procedure of corporation revival.

Prior to the revival of Atlantic East, the plaintiffs, OuYang Dong, Fang Lina and Fang Guochu are not entitled to start the legal action in their respective name for the disputes arising from the Equity Transfer Agreement.

Shareholders of Atlantic East may not claim creditors' rights in the name of corporation until Atlantic East is revived in accordance with the procedures prescribed by law.

2. Ascertainment Report of Certain Legal Issues Concerning Corporation Dissolution under the Newfoundland & Labrador Corporate Law—Supplementary Report (The Supplementary Ascertainment Report)

According to Section 47 of CANL, "When a corporation has only 1 class of shares, the rights of the holders are equal in all aspects and include (a) the right to vote at a meeting of shareholders; (b) the right to receive a dividend declared by the corporation; and (c) the right to receive the remaining property of the corporation on dissolution", and the rules of involuntary dissolution and voluntary dissolution in Sections 303, 334, 335, 357, and Subsection (dd) of Section 2 of Personal Property Security Act of Newfoundland & Labrador, "personal property means goods, a document of title, chattel paper, investment property, an instrument, money or an intangible". According to Black's Law Dictionary, the meaning of "instrument" is that: A written legal document that defines rights, duties, entitlements, or liabilities, such as contract, will, promissory note, or share certificate.

Conclusions can be drawn are:

Before voluntary dissolution, corporation shall dispose of its all property, discharge liabilities and distribute all residual assets to shareholders. Otherwise, the corporation would lose its status as corporate body on the date of dissolution, and the undistributed property shall vest in the Crown.

Only after revival in accordance with procedures prescribed by law may the corporation dispose of its undistributed property.

Before the corporation is legally revived, the property still vests in the Crown, and shareholders of the corporation have no right to dispose of the corporation's property in the name of corporation.

Prior to the voluntary dissolution, shareholders are entitled to distribute corporation's property by resolution of the shareholders in consensus.

Prior to the involuntary dissolution, directors of the corporation may exercise rights of corporation, but the transfer of significant property must be approved by shareholders.

If a corporation's property is distributed to shareholders in the form of dividends, it must be assured that such distribution shall not affect the debts overdue or make the corporation insolvent.

If shares held by all shareholders are common shares with the equal number of votes attached to the shares, each shareholder is entitled to the dividend, and is entitled to claim the corporation's residual property at the time of dissolution, which means that the property legally acquired by shareholders from the corporation are private property of the shareholders.

In the present case, in case of voluntary dissolution of Atlantic East, shareholders of Atlantic East can legally acquire shares owned by Atlantic East in other companies because such shares are property of Atlantic East in Newfoundland & Labrador. These shares are one type of moveable properties under the law of moveable property and shareholders are entitled to dispose of these shares. In other words, shareholders have the right to possess, manage, control, receive principal and benefit of, transfer and inherit the shares, and the rights of shareholders are protected by law.


Read the original: 藍海查明案例 ▍加拿大:關于公司解散的法律問題

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