Resolve or Dissolve? The Drastic Remedy of Liquidation and Dissolution

In extreme circumstances, the Alberta Court of King’s Bench (the “Court”) has the power to order the liquidation and dissolution of a corporation under section 215 of Alberta’s Business Corporations Act[1] (the “Act”). This same power also applies to Alberta societies pursuant to section 35 of the Societies Act.[2] The Court recently commented on these sections and the test to be applied.

Below, we elaborate on what exactly liquidation and dissolution would mean for your company and the test to be applied by the Court. We also comment on the usefulness of a Unanimous Shareholder Agreement (“USA”) in dealing with shareholder disputes and helping to avoid a dissolution order.

What is Liquidation and Dissolution?

Liquidation is the process by which a company or society’s creditors are paid out and any remaining assets are distributed to the shareholders or members.

How the net assets are distributed to the shareholders of a corporation will depend on the Articles of Incorporation and any Unanimous Shareholder Agreement. Typically, preferred shareholders will be paid out first up to the redemption value of their shares. The remaining assets, if any, are then divided in some fashion between the common shareholders.

Dissolution involves the filing of Articles of Discontinuance with the Corporate Registrar which, if accepted, legally terminates the existence of the corporation or society. Following dissolution, the corporation or society no longer exists, though it can be “revived” in certain limited circumstances.

Dissolution is normally a voluntary procedure, completed when the shareholders or members no longer have need for the entity. For example, if a company sells all its assets to a purchaser and is effectively “empty” following the distribution of the sale proceeds to the shareholders, there is no longer a need for the corporation. To avoid continued reporting requirements and associated costs, it makes sense to dissolve the company.

Section 215 of the Act, however, can allow an applicant in limited circumstances to force the liquidation and dissolution of an active corporation or society. This is an extreme remedy.

Below, we set out those circumstances where this remedy may be granted by the Court.

The Test for Dissolution

Under the Act, the Court may order dissolution in three circumstances:

1. The Court is satisfied that it is just and equitable to do so;
2. A corporation or one if its affiliates has acted, carried on its business, or the directors have exercised their powers in a manner, that is oppressive or unfairly prejudicial to a shareholder, creditor, director, or officer; or
3. A USA entitles a shareholder to demand dissolution.[3]

The Court has discretion as to whether to grant this remedy, meaning there is no circumstance that automatically requires the Court to order dissolution. As noted by the Court this year in Blood Tribe v Bearspaw Nation (“Blood Tribe”) this remedy “is not granted lightly or where equity can be achieved through other means”.[4]

Just & Equitable

Most dissolution cases in Alberta focus on the “just and equitable” ground. For example, in Blood Tribe, the Court considered whether it was just and equitable to order dissolution of a society. The Court noted that there are four circumstances, each of which may qualify:

1. deadlock in management;
2. fundamental breakdown in a trust relationship;
3. loss of substratum; and
4. loss of confidence in management.[5]

A “deadlock in management” typically occurs when two equal shareholders are at odds. To be a true deadlock, there must be no reasonable chance of reconciliation and no means for solving the deadlock, for example through tie-breaker or exit provisions in a USA. Simple areas of disagreement will not suffice; there must be an inability to agree on matters fundamental to the corporation or society.[6]

A “fundamental breakdown in a trust relationship” can justify dissolution where the corporation or society at issue is “akin to a partnership”, meaning it was “formed or continued based on a personal relationship, involving mutual confidence”.[7] Because the existence of the entity depends on this personal relationship and trust, a relationship breakdown can make it impossible for the parties to continue working together and agree on fundamental matters. This remedy will not be available for a purely commercial relationship.[8]

A ”loss of substratum” means that the main object of the corporation or society has failed such that it is “impossible for the company to carry on the real business for which it was formed”.[9] In Blood Tribe, the Court held that a temporary failure to move forward with the core objects of the corporation or society will not be sufficient. Instead, the applicant must show a sustained failure of pursuit of the core purpose, tied to a fundamental disagreement or lack of trust.[10]

Lastly, “loss of confidence in management” may result in dissolution where the lack of confidence is justifiable and is “grounded in the conduct of the directors in regard to the company’s business”.[11] Where the applicant is itself part of the management issue, they will not be able to rely on their own actions or inactions to justify a loss of confidence.[12] The Court also sought evidence of attempts to fix the management issue, such as completing formal performance reviews or seeking a change of staff.[13]           

The Court did not order dissolution of the society in Blood Tribe, noting that other, less drastic remedies could resolve many of the issues raised by the applicant. This demonstrates the general hesitation to grant a liquidation and dissolution order, instead preferring to remedy the issues through other means so the corporation or society can continue to operate.

Of note, pursuant to the Act, the Court can make any order it thinks fit following an application for dissolution. Thus, the Court is able to grant lesser remedies in place of a liquidation and dissolution order.[14] As stated by the Court of Appeal, “[t]he correct approach in my view is to make an [alternate] order … in every case where equity could be achieved without invoking the drastic remedy of dissolution.”[15]

Oppressive or Unfairly Prejudicial Conduct

In order for an applicant to establish that conduct was “oppressive or unfairly prejudicial”, they must first prove that a “reasonable expectation was breached”, and second that the breach amounted to oppression or unfair prejudice.[16]

Whether a shareholder or other applicant’s expectation was “reasonable” is highly fact specific. However, some factors that the Court will consider include general commercial practice, the nature of the corporation, the relationship between the parties involved, any steps the applicant could have taken to protect itself, any relevant representations and agreements, and the balancing of conflicting interests of all the stakeholders.[17]

The breach of a reasonable expectation alone is insufficient to justify a dissolution order. Instead, the breach must have been oppressive (that is akin to coercive, abusive or in bad faith) or unfairly prejudicial (somewhat less culpable but with unfair consequences).[18]

If the applicant proves that the conduct satisfies one of these criteria, then the Court can order liquidation and dissolution, or a different remedy under section 242 of the Act. Other options include an order restraining the unfair conduct, the replacement of directors or appointing a receiver of the company. As mentioned above, the courts will not order liquidation and dissolution where one of these other remedies will be sufficient.

USA Right to Dissolve

A USA is an agreement granted special status under the Act. In particular, if a valid USA is entered into by all the shareholders, the USA will override certain provisions of the Act and any bylaws of the company. It also allows various decision-makings powers to be transferred from the directors to the shareholders.

A good USA will include various exit provisions for the shareholders. One such clause, though rare, could allow a shareholder to enforce a liquidation and dissolution of the corporation if certain events occur. For example, in a two-shareholder corporation, the USA could provide that if one shareholder materially defaults in the performance of its obligations under the USA, the other shareholder is entitled to demand dissolution of the company.

More often, exit provisions will allow shareholders to withdraw from the corporation or buy each other out in certain circumstances. This allows a shareholder to remove their equity and cease their involvement with the company, while still allowing the corporation to continue with its business.

Having this type of exit provision would provide an argument against a “deadlock in management” having occurred, making a dissolution order less likely. Where one shareholder can force the buyout of another, the USA could even be used to avoid the application for dissolution altogether.

Conclusion

While rare, under the Alberta Business Corporations Act and Societies Act, the Court can force the liquidation and dissolution of a corporation or society. This remedy will be available where the entity has acted or been managed in an oppressive or unfairly prejudicial manner, a USA grants a shareholder a dissolution right, or the Court considers it just and equitable to dissolve the entity.

The Court will only grant such a drastic order where no other available remedy would achieve an equitable result.

We recommend that corporations are proactive in considering how best to avoid potential future shareholder disputes. Entering into a USA with well-drafted exit provisions can help avoid a court dispute and the uncertainty of what a court will consider an appropriate remedy in the circumstances.

If you have any questions regarding liquidation and dissolution, or would like a USA drafted for your company, our Corporate Commercial Law team would be happy to assist.