FINANCIAL ASSISTANCE UNDER
CANADA BUSINESS CORPORATIONS ACT
Law and Government Division
26 January 2000
TABLE OF CONTENTS
DEALING WITH FINANCIAL ASSISTANCE
RECOMMENDATIONS FOR AMENDING OR REPEALING SECTION 44
FINANCIAL ASSISTANCE UNDER
THE CANADA BUSINESS CORPORATIONS ACT
Section 44 of
the Canada Business Corporations Act (CBCA)(1)
restricts the loans, guarantees and other kinds of financial assistance that can be given
by a CBCA corporation. The section covers two situations: (a) giving financial assistance
to a range of specified persons who have a connection with the corporation; and (b) giving
financial assistance to any person for the purchase of shares issued by the corporation or
an affiliated corporation. More specifically, section 44 prohibits a corporation from
giving financial assistance in these two circumstances where the directors have reasonable
grounds for believing that, as a result, the corporation either is or would become
insolvent or the corporations assets either are or would be less than all of its
liabilities and stated capital.
authorize financial assistance contrary to section 44 are personally liable to the
corporation for the amount. The CBCA does, however, provide directors with a limited
defence that permits them to avoid liability if they have relied in good faith upon the
financial statements or a report of a lawyer, accountant or other professional.
44(2) sets out certain exceptions allowing financial assistance to be given whether or not
there are reasonable grounds for believing the corporation is insolvent; an example would
be financial assistance given to employees under a share purchase plan or to a subsidiary
in any circumstance.
minor changes, section 44 is largely the same as it was when adopted in 1975.
In March 1996,
Industry Canada released a discussion paper on this issue, Financial Assistance and
Related Provisions,(2) which reviews section 44,
outlines problems with the provision, sets out options for dealing with these problems,
and recommends changes.
This note will
review section 44 of the CBCA and outline some of the options for change.
APPROACHES TO DEALING WITH FINANCIAL ASSISTANCE
are reasonable grounds for believing that a corporation is insolvent, section 44 appears
largely designed to protect creditors and minority shareholders against impairment of the
corporations capital through the giving of financial assistance to corporate
insiders. The section does not impose an absolute ban on financial assistance; such
assistance is permitted where it will not adversely affect the corporations
There are many
approaches to regulating the granting of financial assistance. These include
an assets/solvency test ;
little or no regulation;
restrictions such as review of related-party transactions by a committee of independent
financial limits on
absolute prohibitions on
giving financial assistance when a company is or would become insolvent;
imposition of liability on
directors for all debts of a corporation that trades while it is insolvent.(3)
Paper outlined a number of concerns with respect to section 44. The section was criticized
for being vague; for example, it uses such imprecise terms as "directly or
indirectly," "realizable value," and "loan, guarantee or
concern is that directors may find it difficult to ensure that they have complied with the
requirements of section 44 if they have been unable to obtain opinions on the matter from
lawyers or accountants
issue is the nature of the protection provided by section 44 to creditors and minority
shareholders. Since section 44 requires only that the solvency and assets tests be met, a
transaction could conceivably harm the interests of shareholders even though it was not
contrary to the section.
Industry Canada officials held preliminary consultations with some CBCA stakeholders on
amendments to the CBCA and also received a number of written comments on section 44 from
practitioners and organizations. Some called for the repeal of the section, others
supported keeping the section but redrafting it, and still others, wanting greater
flexibility for corporations, favoured more permissive legislation.(4)
OPTIONS AND RECOMMENDATIONS FOR AMENDING OR REPEALING
Discussion Paper set out a number of options for addressing the various concerns with
respect to section 44. Among these options were:
The authors of
the Discussion Paper concluded that eliminating section 44 would create more problems than
it would solve "because it could lead to more litigation and confusion as to whether
fiduciary duties permit financial assistance."(6)
The Paper went on to recommend that, in relation to financial assistance for share
purchases, the solvency/asset test be maintained and clarified but, for related-party
financial assistance, the test be eliminated and replaced by three requirements:
disclosure, a "best interests of the corporation" test, and director or
shareholder approval. The Paper also recommended that, for publicly traded CBCA
corporations, a conduct committee composed of independent directors should review all
material related-party transactions with significant shareholders, directors and officers
of the corporation or a holding corporation and their associates.
It is clear
that section 44 of the CBCA is flawed and needs to be improved. There is no one approach
to dealing with the issue of financial assistance, however. After examining a number of
options, the Discussion Paper recommended that the present assets/solvency test be
retained and clarified for share purchases but eliminated and replaced by another test for
related- party transactions.
recommendations in the Discussion Paper are not government policy, they signal that
changes to section 44 will most likely be part of the forthcoming amendments to the CBCA.
Prohibited loans and guarantees -- Subject to subsection (2), a corporation or any
corporation with which it is affiliated shall not, directly or indirectly, give financial
assistance by means of a loan, guarantee or otherwise
(a) to any
shareholder, director, officer or employee of the corporation or of an affiliated
corporation or to an associate of any such person for any purpose, or
(b) to any
person for the purpose of or in connection with a purchase of a share issued or to be
issued by the corporation or affiliated corporation,
are reasonable grounds for believing that
corporation is or, after giving the financial assistance, would be unable to pay its
liabilities as they become due, or
realizable value of the corporations assets, excluding the amount of any financial
assistance in the form of a loan and in the form of assets pledged or encumbered to secure
a guarantee, after giving the financial assistance, would be less than the aggregate of
the corporations liabilities and stated capital of all classes.
Permitted loans and guarantees -- A corporation may give financial assistance by means
of a loan, guarantee or otherwise
(a) to any
person in the ordinary course of business if the lending of money is part of the ordinary
business of the corporation;
(b) to any
person on account of expenditures incurred or to be incurred on behalf of the corporation;
(c) to a
holding body corporate if the corporation is a wholly-owned subsidiary of the holding body
(d) to a
subsidiary body corporate of the corporation; and
employees of the corporation or any of its affiliates
(i) to enable
or assist them to purchase or erect living accommodation for their own occupation, or
accordance with a plan for the purchase of shares of the corporation or any of its
affiliates to be held by a trustee.
Wholly-owned subsidiary -- A corporation is a wholly-owned subsidiary of another body
corporate for the purposes of paragraph (2)(c) if
(a) all of the
issued shares of the corporation are held by
(i) that other
other body corporate and one or more bodies corporate all of the issued shares of which
are held by that other body corporate, or
(iii) two or
more bodies corporate all of the issued shares of which are held by that other body
(b) it is a
wholly-owned subsidiary of a body corporate that is a wholly-owned subsidiary of that
other body corporate.
Enforceability -- A contract made by a corporation in contravention of this section
may be enforced by the corporation or by a lender for value in good faith without notice
of the contravention.
(1) The text of section 44 is set
out in Appendix 1.
(2) Industry Canada, Canada Business Corporations Act,
Discussion Paper, Financial Assistance and Related Provisions, March 1996.
(3) Ibid., p. 14.
(4) Ibid., p. 28-29.
(5) Ibid., p. 30-35.
Ibid., p. 36.