In Ontario, under the Ontario Business Corporations Act (OBCA), directors of a corporation have a legal responsibility to ensure that the corporation is financially stable before making certain transactions. This includes the payment of dividends, redemption or reacquisition of shares, reduction of stated capital, or provision of financial assistance to certain non-arm’s length persons. These transactions are generally forbidden if there are reasonable grounds to believe that the corporation would be unable to pay its liabilities as they become due, or that the value of its assets would be less than the aggregate of its liabilities and some or all of the stated capital or redemption or liquidation entitlement of its shares.
According to OBCA Section 130(2), if directors vote for or consent to a resolution authorizing any of the actions listed in clauses (b) to (f), which are contrary to OBCA Sections 30, 31, 32, 37, 38, 136, 185 or 248, they are jointly and severally liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation. This means that if a corporation’s directors authorize a dividend, for example, contrary to Section 38 of the OBCA, they are jointly and severally liable to restore the amount distributed or paid to the corporation if it is not otherwise recovered.
Furthermore, according to OBCA Section 130(3), a director who has satisfied a judgment rendered under this section is entitled to contribution from the other directors who voted for or consented to the unlawful act upon which the judgment was founded. A director liable under subsection (2) is entitled to apply to the court for an order compelling a shareholder or other recipient to pay or deliver to the director any money or property that was paid or distributed to the shareholder or other recipient contrary to OBCA Sections 30, 31, 32, 37, 38, 136, 185 or 248.
It’s worth noting that there are some exceptions in the OBCA that may allow for a defence against liability for the directors. According to OBCA Section 130(6), a director is not liable under subsection (1) if the director proves that he or she did not know and could not reasonably have known that the share was issued for a consideration less than the fair equivalent of the money that the corporation would have received if the share had been issued for money.
In summary, under the OBCA, directors of a corporation in Ontario have a legal responsibility to ensure that the corporation is financially stable before making certain transactions and may be held liable for any distributions that contravene the OBCA’s solvency tests. They may also be liable for restoring any amounts so distributed or paid and not otherwise recovered by the corporation. However, there are provisions in the OBCA that may allow for a defence against liability for the directors if they can demonstrate that they did not know and could not reasonably have known about the circumstances that led to the liability.