Operating a business necessitates not only understanding incorporation and the various corporate transactions that follow, but also requires contemplation of winding up, or dissolving, a corporation. This blog will provide a brief overview of the process of winding up a corporation in Ontario. It will also review a recent decision from the Ontario Superior Court of Justice, where the Court considered whether or not to permit the winding up of a corporation.
The Ontario Business Corporations Act (“OCBA”) governs the liquidation procedure of winding up a corporation. Under certain circumstances, such as insolvency, the corporation may be liquidated per the federal Winding-up and Restructuring Act (“WURA”) provisions. This blog, however, will focus on the voluntary liquidation procedure contained in the Ontario Business Corporations Act.
The Ontario Business Corporations Act permits shareholders to voluntarily liquidate a corporation by special resolution, the procedures of which are laid out in sections 193-205. Generally, the process calls for the appointment of one or more liquidators, who can be directors, officers, or employees of the corporation. Following the resolution, the corporation ceases its regular business operations and any subsequent share transfers require the approval of the liquidator. The liquidator assumes control of the corporation’s assets, selling them to settle debts and liabilities. After the liquidator completes asset disposal and debt settlement, a final shareholder meeting is called. The liquidator files a form with the director, publishes a notice in the Ontario Gazette, and, three months later, the corporation is dissolved unless a court order defers or accelerates the dissolution.
However, there is also the process of winding up by the courts. The court may wind up a corporation where it cannot continue with its business and it is advisable to have it wound up, even if it is not bankrupt. There is also a catch-all provision that allows a court to order a corporation to be wound up when “it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation.”
In Srivastava v. DLT Global Inc., the Court considered the grounds of what may be considered “just and equitable” to wind up a corporation where there had been a falling out between the founders. The case involved an application by Mr. Srivastava, a shareholder, co-founder, former director and CTO of DLT Global, a blockchain business, for an order to wind up the business.
After several years of operating a company under a different name in the same space, Mr. Srivastava met Mr. Owen, who had experience growing blockchain businesses. The two entered into business and eventually incorporated DLT Global. The company went on to generate significant business and proprietary technology that was subject to patent applications. However, despite its initial success, the company began to lose money and the relationship between Mr. Srivastava and Mr. Owen broke down.
In the ensuing dispute, Mr. Srivastava claimed ownership of the source code based on his previous corporation’s business activities, which he claims DLT Global adopted. Mr. Owen denies that DLT Global is using intellectual property owned by Mr. Srivastava.
Court Considers Whether Winding Up the Business is Appropriate
Firstly, Mr. Srivastava claimed that DLT Global cannot, by reason of its liabilities, continue its business and it is advisable to wind it up. He submitted that the company was unable to pay a variety of expenses, had expenses in excess of $1.4M per month, and was involved in ongoing litigation. As a result, he claimed that the company would not be able to sustain operations through the next year and had no reasonable prospect of changing course.
The Court considered whether winding up was appropriate in these circumstances, especially where less restrictive options are available. The Court was persuaded by DLT Global’s evidence that it had raised $17M in the previous months and could fund its deficiencies for the time being. As such, the Court found that it was not established that DLT Global could not continue with its business and the Court declined to make an order under the section.
Mr. Srivastava also claimed that it was “just and equitable” to wind up the corporation because the “animating purpose” of the business (to grow his pre-existing business) had been lost. He also submitted that DLT Global was essentially a partnership between himself and Mr. Owen, and due to their dispute, the continuation of the business was not equitable.
Court Dismisses Application to Have Corporation Wound Up
Despite the Court’s finding that there had been a breakdown in the relationship, the Court refused to order a winding down of DLT Global. The Court rejected the submission that Mr. Srivastava and Mr. Owen were to operate the company effectively as partners and that DLT Global had failed to meet its reasonable expectations, which resulted in unfairness such that an order for winding up was just and equitable.
This case sheds light on the facts that the Court might consider when ordering a winding up of a corporation. It is clear that even if a company has a significant burn rate, funding necessary to maintain operations for the time being will often be enough to prevent court intervention. Depending on the facts, it may not be just and equitable to wind down a corporation where there has been a breakdown in the relationship of founders and shareholders.
Purchasing or selling a business is a complicated matter that can result in significant risk and liability if not handled correctly. Corporate transactions involve a variety of legal issues to consider, from employment contracts to real estate matters. If you are a business owner considering a purchase, sale, merger, acquisition, or other transaction, having the right legal team behind you can help you ensure the best outcome.
At Bader Law, our experienced corporate lawyers provide business services that address every element of a merger or acquisition. We have been advising businesses and business owners for over a decade and we help clients identify and flag potential trouble spots before they become bigger problems. Our goal is to eliminate as many unknown elements in the process, so that transactions can move as smoothly as possible. We strive to ensure our clients understand their legal obligations and communicate closely with them to respond proactively to their needs.
At Bader Law, we always provide advice that is in your best interests and the best interests of your venture. Our business law team considers the complete picture to identify and mitigate potential risks while protecting your business’ continued growth and success. Contact us online or at (289) 652-9092 to speak with a member of our team and learn how we can help you.