Can a corporation redeem shares or pay a dividend if it cannot pass the solvency test?

The rule: two tests, not one

Both provisions carry the identical two-part test: a cash-flow limb, asking whether the corporation can pay its liabilities as they fall due, and a balance-sheet limb, asking whether the realizable value of its assets would remain at least equal to its liabilities plus stated capital. A payment can fail the second limb even where the company can plainly meet its bills in the short term — the two tests are independent, and either one failing blocks the payment.

When it changes: directors carry the liability

Section 118 of the CBCA makes directors who vote for or consent to a redemption or dividend that breaches these limits jointly and severally liable to restore the amount to the corporation, subject to a two-year limitation period and a right of contribution among the directors and recovery from the recipient. That liability sits on the directors personally, separate from and in addition to whatever contractual protection the share terms themselves provide.

Where this played out — Case Files

One file works through three separate CBCA provisions governing a corporation buying its own shares, each measured against a different denominator, and shows how reading across from one to another goes wrong. A second shows the same test applied to the single commonest step in a share deal — a pre-closing dividend — usually paraphrased as a cash-flow check and not actually one.

Sources

• • Canada Business Corporations Act, R.S.C. 1985, c. C-44, s.34(1)–(2) and s.36(1)–(2) — laws-lois.justice.gc.ca.
• • CBCA s.42, dividends — laws-lois.justice.gc.ca.
• • CBCA s.118(1)–(2), (4), (5) and (7), directors’ liability — laws-lois.justice.gc.ca.
• • Treadstone Law — dividend policy in a shareholder agreement — adjacent background on how dividend rights are usually documented; it does not work through the statutory solvency tests, which are the point here.