Anonymised, illustrative composite. Ontario, a share purchase, a completion-accounts true-up that went the seller’s way in reverse, and a sale proceeds already gone to three shareholders before the buyer could collect.
At a glance
A family-owned specialty packaging distributor sold all of its shares for $2,900,000 to a strategic buyer. The deal used a standard closing-date working capital target with a post-closing completion-accounts true-up running in either direction. Immediately after closing, the selling corporation’s three shareholders — who had been planning their exits for years — had the corporation distribute substantially all of the net sale proceeds to themselves, roughly in proportion to their shareholdings, and moved on. The purchase agreement held back an indemnity escrow of $100,000 for representation and warranty claims, but nothing was held back specifically against the possibility that the completion accounts might run against the seller.
Fifty-five days after closing, the completion accountants finished their work and found that closing working capital had been overstated by $140,000 — inventory that turned out to be materially obsolete had been carried at full value in the closing balance sheet. Under the adjustment mechanic, the selling corporation owed the buyer $140,000. But by then the selling corporation had no meaningful assets left to pay it: the proceeds were already in the shareholders’ personal accounts. The $100,000 indemnity escrow could not help — it had already been fully claimed against an unrelated environmental representation breach discovered in the same period, and the SPA did not permit escrow funds allocated to one claim to be redirected to satisfy a different one.
The buyer’s first instinct was to go after the three shareholders directly for the value they had received. Ontario does have a statute for exactly this shape of problem — a debtor emptied of assets after a transfer to insiders, with a creditor left holding an unpaid claim — but it is a demanding one. Section 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 provides: “Every conveyance of real property or personal property … made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.” That is a real, fetched, on-point provision — but the operative words are “with intent.” Section 4 extends the Act even to a transfer made for genuine consideration, provided the intent is still there: “Section 2 applies to every conveyance executed with the intent set forth in that section despite the fact that it was executed upon a valuable consideration … unless it is protected under section 3 by reason of good faith and want of notice or knowledge on the part of the purchaser.” But intent is the buyer’s burden. The shareholders had authorised the distribution three weeks after closing, before the completion accounts flagged any problem and before anyone had reason to think a downward adjustment was coming. There was no evidence any of them knew, or should have known, that a $140,000 true-up was likely. An ordinary, contemporaneous distribution of sale proceeds to a corporation’s own owners, made before a contingent liability has even crystallised, does not carry the intent s.2 requires — it looks exactly like what it was, shareholders taking the money from selling their business.
$140,000 owed, against $2,900,000 distributed to three shareholders within three weeks — the shortfall was 4.8% of total proceeds, easily large enough to be worth pursuing, and easily small enough, spread across three recipients, that no individual shareholder’s share looked obviously disproportionate or suspicious on its own. That evidentiary thinness is precisely what makes the intent element hard to prove: a $46,600-per-shareholder distribution made in the ordinary course, weeks before any dispute existed, does not read as a scheme to defeat a creditor, even though the practical effect on the buyer was identical to one.
The buyer did not pursue a Fraudulent Conveyances Act claim. Counsel advised that the intent element could not be made out on the facts, and that the cost of trying and likely failing exceeded the value of the claim. The buyer instead pursued the selling corporation itself for the $140,000, obtained a judgment, and recovered a fraction of it from the corporation’s residual assets before the shell was dissolved. Most of the $140,000 was never recovered.
Had the SPA held back even a modest true-up escrow — something in the range of the typical working-capital swing seen in the target’s own historical financials — the entire dispute over the shareholders’ distribution would never have arisen. A $150,000 escrow, released to the seller only once the completion accounts were finalised and any downward adjustment satisfied, would have cost the seller nothing it was not already going to receive and would have cost the buyer nothing beyond ordinary escrow-agent fees. Chasing shareholders under a century-old fraud statute, after the fact, is what happens when that ordinary precaution is skipped.
The tell was in the SPA’s escrow schedule: it held back money for representation and warranty claims, a familiar and heavily negotiated risk, but held back nothing at all for the working capital mechanism itself — even though the same agreement contemplated the true-up could run in either direction. Many SMB share purchases make exactly this gap: buyers negotiate hard over the indemnity escrow because it is the visible battlefield, and quietly assume the price-adjustment mechanism is self-executing because it is framed as arithmetic rather than risk. It is not self-executing once the seller is a corporation with no assets left after closing.
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