Companies need clear idea of assets, liabilities before dissolving

By Staff

Corporations often don’t live forever — but for those who have decided to dissolve a business, it is crucial to first have a clear picture of their company’s assets or liabilities and seek legal and financial advice before winding down, says Vancouver corporate lawyer Jonathan Reilly.

As Reilly, founder of English Bay Law Corporation, tells, company dissolution can happen one of two ways — either voluntarily or involuntarily.

For those who choose to dissolve a company, he explains, the purpose of the business has generally been served, and there’s no need to continue. The dissolution process in these cases, he says, is usually is a simple administrative procedure.

“It’s a procedure in which the shareholders represent that if there are any remaining liabilities of the company, they will take them on, or at least one shareholder has to represent that," says Reilly.

“Where the shareholders are confident that there are no outstanding liabilities or assetsliabilities being the more important category — then they’ll do a voluntary dissolution, and that ends the company’s responsibility to do annual filings, their tax filings, their GST filings, appoint directors, all of that comes to an end and the company dies and it goes from an active to an inactive status in the registry.”

However, Reilly notes companies can also be dissolved as a result of bankruptcy or failure to comply with filing requirements.

“A company can also die because it stops complying with regulatory requirements, the main one being to annually file with the registrar of companies, a report confirming that it has appointed directors, and who those directors are," he says.

“If a company stops doing that — it can miss two filings, but after it misses the second filing, it comes on the radar of the registry which will administratively dissolve it for failing to keep up its reports.”

In either case, says Reilly, when a company goes through a dissolution, it creates a deemed year-end with the Canada Revenue Agency.

“It requires a final tax return, and if there are capital gains, it crystallizes the capital gains.”

Situations that can complicate a dissolution, Reilly adds, include where there are debts and liabilities, which leaves owners “between a rock and a hard place.”

In this case, he says, they are left with the option of either continuing to spend money to keep the company alive in compliance with the Business Corporations Act, voluntarily dissolve it where they take on personal liability or stop filing reports, and the registry will eventually dissolve it.

Reilly says it also may be inappropriate for a company involved in a dispute between business partners to be dissolved.

“If they allow the registry to dissolve it, the other party to the dispute could get that company restored and take control over it.

“Even though there’s no business going on, there may be real financial issues at stake so that a deadlock is a better position than for the other party to control the company. Each party may not want to see the other party become in control. And for that reason, they may need to keep the company alive in order to prevent losing their dispute.”

For those companies that are choosing to dissolve, Reilly says his firm starts by providing a checklist that outlines a number of items owners need to consider.

“We have a questionnaire for the client to go over a number of things they might not have thought of, that need to be cleaned up before they dissolve, and to be sure that there aren’t any outstanding liabilities or assets, there are no bank accounts or assets lying around that they’ve forgotten about that need to be distributed before they dissolve," he says.

“Then it’s a matter of corporate resolutions of the directors and the shareholders and filing and changing the address of the company from the law office to the client’s office — that’s the registered and records address of the company.”

A voluntary dissolution, he adds, can be completed relatively promptly — inside of a week.

In spite of this, Reilly says he still advises clients to seek accounting advice when dissolving a corporation.

“Talk to an accountant and see if it makes sense, see if it should be done sooner or later or if there’s anything that needs to be done first,” he says.

Ultimately, Reilly says the process of voluntarily dissolving a company can be relatively straightforward, as long as business owners carefully consider the particulars of their situation.

“The most important thing to know is to have a clear idea of whether or not the company has any assets or liabilities — and liabilities includes lawsuits or potential lawsuits — and whether or not they’ve had accounting advice.”

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