Prohibition by jurisdiction (pp. 85-6)
[I]n Saskatchewan, Manitoba, New Brunswick, and Newfoundland…a promissory note cannot be given as consideration for the issuance of shares under any circumstances.…
In Alberta, Ontario, and under the CBCA, the restriction only applies to promissory notes issued by the subscriber or a person who does not deal at arm's length with the subscriber… [A] subscriber could pay for shares with a promissory note issued by an arm's length party. …
[I]n British Columbia, the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….
[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .
Consequences of breach: invalid share issuance (pp. 86-7)
The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15: [1988] Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18: [2013] F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.
Consequences of breach: consequences in court's discretion (p. 87)
The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977), [1978] B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall, [1987] B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd, [1991] B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1), [1978] O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc., [1997] O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd., [2002] A.J. No. 422, 2002 ABCA 84, aff'g [2001] A.J. No. 917, 2001 ABQB 588 [Takla].]… .
Validation by curative provision (p. 88)
Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….
Prohibition by jurisdiction (pp. 85-6)
[I]n Saskatchewan, Manitoba, New Brunswick, and Newfoundland…a promissory note cannot be given as consideration for the issuance of shares under any circumstances.…
In Alberta, Ontario, and under the CBCA, the restriction only applies to promissory notes issued by the subscriber or a person who does not deal at arm's length with the subscriber… [A] subscriber could pay for shares with a promissory note issued by an arm's length party. …
[I]n British Columbia, , the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….
[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .
Consequences of breach: invalid share issuance (pp. 86-7)
The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15: [1988] Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18: [2013] F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.
Consequences of breach: consequences in court's discretion (p. 87)
The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977), [1978] B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall, [1987] B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd, [1991] B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1), [1978] O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc., [1997] O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd., [2002] A.J. No. 422, 2002 ABCA 84, aff'g [2001] A.J. No. 917, 2001 ABQB 588 [Takla].]… .
Validation by curative provision (p. 88)
Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….
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