Reference re constitutional validity of s. 110 of the Dominion Companies Act, [1934] SCR 653

Supreme Court of Canada

Reference re constitutional validity of s. 110 of the Dominion Companies Act, [1934] S.C.R. 653

Date: 1934-06-06.

In the Matter of a Reference Concerning the Constitutional Validity of Section 110 of the Dominion Companies Act.

1934: March 26, 27; 1934 June 6.

Present: Duff C.J. and Rinfret, Lamont, Cannon, Crocket and Hughes JJ.

Constitutional law—Companies—Companies Act, R.S.C., 1927, c. 27, s. 110—Constitutional validity—“Incorporation of companies” (with objects not provincial)—B.N.A. Act, ss. 91, 92.

Sec. 110 of the Dominion Companies Act, R.S.C., 1927, c. 27, (as to directors’ liability for declaring and paying dividend when company is insolvent, or when payment of the dividend renders company insolvent or impairs capital), is intra vires of the Parliament of Canada. The enactment is of a character that brings it within the class of topics that must be supposed to have been contemplated, in the light of

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existing experience, as falling within the subject of “incorporation of companies” within the meaning thereof as used in the B.N.A. Act (and “incorporation of companies” with objects not provincial is within Dominion jurisdiction under the terms of ss. 91 and 92 of the B.N.A. Act).

REFERENCE to the Supreme Court of Canada for hearing and consideration, pursuant to the authority of s. 55 of the Supreme Court Act (R.S.C., 1927, c. 35), of the following question:

“Is section 110 of the Dominion Companies Act, R.S.C., 1927, chapter 27, ultra vires the Parliament of Canada either in whole or in part and if so, in what particular or particulars or to what extent?”

On an appeal before the Court of Appeal for Ontario in Meyer Malt & Grain Co. v. Coombs et al.[1], that court had held, by a majority, against the constitutional validity of the section. When it had been attacked in that court the Attorney-General of Canada had been notified, and he intervened. An appeal from that court’s decision to the Supreme Court of Canada had been entered but on settlement of the action the appeal was discontinued. In these circumstances the present reference was made.

Glyn Osier K.C. and F. P. Varcoe K.C. for the Attorney-General for Canada.

Charles Lanctôt K.C. and L. St. Laurent K.C. for the Attorney-General for Quebec.

I. A. Humphreys K.C. for the Attorney-General for Ontario.

The judgment of the court was delivered by

Duff C.J.—This reference by His Excellency the Governor in Council raises the question whether s. 110 of the Dominion Companies Act (R.S.C., 1927, c. 27) is ultra vires of the Parliament of Canada, either in whole or in part. The section provides as follows:

110. If the directors of the company declare and pay any dividend when the company is insolvent, or any dividend, the payment of which renders the company insolvent, or impairs the capital thereof, they shall be jointly and severally liable, as well to the company as to the individual shareholders and creditors thereof, for all the debts of the company then existing, and for all debts thereafter contracted during their continuance in office, respectively.

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2. If any director present when such dividend is declared does forthwith, or if any director then absent does, within twenty-four hours after he becomes aware of such declaration and is able so to do, enter on the minutes of the board of directors his protest against the same, and within eight days thereafter publishes such protest in at least one newspaper published at the place in which the head office or chief place of business of the company is situated, or, if no newspaper is there published, in the newspaper published in the place nearest thereto, such director may thereby, and not otherwise, exonerate himself from such liability.

3. Nothing in this section shall be deemed to create any liability upon the directors of a mining company by reason of payment of dividends out of funds derived from the operations of such company, if such payment does not reduce the value of the remaining assets of the company so that they will be insufficient to meet the liabilities of the company then existing, exclusive of its nominal paid up capital.

The Companies Act has been treated as enacted under the powers of the Dominion Parliament embraced within the residuary clause, as well as such powers as may arise under no. 2 of s. 91, of the B.N.A. Act. In John Deere Plow Co. v. Wharton[2], it was held that certain provisions of the Companies Act (sections 5, 14, 33, 35 and 37) as well as s. 9 of the present Interpretation Act, are intra vires. The principle of that decision is, as Lord Haldane explained, that the subject matter “Incorporation of Companies with objects not provincial” is a subject which falls within the residuary clause of s. 91 because it is excluded from those embraced with s. 92 by the terms of the section itself. It is also laid down that “Incorporation of Companies” cannot be read in a manner so strict as to limit it to the subject of bringing such companies into being. It was further held that

the power to regulate trade and commerce at all events enables the Parliament of Canada to prescribe to what extent the powers of companies the objects of which extend to the entire Dominion should be exercisable, and what limitations should be placed on such powers. For if it be established that the Dominion Parliament can create such companies, then it becomes a question of general interest throughout the Dominion in what fashion they should be permitted to trade.

The question of what falls within the subject of “Incorporation of Companies” thus vested in the Parliament of the Dominion under the residuary clause, and what falls within the powers of that Parliament in relation to such companies by virtue of the trade and commerce clause (no. 2 of s. 91) is a question which in particular cases may be delicate and difficult. I think the question now raised is one which presents no very great difficulty.

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It seems to me legitimate to glance at the state of the law with respect to the incorporation and management of companies existing in England at the time the B.N.A. Act was passed (Croft v. Dunphy[3].) That there may be no inaccuracy as to the state of it I quote some passages from the 5th edition of Lord Lindley’s book on the Law of Companies:

By the common law of this country every member of an unincorporated partnership, whether it be an ordinary firm or a joint-stock company with transferable shares, is personally liable for all the debts and engagements of the partnership contracted whilst he is a member of it. (p. 245).

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2. With respect to the extent of the liability of the members of a company upon contracts in which it is specially stipulated that the funds of the company alone shall be answerable, and that no member shall be liable beyond the amount of his share, the limit set by contract is the limit of liability:—

Where the company is an incorporated company, there never was any difficulty in giving effect even at law to all the terms of the contract; and in the case of companies registered under the Act 7 & 8 Vict., c. 110, it was held that the members were not liable to have execution issued against, them upon judgments obtained against the company on a contract of the description in question; but that the property of the company was alone liable to make good the demands of the judgment creditor; and this was held at law even in cases where the subscribed capital had been exhausted but the whole capital had not been paid up.

The same principle was acted on in equity, except that a Court of Equity compelled the shareholders to pay up rateably so much of the capital as had not already been subscribed. This can now be done by a properly constituted action.

In all these cases, however, it must be borne in mind that the liabilities which are limited to the funds of the company, are those only which are expressly so limited by the contracts with the creditors; the liabilities to other persons are unlimited.

Companies governed by the Companies Act, 1862, may, although unlimited, limit their liability by special contract, and where they do so the principles above adverted to will be applicable. But as under the Companies Act, 1862, judgments against a company cannot be enforced against its members, questions as to their individual liability can scarcely arise except when a company is being wound up. (pp. 250-251.)

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Passing now to the subject of limited liability by statute, the first point which has to be borne in mind is that the moment a society of any kind is incorporated, its members cease by common law to be in any way liable for the debts and engagements of the body corporate. Moreover, although by common law it has always been lawful for the Crown to create corporations, the Crown has no power by common law to create a corporation and at the same time to render its members individually liable for its debts, the whole of that branch of the law which relates to the liability, as distinguished from the non-liability, of the members of

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incorporated companies for the debts and engagements of such companies, is of modern growth and is based upon statutory enactments. These enactments will be examined hereafter in connection with the subjects of execution and winding up, but it may be useful to state generally in the present place that—

1. The liability of the members of a company governed by the Letters Patent Act depends on the terms of its charter or letters patent, the Crown being empowered by the Act in question to limit their liability or not.

2. The liability of the members of a company governed by the Companies Clauses Consolidation Act is limited to the extent of their unpaid-up shares in the capital of the company.

3. The liability of the members of a company empowered by a special Act of Parliament to sue and be sued by a public officer depends on the terms of such Act, but will almost invariably be found to be unlimited.

4. The liability of the members of a banking company governed by 7 Geo. 4, c. 46, is unlimited.

5. Subject to the exceptions presently to be noticed, the extent of the liability of the members of a company formed and registered under the Companies Act, 1862, depends upon whether the company is registered with limited liability or not. If the company is registered with, limited liability, its members are not liable beyond the amount for which they have undertaken to be responsible; but if the company is not so registered, its members are liable to the full amount of the company’s debts and engagements, whatever that may be. The liability, however, of each member is merely a liability to contribute with others; and such liability can only be enforced by winding up the company. No execution can issue against a member upon a judgment obtained against the company.

The exceptions above referred to are as follows:—

1. Even if the company is registered with limited liability, the liability of the directors will be unlimited if the memorandum of association so provides.

2. If a company carries on business for six months with less than seven members, all the members cognizant of the fact are severally liable for the debts contracted by the company during that time, and may be sued accordingly.

3. The Act contains stringent provisions to compel limited companies and their officers to use the word “limited” as part of the name of the company in matters relating to its business; and persons signing or authorizing the signature on behalf of such a company of any bill of exchange, promissory note, cheque, or order for money or goods, in which the word limited is not used as directed, are themselves liable for the amount, unless the same is duly paid by the company.

4. The liability of limited banking companies issuing notes is unlimited, in respect of such notes.

5. Although a company may be registered without limited liability, the liability of its members may be limited by special contract.

6. The liability of the members of companies not formed under the Act but registered under it, is as to all matters occurring after registration the same as the liability of members of companies formed and registered under the Act. But as to other matters the extent of liability is the same as if no registration had taken place. Existing companies with unlimited liability, whether registered as such under the Act of 1862 or

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not, may be registered as limited companies, and if so registered, the liability of their members as to matters occurring after registration becomes limited also. But banking companies existing at the date of the passing of the Act and registering under it as limited companies, are bound to give certain notices to their customers before the privilege of limited liability can be claimed as against them. (pp. 252-4.)

Legislation relating to companies, therefore, provided, broadly speaking, for the constitution of the companies; for the conditions under which membership could be acquired; for the management by directors or other managers; the terms and conditions upon which profits should be divided or dividends declared; the conditions under which the capital of the company could be increased or diminished; the responsibility of the members of the company in respect to the debts of the corporation; the responsibility of the directors in respect to such debts. It does not follow, of course, as a logical conclusion, because enactments had been passed in relation to these subjects in Great Britain and were on the statute books some years before the passing of the B.N.A. Act, that they are of necessity included within the subject “Incorporation of Companies” within the meaning of s. 92 (11). But they afford evidence, and such evidence could be accumulated indefinitely, that such topics naturally, if not inevitably, engage the attention of the legislature when it is dealing with the subject of the constitution of joint stock companies.

Reading the term “Incorporation of Companies” in light of the existing experience in Great Britain, as well as in this country, such subjects naturally fall within any practical scheme for the incorporation of companies. Let us consider this a little more in detail.

The limitation of the resort of the creditors of the company to the funds of the company itself; the terms and conditions of such limitation, and the terms and conditions of the liability of individual members of the company in respect to the debts of the company, are subjects which would appear to be necessary for consideration and determination.

Then, if you are to limit the recourse of the creditors to the assets of the company, inevitably arises the question, what protection is to be given as to the preservation of such assets? What protection, for example, against

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improper division amongst shareholders under the guise of profits. So, with regard to the position of the managers—managers who are invested with powers and responsibilities. It appears to me that you are strictly within what might properly be called the defining of the constitution of the company when you are making provision for limiting the liability of shareholders in respect of the debts of the company; when you are making co-ordinate provisions for the protection of the assets of the company in the interests of the creditors of the company; when you are providing safeguards against the malfeasance of the managers and, particularly, when, in the interests of persons dealing with the company, you are providing safeguards against the improper or colourable employment by the managers or the shareholders of their powers, in wasting the assets of the company.

It seems to me to follow from all this that s. 110, as we have it before us, is an enactment of a character that brings it within the class of topics that the legislature must be supposed to have contemplated as falling within the subject of “Incorporation of Companies” as used in the British North America Act.

The question submitted is answered in the negative.

Solicitor for the Attorney-General of Canada: W. Stuart Edwards.

Solicitor for the Attorney-General of Quebec: Charles Lanctôt.

Solicitor for the Attorney-General of Ontario: W. B. Common.