The Good, The Bad And The Ugly

THE GOOD - SOLVENCY TESTS ABOLISHED

Under the "red tape" legislation passed by the provincial government in the fall of 1999, the Province finally abolished the requirement under Section 20 of the Ontario Business Corporations Act for related companies to meet solvency tests when providing financial assistance to one another (whether by way of guarantee or otherwise).

Although there are no reported cases involving a guarantor claiming that due to a breach of the solvency test, a guarantee or security provided by the guarantor was not enforceable, lenders have always been faced with the possibility that such an attack could occur. This fear has necessitated the structuring of transactions in order to comply with the test, and has often meant restricting or limiting guarantees and security provided in support thereof.

Under the new amendments, "a corporation may give financial assistance to any person for any purpose by means of a loan, guarantee or otherwise" without regard to the relationship between the guarantor and the debtor.

The only requirement is that where such financial assistance is being given to a shareholder, director or officer of the debtor or a related company, it must disclose the nature of such financial assistance to the shareholders.

Failure to satisfy this disclosure requirement will not impact on any guarantee or security given to a lender.

It should be noted, however, that similar amendments have not been made to the Canada Business Corporations Act. Accordingly, the test still applies for federal companies. At least, however, for Ontario corporations, these previous "make work" projects for lawyers have now been eliminated.

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