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Lecture

Chapter29ReadingNotes.doc

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Department
Business
Course
BU231
Professor
Daniel J Fife
Semester
Spring

Description
1READING NOTESCHAPTER 29External Responsibilities of a CorporationThree External ResponsibilitiesCreditorsInvestorsPublicProtection of CreditorsImplications of Limited LiabilityoIn a corporation a creditors rights are limited to the assets held by the corporation if those assets are inadequate then the creditor normally has no further remedyoFor this reason legislatures and courts have evolved some of the following rules to assure creditors that those assets are not wastedoPrimary concern of the law has been to ensure that corporations capital is not allocated to shareholders before responsibilities to creditors are metProtection Under CBCAoCBCA solves the above with two kinds of rulesProhibit payments to shareholders if it renders a corporations liquid assets insufficient to pay creditorsRestrict dividends even when the corporation might sill be left with sufficient liquid assets to pay creditorsSolvency TestoNo paying out dividends etc unless you have enough oA corporation can either provide shareholders with dividends or buy back sharesoIf either of the above are performed when i the corporation is insolvent already or ii the above actions will make the corporation insolvent then the directors become personally liable to the corporation for the deficiencyMaintenance of Capital TestoGoes beyond the solvency test provided for by s42 of the CBCAStipulates that dividends can only be paid if net assets will still exceed stated assets after the dividends are paid out ie only pay dividends out of profit or if assets increase in valueOnly buy back shares if your assets will still equal or exceed your liabilities and stated capital
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