Several years back Dean Pigeon with two friends invested $300,000 equity capital into a new corporation. As it turns out, they have more capital in the business than they can profitably use. Will the CBCA allow them to take out the excess capital?
A) No, since the excess is not accumulated retained earnings.
B) Yes, as long as the corporation can satisfy both parts of the solvency test.
C) Yes, provided the corporation has no creditors.
D) No, because a "capital fund" is not available to shareholders.
E) Yes, provided the corporation can satisfy the court that the capital is truly unutilised.

Question

Quizplus · Accepted Answer

The solvency test is required by the Canadian Business Corporations Act (CBCA) before a corporation can distribute any amounts to its shareholders. The test requires the corporation to demonstrate both that it is able to pay its liabilities as they become due and that the realisable value of its assets will not be less than the sum of its liabilities and stated capital. Therefore, if the corporation can satisfy both parts of the solvency test, it is possible to take out the excess capital.

Several Years Back Dean Pigeon with Two Friends Invested $300,000