Declared but unpaid dividends: Out in the cold with the other equity claims 


May 2011

Corporate Restructuring Bulletin
Although originating from equity, declared but unpaid dividends have historically been treated as debt claims by courts in proceedings under the Companies' Creditors Arrangement Act (CCAA).1 Following the coming into force of the CCAA amendments in September 2009, a fresh look at the characterization of claims as debt or equity is being undertaken. In the recent decision in Re Nelson Financial Group Ltd.,2 the Ontario Superior Court of Justice concluded that the claims of the majority of preferred shareholders should be treated as equity claims, including those arising from declared but unpaid dividends.


Nelson Financial Group Ltd. was in the business of raising funds from investors and then extending credit to customers in vendor-assisted financing programs at higher rates than it paid to its investors. To raise funds, Nelson issued promissory notes and preferred shares. One of the main terms of the agreements for the preferred shares was that preferred shareholders were to receive a dividend of 10% per annum, payable monthly. As of the date of the commencement of the CCAA proceedings, approximately $53,632 of declared but unpaid dividends were outstanding with respect to the preferred shares and $73,652.51 of accumulated dividends.

The noteholders brought a motion to the Court seeking a declaration that all claims brought forward by preferred shareholders were equity claims. Nelson and the Monitor supported the motion. The preferred shareholders disputed the motion. In addition, the preferred shareholders claimed that Nelson and its management, among other things, stole from, defrauded and made misrepresentations to them when the preferred shareholders invested their money in Nelson.


Although the Court was sympathetic to the plight of the preferred shareholders given the questionable actions of Nelson and its management, the Court ruled that the preferred shareholders' claims were, for the purposes of the CCAA, claims in equity. The Court recognized that, following the coming into force of the CCAA amendments in September 2009, the past treatment of claims as debt or equity in nature would need to be reevaluated in light of the changes to the CCAA. The characterization of whether the preferred shares were debt or equity would be key in determining a preferred shareholders' recovery. In the case of a plan of compromise or arrangement, subsection 6(8) of the CCAA states that the payment of equity claims cannot be made until all claims that are not equity claims are paid in full. In addition, section 22.1 of the CCAA prevents equity claim holders from voting at any creditors meeting unless the court provides otherwise.

The starting point of the Court's analysis was the wording of section 2 of the CCAA in respect of the new definition, "equity claim." An "equity claim" means "a claim that is in respect of an equity interest, including a claim for, among others, (a) a dividend or similar payment, (b) a return on capital, (c) a redemption or retraction obligation, (d) monetary loss resulting from the ownership, purchase or sale of an equity interest or the rescission or annulment of a purchase or sale of an equity interest, or (e) contribution or indemnity in respect of a claim referred to in (a) to (d)."3 An "equity interest" in respect of a corporation includes a share in the corporation.

In the Court's opinion, declared but unpaid dividends, unperformed requests for redemption, compensatory damages for the loss resulting in the purchase of the preferred shares induced by the negligent or fraudulent misrepresentations of Nelson, and amounts due upon the rescission or annulment of the purchase or subscription for preferred shares were all equity claims. All of the aforementioned claims were clearly claims in respect of an equity interest and it was Parliament's intention through the amendments to identify such claims as equity claims.

There were two specific circumstances in which the Court did not make a final determination because it had insufficient evidence. One involved a preferred shareholder who claimed that an unauthorized conversion of his promissory notes into preferred shares had occurred. The second involved a preferred shareholder who claimed that he lent his monthly dividends to Nelson. In both circumstances, if true, such claims could be considered debt in nature.

The Court noted in passing that case law decided before the coming into force of the CCAA amendments in September 2009 had held that an equity claim could become a debt claim if it was reduced to judgment before the insolvency proceedings started and left open the question of whether or not that law was still applicable.


The Nelson decision brings into focus the effect of the CCAA amendments on the determination of claims as either equity or debt in nature. Following the coming into force of the CCAA amendments in September 2009, equity holders should be aware that declared but unpaid dividends are one example of how past claims once considered to be debt may now be considered equity in nature. As the Court noted, there are some circumstances in which equity may become debt claims but, given the outcome in this case, it appears that such exceptions will be fewer in number. This decision and the CCAA amendments emphasize that preferred shareholders cannot take advantage of the benefits of preferred shares without assuming the inherent risks associated with them.

by Waël Rostom and Jeffrey Fung


1  RSC 1985, c C-36. See Re Central Capital Corp (1996), 38 CBR (3d) 1, 27 OR (3d) 494 (CA). 

2  2010 ONSC 6229. 

3  CCAA, s 2 "equity claim."

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011