Unlimited Liability in the Modern Context: An Examination of Shareholder Liability in Nova Scotia Unlimited Liability Companies

IntroductionI. Recent cases and issuesII. Nova Scotia corporate law issues1. Interpretation of section 135: History, context and purpose2. History and context of section 1353. Scheme, object and intention of section 1354. Section 135 establishes a closed system of shareholder liability5. A shareholder's guarantee does not preclude contributory liability under section 1356. Partnership principles are not applicable to NSULCs contributory liabilityIII. Winding up under the NSCA1. Winding up is a process, not a specific event2. Winding up for insolvent companies commences upon public notice of the winding up3. Winding up for the purpose of the NSCA is not limited to proceedings under any specific statute4. Winding up need not take place in the jurisdiction of incorporation5. Winding up of an NSULC can be commenced by a U.S. Chapter 11 filingIV. Bankruptcy law issues1. Jurisdiction: Does U.S. or Canadian bankruptcy law apply?2. U.S. Law: The single satisfaction rule and the doctrine of equitable consolidation3. Canadian law: The rule against double proof and piercing the corporate veilConclusionIntroductionIt has been possible to incorporate companies with unlimited shareholder liability in Nova Scotia for more than a hundred years, but for most of the twentieth century, such companies were as unheard of in Nova Scotia as they were everywhere else. They existed only as anachronisms in the outdated sections of the infrequently amended Nova Scotia Companies Act1-legal relics of a bygone era that had yet to be erased completely through the process of statutory reform. Then, in the 1990s, thanks to the evolution of U.S. tax laws and the pioneering work of a few Nova Scotia lawyers,2 Nova Scotia unlimited liability companies (NSULCs) experienced a dramatic and sustained burst of popularity, becoming more frequently used than they had ever previously been, and for many years, NSULCs were used in the structuring of virtually every U.S.-Canada cross-border acquisition.The key to this sudden popularity was the NSULC's singular defining characteristic: unlimited shareholder liability.3 The possibility of unlimited liability allowed for the creation of an entity considered a corporation under Canadian law that could be treated as a partnership for U.S. tax purposes. Although this advantage has been somewhat diminished recently due to U.S. tax law reforms, for over 20 years it provided a significant incentive to incorporate NSULCs under the NSCA and over 7780 were formed between 1990 and 2013.4The unlimited nature of the liability borne by the shareholders of an NSULC was apparently regarded as something of a technicality that was rarely, if ever, addressed in detail. The precise nature of that liability was not closely examined in the professional or academic literature, and until recently was never considered by the courts. Perhaps unlimited liability was considered too familiar a concept to require detailed analysis, or perhaps it was considered irrelevant in practice because modern NSULCs are typically used in very close corporate structures, usually as whollyowned subsidiaries with clearly defined assets and liabilities and with debts guaranteed by their parent companies. In such a structure, the liability of the parent company seems clear. This apparent clarity proved illusory, however, following the recent financial crisis, when a number of NSULC parent companies faced bankruptcy and restructuring and the precise nature of their unlimited liability was suddenly cast into the spotlight.The principal bankruptcy proceedings for these large NSULC parent companies have typically been heard by the United States Bankruptcy Court in New York and Delaware, with related actions in Canadian courts. As discussed below, most of these cases have been settled by the parties before the courts had an opportunity to comment directly on the issue of NSULC shareholder liability. …

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