When a Departing Founder's Buyout Schedule Hit the Solvency Test

The situation

The letter arrived on a Tuesday, forwarded from the company's registered office with a single line from the receptionist: 'this looked important.' It was. Tesfay's lawyer wrote to say the fourth quarterly redemption payment on his shares was six weeks late, that the shareholder agreement gave the company no discretion on timing, and that if payment did not arrive within ten days the letter would stand as notice of default.

Ishara and Kumari had built the company together nine years earlier, leaving day jobs as a librarian and a surveyor to start what began as a two-person operation and had grown into an established business doing somewhere in the low millions in annual revenue. Tesfay had been the third founder. He left three years ago after a disagreement over the company's direction, and under the shareholder agreement his shares were to be bought back by the corporation in eight equal quarterly instalments, funded out of operating cash. The first three payments went out on schedule. The fourth did not, and Tesfay's lawyer was framing the missed payment as deliberate.

From where Tesfay sat, the pattern was easy to read: a company that had never missed a payment before suddenly missing one right after a difficult conversation about the fifth instalment's size. He suspected Ishara and Kumari were simply tired of paying him and had decided to slow-walk the rest of the schedule, hoping he would accept less to make it go away.

Ishara and Kumari's account was different, though at first it was hard to prove. Revenue had softened over two quarters after a slower stretch for a major customer, and a redemption payment that once fit comfortably inside the company's cash position now did not. They insisted the missed payment was not strategy, it was arithmetic, and they wanted to show that clearly before the dispute hardened into litigation neither side could afford.

Adding to the pressure, Ishara and Kumari had never dealt with a shareholder dispute before. Their working relationship with Tesfay had been close once, and the falling out three years earlier still felt raw enough that they were second-guessing their own judgment. Was the missed payment really unavoidable, or had they let the business's problems creep into a decision they should have flagged sooner? They had continued making the earlier payments even when cash was tight, stretching other obligations to keep the redemption schedule intact, which was part of why the fourth missed payment landed so badly. They had not planned to miss it. They had simply run out of room.

By the time they called our office, the ten-day window in the default letter had already narrowed to six, and they were choosing between a rushed response that might concede more than the facts warranted, and a careful one that risked arriving too close to the deadline to matter.

What the review found

Before responding to the default letter, we asked for two things: the full shareholder agreement, including the redemption schedule and any conditions attached to it, and the company's financial statements for the preceding eighteen months. The agreement, like most well-drafted redemption clauses, was not actually silent on discretion. It incorporated the solvency restriction that Ontario's corporate law places on any redemption of shares. A corporation cannot buy back its own shares if doing so would leave it unable to pay its debts as they come due, or would reduce the realizable value of its assets below the total of its liabilities and the stated capital attached to the shares that remain outstanding.

That restriction is not a matter of choice for the company or a bargaining position it can waive. It is a condition the redemption has to satisfy, and if it is not satisfied the payment cannot lawfully be made, regardless of what the schedule in the agreement says.

The financial statements told a specific story once organized properly. Revenue had dropped by an amount that traced cleanly to the loss of a large customer contract that was not renewed, and payroll had grown modestly as the company hired to diversify its client base. Cash on hand at the date the fourth payment came due was genuinely insufficient to make that payment without pushing the company below the solvency threshold. This was not a close call dressed up to look worse than it was. It was a real constraint, and it was documented in the ordinary course, months before Tesfay's letter arrived, which mattered a great deal for credibility.

The review also turned up something that helped Tesfay's position rather than the company's: nothing in the agreement suspended the company's obligation to pay once it became solvent again, and nothing capped what he was ultimately owed. The solvency test explained why the fourth payment could not be made on schedule. It did not excuse the debt.

We also checked whether the company's directors had exposed themselves personally by approving the earlier payments or by delaying the fourth one. Directors who authorize a redemption that fails the solvency test can face personal responsibility for the shortfall, so it mattered that Ishara and Kumari had, in fact, held the payment back rather than pushing it through despite the numbers. Their instinct to pause, even without knowing the legal reason at the time, had been the right one, and it meant the review's job was to explain a decision they had already made correctly rather than to defend one they had gotten wrong.

One further detail shaped the strategy: the company's financial statements showed the shortfall easing within roughly two quarters, based on new client contracts already signed but not yet generating revenue. That meant the solvency problem was temporary and measurable, not an open-ended excuse, which made it easier to propose a schedule with real dates attached rather than a vague promise to pay when things improved.

What we did

1. Requested the underlying financials before drafting any response, because a claim that redemption was legally impossible had to be demonstrated with numbers, not asserted in a letter. This let us build a factual record before the conversation with Tesfay's lawyer turned adversarial, and it meant the company's first substantive communication would already carry supporting evidence rather than a bare assertion.
2. Confirmed the solvency test applied to this exact payment by running the company's post-payment balance sheet against the statutory measures, showing that making the fourth instalment as scheduled would have left liabilities exceeding realizable assets. This turned a defensive claim into a calculation the other side's lawyer could check for himself, which mattered far more than any assertion we could have made on the company's behalf.
3. Confirmed the directors had not exposed themselves personally by reviewing the board's decision-making around the missed payment, verifying that Ishara and Kumari had withheld the payment deliberately once the numbers were clear, rather than approving a redemption that later turned out to breach the solvency test, because directors who authorize an unlawful redemption can face personal liability for the shortfall. This closed off a secondary risk before Tesfay's lawyer had any chance to raise it.
4. Wrote to Tesfay's counsel with the financial picture attached, rather than a bare denial of default, explaining why the payment had been delayed and confirming the company's intention to pay in full once it could do so lawfully. Leading with evidence, not argument, changed the tone of the exchange within days and moved the conversation from accusation to problem-solving.
5. Proposed a restructured schedule that extended the missed fourth payment and the four instalments still to come over a longer period, and adjusted amounts to track the company's projected cash position quarter by quarter, rather than a fixed figure that ignored the business's actual condition and risked breaching the solvency test a second time. This gave Tesfay a schedule built around what the company could actually pay, not another promise it might break.
6. Negotiated security for the deferred amount, since Tesfay was reasonably unwilling to simply trust a revised promise after one payment had already been missed. The company agreed to a promissory note with interest on the outstanding balance, giving him a documented, enforceable claim independent of the shareholder agreement, and giving him something concrete in place of the certainty he had lost.
7. Built in an acceleration trigger so that if the company's financial position improved faster than projected, based on the new contracts already signed, a portion of the deferred balance would come due early rather than waiting out the full extended schedule regardless of how the business actually performed. This gave Tesfay a real stake in the company's recovery instead of a fixed wait that ignored better news along the way.
8. Reviewed the amended terms against the company's other obligations, including its bank arrangements and ordinary operating expenses, to confirm the new schedule would not itself create a fresh solvency problem down the line, since a restructured promise that broke the same test a second time would have solved nothing. This check gave both sides confidence the new schedule was one the company could actually keep.

The outcome

Tesfay's lawyer accepted the restructured schedule after reviewing the financial statements and confirming the numbers independently. The default notice was withdrawn, and the fourth payment, along with the remaining four, were folded into a new eighteen-month schedule secured by a promissory note carrying interest on the unpaid balance.

This was not a clean win for either side. Tesfay waited longer for his money than the original agreement promised, and accepted a schedule shaped by the company's cash flow rather than a fixed calendar. Ishara and Kumari kept the company solvent and avoided a redemption they could not lawfully make, but gave up flexibility by committing to interest payments and an acceleration clause that would speed up repayment if the business recovered faster than expected.

What made the compromise possible was the order of operations. Because the financial record existed before the dispute began, and because the company brought it forward voluntarily rather than waiting to be forced, Tesfay's lawyer was able to treat the missed payment as a real constraint rather than a stalling tactic. The company finished paying out the note roughly a year later, ahead of the extended schedule, after the acceleration trigger was activated by a stronger quarter than projected.

Ishara and Kumari also came away from the dispute with a clearer view of what their shareholder agreement should have addressed from the start. A redemption schedule tied to fixed dates and amounts, with no reference to the company's actual financial condition, works only as long as the business performs as expected. Once it does not, the schedule and the law can pull in different directions, and someone has to reconcile them under pressure rather than by design. The company's later agreements with new shareholders now build in cash-flow-based adjustment mechanisms from the outset, rather than leaving that work for a crisis.

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