Do you know what your options are if your company is unable to pay its debts? Corporate bankruptcy may be the best solution—but you should not make the decision to file for it before getting advice from an experienced Licensed Insolvency Trustee (“LIT”). If you are considering bankruptcy for your business in Canada, here is information about what it is, how the process works, and why your company will need an insolvency trustee.
What is corporate bankruptcy?
Corporate bankruptcy is a legal process available to an incorporated business struggling financially. It ensures the orderly and fair distribution of the company’s property among its creditors. In order to be eligible for corporate bankruptcy, your company must owe more than $1,000 to creditors, be unable to pay debts when they are due, have debt greater than the sale value of its assets, and be resident in Canada. In addition, your company must work with a LIT to administer the bankruptcy file.
How does a corporate bankruptcy occur?
A corporation may go into bankruptcy by choice or involuntarily if:
The company can make a voluntary assignment into bankruptcy.
Creditors can petition to court for an order forcing the company into bankruptcy.
The company can be deemed bankrupt due to a failed Division I Proposal (Formal Proposal) or failure to meet certain filing requirements and/or deadlines with respect to an NOI or Proposal.
Are personal assets at risk if you file for corporate bankruptcy?
Canada’s Bankruptcy and Insolvency Act sets out the process for all bankruptcy filings, including personal bankruptcy, small business bankruptcy (sole proprietorship or partnership), and corporate bankruptcy. A key difference is that a corporation is an independent legal entity separate from its owners, unlike a business operated as a partnership or sole proprietorship. For that reason, the effects of a corporate bankruptcy are different. An incorporated business can go bankrupt without involving the personal assets of its owners. The corporation is responsible for its own debts and lawsuits, and only the company’s assets will be forfeited. Shareholders, directors, officers, and employees of the corporation are protected from personal liability; they are not responsible for the financial obligations or debts of the corporation, subject to two exceptions:
If an owner has personally guaranteed a loan (for example, put up personal property or their home as collateral or security for the company’s debts), then the owner’s asset is subject to forfeiture.
If a head of the company has failed to remit payments for GST, HST, RST, or employee source deductions (income tax, CPP, etc.), the director’s personal assets can be at risk for money owed to the government.
How does the corporate bankruptcy process work in Canada?
The legal process is complex. The first step is meeting with an insolvency trustee to discuss your company’s financial situation (revenue, profits, debts, personal guarantees, etc.) and the options available. If you decide that voluntary bankruptcy is the company’s best option, the LIT will prepare and file the necessary paperwork with the OSB and will notify creditors of the bankruptcy filing. Collections activities stop, and claims of creditors stay. Corporate assets and operations are turned over to the appointed bankruptcy trustee (and, if applicable, to a receiver). The LIT will arrange a meeting of the company’s creditors and can negotiate with creditors on the company’s behalf to settle debt. Corporate assets are sold, and proceeds are distributed to creditors in legally prescribed priorities. Discharge is the final step in bankruptcy proceedings. The corporation can apply for a discharge from bankruptcy when obligations to creditors (full payment), the LIT, and the court are met. The discharge releases the company from legal obligation to pay back what is owed as of the date of the bankruptcy filing.
Get advice and support from a bankruptcy trustee in Greater Vancouver
Insolvency trustees at Campbell Saunders Ltd. offer effective solutions to resolve your financial problems. Bankruptcy is not the only option if your company is struggling. We can explore all corporate debt solutions, including a business review, informal proposal, and formal restructuring. When you work with our insolvency trustees in Richmond and Greater Vancouver, your questions will be answered. A strategy will be developed and put into action with the assistance of our insolvency trustees. Richmond and Vancouver office appointments are available. Contact us today to book a confidential consultation with a member of our team.