Bankruptcy

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Corporate Bankruptcies

There are a number of ways that a corporation can become bankrupt. They are as follows:

• a creditor can make an application to the Court essentially petitioning or asking the Court to declare that the Corporation is bankrupt;
• the directors of the corporation can pass a motion to assign the corporation into bankruptcy;
• if a corporation made a proposal to its creditors and the creditors voted against the proposal or if the Court refused to approve the proposal, then the proposal would not be successful and the corporation would become bankrupt; or
• if the proposal was approved by the creditors and the court, but the corporation could not meet the terms of the proposal, the proposal could become annulled by an order of the bankruptcy court and the corporation would become bankrupt.

The Process for Corporate Bankruptcies
Each and every corporate bankruptcy is unique, and requires the assistance of various professionals. There are always tax considerations, various legal considerations, and other aspects of the law to consider. For these reasons, many trustees in bankruptcy do not provide corporate insolvency services. However, corporate insolvencies can also be challenging, and there are no two that are similar. The process set out below outlines the various minimal steps in the process; however additional steps are usually required, depending upon the situation.

Upon the Corporation becoming bankrupt: The trustee in bankruptcy is responsible for taking possession of the assets of the corporation and for securing the books and records of the corporation. Within five days, from the date of the bankruptcy, the directors must file with the Office of the Superintendent of Bankruptcy, a sworn statement of affairs showing all of the assets of the business and a list of all of the debts of the business. Although it is the responsibility of the director to file this document, we will assist in the preparation and filing of this document.

The trustee is required to send notice to the creditor's of the bankrupt corporation and to deal with the employees of the corporation. It is normal for there to be various classes of creditors in a corporate bankruptcy, such as Secured, Preferred, and Unsecured creditors. The trustee will review the paper work set out by each class of creditor and will make determinations as to whether security is valid and enforceable against other creditor interests, and whether or not preferred creditors do in fact, have a priority right over other creditors.

Employees - Wage Earner Protection, T4's & Records of Employment Service Canada has created a program that will reimburse employees for all or a portion of their unpaid wages, severance and termination pay and outstanding vacation pay.

The trustee will review the payroll records and will notify employees of the program. In addition to this, the trustee will notify Service Canada of what amounts the trustee believes is outstanding to employees.

Employees are also entitled to their T4's and usually Canada Revenue Agency will want to audit the corporation's payroll records. This is an important step because it provides a comfort level that the payroll records are complete, and that the T4's are correct.

Since employees have just lost their employment, they may need to file for Employment Insurance Benefits and will need a Record of Employment. This also must be completed a provided to the employee.

The process is different from most personal bankruptcies:
Unlike most personal bankruptcies, a meeting of creditors must be called regardless of the size of the corporation. Creditors generally attend the meetings, and ask questions about the affairs of the bankrupt corporation and to give directions to the trustee in bankruptcy.

There is no discharge of a bankrupt corporation. Since a bankrupt corporation will not need credit again, there is little or no need to seek a discharge of the corporation.

After the Meeting of Creditors, the trustee will follow up on the asset realizations; the creditor claims and will eventually prepare its final accounting for the bankrupt estate. This is known as the Final Statement of Receipts and Disbursements.

Final Statement of Receipts and Disbursements schedule
The trustee must submit a final accounting regarding how the assets of the bankrupt estate were liquidated and how much the trustee's fees and expenses were. This will be done on the Statement of Receipts and Disbursements Schedule. This document is also sent to the Creditors and is submitted to the Office of the Superintendent of Bankruptcy. The Trustee will apply to Court and the final accounting and the Trustee's fees get be approved by the Court.

Payment of dividends and Discharge of Trustee
Once approved by the Court, the Trustee will forward to the creditors, the amount due to the. Once this is done the trustee will apply to Court for an order discharging the Trustee from the bankrupt estate.

Reasons for Bankrupting a Corporation
There are various reasons for placing a corporation into bankruptcy. Some of these reasons are as follows: Landlord distraint (seizure of assets to pay for rent arrears) - If a landlord distrains (fancy word for seizes) corporate assets the landlord may sell the assets after five days of the seizure. An assignment into bankruptcy or a notice of intention to file a proposal, if filed within the five day period causes a stay of proceedings which stops the landlord distress;

The corporation is no longer viable and has available assets that are not secured which are available for the creditors;

The corporation would not be viable even if a proposal to the creditors was filed.

To rearrange the priority of statutory creditors. There are times when bankruptcy will reverse the priority that some statutory creditors have and will actually give a secured creditor a benefit or better position by the corporation being bankrupt;

To formally bring the company to and supply a full accounting to the creditors so they do not suspect the principals of any wrong doing; or

Corporate bankruptcies are usually more complicated than personal bankruptcies. Also, since each type of industry will have very unique requirements, there is very little that will be the same from bankruptcy to bankruptcy. Therefore, the information above is very general and should not be substituted for seek the assistance of a trustee in bankruptcy.