Is your business crippled by insurmountable debt? Are you considering filing a business Bankruptcy? Before you make any decisions, here’s a look at how it works, and the steps involved.
Bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act. You can read the act, if you prefer, but we’ve summarized much of the important information here. Below, we outline some helpful terms, followed by a complete discussion of business Bankruptcy:
- Company Insolvency: A company that is unable to pay bills and debt owed. This is not a legal process, rather it is a description of the state of the company’s finances.
- Personal Bankruptcy: A legal process through which an individual who cannot pay their bills can eliminate debt.
- Small Business Bankruptcy: A legal process through which an insolvent small business can eliminate debt. If the business is unincorporated, the assets legally belong to the individual, not the company, and thus would follow the same process as for Personal Bankruptcy. An incorporated small business would follow the same process as for Corporate Bankruptcy.
- Corporate Bankruptcy (or Commercial Bankruptcy): A legal process through which an insolvent incorporated business can wind down the company and eliminate debt.
- Consumer Proposal: A legal process through which an insolvent individual can substantially reduce debt and/or change the payment terms.
- Division I Proposal: A legal process through which both an insolvent person or corporation can substantially reduce debt. A corporation can restructure the company operations while retaining its assets and continuing to run the business.
- Licensed Insolvency Trustee: An individual (or company) licensed by the federal government of Canada to draft and file Bankruptcy papers, or other legal debt remedies, on behalf of insolvent individuals or companies. Their role is to ensure the transparency and equity of the process for both the insolvent and the creditors.
When to Consider Business Bankruptcy
Business owners generally choose to file Bankruptcy when they are insolvent. This may be due to:
- Loss of income due to a downturn in the market or in the economy
- High levels of debt and inadequate cash flow
- Insufficient credit to meet operating needs
- Reliance on personal credit to meet business obligations and perhaps even household expenses
You can declare Bankruptcy in Canada if you are:
- A Canadian resident
- Owing more than $1,000 to creditors
- Unable to meet timely your financial obligations
In order to file Bankruptcy, you will need to use a Licensed Insolvency Trustee. The various options for businesses are outlined below. However, you’ll want to meet with a Trustee who can provide much more information and help you figure out the best plan. While Bankruptcy is generally considered a last resort option, it may be the most viable one for many businesses.
How Do Sole Proprietorships and Partnerships File Small Business Bankruptcy?
If your business is not a corporation, for example, if you are self-employed, a sole proprietorship or partnership, by law the owner(s) is the business. The assets of the business are personal and they belong to the business owner(s). These types of businesses would file a personal Bankruptcy since it is the individual who is bankrupt. This means that you are personally liable for any debt. However, you are not likely to lose assets, such as your home, car or personal belongings.
Bankruptcy, however, is not the only option. If you owe less than $250,000 excluding the mortgage on your principal residence, you may want to consider filing a Consumer Proposal. Or if you have more than $250,000 you may want to consider filing a Division I Proposal. This will significantly reduce your debt and, perhaps, extend the time in which you have to pay. Also, you may be able to rebuild your credit more rapidly than you could with Bankruptcy.
Whether you choose to file for Bankruptcy or to submit a Proposal, you’ll work with a Licensed Insolvency Trustee. They are the only people registered with the federal government and able to file a Bankruptcy, a Division I or Consumer Proposal on your behalf.
If your business is incorporated, large or small, you must file a Corporate Bankruptcy. For corporations, the assets and liabilities primarily belong to the legal entity. In this case, the business goes bankrupt, not the individual. The legal structure of a corporation protects the individual’s assets in a Bankruptcy proceeding. The steps, outlined below, are basically the same as a personal Bankruptcy. However, Corporate Bankruptcy can be more complicated, depending on the size and complexity of the organization.
Corporate bankruptcy can be a proactive choice whereby you voluntarily assign your assets to an LIT and file with the courts. But it may also occur via provisions in Bankruptcy law. Here are the two ways in which a business can automatically go into Bankruptcy:
- Involuntary: Your creditors petition the provincial court for what is known as a receiving order, forcing the company into Bankruptcy.
- Deemed: You petitioned the court to file a Division I proposal and have not met the requirements or you have filed a Division I Proposal and not met the provisions.
What’s Involved? Steps for a Business Bankruptcy
If you decide to move forward with Bankruptcy, the first step is to meet with a Licensed Insolvency Trustee (LIT) so that you can make an informed decision. LITs are federally regulated professionals who can advise you on your debt concerns. As mentioned, Bankruptcy is not the only option and is, perhaps, not the first one you should consider. An LIT can offer other solutions in addition to Bankruptcy. Remember that not everyone who offers financial counselling is federally regulated and licensed.
The LIT will provide all the information you need, but the decision is yours to make. If you decide to proceed with Bankruptcy, the process begins.
- Once the paperwork has been signed and filed, all collection activity and legal proceedings will stop.
- The LIT will notify creditors. The LIT is now legally able to negotiate and find solutions that will put your debt troubles behind you.
- You’ll sign the corporate assets over to the LIT. The LIT will sell assets as needed for the general benefit of creditors. (Note that this primarily refers to corporate assets, not homes, cars, etc.)
- The LIT will arrange a meeting with creditors.
- The LIT prioritizes the creditors as legally prescribed.
Do You Need a Licensed Insolvency Trustee?
Since Bankruptcy is a legal process, you must file through a Licensed Insolvency Trustee. In Canada, they are the only people qualified to help you through this legal process. Although Bankruptcy is a viable option, it’s not your only choice and, indeed, may not be the best one for you.
Your LIT can help you make the right decision. It is their job to protect your interests and help position you for future success. As well, they help ensure that your creditors are treated equitably so that they can continue to serve businesses such as yours in the long run.
Important Considerations Regarding Business Bankruptcy
If the business is not viable, it may be time to cut your losses and get out from under the burden of uncontrollable debt. On the other hand, if the downturn is temporary, you may want to consider an alternative to Bankruptcy, either a Consumer Proposal or a Division I Proposal.
- A Consumer Proposal is for individuals owing less than $250,000 (excluding the mortgage on principal residence).
- A Division I Proposal is for companies (and individuals) owing more than $250,000.
Both share some similarities that make them an attractive alternative to Bankruptcy:
- Collection activity stops
- You can substantially reduce the amount of money owed
- The company retains its assets
- It may be easier to rebuild credit once the conditions of the proposal have been met
A Division I Proposal is more complicated, requiring the LIT to provide project cash flows and hold mandatory meetings with the creditors. The business can also file a restructuring plan with the Division I Proposal. The proposal must be accepted by a two-thirds majority (of the dollar amount owed) and a simple majority of the total number of creditors. If the proposal is rejected, the business automatically goes into Bankruptcy. But if it is accepted, this alternative can provide you with the breathing room you need to get your business back on its feet.