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BANKRUPTING A LIMITED COMPANY: CANADIAN CORPORATE BANKRUPTCY PROCESS

 

Bankrupting a limited company – Introduction

Last week I spoke about voluntary filing an assignment in bankruptcy for an individual. The personal bankruptcy process in Canada. This week I want to describe the process for bankrupting a limited company; the complete guide to the Canadian corporate bankruptcy process.

Bankrupting a corporation – First steps

So the first step is for the directors to meet with the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) to explain the corporate financial position and look at the options available to the company and its directors. The first thing the Trustee will want to identify is the company insolvent. If you liquidated all of its assets could pay off all its liabilities in full. Is it generally paying its debts when due on a regular basis? If not then the company is insolvent.

If it is able to pay its debts and if its assets are worth at least as much of the liabilities than it is not insolvent. So let’s first look at the aspect of the business not being insolvent.

The next question is is the business viable? Does what the business produces or the services it provides? Are those still wanted in the marketplace yes or no? If not, one thing to look at is there someone else with other business lines that you could sell your business to? Would it fit in neatly in some form of integration so that all of a sudden it makes your standalone business that is not viable, viable? Keep in mind that it is a solvent business.

If it can’t be sold then you could always look at a statutory liquidation. You would liquidate the assets pay off the liabilities and then see what amount is left over for distribution to the shareholders.

If the business is viable and remember, it is solvent, you could sell the business or look at a corporate restructuring. If you want to continue running the business and that kind of restructuring would be more in terms of processes and personnel because it is not in financial trouble.

bankrupting a limited company
bankrupting a limited company

Bankrupting an incorporated company when it is insolvent

If the business is insolvent again we still want to know is it viable? If it is viable then we could look at doing a restructuring proposal. After the company is restructured then we could either keep running it or look to sell it.

If it is not viable and it is insolvent then there’s not a lot that can be done. The business is unhealthy financially and the marketplace no longer wants the product or service this business provides. Therefore we’re looking at receivership & bankruptcy. Since the topic is about bankrupting a limited company we will focus on the bankruptcy process.

So in bankrupting a limited company, the Trustee prepares the necessary documentation. A meeting of directors has to be called for the directors to resolve that the company should file an assignment in bankruptcy and appoint one of the directors to be the designated officer in the bankruptcy administration. That’s the person who has knowledge of the affairs of the company who will be signing the bankruptcy documentation and who will be attending the first meeting of creditors as a representative of the company.

The Trustee would either attend the meeting and prepare the minutes or the minutes will be prepared by the directors and provided to the Trustee. Then comes the statement of affairs which is the listing of assets and liabilities, the names addresses and amounts owing to each creditor which the designated officer would swear and the actual assignment in the bankruptcy document. This is all part of bankrupting a limited company.

The actual start of bankrupting a company

The Trustee then files that documentation electronically with the Superintendent of Bankruptcy and the local office of the Superintendent of Bankruptcy will issue a certificate indicating that the company is now bankrupt and that the Trustee is appointed. That is the moment when bankrupting a limited company that the bankruptcy actually occurs and the bankruptcy administration begins.

So in the bankruptcy administration, the Trustee has several responsibilities. The Trustee has to deal with the assets. The Trustee has to first determine are the assets subject to the security of a lender? Is that lender’s security good and valid?

bankrupting a limited company
bankrupting a limited company

The Trustee’s first actions

If all of the assets are encumbered then the Trustee would not take steps to deal with the secured creditor’s assets unless the secured creditor specifically requests the Trustee to do so or appoints the Trustee to deal with the assets. So let’s just take the case where in bankrupting a limited company, the Trustee is dealing with the assets either because they’re not encumbered or because the secured creditor asked the Trustee to deal with them.

The Trustee needs to make sure that the assets air physically safeguarded that they’re properly insured and that the Trustee has performed an inventory of what those assets are.

Then the Trustee has to determine how is it going to sell those assets? Does it make sense for the Trustee to run the business? If so, is the Trustee looking to sell the assets as a business unit? An actual running business going concern sale.

If it doesn’t make sense for the Trustee to run the business then the Trustee will shut it down and look at the alternatives for sale. The assets could either be sold at auction. The Trustee could run a tender sale dividing the assets up into blocs. That makes sense or if the assets are such that it could be sold to the public in a retail environment could operate a retail sale. The nature of the assets will determine what kind of sale the Trustee runs.

The Trustee would notify the creditors of the bankruptcy call for claims to assess the claims hold the first meeting of creditors and then ultimately make a distribution to the creditors. So as you can see these are the players in a voluntary bankruptcy filing for a corporation. It all starts with meeting with the Trustee to explore the various options.

Summary

I hope you have found this bankrupting limited company information useful. If you have any questions please feel free to contact us at any time.

Do you or your company have excessive debt and looking for debt restructuring? Would not it be great if you could do a turn-around?

The Ira Smith Team understands how to do a debt restructuring. More notably, we comprehend the requirements of the business owner or the person who has too much individual debt. Because you are dealing with these stressful financial issues, you are anxious.

It is not your fault you can’t fix this problem on your own. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will get you or your business back on the roadway to healthy and balanced worry-free operations and end the pain points in your life, Starting Over, Starting Now.

bankrupting a limited company
bankrupting a limited company
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CAN YOU FILE PERSONAL AND CORPORATE BANKRUPTCY? SMALL BUSINESS OPTIONS

Can you file personal and corporate bankruptcy: Introduction

Can you file personal and corporate bankruptcy is a question all small business owners ask us when they come to our office for a free consultation. We discuss local business bankruptcy with entrepreneurs in our office. Their personal and business lives are intertwined. There’s very little distinction between the individual their small business.

This is especially true if their business in unincorporated and is being operated as a proprietorship. Our role is to first understand them as a person and as a business separately. This way we can give the best possible advice. If the business is a proprietorship, then we are only talking personal bankruptcy, or alternatives to avoid bankruptcy, such as a consumer proposal or restructuring proposal.

If their business legal form is that of a corporation, then we look at both the corporate and personal issues separately. The reason for this is because in the eyes of the law, the corporation and the individual are separate people. Many times it is not necessary for both the corporation and the individual to each file an insolvency process. Maybe only one has to.

Separating your business and personal assets and liabilities is a great reason for incorporating your business. When discussing bankrupting an incorporated company, we also need to consider if there are any Director liabilities. We must also consider the owner’s personal situation. This is so we can make sure they do not do themselves more personal harm than good. We also first look to see if there is a way to restructure and save the corporation.

Can you file personal and corporate bankruptcy: What is bankruptcy

Bankruptcy is a lawful method for the honest but unfortunate company or person to get a remedy from the burden of the financial debts that cannot be repaid. When an assignment in bankruptcy is submitted a “stay of proceedings” is invoked.

What the stay of proceedings means

The stay of proceedings results in stopping creditors from beginning or continuing with litigation against the company or person. The stay of proceedings also stops an unsecured creditor who has obtained a judgement. It stops them from garnishing funds from a bank account or part of the person’s wages.

For unsecured creditors, the stay of proceedings also calls a timeout to make sure that one unsecured creditor does not get a benefit over others in regards to the settlement of financial obligations. Keep in mind that the bankruptcy process could also be started by one or more unsecured creditors. They must be owed at least $1,000 in total.

can you file personal and corporate bankruptcy

Can creditors push you into bankruptcy?

The unsecured creditor(s) could file a motion with the Court requesting that a Bankruptcy Order be issued against the company or person. The method of bankrupting a corporation in Canada is the same as that of a person. In addition to being able to prove that the company or person owes this unsecured creditor or group at least $1,000, they also need to prove that at least one act of bankruptcy has been committed in the 6 months prior to the filing of the motion.

The Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) identifies the various acts of bankruptcy. The most common one is “ceases to meet his liabilities generally as they become due”.

Secured creditors are generally not impacted by bankruptcy. They can realize upon the assets of the company or person covered by the security. In return for the original loan, the lender required that the borrower put up the security as a condition of the loan. The reason for this was so that if insolvency happens, the lender could sell the assets to try to repay the loan, interest and costs.

The secured creditor only really takes part in the bankruptcy process if after they have sold all the assets covered by their security, they are still owed money. The balance they are still owed is an unsecured debt.

Personal bankruptcy

If an individual’s business is a single proprietorship or a partnership, but not a corporation, legally, the person or people are also the business. So when they deal with the possibility of bankruptcy, all their assets are included, subject to provincial exemptions. Simply put, the assets of the business are not held different from their individual assets, so a small business bankruptcy of this kind is personal bankruptcy.

Where does Canada Revenue Agency fit in?

There are generally 3 types of claims that Canada Revenue Agency (CRA) has against a business. It does not matter if the business is incorporated or is a sole proprietorship.

The 3 kinds of CRA claims generally are:

  1. Unremitted source deductions from employee payroll
  2. Net HST owing
  3. Unpaid income tax from profitable years

Both the HST liability and income tax, in a bankruptcy, is an unsecured claim. However, the HST liability is also a personal claim against the Director(s) of a corporation. Unremitted source deductions are both a deemed trust claim against the bankrupt’s assets and in the case of a corporation, a personal claim against the Director(s) of the company.

When we do our first consultation with a business owner, when the business is run in a corporation, whenever unremitted source deductions or HST is involved, this always leads to a talk about the person’s situation in the event CRA would make a claim against the Director.

Some bankruptcy statistics

According to the Office of the Superintendent of Bankruptcy Canada, for the 12 months ending September 30, 2017, there were 125,912 insolvencies in Canada. This is a decrease of 3% over the same time period a year earlier. Consumer insolvency filings were 122,296 or 97.1% of total filings. The consumer filings were split into 59,192 bankruptcies and 63,104 consumer proposals – roughly half and half.

Business insolvency filings for the same time period in all of Canada totalled 3,616, a decrease of 8.1% from the 12 month period one year earlier. Business insolvency filings were split into 2,719 bankruptcies and 897 proposals. These statistics do not include filings by very large corporations under the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36).

As you can see, for a country the size of Canada, there were not a lot of business insolvencies during the first 9 months of 2017. The consumer filings were split roughly even between bankruptcy and a consumer proposal, the best consumer bankruptcy alternative.

Alternatives to Declaring Bankruptcy

A consumer proposal entails paying back a part of your financial debts in return for your unsecured creditors forgiving the remaining balance owing. A consumer proposal provides a significant benefit for a proprietor or partner in an unincorporated business. Unlike in a bankruptcy, your assets are not available for seizure by the licensed insolvency trustee (LIT).

You can take up to 60 months to pay off your consumer proposal. How much you will have to offer your creditors depends on what the unsecured creditors could expect in your bankruptcy. Working with a LIT, you work out that amount through discussion and analysis. A LIT can explain the entire process to you.

From a financial viewpoint, a consumer proposal is better than your bankruptcy because it permits the unsecured creditors to recoup a larger part of the debt than they would receive in your bankruptcy.

What is best for you and your business?

If you find you or your business is in a financial danger zone, contact Ira Smith Trustee & Receiver Inc. We’re full-service insolvency and financial restructuring practice serving companies and people throughout the Greater Toronto Area (GTA) facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now.

Your financial problems can be solved with immediate action and the right plan. Give us a call today.

can you file personal and corporate bankruptcy
can you file personal and corporate bankruptcy
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