Tag: business bankruptcy

BANKRUPTCY OF THE COMPANY: OUR ENTREPRENEUR’S COMPREHENSIVE GUIDE TO REBUILDING AFTER BANKRUPTCY

Post author By Brandon Smith
Post date December 9, 2024

bankruptcy of the company

Bankruptcy of the Company: Introduction

Imagine being at the helm of a thriving business, only to watch the bankruptcy of the company. As an insolvency professional, a Canadian licensed insolvency trustee (formerly called a trustee in bankruptcy), I have witnessed the rollercoaster of emotions that come with financial failure, often paired with the entrepreneur’s sense of guilt and loss that can feel insurmountable.

Recovering from the bankruptcy of the company is challenging but possible. By understanding the impacts, assessing finances, creating a strong recovery plan, and rebuilding credit and reputation, business owners can rise again with resilience and prepare for future growth.

This is not the end. It’s a transformative stage that opens doors to rethinking, reconstructing, and revitalizing your future. Let’s explore the roadmap to recovery together, filled with actionable advice and insightful anecdotes.

Bankruptcy of the Company: Understanding Business Bankruptcy

Canadian law offers two primary types of bankruptcy for addressing the insolvent company corporate bankruptcy process:

Liquidation

Liquidation is the process of closing a business and selling its assets to generate funds. The proceeds from these sales are then used to pay off creditors. While it represents the conclusion of the company’s operations, understanding this process can help you navigate the winding down of a business effectively.

Reorganization

This initiative aims to thoughtfully reshape the company’s financial and operational structures, ensuring its ongoing success and stability. Reorganization presents a valuable opportunity for businesses facing financial difficulties, allowing them to effectively address and potentially overcome their economic challenges. Typically, this process is carried out through a commercial proposal under the Bankruptcy and Insolvency Act. For larger corporations with debts of at least $5 million, reorganization can take place under the Companies’ Creditors Arrangement Act.

Let’s take a closer look at each of these options to better understand how they can help.

Liquidation under bankruptcy of the company

Liquidation is the process of winding up a company that can no longer meet its financial obligations. It follows a structured corporate bankruptcy process outlined in the BIA, which bears similarities to Chapter 7 of the US Bankruptcy Code. Corporate bankruptcy is also called commercial bankruptcy.

Here’s a step-by-step breakdown of liquidation:

The decision to file:
The board of directors makes the difficult decision to file for bankruptcy and appoint a person to sign the official bankruptcy documents.
Assignment in Bankruptcy: A director, or the sole director, signs the required bankruptcy documents to make the company’s assignment into bankruptcy.
Appointment of the Licensed Insolvency Trustee: An insolvency trustee is appointed to oversee the process.
Asset Transfer: All corporate assets are transferred to the Licensed Insolvency Trustee, which then manages and sells them.
Distribution to Creditors: Proceeds from asset sales, after the cost of the corp bankruptcy proceedings, are distributed to creditors based on a predetermined legal priority.
Secured creditors, such as lenders with liens on company assets, generally have priority over unsecured creditors.
The company ceases to operate: Once assets are distributed, although the bankrupt corporation is not legally dissolved, it no longer operates.

Depending on whether the company is federally or provincially incorporated, eventually, the appropriate government authority will cancel the company’s charter due to the bankruptcy of the company.

Liquidation can be a complex process, but it offers a clear and organized approach to closing a company that is experiencing significant financial challenges. This process ensures that assets are distributed fairly among creditors, helping to bring some resolution to a difficult situation. If you find yourself in this position, rest assured that there are steps in place to manage the process as smoothly as possible.

“The closure of a business doesn’t just impact balance sheets, it impacts lives.”

Reasons for Bankruptcy of the Company

Financial Challenges

Cash Flow Management: Many companies struggle to manage their cash flow effectively, leading to a buildup of debt and ultimately, the bankruptcy of the company. This can be due to a variety of factors, including poor budgeting, delayed payments from customers, or over-reliance on credit.
High Debt Levels: Companies that take on too much debt can quickly become overwhelmed by their financial obligations. This can be particularly true for companies that have taken on debt to finance expansion or acquisitions.
Inefficient Use of Assets: Companies that fail to optimize their use of assets, such as inventory or equipment, can struggle to generate sufficient revenue to meet their financial obligations.
Poor Financial Planning: Companies that fail to plan for the future or make poor financial decisions can quickly find themselves in a difficult financial situation.

Operational Issues

Inefficient Operations: Companies that fail to streamline their operations or make inefficient use of resources can struggle to remain competitive and profitable.
Lack of Scalability: Companies that may not be fully attuned to shifts in the market or industry can find it difficult to scale their operations effectively. By staying adaptable and responsive to changes, businesses can better meet growing demand and seize new growth opportunities.
Poor Management: Companies that are poorly managed or lack effective leadership can struggle to make sound business decisions and ultimately, may force the bankruptcy of the company.
Failure to Innovate: Companies that fail to innovate or adapt to changes in the market can quickly become obsolete and struggle to remain competitive.

External Factors

Economic Downturn: Companies that operate in industries that are heavily reliant on consumer spending or are sensitive to economic fluctuations can be particularly vulnerable to bankruptcy during economic downturns.
Regulatory Changes: Companies facing evolving regulations or laws may find it challenging to adapt. However, with the right strategies and support, they can navigate these changes effectively and avoid potential difficulties. It’s important to stay informed and seek assistance to thrive in a dynamic regulatory environment.
Competition: Companies that operate in highly competitive industries can struggle to remain profitable and may force the bankruptcy of the company if they are unable to differentiate themselves or compete effectively.
Natural Disasters: Companies that are affected by natural disasters, such as hurricanes or wildfires, can struggle to recover and may ultimately be forced into bankruptcy.

Understanding the Ripple Effects of Bankruptcy

The bankruptcy of the company can turn your business life upside down. But understanding its effects can help you navigate this rough terrain. What are the immediate and long-term consequences?

Understanding The Immediate Effects on Your Credit Score

It’s important to know that your business’s credit score is separate from your credit score. The company is considered a distinct legal entity, meaning that, generally, its financial activities do not directly impact your credit score. However, as an entrepreneur, if you’ve personally guaranteed any bank loans or lines of credit for your business, this could affect you personally. If the company is unable to repay those loans, the bank will look to you to cover any outstanding amounts.

Additionally, as a director of the company, you hold responsibility for any unremitted employee source deductions and unremitted HST owed to the Canada Revenue Agency. Being aware of these obligations can help you manage your financial responsibilities more effectively and protect your credit standing. If you have questions or need further clarification, don’t hesitate to reach out for assistance.

So although the bankruptcy of the company does not directly affect your personal credit score, depending on what your financial position is now and how it is affected by the bankruptcy of the company, it could very well have a negative impact on your credit score.

The bankruptcy of the company gets reported to the two Canadian credit bureaus, TransUnion and Equifax. Depending on how your financial situation is affected by the bankruptcy of the company, your credit score may then suffer. It usually suffers in two ways:

Loss of borrowing capacity: You might find it challenging to get credit lines or loans.
Higher interest rates: If you do get offers, they may come with steep rates.

Loss of Trust Among Stakeholders

Trust is hard to regain once lost. After filing for corporate bankruptcy, if you wish to start up a new business, suppliers may hesitate to extend credit, leaving you in a bind. Customers might question your reliability, and partnerships can falter.

Legal Limitations Post-Bankruptcy

Additionally, there are legal limitations that follow the bankruptcy of the company. If you are applying for a job or credit for a new business, there could be a question to answer like “Have you ever been a director of a company that filed for bankruptcy”. Your answer could include restrictions on the types of businesses you can operate or positions you can hold.

Understanding these ripple effects is crucial. As financial advisor Jamie Carter wisely said,

“Bankruptcy can be a valuable lesson if you are willing to learn from it and adapt.”

Remember, the impacts extend beyond finances to reputational damage and legal constraints. You can emerge stronger if you take the time to understand these dynamics.

Reflecting on Financial Health Post-Bankruptcy

Understanding Your Financial Landscape

Recovering from the bankruptcy of the company can feel overwhelming. But remember, it all starts with understanding your financial situation. You can’t chart a path forward if you don’t know where you stand. So, how do you begin?

1. Gather Your Financial Documents

Start by collecting all of your financial statements and paperwork.
Make sure to include documents that reflect your current cash flow, outstanding debts, and assets.
Having this information organized will give you a clear understanding of your current financial position, making it easier to assess your situation effectively.

2. Create a List of Assets and Debts

Take the time to write down what you own and what you owe. Having a clear picture of your financial reality is crucial.

Total Debts: $200,000
Remaining Assets: $50,000

This exercise can feel daunting. But it’s necessary for redefining your reality. Consider this: how can you build a new foundation without understanding the ground underneath? Remember that you may have given personal guarantees to a lender to the company.

3. Set Realistic Financial Goals

Having a goal gives you direction. Break your recovery journey into achievable steps:

Short-term goals: Focus on income generation, budget management and expense reduction.
Long-term goals: Aim for debt reduction and credit score improvement.

Your goals should be tangible and reflect your new financial reality. It’s about letting clarity drive your recovery.

Using Financial Statements as a Roadmap

Your financial statements will serve as a roadmap throughout your recovery journey. They provide essential guidance when making decisions. For example, if you see a consistent cash flow issue, it might be time to revisit your business strategy.

Visualizing Your Financial Position

Understanding your debts versus assets is vital. The chart below visualizes your financial health:

Financial Element	Amount ($)
Total Debts	$200,000
Remaining Assets	$50,000

Preparation involves a meticulous assessment of your financial landscape. It’s about clarity, honesty, and setting yourself up for real change.

Crafting a Proactive Recovery Blueprint

Recovery is not merely about surviving; it’s about thriving. You can turn challenges into opportunities with the right proactive plan. Let’s break down some essential steps.

1. Establishing a Comprehensive Budget

Creating a detailed budget is crucial. It serves as your roadmap. Think of it as a financial GPS that helps guide your decisions.

Forecasting Cash Flows: This allows you to anticipate income and expenses. By understanding your cash flow, you can eliminate any surprises. Wouldn’t it be great to know your financial future better?
Identifying Fixed and Variable Costs: Understanding the difference between fixed and variable costs is essential for effective planning. Fixed costs, such as rent and salaries, remain constant regardless of production levels, while variable costs fluctuate based on your business activity.
By recognizing these distinctions, you can make more informed decisions and enhance your financial strategy.

2. Exploring Cost-Cutting Avenues

The goal here is to reduce costs without sacrificing quality. It’s a delicate balance.

Assess your needs and look for ways to get better deals.
Cut unnecessary expenditures.

How much could you save by embracing smarter practices?

3. Implementing Financial Management Systems

Robust financial management systems help ensure future stability. They make monitoring and adjusting your budget easier. They are available to everyone at a reasonable cost.

Adopt accounting software: This can automate processes and save time.
Conduct regular financial reviews: Staying updated allows for timely adjustments.

“Failing to prepare is preparing to fail.” – John C. Maxwell

These strategies don’t guarantee instant success, but they set a solid foundation for recovery. It’s about making informed decisions today to secure a better tomorrow.

Rebuilding Business Credit: It’s a Marathon, Not a Sprint

Getting into a new business requires building your business credit and access to financing after hardship is a journey. It’s a marathon, not a sprint. Why rush? Quick fixes can lead to long-term pain. Instead, focus on long-term strategies. Patience is your best friend here.

1. Opening New Credit Lines Responsibly

Start slow. Open new credit lines when you can manage them. This is your stepping stone. Think of it like planting seeds. You need to nurture them to grow. Responsible borrowing can improve your credit utilization ratio. This, in turn, boosts your credit score.

Choose accounts that report to credit bureaus.
Start with secured credit cards or smaller loans.

2. Using Secured Credit Cards

Secured credit cards are excellent tools for growth. They require a deposit, but they report your payments to credit bureaus. This means you’re building a positive credit history, one payment at a time. It’s about creating a solid foundation for your credit profile.

3. The Importance of Timely Payments

Let’s take a moment to discuss the significance of making payments on time. Your financial reputation is important, and timely payments play a crucial role in demonstrating your responsibility and stability. Think of it as essential for maintaining a healthy credit score – just like breathing is for your well-being.

If you happen to miss a payment, it can negatively impact your score, so it’s important to stay consistent. By prioritizing timely payments, you’re setting yourself up for financial success!

“Rebuilding credit will require discipline and strategy but can lead to an empowered financial future if handled well.”

4. Learning from Others

Many businesses have successfully navigated this path. Their stories are inspiring. They show that it’s possible to come back stronger. Embrace the lessons from those who have rebuilt their credit. Their experiences can guide you.

Remember, this isn’t just about fixing credit. It’s about creating a healthier future for your business. Stay focused on these long-term strategies to ensure lasting impact and success.

Repairing Your Company’s Image: The Reputation Rehabilitation

Repairing Trust through Transparent Communication

After a reputation setback, you might wonder how to regain trust. The answer lies in transparent communication. Regularly update your stakeholders about your journey. Share not just successes but also hurdles. This honesty shows integrity.

Consider this: Wouldn’t it be easier to trust someone who is open about their difficulties? When your audience perceives you as authentic and genuine, it becomes much simpler to reconnect with them.

Leveraging Digital Platforms for Positive Narratives

In today’s connected world, digital platforms play a crucial role. Use social media and your company website to share uplifting stories. Highlight how you’re improving and what your team is excited about.

Share success stories from employees or customers.
Post updates on community involvement and corporate social responsibility initiatives.
Engage with your audience through polls or Q&A sessions.

“Your brand is a story unfolding across all customer touchpoints.” – Jonah Sachs

As this suggests, every interaction is an opportunity to shape your narrative.

Documenting Changes to Restore Confidence

Last but not least, it’s vital to document and showcase changes. This can be anything from new management practices to enhanced product quality. Displaying tangible improvements can effectively demonstrate your commitment to recovery.

Regular updates not only remind stakeholders of your progress but also instill confidence. Keep in mind, that restoring your reputation is a journey, not a sprint.

So, how ready are you to engage fully in your reputation rehabilitation? Embracing these strategies can set your business on the right path.

Innovating Your Way Back to Success: Growth Beyond Recovery

With a foundation grounded in recovery, you’re now in a position to think bigger. The journey ahead is about more than just bouncing back; it’s about redefining your business potential. Let’s explore some key strategies you can adopt.

1. Identifying New Markets and Opportunities for Diversification

After any setback, understanding where to pivot is essential. Ask yourself: Are there untapped markets waiting for your offerings? Consider the possibilities:

Geographic expansion: Could your product resonate in a different region?
New demographics: What about targeting younger or older audiences?
Product diversification: Have you considered exploring complementary products or services that could enhance your offerings? This could be a great way to provide more value to your customers!

2. Investing in Tech and Innovative Practices

In today’s fast-paced environment, standing still is not an option. Innovation is power. Investing in technology can provide you with a competitive edge. For instance:

Automation: Streamline processes to save time and costs.
Data analytics: Leverage data to make informed decisions.
Digital marketing: Boost your online presence to engage and attract new customers effectively.

3. Building Alliances and Partnerships

Alone, you might find challenges hard to overcome. But together? You can achieve new heights. Consider forming strategic alliances. It could mean collaborating with other businesses to:

Share resources, which can lower costs.
Access new audiences through shared marketing efforts.
Mutual growth leads to stronger foundations for both parties.

“In today’s interconnected world, collaboration is the new competition.”

The Importance of Innovation

Absolutely! It’s important to recognize that innovation goes beyond just technology – it’s fundamentally about our mindset. By adopting an innovative approach during recovery phases, we can create opportunities for sustainable growth. Embracing this perspective can truly make a difference!

As you explore these avenues for growth, keep a sharp focus on your core mission and values. This will reignite your passion and drive for business.

Measuring Progress and Celebrating Wins Along Your Journey

Recovery is a journey filled with small victories. To make your path clear and effective, you need to start by establishing Key Performance Indicators (KPIs). These are measurable values that demonstrate how effectively you’re achieving your recovery goals. Think of them as signposts that guide you along the way.

Establishing KPIs to Monitor Your Recovery Journey

Choose KPIs that resonate with your specific recovery objectives. Here are a few ideas:

Credit score improvements
Reduction in outstanding debts
Revenue growth
Customer retention rates

Why is it important to track these KPIs? Regular updates and adjustments to your recovery strategy are essential. When you notice patterns in your progress, you can adapt your plan accordingly. Are you hitting targets? Celebrate that achievement! Are numbers not improving? Analyze what might need to change.

Acknowledging Small Milestones

It’s crucial to acknowledge and celebrate small milestones. Each small win is a step forward. Taking a moment to recognize these successes not only boosts morale but also motivates you to keep pushing onward. Think about what you have accomplished—each step is proof of your progress.

Incorporating these practices—setting KPIs, adjusting strategies as necessary, and celebrating your successes—can transform your recovery journey. By implementing effective tracking and celebrating your achievements, you can maintain a positive outlook and remain committed to your goals.

“Documenting progress not only keeps you accountable but also energizes your journey forward.”

Remember, recovery from the bankruptcy of the company is not just about bouncing back. It’s about moving forward stronger and more resilient than before. Embrace the journey, celebrate each victory, and you’ll find the path to success becomes much clearer. Keep pushing your limits, and don’t shy away from recognizing the efforts that take you further along your journey.

Bankruptcy of the Company FAQ

1. What happens when my company goes bankrupt?

In Canada, the bankruptcy of the company can be taken down one of two main paths: liquidation and reorganization.

Liquidation involves closing the business, selling its assets, and using the proceeds to pay off creditors. It signifies the end of the company’s operations.
Reorganization, typically through a proposal under the Bankruptcy and Insolvency Act, aims to restructure the company’s finances and operations to enable its continued existence.

The specific process and outcome will depend on the chosen path and the company’s individual circumstances.

2. How does company bankruptcy affect my personal credit score?

Generally, the bankruptcy of the company doesn’t directly impact your personal credit score. Companies are considered separate legal entities. However, there are exceptions:

Personal Guarantees: If you personally guaranteed any of the company’s debts, you become liable for those debts if the company can’t pay. This can negatively affect your credit score.
Director Liabilities: As a director, you are responsible for unremitted employee source deductions and HST owed to the CRA. Failure to remit these could impact your creditworthiness.

While the bankruptcy of the company isn’t a direct hit, the resulting financial strain from personal guarantees or liabilities can indirectly affect your creditworthiness.

3. What are the immediate consequences of bankruptcy beyond finances?

The impact of the bankruptcy of the company extends beyond just the financial aspect. You might experience:

Loss of Trust: Stakeholders like suppliers, customers, and potential partners might hesitate to work with you due to the bankruptcy of the company.
Reputational Damage: The bankruptcy of the company becomes a public record, potentially affecting your future business prospects.
Legal Limitations: You might face restrictions on the types of businesses you can operate or positions you can hold.

These consequences highlight that bankruptcy’s impact can be far-reaching and affect your ability to rebuild.

4. How can I understand my financial situation after company bankruptcy?

Start by:

Gathering Financial Documents: Collect all personal and business financial statements, including cash flow statements, debt records, and asset documentation.
Listing Assets and Debts: Create a comprehensive list of what you own and what you owe, including any personal guarantees for company debts.
Setting Realistic Goals: Define achievable short-term goals (income generation, budgeting) and long-term goals (debt reduction, credit score improvement).

This process helps you understand your current financial position and create a roadmap for recovery.

5. How do I rebuild business credit after bankruptcy?

Rebuilding business credit takes time and strategic effort. Focus on:

Responsible New Credit Lines: Start small with secured credit cards or loans that report to credit bureaus, gradually building a positive credit history.
Timely Payments: Consistently making payments on time demonstrates financial responsibility and is crucial for improving your credit score.
Learning from Others: Seek advice and inspiration from other businesses that successfully rebuilt their credit after bankruptcy.

Remember, patience and responsible financial management are key to rebuilding business credit.

6. How can I repair my company’s reputation after bankruptcy?

Focus on:

Transparent Communication: Openly communicate with stakeholders about the bankruptcy of the company, your recovery plan, and progress made. This honesty builds trust.
Leveraging Digital Platforms: Utilize your website and social media to share positive stories, highlight improvements, and engage with your audience.
Documenting Changes: Showcase tangible improvements in your operations, management practices, and product quality to demonstrate your commitment to recovery.

By actively managing the narrative and showcasing positive change, you can gradually rebuild trust and restore your company’s reputation.

7. What are some strategies for growth after recovering from bankruptcy?

Consider these strategies:

Identifying New Markets: Explore untapped markets by expanding geographically, targeting new demographics, or diversifying your product/service offerings.
Investing in Innovation: Embrace technology and innovative practices through automation, data analytics, and digital marketing to gain a competitive edge.
Building Partnerships: Form strategic alliances with other businesses to share resources, access new audiences, and achieve mutual growth.

Growth after the bankruptcy of the company involves strategic planning and proactive efforts to explore new opportunities and redefine your business potential.

8. How do I measure my progress and stay motivated during recovery?

Utilize these methods:

Establish KPIs: Define key performance indicators (KPIs) that align with your recovery goals, such as credit score improvement, debt reduction, revenue growth, etc.
Track and Adjust: Regularly monitor your KPIs and adjust your recovery strategy as needed, celebrating successes and addressing areas requiring improvement.
Acknowledge Milestones: Celebrate even small wins and acknowledge your progress to maintain motivation and a positive outlook throughout the recovery journey.

By actively tracking your progress and celebrating achievements, you can stay focused and committed to rebuilding your business stronger than before.

Bankruptcy of the Company: Conclusion

I hope you enjoyed this bankruptcy of the company Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring due to distressed real estate or other reasons? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding the bankruptcy process. We can get you debt relief freedom using processes that are a bankruptcy alternative.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

Brandon Blog Post

NAVIGATING CORP BANKRUPTCY IN CANADA: OUR COMPREHENSIVE GUIDE FOR BUSINESS OWNERS

Post author By Brandon Smith
Post date December 2, 2024

corp bankruptcy

Corp Bankruptcy Introduction

Running a business can be tough. Sometimes, despite your best efforts, your company may face overwhelming financial difficulties. When business debts pile up and staying afloat seems impossible, it might be time to consider corp bankruptcy proceedings. This can be stressful and complex, but understanding your options is crucial for making the best decisions for your company and yourself.

This guide aims to demystify Canada’s different types of company insolvency proceedings. We’ll break down the intricacies of bankruptcy, Division I proposals, and receivership, providing clarity on their implications for debt resolution and your business’s future.

Understanding What Is Corp Bankruptcy

In Canada, corp bankruptcy, also known as commercial bankruptcy or business bankruptcy, is a legal process that allows the incorporated legal entity unable to pay their debts to seek relief by filing bankruptcy. It provides a framework for either liquidating the company and distributing assets to creditors or reorganizing the business to become financially stable again.

Corp bankruptcy is fundamentally different from personal bankruptcy, which pertains to individuals, including sole proprietorships and partnerships. While personal bankruptcy is designed to assist individuals in obtaining a fresh start by addressing their personal assets, corporate bankruptcy seeks to facilitate either an orderly dissolution of the company or its restructuring.

Navigating this process necessitates specialized knowledge. A Licensed Insolvency Trustee, who is a federally licensed professional, plays an essential role in guiding you through the proceedings. They ensure compliance with the Bankruptcy and Insolvency Act (BIA) and other relevant regulations while effectively managing a variety of financial matters.

Types of Corp Bankruptcy Proceedings in Canada

Canadian law offers two primary avenues for addressing the corp bankruptcy process:

Liquidation

This involves closing down the business, selling its assets, and using the proceeds to pay creditors. It’s a final step, signifying the end of the company’s operations.

Reorganization

The objective of this initiative is to strategically restructure the company’s financial and operational frameworks, thereby ensuring its continued viability. Reorganization serves as a critical opportunity for businesses facing financial challenges, enabling them to navigate and potentially surmount their economic obstacles.

Let’s explore each type in greater detail.

Liquidation under Corp Bankruptcy

Here’s a step-by-step breakdown of liquidation:

Decision to File:
The board of directors makes the difficult decision to file for bankruptcy
. Assignment in Bankruptcy: A director, or the sole director, signs the required bankruptcy documents to make the company’s assignment into bankruptcy
Appointment of the Licensed Insolvency Trustee: An insolvency trustee is appointed to oversee the process.
Asset Transfer: All company assets are transferred to the Licensed Insolvency Trustee, which then manages and sells them. Distribution to Creditors: Proceeds from asset sales, after the cost of the corp bankruptcy proceedings, are distributed to creditors based on a predetermined legal priority.
Secured creditors, such as lenders with liens on company assets, generally have priority over unsecured creditors.
The company ceases to operate: Once assets are distributed, although the bankrupt corporation is not legally dissolved, it no longer operates.

Depending on whether the company is federally or provincially incorporated, eventually, the appropriate government authority will cancel the company’s charter.

Liquidation can be a challenging process, but it provides a structured way to wind down a company facing insurmountable financial difficulties and allows for a fair distribution of assets to creditors.

“The closure of a business doesn’t just impact balance sheets, it impacts lives.”

Reorganization: A Path to Recovery

Reorganization, often known as “bankruptcy protection,” provides struggling but viable businesses an opportunity to restructure their debts and operations, helping them avoid shutting down completely.

In Canada, there are two main legal options for corporate reorganization:

Companies’ Creditors Arrangement Act (CCAA): This federal law is designed for larger corporations with debts over $5 million. The CCAA process is supervised by the court to ensure fairness and transparency.
Division I Proposal under the BIA: This option is geared towards smaller businesses that don’t meet the debt threshold required for the CCAA.

Both of these processes are similar to Chapter 11 reorganizations in the US Bankruptcy Code, offering a structured way for companies to get back on their feet.

The reorganization process generally follows these steps:

Filing for Protection: The company initiates the bankruptcy process by filing under the CCAA with the court or the Bankruptcy and Insolvency Act (BIA) with the Office of the Superintendent of Bankruptcy. A Licensed Insolvency Trustee is assigned to oversee the process, acting as either the Monitor for CCAA cases or the Proposal Trustee for Division I Proposals under the BIA.
Stay of Proceedings: Once the filing is done, the court grants a stay of proceedings. This means creditors are temporarily barred from starting or continuing any legal actions against the company while it works on its reorganization.
Plan Development: The company then creates a plan of arrangement (for CCAA) or a proposal (for BIA) that details how it plans to restructure its debts and operations.
Creditor Approval: The proposed plan is presented to the creditors, who must approve it. A two-thirds majority vote is needed for the plan to pass.
Court Approval: Finally, the court reviews the plan and must give its approval before the company can move forward with the implementation. This step is especially important for filings under the CCAA.

“Understanding your options is essential for financial clarity and future success.”

Division I Proposals vs. Bankruptcy: Understanding Key Legislation and the Nuances

Although both Division I proposals and bankruptcy fall under the umbrella of corp bankruptcy proceedings, they offer distinct approaches to dealing with financial distress.

Here’s a closer look at the key differences:

Feature	Division I Proposal	Bankruptcy
Eligibility	Smaller corporations (debt typically below $5	Any insolvent Any insolvent corporation
Court involvement	Less involved; primarily oversees the approval process	Potentially more involved in settling disputes
Flexibility	More flexible; allows for tailored debt restructuring plans	Less flexible; focuses on asset liquidation and distribution
Timeframe	Shorter timeframe for filing a plan	No specific timeframe
Outcome if rejected	Automatic bankruptcy	N/A
Cost	Can be more costly due to the need to restructure operations and negotiate with creditors	Cost depends on complexity and types of assets to be sold

Choosing the right path depends on your company’s specific circumstances, the severity of its financial troubles, and the potential for recovery.

Receivership: When Secured Creditors Take Action

Receivership is a legal process that empowers a receiver, which in Canada can only be a licensed insolvency practitioner, to take control of a company’s assets when it defaults on secured loans.

There are two types of receivership:

Private Receivership: The secured creditor appoints a receiver based on the terms of the security agreement, through an appointment letter.
Court-Appointed Receivership: The court appoints a receiver upon application, usually by a secured creditor.

The receiver has the authority to:

Take possession of corporate assets.
Manage the assets, potentially running the business temporarily.
Sell assets to recover the secured creditors’ debts, in order of priority.

The primary responsibility of a privately appointed receiver is to the appointing creditor. In contrast, a court-appointed receiver has a duty to all stakeholders and may be subject to court-imposed restrictions.

Receivership can be a powerful tool for secured creditors seeking to recover their funds, but it often results in the liquidation of the company. It may also occur concurrently with corp bankruptcy proceedings, especially when secured creditors hold significant claims against the company.

Corp Bankruptcy: Weighing the Pros and Cons

Each corp bankruptcy proceeding presents unique advantages and disadvantages. Let’s examine these for each option:

Advantages and Disadvantages of Liquidation

Advantages	Disadvantages
Provides a legal framework for businesses unable to pay their debts.	Results in the closure of the business.
Offers an orderly process for winding down the business.	This may lead to action taken due to personal liability for directors for specific debts.
Facilitates the fair distribution of assets to creditors based on their legal priority.	Can be a time-consuming and expensive process.
	Can negatively impact the reputation of the directors.

*Advantages and Dis**advantages of Reorganization*

Advantages	Disadvantages
Offers a chance to save the business and preserve jobs.	May not be successful, leading to eventual liquidation.
Provides an opportunity to improve profitability and efficiency.	Can negatively impact employee morale and customer confidence during the restructuring process.
Allows for the modernization of strategies and financial arrangements.	Requires a significant time investment and may cause cash flow challenges.
Can be conducted informally or formally through the BIA or CCAA.

“Reorganization aims to breathe new life into a struggling company.”

Advantages and Disadvantages of Receivership

Advantages	Disadvantages
Offers a direct and efficient method for secured creditors to recover their funds.	Focuses primarily on protecting the interests of the secured creditor, potentially neglecting the interests of other stakeholders.
May facilitate the sale of the business as a going concern, preserving jobs.	The receiver may face conflicts of interest between their duty to the appointing creditor and their duty to the company.

Corporate Recovery and Restructuring: Exploring Alternatives to Corp Bankruptcy in Canada With Other Potential Recovery Options

Before resorting to corp bankruptcy proceedings, it’s essential to explore alternative solutions that might help your company recover without resorting to formal legal processes.

Here are five alternatives to consider:

Cost-Cutting and Budgeting

Implement tighter spending controls and create a realistic cash flow budget. Identifying and eliminating unnecessary expenses can free up funds to address debt obligations.

Debt Refinancing

Consider looking into refinancing options to combine your current debts into a more manageable repayment plan. This could include discussing with your lenders to secure lower interest rates or longer repayment terms.

Shareholder Investment

Consider seeking additional investment from existing shareholders. This infusion of capital can bolster the company’s financial stability and allow it to meet its obligations.

Informal Debt Settlement

Engage in direct negotiations with creditors to reach an informal debt settlement agreement. This might involve proposing a reduced payment amount or a revised payment schedule.

Asset Sales

Evaluate the possibility of selling non-core assets to raise capital. This can provide immediate cash flow to address pressing debt payments and improve the company’s overall financial health.

Informal workouts, negotiated directly with creditors, often provide a more cost-effective and faster solution than formal corp bankruptcy proceedings. However, they require cooperation and flexibility from all parties involved.

If these alternatives prove insufficient, and the company has the potential for long-term viability, restructuring through the CCAA or a Division I proposal under the BIA becomes a viable option. However, if the company is deemed not viable, receivership may be the most appropriate course of action, especially for secured creditors.

Corp bankruptcy FAQs

What is the difference between “insolvency” and “bankruptcy” in Canada?

While the terms are often used interchangeably, they have distinct meanings under Canadian law. Insolvency is a financial state where a debtor is unable to pay their debts as they become due. This could be due to various reasons like business downturns or personal financial mismanagement.

Bankruptcy, on the other hand, is a legal process initiated when an insolvent person’s assets are transferred to a Licensed Insolvency Trustee. The insolvency trustee then distributes these assets to creditors based on a priority order set by the BIA.

In simpler terms, insolvency is the financial condition, while bankruptcy is the legal process to address it.

What are the primary laws governing insolvency and bankruptcy laws in Canada?

Canada’s insolvency framework primarily comprises two federal statutes: The BIA: This Act applies to both personal and corporate bankruptcies. It outlines the procedures for filing for bankruptcy, governs insolvency trustee licensing, and dictates the distribution of a bankrupt entity’s assets among creditors. The CCAA: This Act provides a framework for restructuring insolvent companies with debts exceeding $5 million. It allows for the creation of a Plan of Arrangement to compromise with creditors or facilitate the sale of the business under court supervision.

What does the Office of the Superintendent of Bankruptcy (OSB) do?

The OSB is the federal agency that oversees bankruptcy processes in Canada. Its main responsibilities include:

Overseeing cases under the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA).
Making sure that the laws set out in the BIA and CCAA are followed.
Regulating Licensed Insolvency Trustees.
Keeping a public record of filings related to the BIA and CCAA.

4. What happens to a company’s operations when it files for bankruptcy?

Typically, day-to-day business operations cease upon filing for bankruptcy. A LIT takes control of the company’s assets, liquidates them, and distributes the proceeds to creditors based on the BIA’s priority rules.

Shareholders generally lose their investments, and directors may face personal liability for certain debts, depending on specific circumstances and provincial laws.

How does the Canadian insolvency system prioritize creditors?

The BIA establishes a specific order of priority for creditor claims:

Deemed trusts: Amounts like unremitted source deductions from employees and unremitted HST are held in trust for the Crown and are paid first.
Unpaid suppliers: Suppliers can reclaim unpaid goods delivered within a specific timeframe before bankruptcy.
Super-priorities: These include unpaid wages, pension contributions, and costs for environmental cleanup.
Secured claims: Creditors with security over specific assets are paid from the proceeds of those assets.
Preferred claims: Certain unsecured claims under section 136(1) of the BIA, such as administrative costs of the bankruptcy, are prioritized.
Ordinary unsecured claims: All other claims are paid proportionally from the remaining funds.

Can a company avoid bankruptcy in Canada?

Yes, alternatives to bankruptcy debt relief options are:

Proposal to Creditors (BIA): A company may propose a plan to restructure its debts and negotiate compromises with creditors. If this proposal is accepted by both the creditors and the court, the company can successfully avert bankruptcy.
Restructuring under the CCAA: Corporations with debts exceeding $5 million may seek court protection under the CCAA to undertake a restructuring of their operations and financial obligations.
Informal Arrangements: Companies have the option to engage in direct negotiations with creditors to establish informal agreements, which may include debt restructuring or payment deferrals.

What is receivership, and how does it relate to bankruptcy?

Receivership is a legal process where a secured creditor appoints a receiver to take control of a debtor’s assets, typically to enforce a security interest. This appointment can be made privately by the creditor or through a court order.

While receivership can happen at the same time as bankruptcy, it mainly aims to protect the interests of the secured creditor. The receiver may sell off assets to pay back the secured debt, whereas a trustee in bankruptcy oversees the distribution of assets to all creditors following the priorities set out in the BIA.

How can a foreign company with operations in Canada be affected by Canadian insolvency laws?

If a foreign company has assets or carries on business in Canada, it falls under the jurisdiction of Canadian insolvency laws like the BIA and CCAA. It can be subject to bankruptcy proceedings or restructuring efforts in Canada.

The BIA also has provisions for recognizing and cooperating with foreign insolvency proceedings, allowing for coordination between Canadian courts and foreign jurisdictions in cross-border insolvency cases.

Conclusion: Seeking Expert Guidance for Corp Bankruptcy

Navigating the complexities of corp bankruptcy in Canada demands a thorough understanding of the legal frameworks and available options. Bankruptcy, Division I proposals, and receivership each offer distinct paths with varying implications for debt resolution, business operations, and stakeholder interests.

Remember, seeking professional advice is paramount. A LIT and a qualified lawyer specializing in insolvency can provide expert guidance, ensuring you make informed decisions and protect your rights throughout the process. Early intervention and expert assistance can significantly improve the chances of a successful outcome, whether that means restructuring your company or navigating a controlled and dignified wind-down.

I hope you enjoyed this corp bankruptcy Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring due to distressed real estate or other reasons? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

corp bankruptcy

Brandon Blog Post

WHAT DOES BANKRUPTCY PROTECTION MEAN? THE ABSOLUTELY IMPORTANT THINGS YOU NEED TO KNOW

Post author By Brandon Smith
Post date October 28, 2024

what does bankruptcy protection mean

What does bankruptcy protection mean? Canada’s Bankruptcy & Insolvency Act

What does bankruptcy protection mean? Bankruptcy protection is a legal status granted to individuals or businesses under Canada’s Bankruptcy and Insolvency Act (BIA). This protection shields debtors from creditor actions while working towards a fresh financial start, whether through bankruptcy or a consumer proposal.

Common questions are:

How does bankruptcy protect my assets?
What is the difference between a Consumer Proposal and bankruptcy?
How does bankruptcy protect my income?
Can I file for bankruptcy if I have no assets or income?
What happens to my debts after bankruptcy?
Do I need a bankruptcy lawyer to file for bankruptcy?

In this Brandon’s Blog, I demystify the concept of bankruptcy protection, shedding light on its significance and the various forms it can take. I answer these and other questions to explain “What Does Bankruptcy Protection Mean?“.

What Does Bankruptcy Protection Mean? Legal Framework of Bankruptcy Protection

The legal framework of bankruptcy protection is rooted in the BIA in Canada. This act provides a structured process for individuals and business debtors facing overwhelming debt to seek relief and a fresh financial start.

Here’s a breakdown of the key elements:

Automatic Stay: Upon filing for bankruptcy or a Consumer Proposal, an automatic stay comes into effect. This legal measure serves as a shield against creditor actions. It immediately halts all collection attempts, including legal actions, wage garnishments, and asset seizures.

Exempt Assets: Contrary to the misconception that bankruptcy leads to complete asset forfeiture, provincial laws designate certain assets as exempt. These assets, encompassing essential items like household goods, a vehicle, limited home equity, tools of the trade, and certain RRSPs, are protected during bankruptcy proceedings. The specific value allowances for these exemptions vary by province.

Asset Protection Mechanisms: Even if an individual possesses assets exceeding the prescribed exemption limits, there are options to retain them. The repurchase of a person’s equity in the assets allows individuals, such as a family member, to keep an asset by paying the non-exempt portion of its value into the bankruptcy estate.

Alternatives to Bankruptcy: Consumer Proposals offer an alternative path to bankruptcy while still protecting through an automatic stay. In a Consumer Proposal, individuals negotiate a reduced debt repayment plan with their creditors, preserving their assets.

Income Protection: Bankruptcy filings protect income from creditors, effectively preventing wage garnishments and bank account freezes. This protection extends to most creditors, including the Canada Revenue Agency, with exceptions like ongoing child or spousal support payments. During bankruptcy, earned income goes directly to the individual. Depending on the income level, a person may need to pay over a portion using monthly payments for the benefit of the creditors.

It’s worth mentioning that bankruptcy protection laws can be quite complicated. It’s a good idea to consult with qualified professionals, like a licensed insolvency trustee (formerly known as a bankruptcy trustee or a trustee in bankruptcy), who can offer tailored advice and assist you in understanding the process.

What Does Bankruptcy Protection Mean? Types of Bankruptcy Protection

The BIA is a federal law that covers bankruptcy protection. Provincial laws determine which assets you can keep when filing for bankruptcy. Here are the main types of bankruptcy protection in Canada:

*Canadian L**iquidation Bankruptcy (known in the United States as a Chapter 7 bankruptcy)*

This is a legal process available to both companies and individuals. The company or the person declares themselves unable to repay your debts when filing an assignment in bankruptcy. This results in a stay of proceedings that prevents creditors from taking action against you or your property. A licensed insolvency trustee will be appointed to manage your bankruptcy.

The bankrupt person or company may be required to surrender some assets to the Trustee, who will then sell them and distribute the funds to your creditors. However, for individuals, certain assets are protected under provincial law. For a first-time bankrupt person with no surplus income, you will be discharged from bankruptcy, usually within nine months, after which your debts will be wiped out, with limited exceptions.

Consumer Proposal (known in the United States as a Chapter 13 bankruptcy)

A consumer proposal is a financial restructuring bankruptcy alternative for people who owe $250,000 or less, other than for any debts registered against your principal residence. In a consumer proposal, you offer your creditors a partial repayment of your debt through a licensed insolvency trustee. If your creditors accept the proposal, your debts are consolidated into one settlement, and you make payments over some time, typically up to five years. Your assets are not affected by a consumer proposal, and you are protected from creditor actions while the proposal is in effect.

Commercial Proposal (known in the United States as a Chapter 11 bankruptcy)

Companies, or people who owe more than $250,000, can get bankruptcy protection, restructure their finances and avoid bankruptcy through the commercial proposal section of the BIA.

Restructuring under the Companies’ Creditors Arrangement Act (this is the closest we have to a US Chapter 11 bankruptcy protection filing)

Companies that owe $5 million or more, can gain bankruptcy protection and restructure their operations and finances using federal legislation called the Companies’ Creditors Arrangement Act.

All of the above bankruptcy protection alternatives require a licensed insolvency trustee to administer the process.

What Does Bankruptcy Protection Mean? Key Concepts of Bankruptcy Protection

Automatic Stay

What is a stay of proceedings and how does it work? A stay of proceedings is a legal measure triggered by filing for bankruptcy or a Consumer Proposal for financial restructuring. It immediately halts all creditor actions against you, including collection calls, legal proceedings, and asset seizures. This provides relief from creditor harassment and safeguards your assets and income while navigating the process.

Debt Restructuring through bankruptcy or consumer proposal

Two primary methods for debt restructuring in Canada are bankruptcy and consumer proposals. People understand how consumer proposals are for debt restructuring because that is exactly what it does. But how can personal bankruptcy be a debt restructuring tool?

Both options provide legal protection from creditors and offer a path toward financial stability.

Bankruptcy process

Filing for bankruptcy initiates a legal process and invokes the stay of proceedings. That halts all creditor actions, including collection calls, lawsuits, and wage garnishments. This protection extends to most creditors, including government agencies like the Canada Revenue Agency, with a few exceptions, like family support payments.

A common misconception is that bankruptcy leads to the loss of all assets. However, there are provincial laws in Canada that intersect with federal bankruptcy laws. One such provincial statute is the Ontario Execution Act, R.S.O. 1990, c. E.24, which designates certain assets as “exempt”. These exempt assets, based on liquidation value, not original cost, are protected during bankruptcy and can include:

Household furnishings and appliances – $13,150
Equity in a vehicle – $6,600
Home equity up to $10,000
RRSPs, other than for contributions made in the 12 months before filing bankruptcy
Medical aids and devices that are required to assist with a disability or a medical or dental condition
Cash surrender value of life insurance policies where a spouse or family member is an irrevocable designated beneficiary

Even if an asset exceeds the exemption limit, options exist to retain it. These options include repurchasing the asset by paying the non-exempt value into the bankruptcy estate or including that value in calculating what you need to pay for a successful consumer proposal instead.

To file for bankruptcy, you need to owe at least $1,000. You need debts to file; it doesn’t require any assets or income to be eligible! Individuals with minimal or no assets can still file for bankruptcy and benefit from its protections.

Consumer Proposal

A consumer proposal is a formal arrangement between a debtor and their creditors, arranged through a licensed insolvency trustee. This option helps debtors combine their debts and propose to repay creditors a portion of what they owe, typically between 20% and 50% of the total debt.

Consumer proposals offer several advantages:○

You do not lose your assets, making it suitable for those with significant non-exempt assets.
Interest charges stop accruing.
Creditors are legally prevented from starting or pursuing further collection actions due to the “stay of proceedings”.
Although a consumer proposal isn’t technically bankruptcy, it provides similar legal protections and debt relief benefits.

Both bankruptcy and consumer proposals are complex legal processes. Consulting with a licensed insolvency trustee, the only professional authorized to administer these proceedings is crucial to determine the most suitable option for individual circumstances. We can assess your financial situation, explain the implications of each choice, and guide you through the process.

What Does Bankruptcy Protection Mean? Rights and Responsibilities of Debtors

Rights of Debtors:

Stay of Proceedings
Asset Protection
Options For Non-Exempt Assets
Income Protection: Bankruptcy shields debtors’ income from most creditors, protecting them from wage garnishments and bank account seizures. This includes protection from the CRA. There are some specific cases where income protection is not available, such as ongoing child or spousal support payments.
Eligibility Regardless of Assets or Income
Consumer Proposals as an Alternative: Consumer proposals provide a bankruptcy alternative, allowing debtors to consolidate debts and negotiate a reduced repayment plan with their creditors10. While offering similar creditor protection through a stay of proceedings, consumer proposals do not impact assets, making them attractive for individuals with significant non-exempt equity.

Responsibilities of Debtors:

While the sources primarily focus on the rights and protections offered by bankruptcy and consumer proposals, there are certain inherent responsibilities:

Full Disclosure: Debtors are obligated to provide accurate and complete financial information to their licensed insolvency trustee, including all assets, debts, income, and expenses.
Cooperation: Debtors must cooperate with their Trustee throughout the bankruptcy or proposal process, attending meetings, providing requested documentation, and adhering to the terms of their agreement.
Compliance with Legal Requirements: Debtors must fulfill the specific legal requirements of their chosen debt relief solution, which may include attending financial counselling sessions or making agreed-upon payments.

Choosing the Right Path

Deciding between bankruptcy and a consumer proposal requires careful consideration with the guidance of a licensed insolvency trustee. The Trustee’s expertise helps determine the most suitable option based on individual circumstances, ensuring debtors understand their rights and obligations.

What Does Bankruptcy Protection Mean? The Role of Bankruptcy Courts

In Canada, bankruptcy courts play a crucial role in the administration of bankruptcy and insolvency proceedings. Here are some key responsibilities of bankruptcy courts in Canada:

Hearing Bankruptcy Applications: Bankruptcy courts hear petitions filed by individuals or businesses seeking to be declared bankrupt be it personal or business bankruptcy. The court determines whether the applicant is eligible to be declared bankrupt and whether the petition is valid.
Approving Reorganization Plans: In cases where a company is seeking to restructure its debt through BIA or CCAA reorganization plans, the bankruptcy court must approve the plan. The court ensures that the plan is fair and reasonable and that it provides for the payment of creditors in a timely manner.
Approving Asset Sales: Bankruptcy courts have the authority to approve asset sales conducted by the Trustee. This ensures that the sales are conducted fairly and reasonably and that the assets are sold for a fair price under the circumstances.
Hearing Creditors Appealing the Trustee’s Disallowance of Their Claim: Bankruptcy courts hear appeals of claim disallowances against the bankrupt’s estate. The court determines if the Trustee’s decision on the validity and priority of each claim is correct or not if appealed.
Approving Settlements: Bankruptcy courts can approve settlements between the Trustee and creditors, ensuring that the settlement is fair and reasonable.
Overseeing the Administration of the Bankrupt’s Estate: Bankruptcy courts monitor the administration of the bankrupt’s estate, ensuring that the Trustee is performing their duties following the BIA and that the estate is being managed fairly and reasonably.
Making Rulings on Disputes: Bankruptcy courts make rulings on disputes that arise during the bankruptcy process, such as disputes between the Trustee and creditors, or between creditors themselves.
Providing Guidance: Bankruptcy courts can guide the Trustee, creditors, and other stakeholders on the interpretation and application of the BIA and other relevant laws in response to such a motion.
Bankrupt’s opposed discharges: The Court hears all opposed applications for discharge of the bankrupt person and rules on what kind of discharge the person is entitled to.
what does bankruptcy protection mean

What Does Bankruptcy Protection Mean? The Role of the Office of the Superintendent of Bankruptcy Canada

The Office of the Superintendent of Bankruptcy Canada (OSB) is a federal agency that manages bankruptcy and insolvency proceedings across the country. The OSB is essential for enforcing the BIA and making sure the insolvency system runs smoothly and fairly. Here are some of the main responsibilities of the OSB:

Regulation and Oversight: The OSB regulates and oversees the activities of trustees, receivers, and other insolvency professionals to ensure that they comply with the BIA and other relevant laws.
Licensing and Registration: The OSB licenses and registers trustees, receivers, and other insolvency professionals, ensuring that they meet the necessary qualifications and standards.
Monitoring and Investigation: The OSB monitors and investigates complaints and concerns related to the administration of bankruptcy and insolvency proceedings, including allegations of misconduct or fraud.
Enforcement: The OSB enforces the BIA and other relevant laws, including issuing warnings, fines, and penalties to individuals and companies that violate the law.
Guidance and Education: The OSB provides guidance and education to stakeholders, including trustees, creditors, and debtors, on the BIA and other relevant laws and regulations.
Research and Analysis: The OSB conducts research and analysis on insolvency trends, statistics, and best practices, which help inform policy decisions and improve the effectiveness of the insolvency system.
Policy Development: The OSB develops and recommends policies to the Minister of Justice and Attorney General of Canada, which helps shape the direction of the insolvency system.
Public Education: The OSB provides public education and awareness campaigns to inform Canadians about the insolvency system, the consequences of bankruptcy, and the importance of financial literacy.
Collaboration with Other Agencies: The OSB works closely with other government agencies, such as the CRA and the Financial Consumer Agency of Canada (FCAC), to ensure a coordinated approach to insolvency and debt management.
Reporting and Accountability: The OSB is responsible to Parliament and reports directly to the Minister of Justice and Attorney General of Canada. This structure ensures transparency and accountability in its operations and decisions.

In summary, the OSB is essential for maintaining the integrity and efficiency of Canada’s insolvency system and safeguarding the rights of creditors, debtors, and other parties involved.

What Does Bankruptcy Protection Mean? Impacts of Bankruptcy Protection

Financial Relief for Debtors

Bankruptcy provides an opportunity for debt relief. While it does not require the debtor to have any assets, it might involve surrendering non-exempt assets to the bankruptcy estate. However, debtors can explore options like a family member repurchasing assets by paying the non-exempt value or filing a Consumer Proposal, which allows for debt consolidation and partial repayment to creditors without surrendering assets.

Bankruptcy allows individuals and businesses struggling with debt to restructure or eliminate their debts and rebuild a stable financial future. After the personal bankruptcy process, debtors receive a discharge, typically within nine months for a first-time bankrupt person, marking the end of their bankruptcy and the elimination of eligible debts. In corporate bankruptcies, there is not a discharge process.

Effects on Credit Scores

Filing for bankruptcy becomes a matter of public record and is reported to credit bureaus. This information remains on your credit report for a significant period, typically six to seven years in Canada, though this can vary based on provincial laws and the type of bankruptcy protection filed. This negative mark on your credit history will likely result in a significant drop in your credit score.

Lenders use credit scores to assess the risk associated with lending money. A low credit score resulting from bankruptcy makes it difficult to obtain new credit, such as loans, credit cards, or mortgages. Even if you do qualify for credit, you may face less favourable terms, including higher interest rates and lower credit limits.

While not directly related to credit scores, bankruptcy can impact other aspects of your financial life. For instance, some employers and landlords may consider credit history when making hiring or rental decisions.

What Does Bankruptcy Protection Mean FAQ

Here is our what does bankruptcy protection mean FAQ:

What does “Bankruptcy Protection” mean? Bankruptcy protection refers to the legal safeguards provided to individuals or companies when they file for bankruptcy. It essentially halts all debt collection activities, legal actions, and wage garnishments by creditors. This protection is activated through an “automatic stay” upon filing for bankruptcy.
What does Bankruptcy Protection protect? Bankruptcy protection is designed to help you keep your assets safe from creditors. It provides a legal way to either reorganize your finances or sell off assets in an orderly fashion under court oversight. Many people think that filing for bankruptcy means you have to give up everything, but that’s not the case. Some laws allow you to keep important items such as your home, car, and personal possessions.
How does the automatic stay work? The automatic stay is a court order that takes effect immediately upon filing for bankruptcy. It acts as a legal shield, prohibiting creditors from taking any further action to collect debts incurred before the bankruptcy filing. This includes stopping lawsuits, wage garnishments, bank account freezes, and even harassing phone calls.
Does filing for bankruptcy mean I will lose all my assets? Not necessarily. While bankruptcy may involve liquidating some assets to repay creditors, the bankruptcy code provides exemptions that allow you to keep certain assets deemed necessary for your livelihood. These exemptions vary by state but generally include a homestead exemption for your primary residence, a vehicle exemption, and exemptions for personal property like clothing, furniture, and tools needed for your profession.
How does bankruptcy protection help me keep my assets? Bankruptcy protection helps preserve your assets in two primary ways:
Automatic Stay: It prevents creditors from seizing your assets while you reorganize your finances or create a repayment plan. Exemptions: These legal provisions shield specific assets from liquidation, ensuring you retain essential possessions.
What is the difference between Bankruptcy and a Consumer Proposal? Bankruptcy means selling off non-exempt assets to repay creditors. It’s generally an option for individuals or businesses that are struggling with low income and limited assets. On the other hand, a consumer proposal is a way for individuals with a steady income to suggest a repayment plan to their creditors that lasts up to five years. This option lets you keep your assets while getting rid of your debt.
How can I learn more about bankruptcy protection and whether it’s right for me? If you’re looking to learn more about bankruptcy protection and whether it’s the right choice for you, it’s important to talk to a licensed insolvency trustee. They can provide insights tailored to your financial situation, explain the various bankruptcy options available, clarify how it might affect your assets, and help you navigate the legal steps involved.
What are some misconceptions about bankruptcy? You will lose everything: While some assets may be liquidated, exemptions exist to protect essential belongings. It will ruin your credit forever: While bankruptcy negatively impacts credit scores, it is possible to rebuild credit over time with responsible financial management. It is a mark of shame: Bankruptcy is a legal process designed to provide individuals and businesses with a fresh financial start.

What Does Bankruptcy Protection Mean Conclusion

Navigating the world of bankruptcy protection can feel daunting, but fear not! It’s a valuable safety net designed to help both individuals and businesses get back on their feet during tough financial times. Think of it as a wonderful opportunity to reorganize debts and embrace a fresh start.

By familiarizing yourself with the different types of bankruptcy, understanding the implications of filing, and discovering how it may affect your credit score, you’ll be well-equipped to make smart choices for your financial future. While bankruptcy isn’t the perfect fit for everyone, it can truly be a lifesaver for those in need of a financial reboot. So take a deep breath and explore your options—you’ve got this!

I hope you enjoyed this what does bankruptcy protection mean Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring due to distressed real estate or other reasons? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

Tags bankruptcy estate, bankruptcy filings, bankruptcy laws, bankruptcy lawyer, bankruptcy process, bankruptcy protection, business bankruptcy, Canada Revenue Agency, corporate bankruptcies, exempt assets, filing bankruptcy, filing for bankruptcy, Ira Smith Trustee, legal proceeding, licensed insolvency trustee, personal bankruptcies, reorganization plan, types of bankruptcy

Brandon Blog Post

NAVIGATING BUSINESS INSOLVENCY IN CANADA: A LAWYER AND ACCOUNTANT’S COMPREHENSIVE GUIDE TO MASTERING INSOLVENCY LAW

Post author By Brandon Smith
Post date April 22, 2024

Introduction to Business Insolvency

Welcome to our Brandon’s Blog where we will explore the intricate world of insolvency and its profound impact on businesses in Canada from my perspective as a professional in the field. In this exploration of business insolvency, we will uncover the implications that insolvency brings for creditors, shareholders, their lawyers and accountants, and employees alike.

Understanding the complexities of financial distress is crucial for businesses to navigate through turbulent times successfully. Join me as we discuss effective strategies and best practices to mitigate the challenges of insolvency, ensuring a smoother transition toward financial stability.

Definition of Business Insolvency

Business insolvency in the Canadian context refers to the financial state of a business where it is unable to pay its debts as they become due. It is a financial condition, not a legal one. Do not confuse the business or company with the financial condition of being an insolvent person with the legal condition of being involved in bankruptcy proceedings. Corporate insolvency is not corporate bankruptcy.

Corporate insolvency results in the business being unable to pay its debts when due which may make it impossible for the business to continue its operations. Insolvent companies may very well end up in the legal state of bankruptcy or as an alternative to bankruptcy, in insolvency restructuring proceedings.

Business insolvency can force the business to choose one of the insolvency options for businesses, including bankruptcy filings or proposals for restructuring and repayment plans under the Bankruptcy and Insolvency Act (Canada) (BIA).

In Canada, the number of business insolvencies has been on the decline for many years, but the impact of the COVID-19 pandemic has seen a reversal of this trend. Business insolvency filings are on the rise again. However, there are many small businesses where a business bankruptcy process does not make any sense as there are either no or few assets to offset the large company debts. We get calls daily from entrepreneurs of such companies where we tell them it is in their best interests to merely close the business doors rather than spend money to put their company into bankruptcy.

Causes and Warning Signs of Business Insolvency

Economic Downturn and Market Volatility

One of the primary contributors to business insolvency in Canada is the unpredictable nature of economic fluctuations and market volatility. As businesses strive to adapt to shifting market trends and consumer demands, they are often met with unforeseen challenges that can strain financial resources. Economic downturns, changes in consumer behaviour, and global market dynamics all play a pivotal role in determining the financial health of businesses across various sectors.

Cash Flow Problems: Overleveraging and Excessive Debt Burden

Another significant factor that can precipitate business insolvency is overleveraging and an excessive debt burden. While leveraging can be a strategic tool for growth and expansion, it becomes problematic when businesses accumulate debt beyond their capacity to repay. High levels of debt, coupled with declining revenues or profitability, can create a precarious financial situation, ultimately leading to insolvency if left unaddressed.

Poor Financial Planning and Management

Effective financial management and planning are essential components of sustainable business operations. However, inadequate financial oversight and poor planning can leave businesses vulnerable to insolvency. From misaligned budgeting strategies to ineffective cash flow management, deficiencies in financial management practices can exacerbate existing challenges and hasten the onset of insolvency.

Regulatory Compliance and Legal Challenges

Navigating the complex regulatory landscape in Canada can pose significant challenges for businesses, especially concerning compliance and legal matters. Failure to adhere to regulatory requirements, such as tax obligations or industry-specific regulations, can result in legal disputes, penalties, and fines, placing additional strain on financial resources. Moreover, litigation and legal challenges can further impede business operations and contribute to business insolvency.

Technological Disruption and Industry Shifts

The rapid pace of technological innovation and industry shifts can disrupt traditional business models and market dynamics, presenting both opportunities and challenges for businesses in Canada. Failure to embrace technological advancements or adapt to changing industry trends can render businesses obsolete or inefficient, leading to a decline in competitiveness and financial viability. As such, businesses must remain agile and proactive in leveraging technology to stay ahead of the curve and mitigate the risk of insolvency.

External Shocks and Unforeseen Events

External shocks and unforeseen events, such as natural disasters, geopolitical instability, or pandemics, can have profound implications for business continuity and financial stability. The unprecedented disruptions caused by such events can severely impact supply chains, disrupt operations, and erode consumer confidence, thereby jeopardizing the financial health of businesses. While certain external shocks may be beyond the control of businesses, proactive risk management and contingency planning are essential to mitigate their adverse effects.

Remember, proactive planning, decisive action, and collaboration with knowledgeable professionals are the cornerstones of navigating business insolvency effectively.

Business Insolvency: Overview of Insolvency Law in Canada

In Canada, insolvency law plays a vital role in guiding businesses through financially distressed situations. As a professional knowledgeable in this field, I will delve into the types of insolvency proceedings and the key legislation and regulations that govern insolvency processes.

Types of Insolvency Proceedings: In Canada, businesses can navigate various types of insolvency proceedings:

- bankruptcy;
- proposal;
- corporate restructuring;
- receivership.

Bankruptcy involves the liquidation of assets to repay creditors, while a proposal allows for negotiating repayment plans to avoid bankruptcy. For larger corporations, corporate restructuring under different legislation than a proposal (discussed next) is available. Finally, when a secured creditor enforces its security to liquidate the business assets, that is receivership.

Understanding the nuances between these proceedings is essential for businesses facing financial challenges. All of these proceedings are described in detail in my previous blogs in the Lawyer and Accountant Series over the last few weeks.

Key Legislation and Regulations: The BIA applies to all business bankruptcy, proposal and receivership proceedings in Canada. The Companies’ Creditors Arrangement Act (CCAA) applies to corporations that owe more than $5 million to creditors who wish to avail themselves of Canadian bankruptcy protection to restructure their operations and finances.

These are the pivotal legislation for an insolvent person, be they a consumer, individual, proprietorship, partnership or corporation. They govern personal insolvency and business insolvency in Canada. The BIA will govern any personal bankruptcy or corporate bankruptcy.

Understanding these aspects of insolvency law is imperative for businesses as they navigate through financial difficulties. By recognizing the procedures and regulations outlined in the key legislation, businesses can protect their interests and work towards a successful resolution of insolvency issues.

As we continue to unravel the intricate landscape of insolvency law in Canada, I will now explore the specific roles of lawyers and accountants in business insolvency, shedding light on their invaluable contributions to navigating insolvency proceedings effectively.

Role of a Lawyer in Business Insolvency

Lawyers play a critical role in guiding businesses through the challenging landscape of insolvency. There are many complexities and responsibilities involved in representing clients during financial distress. Let’s explore the legal responsibilities and duties, as well as effective strategies for representing clients in insolvency proceedings.

Legal Responsibilities and Duties

A lawyer’s primary responsibility is to ensure that their clients navigate the legal proceedings smoothly, legally and ethically. Upholding the highest standards of professionalism and compliance with relevant laws is paramount in protecting the interests of all involved parties. From providing sound legal advice to negotiating on behalf of clients, every action must align with the legal framework outlined in insolvency law.

In insolvency proceedings, it’s essential to draft and review legal documents meticulously, such as restructuring plans and agreements, to safeguard the rights of creditors, shareholders, and employees. Transparency and adherence to the law are non-negotiable aspects that guide a lawyer’s responsibilities in representing clients effectively.

Strategies for Representing Clients

When representing clients in business insolvency cases, adopting a strategic approach is key to achieving successful outcomes. Clear communication with clients to understand their objectives and concerns forms the foundation of developing a tailored strategy. By conducting in-depth research, analyzing financial documents, and collaborating with other professionals like accountants and insolvency practitioners, lawyers can offer comprehensive legal services.

Each client’s situation is unique, requiring a personalized strategy that addresses their specific needs and goals. Through a combination of legal expertise, practical considerations, and proactive communication, lawyers strive to navigate the complexities of insolvency proceedings effectively. By working collaboratively with clients and other professionals, especially the insolvency professionals, they can secure the best possible resolutions for their clients’ insolvency challenges.

Role of an Accountant in Business Insolvency

Accountants also play a critical role in the realm of business insolvency. The CPA understands the importance of financial analysis and compliance with accounting standards in navigating through the complexities of insolvency. Let’s explore how accountants play a pivotal role in helping businesses facing financial distress.

Financial Analysis and Reporting

Financial analysis and reporting are fundamental aspects of dealing with business insolvency. The accountant’s role involves carefully assessing the financial health of a company experiencing insolvency issues. By analyzing crucial financial statements, cash flow projections, and other relevant data, CPAs can provide insights that help the business understand its current financial situation.

Through their expertise in financial analysis, CPAs identify key areas of concern and create accurate reports that are essential for stakeholders, including creditors, shareholders, and employees, to make informed decisions. Effective financial analysis enables businesses to develop strategies for managing financial distress, paving the way for a smoother resolution of insolvency issues.

Compliance with Accounting Standards

Compliance with accounting standards is a cornerstone for businesses navigating insolvency in Canada. The CPA will ensure that the financial statements are prepared in adherence to the relevant accounting principles and regulations. This commitment to compliance promotes transparency and upholds the integrity of financial reporting.

By maintaining strict compliance with accounting standards, businesses demonstrate their dedication to ethical practices and financial accuracy. This, in turn, fosters trust among creditors, shareholders, and other stakeholders during times of financial distress. Upholding accounting standards is crucial for businesses to mitigate legal and financial risks, emphasizing the need for meticulous attention to regulatory requirements.

CPAs recognize the significance of financial analysis and compliance with accounting standards in guiding businesses through the insolvency process. By providing invaluable financial expertise ensuring adherence to regulatory guidelines, and working with other professionals, especially the insolvency professionals, the external CPA supports businesses in making well-informed decisions and navigating the complexities of business insolvency successfully.

This is how both non-insolvency lawyers and accountants can still play a meaningful role in business insolvency, especially in a business restructuring process. A successful outcome of the business restructuring is the best way for the existing lawyer and accountant to maintain both the client but also a close meaningful business relationship for the long term.

Impact of Business Insolvency

Job Losses and Unemployment

The impact of Canadian business insolvency on job losses and unemployment can be significant. When a business becomes insolvent, it may be forced to lay off employees or shut down entirely, leading to job losses. This can result in a higher unemployment rate as workers find themselves without a job and struggle to secure new employment.

The COVID-19 pandemic has exacerbated these challenges, with many entrepreneurial businesses in Canada continuing to face financial difficulties and the continued risk of closure. Such businesses are still struggling to return to normal revenues, carry unpaid debt taken on during the pandemic, and face rising costs and a shortage of labour.

Targeted measures and support for small businesses are crucial to prevent closures and job losses. By assisting, such as financial aid, access to resources, and support for restructuring, the impact of business insolvency on job losses and unemployment can be mitigated. Additionally, policies like the recent amendments to prioritize creditor claims related to defined-benefit pension plans can help protect employees’ financial security in the event of insolvency.

Effects on Suppliers and Creditors

The effects of Canadian business insolvency on suppliers and creditors can be significant. When a business becomes insolvent, suppliers may face challenges in receiving payment for goods or services provided to the business. This can result in financial difficulties for the suppliers themselves, especially if they rely heavily on the insolvent business as a major customer.

Creditors, including financial institutions and other lenders, may also experience losses when a business files for bankruptcy or proposes a restructuring plan. In most cases, creditors will not receive the full amount owed to them, or they may have to wait a significant amount of time to receive any repayment.

Overall, Canadian business insolvency can have a ripple effect on suppliers and creditors, leading to financial challenges and losses for those involved in the business’s operations. Suppliers and creditors need to assess their credit risks before extending credit and take appropriate measures to protect their interests in the event of a business insolvency.

Potential Closure or Sale of the Business

In Canadian business insolvency, the potential closure or sale of the business can have significant implications for the business owner, employees, creditors, and the economy as a whole. If an entrepreneurial business is unable to meet its financial obligations and is forced to close its doors, it can result in job losses, financial losses for creditors, and a decrease in economic activity in the local community.

For the business owner, the closure or sale of the business can mean the end of their entrepreneurial venture, financial loss, and potential personal liability for both Director liabilities as well as any corporate debt personally guaranteed by the entrepreneur. Such liabilities can have a significant impact on their financial well-being and prospects.

For employees, the closure of a business can result in job loss, uncertainty, and financial hardship. They may struggle to find new employment, especially if the closure is due to broader economic challenges in the industry or region.

For creditors, the closure of a business can mean they probably will not recover the full amount owed to them. They may have to write off the debt as a loss, which can impact their financial stability and ability to extend credit to other businesses.

In terms of the economy, the closure or sale of a business can contribute to a decrease in economic activity, reduced consumer confidence, and a negative impact on the overall business environment. It can also lead to a loss of tax revenue for the government, further impacting public services and infrastructure.

Overall, the potential closure or sale of a business in a Canadian business insolvency is a complex and challenging situation that requires careful consideration of the implications for all stakeholders involved. It underscores the importance of effective financial management, planning, and risk mitigation strategies for entrepreneurial businesses to avoid insolvency and closure in the first place.

Reputation Damage

Reputation damage arising from a Canadian business insolvency can have long-lasting effects on a company. When a business becomes insolvent, it is unable to fulfill its financial obligations, leading to creditors and suppliers losing trust in the company. This can result in difficulty in securing credit, partnerships, and contracts in the future.

Moreover, news of a business insolvency can spread quickly, damaging the company’s reputation among customers and stakeholders. Customers may lose faith in the company’s ability to deliver products or services, leading to a loss of business and revenue. Employees may also become concerned about job security and employee wages. Morale suffers and the most qualified employees can find new jobs quickly. All of this leads to morale suffering which makes the business insolvency closer to a self-fulfilling prophecy.

Reputation damage from a business insolvency can be difficult to overcome. Rebuilding trust with creditors, suppliers, customers, and employees may take time and effort. Companies trying to implement a restructuring insolvency plan need to implement strong communication strategies to address concerns and demonstrate a commitment to financial stability and responsibility.

Overall, reputation damage arising from Canadian business insolvency can have significant consequences for a company’s long-term success and viability. Businesses need to address insolvency issues promptly and transparently to mitigate potential reputational harm.

Navigating Business Insolvency Proceedings

Initiating the Insolvency Process

In Canada, the process of initiating insolvency proceedings is a critical step for businesses facing financial distress. There are two kinds of processes; 1. voluntary and 2. involuntary.

The voluntary process normally begins with the insolvent business formally declaring insolvency by filing for bankruptcy protection under either the BIA or CCAA to begin the restructuring process. Alternatively, the insolvent business can file corporate bankruptcy if liquidation is the only answer for a business that is no longer viable.

The involuntary process would normally begin with either a secured creditor privately appointing or making an application to the Court for the appointment of a receiver. Alternatively, one or more unsecured creditors owed in total at least $1,000 can launch a Bankruptcy Application against the insolvent company.

Seeking professional guidance from experts like insolvency lawyers and licensed insolvency trustees is essential to navigate this complex process effectively. Businesses can begin addressing their financial challenges by initiating insolvency proceedings and working toward a resolution.

Managing Stakeholder Relationships

Managing stakeholder relationships is paramount during times of business insolvency in Canada. Creditors, shareholders, and employees all have vested interests in the outcome of insolvency proceedings. Effective communication and transparency are essential to build trust and mitigate potential conflicts. By keeping stakeholders informed, addressing their concerns, and involving them in decision-making processes, businesses can navigate insolvency proceedings with clarity and confidence.

Business insolvency is a complex issue that requires careful navigation. By understanding the implications for all stakeholders and seeking professional advice, businesses can better prepare for financial challenges.

Resolving Legal issues Within a Business Insolvency

There are two main avenues for addressing legal issues within insolvency cases: 1. Negotiation and Mediation Techniques, as well as 2. Litigation and Court Proceedings. I will now delve into the strategies and approaches essential for navigating through challenging financial times successfully.

Negotiation and Mediation Techniques

When faced with legal issues within insolvency cases, negotiation and mediation techniques can be powerful tools for finding amicable solutions. Insolvency trustees find that engaging in constructive dialogue with stakeholders can often lead to mutually beneficial outcomes. By exploring innovative and collaborative approaches, businesses can avoid unnecessary conflicts and costly legal battles.

Effective negotiation involves understanding the concerns and needs of all parties involved.
Mediation offers a platform for open communication, ensuring that diverse perspectives are heard and respected.
Skilled mediators facilitate the process, guiding toward agreements that protect the interests of creditors, shareholders, and employees.

By adopting a strategic and empathetic approach to negotiation and mediation, businesses can navigate the complexities of insolvency issues with resilience and integrity. The ability to find common ground and explore creative solutions is essential in any business restructuring.

Litigation and Court Proceedings

While negotiation and mediation are preferred methods for resolving legal issues within the insolvency case, there are instances where litigation and court proceedings become inevitable. This is more so within a liquidating bankruptcy proceedings rather than in a business reorganization. Licensed insolvency trustees understand the importance of legal recourse in protecting the rights and interests of all stakeholders involved.

Litigation provides a formal platform for resolving disputes and making legally binding decisions.
Court proceedings ensure that insolvency matters are adjudicated fairly and by the law.
Legal experts specializing in insolvency law offer invaluable guidance throughout the litigation process.

By preparing meticulously and engaging competent legal representation, businesses can navigate the complexities of court proceedings with confidence. While litigation may signify a more adversarial approach, it can also lead to definitive resolutions that provide clarity and direction in times of financial turmoil.

4 Common Business Insolvency FAQs

What is the difference between company insolvency and personal bankruptcy?

Company insolvency refers to a company that is unable to pay its bills and debts owed, while personal bankruptcy is a legal process for individuals who cannot pay their bills to eliminate debt.

When should a company consider filing for bankruptcy?

A company should consider filing for bankruptcy or bankruptcy protection to restructure when they are facing overwhelming financial difficulties, such as a loss of income, high levels of debt, inadequate cash flow, and reliance on personal credit to meet obligations. This only makes sense if action is taken relatively early in the insolvency when there are still assets that can be used in perhaps a different corporate form to continue to run the viable part of the insolvent business.

How much debt does a business need to owe to file for bankruptcy in Canada?

In Canada, an insolvent person or insolvent business needs to owe $1,000 or more to unsecured creditors to be eligible to file for bankruptcy.

Can sole proprietorships and partnerships file for business bankruptcy?

Yes, sole proprietorships and partnerships can file for business bankruptcy, and they would need to work with a Licensed Insolvency Trustee to do so. In these forms of business, it is the sole proprietor or partners who would be filing bankruptcy. As this would be a consumer insolvency, the bankruptcy rules dealing with the insolvency of individuals would guide this kind of bankruptcy process.

Business Insolvency Conclusion

Navigating business insolvency in Canada is a multifaceted challenge that requires careful consideration and strategic planning. As a licensed insolvency trustee, I have explored the intricacies of insolvency law and its impact on businesses, creditors, shareholders, and employees. Understanding the complexities of insolvency is pivotal for businesses to weather financial storms successfully for a brighter financial future.

The role of corporate lawyers and accountants in helping to guide businesses through insolvency proceedings is an important one. By recognizing the significance of legal responsibilities, financial analysis, and compliance with accounting standards, businesses, with the help of a Licensed Insolvency Trustee and insolvency legal counsel can tackle insolvency issues with confidence and resilience.

I hope you enjoyed this business insolvency Brandon’s Blog. Individuals and business owners must take proactive measures to address financial difficulties, consumer debt and company debt and promptly seek assistance when necessary. It is crucial to recognize that financial stress is a prevalent concern and seeking help is a demonstration of fortitude, rather than vulnerability. Should you encounter challenges in managing your finances and find yourself burdened by stress, do not delay in pursuing aid.

Revenue and cash flow shortages are critical issues facing people, entrepreneurs and their companies and businesses with debt problems that are in financial distress. Are you now worried about just how you or your business are going to survive? Are you worried about what your fiduciary obligations are and not sure if the decisions you are about to make are the correct ones to avoid personal liability? Those concerns and more associated with your company debt are obviously on your mind.

The Ira Smith Team understands these overwhelming debt financial health concerns. More significantly, we know the requirements of the business owner or the individual who has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious. It is not your fault you can’t fix this problem on your own and it does not mean that you are a bad person. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. You have only been taught the old ways. The old ways do not work anymore.

The Ira Smith Team uses innovative and cutting-edge methodologies, to adeptly navigate you through the intricacies of your financial challenges ensuring a resolution to your debt-related predicaments without resorting to the rigours of the bankruptcy process. We can get you debt relief now! We have helped many entrepreneurs and their insolvent companies who thought that consulting with a Trustee and receiver meant their company would go bankrupt.

On the contrary. We helped turn their companies around through financial restructuring. 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.

The Ira Smith Trustee & Receiver Inc. team understands 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 listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, to begin your debt-free life, Starting Over, Starting Now.

Tags bankruptcy proceedings, benefit of creditors, business bankruptcy, business insolvency filings, canadian businesses, company debts, consumer insolvency, Corporate Bankruptcy, corporate insolvency, employee wages, financial distress, insolvency of individuals, insolvency options, insolvency process, insolvency professionals, insolvency trustee, insolvency trustees, legal proceedings, secured creditor

Brandon Blog Post

THE COMPLETE CORPORATE BANKRUPTCY IN CANADA GUIDE: WHAT EVERY BUSINESS OWNER NEEDS TO KNOW

Post author By Brandon Smith
Post date January 30, 2023

business bankruptcy in canada

Corporate bankruptcy in Canada: Introduction

Are you a business owner with company financial difficulties and apprehensive about the possibility of corporate bankruptcy and is it something that you will have to seriously consider? Corporate bankruptcy in Canada process can be complex and overwhelming, but understanding it is necessary for making authoritative decisions about your business.

In this Brandon’s Blog, I will analyze the ins and outs of corporate bankruptcy in Canada, including the different types, the steps in filing for corporate bankruptcy, the impact on creditors and shareholders, and alternatives to consider. By the end of this Brandon’s Blog, you will have a better understanding of corporate bankruptcy in Canada and be able to understand how to make the best decision for your business.

Explanation of what corporate bankruptcy in Canada is

The corporate bankruptcy process in Canada – otherwise known as commercial bankruptcy or incorporate business bankruptcy – is a legal means by which an incorporated business that is unable to pay its debts can be liquidated, and its liabilities discharged. This process allows the business to liquidate its assets and redistribute the value among its creditors. The process is intended to give an honest, but unfortunate corporate debtor a discharge from most debts while ending the business of that corporation.

It is important to note that corporate bankruptcy is different from personal bankruptcy which is a legal process through which an insolvent individual can substantially reduce debt and hopefully restructure. Unlike an individual who files for personal bankruptcy, it is not intended that the bankrupt corporation will come out of bankruptcy through a discharge process.

If single individuals are operating businesses and are considering business bankruptcy, then we are talking about the bankruptcies of sole proprietorships. If more than one person is operating a business partnership, then we need to think of the issues in a partnership bankruptcy. Either way, we have insolvent persons, which means personal bankruptcy, which is not the subject of this Brandon’s Blog.

It’s important to note that the process of corporate bankruptcy in Canada is complex and can only be handled by a licensed insolvency trustee. The Trustee will help you understand the process and the options available to your corporation and then prepare the documents required to submit the bankruptcy filing.

In Canada, if a corporation is bankrupt, it is subject to both the federal Bankruptcy and Insolvency Act (Canada) (“BIA”) and relevant provincial regulations. The BIA outlines the procedure for managing a corporate bankruptcy, while provincial law governs other aspects of the business such as labour laws.

corporate bankruptcy in canada

A brief overview of how the process of corporate bankruptcy in Canada begins

Navigating corporate bankruptcy in Canada can be complicated, as there are numerous steps that need to be taken. To begin, it is important to consult with a licensed insolvency trustee to review the financial details of the company, including income, profits, liabilities, and any personal guarantees. From there, the next step is to determine the misogynist options.

The board of directors needs to hold a meeting, in order to pass a resolution permitting the corporation to file for bankruptcy. This process is initiated by a director, or the single director, who will then execute the necessary bankruptcy paperwork.

Types of corporate bankruptcy in Canada

There are two types of corporate bankruptcy in Canada: liquidations and reorganizations. Although a reorganization is not an actual bankruptcy, the phrase “bankruptcy protection” is used to describe a formal reorganization. So for the purposes of this Brandon’s Blog, we will consider both as types of bamkruptcy.

The type of corporate bankruptcy in Canada proceedings can often provide a good indication as to whether the unsecured creditors will get all, a portion, or none of what they are owed.

corporate bankruptcy in canada

An overview of the 2 types of bankruptcy proceedings available to Canadian businesses

Liquidation

The process of corporate bankruptcy involves a business ceasing operations as it is unable to fulfill its financial obligations and the demand for its goods and services has become obsolete. This form of corporate bankruptcy is commonly referred to as liquidation.

Canadian bankruptcy proceedings must adhere to Canadian bankruptcy law under the BIA. This law contains similar liquidations to Chapter 7 of the U.S. Bankruptcy Code. Commencing the process of bankruptcy liquidation in Canada is the initial step.

It all starts with the board of directors of the corporation getting together and deciding to file for bankruptcy. One of the directors, or a single director, will then have to sign the official documents for the bankruptcy process.

Once the liquidation process has been initiated, the corporation’s assets, subject to the rights of any creditor having security over all or some of the assets, are taken over by the Trustee. The Trustee will sell the corporate assets and the proceeds will be distributed among the creditors according to the priority established by law. The corporation will then be laid to rest, as it will no longer operate as a legal entity.

Reorganization

Corporate reorganization is one of the alternatives to bankruptcy. It is a process in which a process for a company that is facing financial difficulties is able to restructure its outstanding debt and its operations in order to improve its financial situation. In Canada, the primary statutes for corporate reorganization are the Companies’ Creditors Arrangement Act (CCAA) and the BIA. These laws are similar reorganizations under Chapter 11 of the U.S. Bankruptcy Code.

The CCAA provides a thoroughfare of debt reorganization for corporations on a larger scale, as the amount owed by the company must exceed $5 million. Through this federal legislation, the debtor corporation can still operate while reaching an approved plan of arrangement with its creditors.

For corporations that do not reach this $5 million threshold, the Division I Proposal under the BIA can be utilized. The BIA provides for the restructuring of insolvent corporations and individuals.

The CCAA is a federal statute that allows for the sale of an insolvent business, with a reach that transcends the wideness of the whole Canadian nation and even extends beyond its borders.

The process of corporate reorganization under either the CCAA or BIA begins with the corporation filing for protection under the appropriate Act. In the case of the CCAA, the filing is with the court. Under the BIA, the filing is with the Office of the Superintendent of Bankruptcy Canada.

The debtor will then be safeguarded with all its possessions. Then, the corporation will be allotted a specified value of time – typically 30 to 45 days – to present a plan of arrangement. This plan must be approved by the creditors and the court in order to move forward. When the plan of arrangement is given the thumbs up, it can be set into motion.

So corporate reorganization in Canada is a process in which a company that is viable but is facing financial difficulties is allowed to restructure its business debts and operations in order to modernize its financial situation. The CCAA is mainly used for larger corporations and the BIA for smaller ones. Both legislations provide a process to restructure a company while under the protection of the court and it’s intended to be a way to save a company while protecting the rights of the creditors.

Advantages and disadvantages of corporate bankruptcy in Canada

Liquidation

Advantages of corporate liquidation using corporate bankruptcy in Canada:

Allows an incorporated entity that is unable to pay its debts to file for bankruptcy, as per the BIA.
Allows for the liquidation of resources and redistribution of that value among creditors, which can provide relief for the corporation and its creditors.

Disadvantages to bankruptcy and corporate liquidation using corporate bankruptcy in Canada:

The Canada Business Corporations Act (CBCA) prevents a company in bankruptcy from seeking dissolution under the CBCA.
Unfortunately, specific liabilities or obligations of the corporation are passed to its directors. This would put personal assets at risk.
The process is time-consuming and may also be expensive.
Unfortunately, the director’s reputation may moreover be tarnished in the process.

Reorganization

Advantages of reorganization under corporate bankruptcy in Canada:

Can uplift profits and increase efficiency.
Can extend the life of the business.
Can modernize strategy and financial arrangements.
Could be done informally without a court process by agreement between the debtor and its creditors or formally under either a proposal as outlined in part III of the BIA or a plan of arrangement under the CCAA.

Disadvantages of reorganization under corporate bankruptcy in Canada:

It may not work.
Decreased employee morale and concern among customers.
Can be a significant time investment with potential setbacks in cash flow
If the financial matters are so dire that a reorganization is not viable, the remaining option is full bankruptcy, which results in the liquidation of resources to pay creditors.
corporate bankruptcy in canada

Filing a voluntary assignment into bankruptcy for corporate bankruptcy in Canada

Overview of steps involved in filing for Corporate Bankruptcy in Canada

Finding a Licensed Insolvency Trustee (formerly called a trustee in bankruptcy) (LIT) and retaining the LIT to make an informed decision about proceeding with bankruptcy.
One of the directors (or sole director) will be required to execute corporate bankruptcy papers
Upon bankruptcy assignment, the LIT will notify business creditors of the bankruptcy proceeding.
Hold a meeting of creditors.
Conduct a sale of assets.
Carry out its other duties in accordance with the BIA.

Note: The above steps are a general outline and the specific process may vary depending on the case. It’s advisable to seek guidance from a licensed insolvency trustee and a legal professional to ensure compliance with the laws and regulations.

Essential paperwork and information

In order to file a voluntary assignment for corporate bankruptcy in Canada, and get to the point of holding the First Meeting of Creditors, the following documentation and information are typically required:

Provide the LIT with the corporate minute book, seal and accounting records.
Fully signed minutes of a validly held meeting of directors resolving that the corporation file an assignment in bankruptcy and appointing either a director or senior management person to be the Designated Officer to sign all bankruptcy documents and attend the First Meeting of Creditors.
A completed Voluntary Assignment of the corporate debtor, prepared by the LIT and signed by the Designated Officer.
The LIT prepared statement of affairs, reviewed, approved and sworn/confirmed by the Designated Officer, which includes information about the debtor’s assets and the names and addresses of all known creditors and the amounts owing to each of them.
The LIT will take the necessary steps to lodge the paperwork with the Office of the Superintendent of Bankruptcy, who in turn will give the Certificate of Bankruptcy – marking the very beginning of bankruptcy proceedings in Canada. The moment the Certificate is issued will be the exact time the corporate bankruptcy in Canada is activated.
The LIT then prepares the statutory notice to creditors which is mailed to all known creditors with a notice of the time and place of the First Meeting of Creditors will be held and also includes a proof of claim form for the creditors to complete fully and file with the LIT.
The LIT will also prepare the bankruptcy notice to be placed in a local newspaper to advertise for creditors to contact the Trustee.
The LIT prepares its Report on Preliminary Administration to provide necessary information to the creditors about the causes of the corporate bankruptcy in Canada, the available assets to be sold, if any and other important information. The LIT’s report is distributed at the First Meeting of Creditors.

In a voluntary assignment, the LIT is picked by the debtor. In an involuntary assignment, the LIt is suggested to and chosen by the court. In issuing the Certificate, the LIT choice is confirmed by the Office of the Superintendent of Bankruptcy. However, it is ultimately up to the creditors attending and voting at the First Meeting of Creditors to either confirm the appointment of the LIT or substitute the LIT with another one (don’t worry about the mechanics for now!). The LIT will be responsible for overseeing the administration of the debtor’s estate and distributing the proceeds to creditors.

It’s important to note that the above list is not exhaustive and additional documentation and information may be required by the Office of the Superintendent of Bankruptcy(OSB) or the appointed Trustee. It’s recommended to seek professional advice from a LIT, a lawyer or both, before filing for a voluntary assignment in bankruptcy.

The OSB plays an important part in the area of insolvency

The OSB is tasked with keeping orderly standards for the supervisory oversight of stakeholders within the insolvency process, creating an accessible archive of public records, compiling and analyzing data, and enforcing the BIA and CCAA regulations. Furthermore, the OSB is devoted to facilitating an effective and efficient insolvency framework in Canada.

The OSB in Canada is responsible for the supervision and regulation of the Canadian insolvency system, and overseeing the administration of all insolvency proceedings described as bankruptcies, commercial reorganizations, Division I commercial proposals, consumer proposals and receiverships.

The effects of corporate bankruptcy in Canada on creditors and stockholders

How corporate bankruptcy affects the distribution of assets among creditors

Divvying up resources among those owed money in a corporate bankruptcy in Canada can be quite intricate and can be affected by various elements, such as the kind of bankruptcy declared and the company’s ownership and organizational setup.

When a company files for bankruptcy, its day-to-day operations will typically come to a halt. All of the corporation’s assets will be sold off and the proceeds will be divided among its creditors. In Canada, this process can have a major impact on how the assets are divided up among those who are owed money.

The BIA requires the LIT to take control of all the unencumbered assets, sell them and assigns orders of importance to the many claims against the debtor. The net sale proceeds are then doled out to creditors depending on the priority of the claims.

In a nutshell, the types of creditors and the order of priority is:

Trust claims, including unremitted employee payroll withholdings.
Secured lenders.
Preference is given to certain kinds of unsecured debt.
Ordinary unsecured creditors are last.

In Canada, though the assets of a company are distinct from the owners’ individual wealth, banks will always take security on the company’s assets when loaning funds and anticipate the entrepreneur to provide some kind of collateral. It bears mentioning that this is a standard requirement.

Should the proceeds of the company assets fail to cover the bank debt in the event of a Canadian bankruptcy, the owners will be called upon to make good on their personal liability and may be faced with the liquidation of some or all of their personal belongings to make up the difference.

What sort of ramifications does corporate bankruptcy in Canada have on the equity holders and their privileges?

Generally, when it comes to bankruptcy proceedings, it’s usually shareholders who are left holding the shorter end of the stick. Most often, they don’t get anything back after all other creditors have been taken care of– leaving them with nothing but the realization that their investments have gone down the drain. Furthermore, they forfeit any rights they once held with the company.

If any of the shareholders are also in a director position, then they will have the added worry about whether there are any debts that are also a director liability. Legal advice is always required by directors of an insolvent company. In next week’s Bradon’s Blog, I will talk about recent developents arising from an Ontario court decision about the directing mind of a bankrupt corporation.

The one small solace they may have is that Canada Revenue Agency will acknowledge the corporate bankruptcy in Canada as a legitimate means of allowing shareholders to deduct the value of their shares as a loss on their tax return.

corporate bankruptcy in canada

Alternatives to Corporate Bankruptcy in Canada

For a business that is viable yet unable to pay off its debts, there are 5 alternatives to corporate bankruptcy in Canada that must be explored:

Implement tighter controls over spending and create a cash-flow budget to see if costs can be cut or eliminated, freeing up funds to pay off debts.
Refinance existing debt in order to consolidate it into more manageable payments.
The shareholders provide a fresh injection of funds.
Informal out-of-court debt settlement through direct negotiation with creditors.
Selling redundant or no longer-needed assets to raise cash for debt repayment.

Rather than going through the effort of reorganizing debt under the CCAA or BIA, a corporate workout is an amicable arrangement between the company and its creditors that allows them to come to a mutually-satisfactory resolution without resorting to legal proceedings and a reorganization court case. This is seen as an advantageous alternative to a formal filing.

If all other solutions fail to prevent a company in Canada from going bankrupt, then the CCAA or BIA’s restructuring provisions should be carefully considered to potentially save the company, its jobs and business assets.

If the company is not viable or profitable and is in a state of financial distress, then a secured lender can exercise their rights through a receivership process. This could be used in conjunction with a corporate bankruptcy in Canada if the situation calls for that.
The reasons why bankruptcy and receivership may be needed to work in tandem are complex and are best left as a topic for another day.

Corporate bankruptcy in Canada: Conclusion

I hope you enjoyed this corporate bankruptcy in Canada Brandon’s Blog.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. Are you now worried about just how you or your business are going to survive? Those concerns are obviously on your mind. Coming out of the pandemic, we are now worried about its economic effects of inflation and a potential recession.

The Ira Smith Team understands these concerns. More significantly, we know the requirements of the business owner or the individual that has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious.

It is not your fault you can’t fix this problem on your own. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. 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 have helped many entrepreneurs and their insolvent companies who thought that consulting with a trustee and receiver meant their company would go bankrupt. On the contrary. We helped turn their companies around through financial restructuring.

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 listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, Starting Over, Starting Now.

corporate bankruptcy in canada — *business bankruptcy in canada*

Brandon Blog Post

ENTREPRENEURIAL CANADIAN BUSINESS BANKRUPTCIES: THE TIP OF A HUGE ICEBERG?

Post author By Brandon Smith
Post date August 22, 2022

business bankruptcies

Insolvency for business including business bankruptcies

In the last two Brandon’s Blogs, I wrote about personal bankruptcy. The topic was the class of debts not released by a person’s discharge from personal bankruptcy. In this Brandon’s Blog, I discuss insolvency for business, and specifically, business bankruptcies, as a result of the recent report by the Canadian Federation of Independent Business (CFIB).

If a business is incapable to pay its financial obligations as they come due, it might deal with some negative effects, including legal action. However, this does not have to damage a business’s credibility forever, if management is prepared to take the required corrective activity before it is far too late.

If a business that is unable to pay its debts cannot turn itself around, it may be forced to declare business bankruptcies, which can have a devastating impact on the business and its employees.

What will happen to the company if it is insolvent?

If your company is financially troubled, it may need to assign itself into bankruptcy. Nonetheless, business bankruptcies are not always the automatic result of being insolvent. If your business is experiencing financial problems, it is essential to speak to a bankruptcy lawyer or a licensed insolvency trustee to review all of your realistic choices. Bankruptcy should be the last choice when nothing else will work.

Case in point, the recent report issued by the CFIB on small business insolvency says that its survey finds that only 10% of business owners would certainly declare bankruptcy if they were to shut down completely.

The CFIB report is meant to give a more comprehensive view of Canadian business insolvencies (bankruptcies + proposals). The data indicates that the number of businesses filing for bankruptcy has been on the rise and is now at the highest level of business insolvencies in two years.

As we recover from the COVID-19 pandemic, Canadian small businesses face a number of challenges in returning to normal operations, including debt from necessary pivots, increased costs of doing business and trouble finding employees to work.

The CFIB study found that half of the businesses (54%) are still seeing below-normal revenues, and over 60% are carrying unpaid debt from the pandemic. Small businesses are under significant financial pressure, with little room to maneuver.

Insolvency fears among Canadian small businesses are alarmingly high, and the true scope of the problem may be even greater than what is reflected in official statistics. Business owners have a range of options available to them when faced with financial difficulties, and bankruptcy is only one of these.

The CFIB recently released report details the different ways the surveyed small businesses in Canada said they would take if they had to shut down as follows:

46% – Just ceasing all operations permanently.
27% – Selling or transferring ownership to another party.
10% – Filing for business bankruptcies or business bankruptcy protection.
10% – Unsure at this time.
7% – Exploring all options.

Interestingly enough, recapitalizing the legal entity or taking on more business debt by way of loans was not one of the answers. That should tell you how tapped-out Canadian small business shareholders are and that the businesses have no borrowing base room left on their assets to increase their bank borrowings.

business bankruptcies

Business bankruptcies: The insolvency of a business – First steps

The first step for the Directors is to consult with a business bankruptcy attorney/lawyer and a licensed insolvency trustee (formerly called a bankruptcy trustee) (sometimes referred to as “Trustee”). The lawyer can confidentially discuss the situation with the Directors and develop a proposed plan to deal with the situation.

The licensed insolvency trustee will review the company’s financial position and proposed game plan, and consider all options available to the company and its Directors. In Canada, the only party licensed to run the administration of bankruptcy, or any formal insolvency process, is a licensed insolvency trustee.

The licensed insolvency trustee will want to understand fully the company’s assets and liabilities. With a clear understanding of the company’s financial status, the Trustee can explain how best to implement the plan to either restructure or liquidate the company. If necessary, the Trustee can tweak the game plan.

The next question is whether the business is viable. Does it produce goods or services that are still in demand in the marketplace? If not, one option to consider is selling the business to another company that has complementary lines of business. Would the business fit in neatly with the buyer’s existing operations?

Could it perhaps be integrated in some way that would make your standalone business, which is not currently viable, become viable? Keep in mind for this to be an option, the company would need to have a solvent business.

If you can’t sell your unprofitable but still solvent company, you could always explore the option of a statutory liquidation. This would involve liquidating all the company assets, paying off any outstanding liabilities, and then distributing the remaining amount to shareholders.

Companies under business bankruptcy protection

If your business is struggling financially but still has potential, you may be able to restructure it through business bankruptcy protection. In Canada, there are two main possible federal statutes to restructure under; (i) the Bankruptcy and Insolvency Act (Canada); and (ii) the Companies’ Creditors Arrangement Act. One of these restructuring legal proceedings is an alternative to business bankruptcies.

A proposal under the Bankruptcy and Insolvency Act (Canada) (“BIA”)

The BIA is the canadian bankruptcy legislation containing all the rules and regulations in Canada’s bankruptcy regime. However, it also includes bankruptcy options such as a Division I Proposal for debtors who owe more than $250,000. This kind of financial restructuring allows the company to remain in business while it restructures. The essence of a BIA Proposal restructuring is that the company is offering a contract to its unsecured creditors to pay less than the total it owes those unsecured creditors in return for eliminating all of its unsecured debt.

To ensure that the company can successfully implement a proposal and pay its post-filing debts, the licensed insolvency trustee will need to be satisfied that all relevant information has been obtained and that the company has a good chance of success. The company’s cash flow will need to be monitored to ensure that it is sufficient to run the business and pay for the goods and services it needs going forward.

The Trustee will send all known creditors a copy of the proposal, a portion of the company’s statement of affairs listing the company’s assets and liabilities, a list of creditors, a proof of claim form, a voting letter and the Trustee’s report providing additional information and the Trustee’s recommendation.

The meeting of creditors is then held and if the proposal is accepted by the required majority of unsecured creditors, the licensed insolvency trustee takes the proposal documentation to Court for approval. If the proposal is accepted by creditors and approved by the court, the company is now bound by the proposal.

If the companies successfully complete their financial restructuring proposal, they will avoid business bankruptcies. However, if the company fails to get creditor or court approval, or fails to successfully complete the proposal, it will automatically go into bankruptcy under the BIA.

Financial restructuring under a Companies’ Creditors Arrangement Act (“CCAA”) plan of arrangement

Restructuring through a CCAA plan of arrangement is a financial restructuring process that provides companies with a way to restructure their debts and other obligations. This process can help companies to avoid the business bankruptcy process and to continue operating while they repay their creditors. It is very similar to a BIA proposal. The main difference is that it is only for companies with debts of $5 million or more, it is much more court-time intensive and there is no automatic business bankruptcy provision. In a CCAA, the licensed insolvency trustee acts as a monitor under the CCAA to administer the restructuring process.

When you hear when a company files for protection, or bankruptcy protection, in Canada it is usually under the CCAA. In the United States, it is under Chapter 11 of the US Bankruptcy Code.

business bankruptcies

Licensed insolvency trustees say if companies are insolvent and not viable the best option may be business bankruptcies

We still want to know if the business is viable when it is insolvent. If it is viable, then we could look at doing a restructuring as outlined above. After the company is restructured, we could either keep running it or look to sell it. If there are impediments to a successful restructuring, the approach we take even through business bankruptcies will be different than if it is not a viable business model any longer.

If the business is not viable and insolvent, then there is not much that can be done. The business is financially unhealthy and the marketplace no longer wants the product or service this business provides. Therefore, we are looking at bankruptcy if there is not a secured creditor who is going to enforce their security through a receivership. Receivership is a whole topic unto itself which is for a different day.

As a licensed insolvency trustee, I am responsible for understanding all the issues in business bankruptcies and preparing the necessary documentation for limited companies to assign themselves to business bankruptcies. A meeting of directors must be called for them to resolve that the company should put its business into bankruptcy and appoint one of the directors to be the designated officer.

The officer designated by the board should be the director with the most intimate knowledge of the company’s affairs. This officer will sign the bankruptcy documentation and be the company’s representative at the first meeting of creditors.

The Trustee attends the director’s meeting and prepares the meeting minutes, or the minutes will be prepared by the directors and provided to the Trustee. Then, the licensed insolvency trustee prepares the bankruptcy documents which include the statement of affairs, which is the listing of assets and liabilities, names addresses and amounts owing to each creditor. The designated officer then attests to the truthfulness of the information and signs it all.

The companies are insolvent and have to go into business bankruptcies

The Trustee files the necessary documentation with the Superintendent of Bankruptcy, who issues a certificate of bankruptcy and appoints the Trustee. That’s when a company is officially entered into the bankruptcy process and the bankruptcy proceedings begin. This is the process of a company filing an assignment into bankruptcy.

So in a commercial 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?

What happens when the certificate is issued for business bankruptcies?

If every one of the assets is covered by a lender’s valid security which makes the security cover the assets in priority to the rights of a Trustee, then the bankruptcy trustee would not take steps to handle the company’s secured assets unless the secured lender particularly requests the Trustee to do so separately either as Receiver or Agent of the secured lender.

So let’s simply take the case where in bankrupting the company, the Trustee is handling the assets either due to the fact that they’re not secured or because the secured financial institution wants the Trustee to handle the secured assets within the bankruptcy (which is not normal, but not unheard of either).

The Trustee needs to make certain that the corporate assets are safeguarded, that they’re appropriately insured and that the Trustee has carried out an inventory of those assets.

The Trustee then needs to figure out how is it going to offer those business assets for sale. The Trustee must do a risk-reward analysis to see if it makes good sense for the Trustee to run the business. If so, is the Trustee looking for a sale of assets as a going-concern business sale or just shut down the business and liquidate the assets once the reasons for running the business have been met?

If it doesn’t make sense for the Trustee to run the business, the Trustee will close it down and take a look at the alternatives available. The assets can be sold by public auction, private sale or by tender sale separating the assets up into blocs. If the assets are such that they would attract a retail audience where consumers would pay more than if it was sold in lots to wholesalers, then a retail sale would be the way to go. The nature of the assets will identify what sort of sale of assets the Trustee runs.

Business bankruptcies: How will I know what’s going on?

The Trustee alerts all of the company’s creditors listed in the sworn statement of affairs of the bankruptcy in a mailing. The Trustee includes a proof of claim form so that all creditors can file their claim. The Trustee examines the claims and holds the first meeting of creditors.

After the first meeting, a meeting of inspectors is held. Inspectors are creditor representatives who assist the Trustee in providing approval for the Trustee’s recommendations and actions it wishes to take. This includes any approval of asset sales the Trustee recommends after making an informed decision. Inspectors also need to approve the Trustee’s Final Statement of Receipts and Disbursements near the end of the administration of all business bankruptcies.

Finding a Licensed Insolvency Trustee

I hope you enjoyed this Brandon’s Blog on business bankruptcies. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

If you would like our free e-Book, “Closing A Business Without Going Bankrupt” CLICK THE PICTURE BELOW

Brandon Blog Post

BUSINESS BANKRUPTCY: SHOULD CANADA ADOPT A SATISFYING COMPLETE USA-STYLE PROCESS FOR SMALL BIZ RESTRUCTURING?

Post author By Brandon Smith
Post date February 21, 2022

As the COVID-19 pandemic continues, we hope that you, your family, and your friends are safe, healthy, and secure. Ira Smith Trustee & Receiver Inc. is fully operational, and both Ira and Brandon Smith are readily available for phone or video consultations.

Business bankruptcy: Insolvency for business

Hundreds of thousands of small businesses around the world have been affected by the lockdowns caused by the Coronavirus pandemic. There have been many company closures, and others have been forced to restructure. Although restructuring may be painful, it is necessary if you want to come out from under crippling debt and grow your business.

Many businesses experiencing financial difficulties simply shut their doors rather than restructure. Most small businesses cannot reorganize their company debts under the Bankruptcy and Insolvency Act (Canada) (BIA) due to the high costs of administration. A small business owner does not benefit from spending money to have a business bankruptcy. It is therefore only possible to lock the door and give the key to one of the secured creditors, usually the bank or to the landlord.

Globally, small and medium-sized businesses play an important role. In 2019, I wrote a Brandon Blog post about business bankruptcy issues that US bankruptcy experts identified as problems for small business bankruptcy restructuring with Chapter 11 restructurings. This process was not working for these businesses. Chapter 11 restructurings are expensive, ineffective, and impractical. The US insolvency system therefore could not help many businesses in need of restructuring in the USA.

In this Brandon Blog, I provide an update on the successful experience and unanimous calls to extend the US subchapter V of Chapter 11 of the United States Bankruptcy Code. Therefore, I revisit the question as to whether such a small business bankruptcy tool should exist in Canada.

Business bankruptcy and Insolvency at a glance

Congress passed the Small Business Reorganization Act (SBRA) on July 23, 2019. On August 1, the Senate passed the bill. In August 2019, it became law.

SBRA makes business bankruptcy protection easier for small and medium-sized enterprises. Chapter 11, subchapter V of the US Bankruptcy Code (Title: Small Business Debtor Reorganization) is the result. Increasing its affordability will help save otherwise viable owner-managed businesses.

SBRA defines a small company as one with non-contingent debts of $2,725,625 or less, leaving out financial obligations to affiliates or parties not dealing at arm’s length, and which elects to be dealt with under the SBRA. A new subchapter V to Chapter 11 of the US Bankruptcy Code is included in the Act. In this new approach, small companies are able to restructure efficiently with greater ease and at a lower cost.

The primary purpose of this legal process is:

Secured creditors and unsecured creditors cannot lodge a Chapter 11 restructuring plan that it is prepared to support. Only businesses with debt problems can. In most cases, the company’s plan must be filed within 90 days of when it filed for bankruptcy protection.
To manage each case, trustees similar to those selected in a personal restructuring (Chapter 13) situation will be selected.

A creditors committee will not be established.
If the home loan/mortgage secured by the home was used to fund the business, the Chapter 11 plan can change the legal rights of the lender.
It is possible for a Court to approve a small business bankruptcy restructuring plan without the approval of any class of creditors. If the court is satisfied that all creditors are treated fairly and no creditor class is prejudiced, it will approve the restructuring plan,.
A restructuring plan must ensure that all earnings received during the restructuring will be available to fund the restructuring for a period of 3 to 5 years in order to be fair and equitable.

Consequently, it is the responsibility of the creditors to carefully review all cases filed under SBRA. The creditors should consult bankruptcy experts for guidance. Their role will be to ensure that restructuring cases are fairly examined by courts and that all creditors are treated equally. For those without the support of their creditors, this will be particularly true.

It will be very interesting to see if this new legislation accomplishes its goal of simplifying and reducing the costs associated with business bankruptcy restructuring for small businesses.

business bankruptcy

Business bankruptcy: The bottom line on the SBRA

This tool was successful in protecting small businesses from bankruptcy liquidation. Republicans and Democrats alike have embraced this obscure federal program that allows small-business owners to shed debt in bankruptcy protection so much, they are now considering extending it. Republican and Democratic agreement on anything is very rare these days.

In a Subchapter V bankruptcy, closely-held businesses can file for bankruptcy much more quickly and inexpensively than they would in a Chapter 11 bankruptcy. The government appoints a trustee with limited powers who assesses the company’s finances and helps reach a consensus with creditors. Rather than official creditor committees, there is only a trustee appointed by the government. Furthermore, company owners don’t risk losing control of their companies to creditors, a common outcome in bankruptcy.

When the pandemic ravaged thousands of small businesses, the government raised the debt threshold to qualify for Subchapter V to $7.5 million from $2.7 million and extended it an additional year. In the absence of another renewal, the higher limit will expire next month, shutting out thousands of companies that could benefit as they deal with new challenges such as supply chain issues and higher interest rates.

**The main benefits of the SBRA business bankruptcy protection**

Quick response

Since the program began, more than 2,800 cases have been filed. Restructuring advisers predict that number will rise as banks and landlords become more aggressive in collecting overdue loans and back rent.

Government assistance and eviction moratoriums have enabled small businesses to exist in limbo but that won’t last. Experts predict that more subchapter V filings will take place in 2022.

The American Bankruptcy Institute studies bankruptcy statistics. They state that the quick turnaround time of Subchapter V has attracted and will attract more filings.

Corporation envy

Some distressed corporations are so envious of Subchapter V that restructuring advisers are hunting in vain for strategies that might let their bigger clients qualify. For example, there was a company with 130 company-owned locations that filed for bankruptcy protection in 2020. It initially attempted to file individual brick-and-mortar locations under the program, before switching to a chapter 11 proceeding.

This business bankruptcy restructuring statute has proved to be a lifeline for smaller companies and should be extended.

business bankruptcy

The Canadian business bankruptcy and restructuring landscape

Canada lacks an equivalent streamlined corporate insolvency restructuring statute. There are two Canadian insolvency regimes: the Companies’ Creditors Arrangement Act (CCAA) and the BIA. For large corporations, the CCAA applies. The process is heavily governed by the courts. In my opinion, it would not be possible to sufficiently streamline the CCAA for small businesses to have enough staying power during restructurings under the CCAA to survive.

A streamlined restructuring process is possible under the BIA for small and medium-sized businesses. There was a streamlined restructuring process for individuals so that consumer bankruptcies can be avoided. These consumer proposals are found in Part I Division II of the BIA. So why not a special restructuring proposal section for smaller companies? I called it a new Part I Division III of the BIA in my earlier Brandon blog I referred to above – a general scheme for small business proposals (SBP) section of the BIA. The aim is to provide small businesses with the opportunity to restructure business debts on a cost-effective basis rather than to make Canadian bankruptcies the only real option to consider.

In the US, using a streamlined restructuring model has been so successful. That’s why I am bringing back my idea from 2019. I won’t repeat everything, however. You can see what my recommendations were by reading my blog – BANKRUPTCY EXPERTS WEIGH IN ON US & CDN SMALL BIZ RESTRUCTURING.

Business bankruptcy: The debtor (owes money) not the creditors (are owed money) would control the reorganization

An insolvent corporation, sole proprietors, or partnership that is set up to conduct business should be able to access the new SBP. The total amount of their debt should not exceed $1.5 million. Such a number is not based on any scientific calculations.

In order to determine an appropriate debt level, Statistics Canada could assess the average debt load of Canadian businesses. In this discussion, I’ll use the $1.5 million amount.

Loans from affiliates or from people with a non-arm’s-length relationship would not be excluded as in US law. A Canadian company’s first funding is usually provided by its owners. Chartered banks require owners to make a commitment with their personal assets before they are willing to lend. To get the business off the ground, the owners sacrificed their own money. Because they had to finance the company that way, I would not exclude that debt from the calculation.

The Canadian business landscape differs from the American one. We tend to be smaller in size. For non-arm’s-length debt to be excluded, the debt threshold would have to be lowered. Keeping that debt threshold in mind, let us include all debt, whether it’s secured or unsecured, related, or arms’ length.

This new SBP would not be applicable to people who are not conducting business in their own name. Those people will fall into either Division I or Division II restructuring proposals which include two mandatory credit counselling sessions.

Restructuring proposals can currently only be administered by a licensed insolvency trustee (formerly called a bankruptcy trustee). A licensed insolvency trustee is known as the Proposal Trustee under Division I Proposals. As part of Division II personal restructurings, they are known as the Administrator.

Therefore, I will call the Trustee the Small Business Administrator for the new SBP. As a result, it is obvious that it is the restructuring of a business that qualifies under Division III. The use of the word “administrator” is consistent with the words used by Parliament for consumer proposals. Again, this means that the Trustee is administering a streamlined restructuring for small businesses.

The main points I recommended in my earlier blog in a Canadian small business streamlined restructuring statute include:

Currently, it is possible for a company or person to begin the restructuring process by filing either a Notice of Intention to Make A Proposal (NOI) or a Proposal itself. Regardless of the filing method, there is a 10-day limitation period under which the debtor must submit a cash-flow statement that has been reviewed and approved by both the company or person and the Trustee. A company or individual filing an NOI then has an additional 20 days (30 days after the filing date of the NOI) to file a Proposal (unless the court extends the time).

I propose extending the deadline for filing a Proposal from 30 days to 90 days after the filing of an NOI, without the need to go to the Court for an extension. As a result, the business should have enough time to get all of its tax and corporate filings up to date and, hopefully, avoid the need to adjourn the meeting of creditors.

A creditor would file a proof of claim in the same way they do now in a BIA Proposal.
There is a concept of deemed creditor approval and deemed court approval in the current consumer proposal legislation. A creditors’ meeting is not necessary unless creditors holding 25% of the proven claims request it. In addition to the proof of claim process, creditors receive voting letters to cast their vote when they submit a proof of claim. If there is no obligation to convene a meeting, a consumer proposal is considered accepted.If a consumer proposal is either accepted or deemed accepted by the creditors, the Trustee Administrator will probably not need to seek approval from the Court. There are no deeming provisions in corporate restructuring, either for creditor acceptance or for court approval. The new SBP section should include similar provisions regarding creditor acceptance and court approval. This would save time and money, thus enhancing efficiency.
The Meeting of Creditors if required, would be held 21 days after the Trustee Administrator recognizes that the small business restructuring did not receive deemed approval.
When creditors fail to vote in favour of a Division I Proposal or when the court does not approve it, it is automatically deemed an assignment in bankruptcy. This does not apply to consumer proposals. Debtors return to their normal state without creditor protection after an unsuccessful consumer proposal attempt.For the new streamlined business restructuring proposal law, if creditors fail to accept or the court does not approve the restructuring plan, then that does not automatically mean there is a bankruptcy. The debtor small business would simply return to its normal unprotected insolvent state and must defend itself against creditors.A voluntary assignment into bankruptcy may result, but not automatically. A bankruptcy proceeding does not make sense in certain corporate situations. If a chartered bank holds security over all assets it will enforce its security through a receivership, this is especially true.

Business bankruptcy summary

A streamlined small business bankruptcy protection section is working in the US and both Republicans and Democrats want it extended and made to be able to handle even more bankruptcy cases. So why should we not have one in Canada too? I know that it could work.

I hope you found this business bankruptcy Brandon Blog informative. Although nothing is guaranteed, managing your debt in a way that will allow you or your company to be able to afford it, will lead to your financial success. It will also give you the best shot at having a financially stress-free life.

Are you or your company in financial distress and a debt crisis? Are you embroiled in costly litigation or a crushing debt load and need a time out in order to restructure? Do you not have adequate funds to pay your financial obligations as they come due? Are your credit cards maxed out? Are you worried about what will happen to you? Do you need to search out easy-to-understand debt solutions and realistic ones for your family debt problems? Is your company in financial hot water?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a Government of Canada-approved debt settlement plan to do that. It is an alternative to bankruptcy. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

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Brandon Blog Post

INSOLVENCIES IN CANADA: THE CALM BEFORE THE SCARY STORM?

Post author By Brandon Smith
Post date June 24, 2020

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Insolvencies in Canada introduction

Insolvencies in Canada are at a record low. Is it the calm before the scary storm?

Consumer insolvencies in Canada have been driven to unusually reduced degrees in recent years because of sustained low-interest rates and strong property values.

In this Brandon’s Blog, I discuss what could very well happen in the 4th quarter of 2020 and into 2021.

Insolvencies in Canada – recent history

The lower number of insolvency filings is not a new phenomenon. Insolvencies in Canada have been at historically low levels for many years. It was not until last year that personal insolvency filings increased year over year.

In 2019, consumer insolvencies for the 12-month period finishing December 31, 2019, increased by 9.5% compared to the 12-months ending December 31, 2018. Personal bankruptcy decreased by 1.2%, while consumer proposals were 17.9% higher.

After many successive years of steady decline, business bankruptcies in Canada had reached a plateau level in 2019. Typically speaking, business bankruptcies in Canada have been stable.

During the 1st quarter of 2020, the Office of the Superintendent of Bankruptcy Canada (OSB) reports that between the 4th quarter of 2019 and the end of the 1st quarter of 2020, for insolvencies in Canada:

Total insolvency filings decreased by 5.4%.
Consumer filings were down by 5.5%.
Business insolvency filings were 2.6% lower.
In all cases, bankruptcy filings were drastically lower and restructuring proposals were essentially flat.
For personal filings, Alberta was basically flat while the other provinces and territory showed decreases.
In business filings, Ontario showed a slight increase (8.3%) and British Columbia showed a huge increase (43.5%). Again, it was restructuring proposals, not bankruptcy, making up the majority of business filings. All other provinces and territories showed a decrease.

Then the effects of the economic shutdown of the country started taking hold in April 2020.

April 2020 insolvencies in Canada and the United States

The total variety of insolvencies in Canada (both bankruptcy and proposal filings) decreased by 38.7% in April 2020 contrasted to March 2020. Personal bankruptcy decreased by 41.5% and proposals decreased by 37.2%.

The number of insolvencies filed in April 2020 was 43.5% less than the total in April 2019. Consumer bankruptcies decreased by 43.1%, while consumer proposals decreased by 54.8%.

The story in the United States is very similar. American Banker reports that presently in the US, personal bankruptcy filings are actually reduced year over year. It reports that according to information from the federal courts, there were 186,000 consumer bankruptcy cases in the first quarter of 2019. By comparison, there were 175,000 for the initial quarter of 2020.

A lot more noticeably, the rate of consumer insolvency cases for April of 2020 was 46% lower than in April of 2019.

There are a variety of reasons in both countries. From my discussions with a couple of US bankruptcy lawyers, I am friendly with, it seems the reasons in both countries are generally the same.

In no particular order, the main reasons are:

Mortgage payment deferral programs masking what might otherwise be increased delinquencies.
Lower overall credit card spending while people are at home in self-quarantine.
Various government programs supplying much-needed cash to unemployed people and businesses.
Government programs deferring the timing for filing income tax returns and the payment of income tax.
Moral suasion so far stopping banks, credit card companies and collection agencies from aggressively making collection attempts during this time.
The closure of the courts making it impossible to sue anyone.
insolvencies in canada

The economy is starting to reopen

In conjunction with the federal government, the provinces and territories are starting to reopen cities and businesses. No doubt there will be a lot of growing pains as the economy reopens. What should we expect? What will it mean for insolvencies in Canada?

In his first speech as Governor of the Bank of Canada, on June 22, 2020, Tiff Macklem stated that he expects there will be an initial boost to the Canadian economy as it reopens and activity resumes. He does not expect that good news to last very long. Rather, he expects there will be the 2nd stage of economic recovery that will certainly be long and slow, due to the remaining unpredictability around the coronavirus.

The federal government will need to wean Canadians off of the various support programs. When that happens, all the financial pain currently hiding under the radar will rise to the forefront. COVID-19 support programs, payment deferrals and other “time outs” will end and the courts will reopen. Creditors will get back to business as usual in chasing delinquent accounts. The federal, provincial and territorial governments will feel they have done enough to the tune of trillions of dollars. Their attitude will be, in so many words, it is now time for you to stand on your own two feet again.

In fact, some government attitudes are already changing.

Will temporary layoffs be a harbinger for business insolvencies in Canada?

Throughout the coronavirus pandemic, BC seemed to handle their lockdown and other COVID-19 things a bit differently than the other provinces and territories. As they now consider reopening, BC businesses are worried.

British Columbia businesses are discouraged by Labour Minister Harry Bains’s failure to recognize the seriousness of problems facing the mainly small and medium-sized businesses. Their issue is the possibility for thousands of companies to have to make an insolvency filing. Their main worry is that they will be compelled to make severance payments as a result of the unexpected scenarios brought by the COVID-19 pandemic.

The Minister has it within his power to supply a Ministerial Order to expand the temporary layoff time frame under the Employment Standards Act to provide companies with the breathing room” required to survive, recoup, and facilitate return-to-work for laid-off staff.

All provinces and territories face extraordinary difficulties as a result of the economic results from COVID-19. Few business owners can plan for or have the cash-on-hand to terminate all or a considerable part of their labour force at the same time throughout the very best of times.

BC companies will be faced with fears as the clock ticks to target dates beginning in very early July requiring several companies to either recall or permanently terminate laid-off staff members. They don’t have enough business or money to rehire everyone. They also don’t have the cash to make the severance payments. Without legislative support, this problem will face all Canadian businesses.

In the nick of time, the federal government has come to the rescue. On June 23, 2020, Prime Minister Justin Trudeau announced that the federal government has expanded the period for temporary layoffs by as much as 6 months. Employers now have more time to recall staff members who were laid off due to COVID-19.

Now, for employees who were laid off before March 31, the government has proposed that their employers have the earlier of 6 months or up until December 30 to recall their staff. For employees laid off between March 31 and September 30, their company will have up until December 30, unless a later recall day was given on their layoff notification.

I caution that this is a proposal floated by our PM right now and not actual legislation. Labour legislation is largely left up to the provinces and territories. It is interesting to note that the Feds seem to be stepping into this. As we all know, ultimately, businesses will either be able to survive or will have to restructure under our laws for insolvencies in Canada.

Will extending employee recalls be a harbinger for personal insolvencies in Canada?

So now that employees can expect to remain unemployed for longer, what is that going to mean? For several years now polls have shown that Canadians are on the brink of insolvency. As I already mentioned, rock-bottom interest rates and rising real estate values, leading to lots of home equity lines of credit room to borrow on. This has kept Canadians in debt and out of becoming one of the statistics for insolvencies in Canada.

So the question is, once the Canada Employment Response Benefit (CERB) runs out, what will the unemployed do? Seems to me there are a few options, none of them good:

Cut back on spending as much as possible. In places like the Greater Toronto Area (GTA), you have to be a magician to be able to live on $2,000 per month (after putting away the amount you will have to pay eventually in CERB income tax).
Burn through the rest of your savings until you have no cash.
As a result of 1 or 2, go deeper into debt on your lines of credit and credit cards until you have no more borrowing room.

Once all of this has happened, the only thing left to do will be to consult with a licensed insolvency trustee (formerly called a bankruptcy trustee) to discuss your realistic options for eliminating debt.

Insolvencies in Canada summary

I hope you have found the insolvencies in Canada Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Tags american banker, bank of canada, bankruptcy trustee, business bankruptcy, canada employment response benefit, cerb, consumer insolvencies, Consumer Proposal, coronavirus, covid-19, covid-19 pandemic, debt relief, insolvencies in canada, ira smith team, licensed insolvency trustee, Office of the Superintendent of Bankruptcy Canada, personal insolvency, tiff macklem

Brandon Blog Post

HOW HERTZ TEACHES US MODERN AND RISKY RULES OF BUSINESS BANKRUPTCY IN CANADA AND THE USA

Post author By Brandon Smith
Post date June 8, 2020

The Ira Smith Team is fully operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Stay healthy, well balanced and safe and secure everyone.

If you would prefer to listen to the audio version of this business bankruptcy in Canada and the USA Brandon’s Blog, please scroll to the bottom and click play on the podcast.

Business bankruptcy in Canada Introduction

Late in the day on Friday, May 22, 2020, Hertz Global Holdings Inc. (Hertz) filed for Chapter 11 bankruptcy in Delaware. The filing gives Hertz some breathing room to operate its business. During this time, Hertz also needs to come up with a business turnaround plan and a debt restructuring plan that creditors can support. The movement of Hertz stock last week teaches us some modern and risky rules of business bankruptcy in Canada and the United States.

Corporate bankruptcies and the Hertz investors

Hertz stock closed on the NASDAQ exchange on May 22 at US$2.84. It dipped to a low of US$0.40 on May 26. Legendary investor Carl Icahn sold all of his Hertz shares at an average price of $0.72. He dumped his 39% stake in Hertz at a loss of nearly $2 billion. Last Friday Hertz shares closed at US$2.57 per share. This morning, the trading touched US$3.40 per share.

So Hertz is up handsomely since May 26. Hertz has filed for bankruptcy protection. It doesn’t make sense that investors should be pushing the stock up. Hertz is selling off its fleet and further depressing the used car market. So far there is no indication that a business plan and debt reduction plan has been developed, let alone accepted by the creditors.

As far as assets, they have locations and a database of customers. But every major rental car company also has locations and a database. Whenever business and leisure travel resumes to pre-COVID-19 levels, if you can’t rent a car from Hertz you will rent it from a different company. So what are the non-fleet assets worth?

So on the surface, the investor money finding a home in Hertz stock and pushing up the stock price doesn’t make sense. So, are there savvy investors getting into Hertz or are they all just following the herd and will all end up losers?

Why Hertz filed for Chapter 11 bankruptcy protection

Since 2014, Hertz has had four different CEOs. It is difficult to develop and implement a cohesive business strategy with such turmoil in the senior management ranks. As the coronavirus pandemic brought travelling to a sudden halt, Hertz suffered dramatically as a mass of its revenue depended on business travellers and vacationers renting vehicles when arriving at their destination airport. Nobody knows how long it will take until travel gets back to where it was and what Hertz needs it to be.

Hertz’s debt has been increasing as it invested heavily in its vehicle fleet. They may have also missed the mark in the mix of vehicles consumers want, requiring it to take on even more debt to make further fleet purchases. Hertz could no longer afford to make the interest payments on its debt load. At the time of its bankruptcy filing, Hertz had US$1 billion of cash and US$13 billion of debt.

The $13 billion in financing Hertz made use of to acquire its fleet of 500,000 automobiles. The financing was done via what is known as asset-backed securities. These are connected straight to the value of the vehicles. When the value of the cars drops, Hertz must make up the difference in cash within about three months, unless values rebound before that time.

However, with the coronavirus pounding the brakes on the economy and eliminating employment for so many, the drop in the value of used vehicles is expected to remain that way for a long time. Hertz knew that it could not make up the difference to its lenders when they made a demand, which was their right. Hence the bankruptcy filing.

The modern risky rules of investing in business bankruptcy in Canada and the USA

Normally, in a public company restructuring, it is not only the creditors that take a hit. Shareholders usually get a good drubbing. Share values fall and new shares are issued to raise capital. This further dilutes the holdings and value of those holdings for shareholders. But investors must believe that Hertz will come back. How else can you explain the surge in the share price?

Before this year, the company had ten consecutive quarters of positive growth. They were still losing money, just not as much. Investors must believe that Hertz will be able to survive. They must believe that the company although leaner and smaller, this is the time to jump on an opportunity to make money.

I am not a financial advisor, I am not saying whether this is a good or bad investment. It certainly is a very risky one. All I am saying is that as a licensed insolvency trustee (formerly called a trustee in bankruptcy) administering business bankruptcy in Canada, this does not make any sense to me.

I guess only time will tell if these investors pushing up the stock price are insightful risk-takers or losers. Carl Icahn doesn’t believe it.

Business bankruptcy in Canada and the USA summary

I hope you have found this business bankruptcy in Canada and the USA Brandon’s Blog helpful.

The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Stay healthy, well balanced and safe and secure everyone.

Tags Bankruptcy, bankruptcy filing, bankruptcy protection, business bankruptcy, business bankruptcy in canada, carl icahn, chapter 11, chapter 11 bankruptcy, company restructuring, corporate bankruptcies, covid-19, Hertz, Ira Smith Trustee, licensed insolvency trustee, restructuring, trustee in bankruptcy

Brandon Blog Post

CAN YOU FILE PERSONAL AND CORPORATE BANKRUPTCY? SMALL BUSINESS OPTIONS

Post author By Brandon Smith
Post date January 17, 2018

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.

Can you file personal and corporate bankruptcy: Better to be separate legal entities

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:

Unremitted source deductions from employee payroll
Net HST owing
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

Bankruptcy of the Company: Introduction

Bankruptcy of the Company: Understanding Business Bankruptcy

Liquidation

Reorganization

Liquidation under bankruptcy of the company

Reasons for Bankruptcy of the Company

Financial Challenges

Operational Issues

External Factors

Understanding the Ripple Effects of Bankruptcy

Understanding The Immediate Effects on Your Credit Score

Loss of Trust Among Stakeholders

Legal Limitations Post-Bankruptcy

Reflecting on Financial Health Post-Bankruptcy

Understanding Your Financial Landscape

1. Gather Your Financial Documents

2. Create a List of Assets and Debts

3. Set Realistic Financial Goals

Using Financial Statements as a Roadmap

Visualizing Your Financial Position

Crafting a Proactive Recovery Blueprint

1. Establishing a Comprehensive Budget

2. Exploring Cost-Cutting Avenues

3. Implementing Financial Management Systems

Rebuilding Business Credit: It’s a Marathon, Not a Sprint

1. Opening New Credit Lines Responsibly

2. Using Secured Credit Cards

3. The Importance of Timely Payments

4. Learning from Others

Repairing Your Company’s Image: The Reputation Rehabilitation

Repairing Trust through Transparent Communication

Leveraging Digital Platforms for Positive Narratives

Documenting Changes to Restore Confidence

Innovating Your Way Back to Success: Growth Beyond Recovery

1. Identifying New Markets and Opportunities for Diversification

2. Investing in Tech and Innovative Practices

3. Building Alliances and Partnerships

The Importance of Innovation

Measuring Progress and Celebrating Wins Along Your Journey

Establishing KPIs to Monitor Your Recovery Journey

Acknowledging Small Milestones

Bankruptcy of the Company FAQ

1. What happens when my company goes bankrupt?

2. How does company bankruptcy affect my personal credit score?

3. What are the immediate consequences of bankruptcy beyond finances?

4. How can I understand my financial situation after company bankruptcy?

5. How do I rebuild business credit after bankruptcy?

6. How can I repair my company’s reputation after bankruptcy?

7. What are some strategies for growth after recovering from bankruptcy?

8. How do I measure my progress and stay motivated during recovery?

Bankruptcy of the Company: Conclusion

Corp Bankruptcy Introduction

Understanding What Is Corp Bankruptcy

Types of Corp Bankruptcy Proceedings in Canada

Liquidation

Reorganization

Liquidation under Corp Bankruptcy

Reorganization: A Path to Recovery

Division I Proposals vs. Bankruptcy: Understanding Key Legislation and the Nuances

Receivership: When Secured Creditors Take Action

Corp Bankruptcy: Weighing the Pros and Cons

Advantages and Disadvantages of Liquidation

Advantages and Disadvantages of Reorganization

Advantages and Disadvantages of Receivership

Corporate Recovery and Restructuring: Exploring Alternatives to Corp Bankruptcy in Canada With Other Potential Recovery Options

Cost-Cutting and Budgeting

Debt Refinancing

Shareholder Investment

Informal Debt Settlement

Asset Sales

Corp bankruptcy FAQs

Conclusion: Seeking Expert Guidance for Corp Bankruptcy

What does bankruptcy protection mean? Canada’s Bankruptcy & Insolvency Act

What Does Bankruptcy Protection Mean? Legal Framework of Bankruptcy Protection

What Does Bankruptcy Protection Mean? Types of Bankruptcy Protection

Canadian Liquidation Bankruptcy (known in the United States as a Chapter 7 bankruptcy)

Consumer Proposal (known in the United States as a Chapter 13 bankruptcy)

Commercial Proposal (known in the United States as a Chapter 11 bankruptcy)

Restructuring under the Companies’ Creditors Arrangement Act (this is the closest we have to a US Chapter 11 bankruptcy protection filing)

What Does Bankruptcy Protection Mean? Key Concepts of Bankruptcy Protection

*Advantages and Dis**advantages of Reorganization*

*Canadian L**iquidation Bankruptcy (known in the United States as a Chapter 7 bankruptcy)*