A Recent Ontario Court Decision Every Business Owner Should Know About
As a Licensed Insolvency Trustee practicing in the Greater Toronto Area, I’ve guided many businesses through difficult financial times. Today, I want to share an important recent court decision showing the legal development of how companies handle creditor payments when facing money troubles.
What Happened: The $400,000 Payment That Backfired
A company called Specialty Chemical Industries was struggling financially
They owed over $11 million to various parties in respect of various secured loans and unsecured creditor suppliers’ unpaid debts
One supplier, American Pacific Corporation (AmPac), was their main supplier
Specialty paid AmPac $400,000 to get $100,000 worth of chemicals
They hoped this would help them fill an order for their main customer
Less than two months later, Specialty went bankrupt
The court ruled that this $400,000 unsecured debt payment was a “preference” – meaning Specialty unfairly favoured one creditor (AmPac) over all their other creditors. AmPac was ordered to return the money.
When a business is going under, the law says all creditors should be treated fairly. Section 95 of the Bankruptcy and Insolvency Act (BIA) calls this “creditor equality.”
A preference happens when:
A debtor pays one creditor shortly before bankruptcy (within 3 months)
This payment gives the payee better treatment than others
The debtor knew it couldn’t pay all its debts
The law assumes any payment made within 3 months of bankruptcy was intended to prefer that payee. It’s up to the business to prove otherwise.
Why Did Specialty’s “Business Survival” Argument Fail?
The argument was that Specialty paid AmPac under unsecured credit terms because they needed to keep their business going. It was argued this wasn’t preferring one over others – it was trying to save the company for everyone’s benefit.
The court didn’t buy this argument. Here’s why:
No solid plan: Specialty had no clear plan showing how this payment would help the company and all stakeholders
Poor financial position: After the payment, they had only $35,000 left but owed $11 million
Low profit margins: Their profit margins were only 2-10%, not enough to dig out of debt
No testimony: No company director testified to explain their plan
Failed strategy: Their main customer left anyway
FULL DISCLOSURE: My Firm was the licensed insolvency trustee administering the company director’s bankruptcy. The personal bankruptcy occurred by the court issuing a Bankruptcy Order in January 2019, through a legal proceeding initiated by RPG. Both the director and my Firm have since been discharged. My Firm was not involved in this court case I am writing about.
What This Means for Your Business
If your business is facing financial problems, this case offers important lessons:
Do:
Treat all creditors fairly if you’re approaching insolvency
Document your business plans that show how payments benefit all stakeholders
Seek professional advice early from a Licensed Insolvency Trustee
Don’t:
Pay one unsecured party a large sum when you can’t pay others
Make last-minute payments, hoping to save your business without a solid plan
Assume “business necessity” justifies preferring one over another
I often see business owners make decisions based on hope rather than reality when facing financial trouble. They think, “If I just pay this one supplier, I can keep going.”
The court’s message is clear: hope isn’t enough. If you can’t prove your plan truly benefits all stakeholders,, not just one, the payment could be considered a preference and later clawed back.
Key Takeaways
All unsecureds rank equally under bankruptcy law
Payments made shortly before bankruptcy are carefully scrutinized
Commercial pressure doesn’t justify preferring one over another
Only evidence-based rescue plans can justify paying one over others
Protecting Your Business from Preference Issues
As a business owner, you need to understand these rules before financial troubles hit. If you’re struggling to manage all your payments, it’s time to speak with a Licensed Insolvency Trustee about your options.
We can help you develop strategies that comply with the law while giving your business the best chance for recovery, or at least ensure you will not be giving yourself bigger headaches and legal liability if bankruptcy becomes necessary.
Final Thoughts on Fairness
The law may seem harsh, but it serves an important purpose: ensuring everyone is treated fairly when a business fails. Without these rules, stronger or favoured suppliers would get paid while others get nothing.
Remember: when it comes to creditor treatment during financial distress, good intentions aren’t enough. The law demands fairness – even when that’s difficult.
Preference FAQ: Your Questions Answered
What exactly does “anti-preference” mean in bankruptcy law?
The anti-preference rules in the BIA stop businesses from playing favourites when they’re about to go bankrupt. These rules make sure all regular unsecureds are treated fairly and share equally in whatever assets are left. This is the cornerstone of Canadian bankruptcy law – fairness for all stakeholders.
When might a payment to a creditor be considered unfair?
A payment might be considered unfair (or “void”) when:
It’s made within 3 months before bankruptcy
It’s made while the business can’t pay all its debts
It gives that party better treatment than others
If these conditions are met, the court assumes the payment was meant to give special treatment.
What is a “rebuttable presumption” regarding creditor payments?
This legal term simply means the court starts by assuming any payment made to a creditor within 3 months of bankruptcy was intended to favour them. It’s then up to the business to prove this wasn’t their intention. Even if a creditor was putting pressure on the business, that pressure alone isn’t enough to justify the payment.
Can a business explain that they were under pressure from a creditor?
Yes, but with limits. A business can tell the court about pressure put on them to help explain their situation, but pressure alone won’t justify the payment. The court will consider this information as part of the whole picture, not as a valid reason for favouring one over others.
How can a business prove they weren’t trying to favour one creditor?
A business must show that its main goal wasn’t to give one stakeholder special treatment. They need to prove, with clear evidence, that they had a different reason for making the payment, like trying to keep the business going with a solid plan that would benefit all stakeholders in the long run.
When is “trying to save the business” a valid reason for paying just one creditor?
This reason only works if the business had a realistic plan that would help everyone, not just one. Having a vague hope or wish isn’t enough. The business needs to show:
A sensible business plan
Evidence that the plan could realistically work
Proof that the plan would benefit all stakeholders, not just one
That the financial situation wasn’t already hopeless
Why does a business continuity plan need to be “reasonable”?
The “reasonable plan” requirement ensures businesses don’t drain their remaining assets, helping one or two parties while leaving nothing for everyone else. A reasonable plan aligns with bankruptcy law’s core purpose – fair treatment for all. If a payment is part of a genuine strategy that could improve the situation for everyone, then it isn’t considered unfair to others.
What factors do courts look at when deciding if a business plan was reasonable?
Courts consider several practical factors:
Was there a clear, sensible business plan?
Was the business already too far gone financially?
Did the potential benefits outweigh the payment amount?
Would a bankruptcy trustee have made the same decision to maximize recovery for all creditors?
Six Key Lessons from the Preference Case
This case teaches us important lessons about how creditors are treated when a business is heading toward bankruptcy. Let’s break down what the Court of Appeal for Ontario said in simple terms:
1. All Creditors Must Be Treated Equally
The court firmly reminded us that the foundation of bankruptcy law is treating all creditors fairly. Section 141 of the BIA states that “all unsecured creditors rank equally and share equally in the bankrupt’s assets.” This isn’t just a nice idea – it’s the law.
2. Payments Shortly Before Bankruptcy Can Be Reversed
When a business pays one creditor right before bankruptcy (within 3 months), that payment can be “voided,” – meaning the creditor has to give the money back. This happens when:
The business was already unable to pay all its debts
The payment gave that creditor better treatment than others
In this case, AmPac had to return the entire $400,000 payment.
3. Courts Assume Preferential Intent
If arrangements with creditors, including a payment, check the boxes above, the court starts with the assumption that the business intended to give that creditor special treatment. This is called a “rebuttable presumption,” which means it’s up to the business to prove otherwise.
4. Pressure from a Supplier Isn’t an Excuse
The court clarified an important point: just because a creditor was demanding payment doesn’t justify giving them special treatment. While the court will consider creditor pressure as part of the whole story, it can’t be the main excuse for the payment.
5. Business Continuation Plans Need to Be Realistic
The court established a clear standard: if a business claims they made a payment to stay afloat (not to prefer one creditor), they must show they had a reasonable plan. This plan must:
Be more than just wishful thinking
Shows real potential to benefit all creditors, not just one
Be something a bankruptcy trustee might reasonably do to help all creditors
6. Courts Look at Hard Facts, Not Just Good Intentions
When deciding if a business plan was reasonable, courts look at practical factors:
Was there a sensible, detailed business plan?
Was the business already beyond saving?
Did the potential benefits outweigh the payment amount?
Would the plan help satisfy all creditor claims?
The Hard Truth About Equality
The outcome of this case might seem harsh. AmPac provided goods, Specialty made a payment, and now AmPac has to give the money back. But bankruptcy law has a greater purpose – making sure one creditor doesn’t get special treatment while others get nothing.
In the end, the court ordered AmPac to return the entire $400,000. This reinforces an important principle: when a business is heading toward bankruptcy, fairness to all creditors matters more than the survival of one relationship.
For business owners, the message is clear: when you’re facing financial trouble, you can’t play favourites with creditors – even if it feels like the only way to keep your business alive. The law demands fairness, even when fairness is difficult.
As a licensed insolvency trustee serving the Greater Toronto Area, I encourage business owners to view financial difficulties not as failures but as challenges that can be addressed with proper guidance. By understanding the warning signs of company insolvency and seeking professional advice early, many businesses can find a path forward – whether through restructuring, strategic changes, or in some cases, an orderly wind-down that protects their future opportunities.
Remember: The earlier you seek help for company insolvency concerns, the more options you’ll have.
If you or someone you know is struggling with too much debt, remember that the financial restructuring process, while complex, offers viable solutions with the right guidance. As a licensed insolvency trustee serving the Greater Toronto Area, I help entrepreneurs understand their options and find a path forward during financial challenges.
At the Ira Smith Team, we understand the financial and emotional components of debt struggles. We’ve seen how traditional approaches often fall short in today’s economic environment, so we focus on modern debt relief options that can help you avoid bankruptcy while still achieving financial freedom.
The stress of financial challenges can be overwhelming. We take the time to understand your unique situation and develop customized strategies that address both your financial needs and emotional well-being. There’s no “one-size-fits-all” approach here—your financial solution should be as unique as the challenges you’re facing.
If any of this sounds familiar and you’re serious about finding a solution, reach out to the Ira Smith Trustee & Receiver Inc. team today for a free consultation. We’re committed to helping you or your company get back on the road to healthy, stress-free operations and recover from financial difficulties. Starting Over, Starting Now.
The information provided in this 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 should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc., and any contributors do not assume any liability for any loss or damage.
I know it looks weird, but I have noticed through our software that people wanting to find out more about the Canadian bankruptcy process are searching for the two-syllable phrase “bank ruptcy“. I started to investigate this phenomenon. It turns out that individuals may often search for the term “bankruptcy” by entering “bank ruptcy” due to a phenomenon known as “typo-based search behaviour.” This behaviour occurs when users inadvertently type a word incorrectly while still approaching the correct spelling closely enough that their search engine or browser can suggest the accurate term.
In this instance, individuals may intend to find information about “bankruptcy” but mistakenly type “bank ruptcy.” The search engine or browser, recognizing the intent, may then offer “bankruptcy” as a suggested correction, which users can select to access the desired information.
Moreover, some users may be utilizing mobile devices or keyboards with non-standard layouts, which can contribute to typographical errors or misspellings. In such instances, search engines or browsers often retain the capability to discern the user’s intent behind the query and provide relevant search results.
It is also important to acknowledge that search engines, such as Google, are designed to improve user experience by interpreting and correcting common typing errors, thereby facilitating more effective information retrieval without necessarily teaching the person the correct spelling.
Bank ruptcy: What is Bankruptcy and Where Did the Word Originate?
The term “bankruptcy” has its origins in ancient civilizations, notably in Greece and Rome, where debtors had avenues for seeking relief from their creditors through various forms of debt forgiveness or restructuring. However, the modern legal framework and procedures associated with bankruptcy are a more recent development, emerging in Europe during the 16th century.
The word bank ruptcy is likely derived from the Italian two-word phrase “banca rupta,” which translates to “broken bench” or “broken table.” In this context, “banca” refers to a “bench” or “table,” while “rupta” means “broken.” This term was historically employed in medieval Italy to describe a merchant or trader who was unable to meet their financial obligations. Business was conducted at the benches or tables of the various merchants. Consequently, their “bench” or “table,” representing their business, was broken and rendered inoperative if they ran out of money.
In the 14th century, the Old French term “banqueroute” evolved from the phrase “banquer ost,” which followed the Italian meaning and further contributed to the development of the modern word and concept of bankruptcy as we understand it today.
The term evolved to include the concept of a legal process by which a person or business could be declared insolvent and their assets liquidated to pay off creditors. Being insolvent is the financial condition that can lead to the legal bankruptcy process to allow the honest but unfortunate debtor to have financial recovery.
bank ruptcy
Bank ruptcy: Are you ready to take control of your financial life and gain peace of mind?
Are you facing overwhelming debt and experiencing persistent financial stress and uncertainty? Do you aspire to liberate yourself from the burdens of debt and emerge more resilient and financially savvy? If so, you are not alone.
Millions of individuals worldwide are navigating similar challenges, and it is common to feel isolated in your struggle with debt issues. However, there is a solution. By identifying the underlying causes of debt and formulating a tailored recovery plan, you can take significant steps toward financial stability.
If you are prepared to regain control of your finances, overcome debt, and lay the groundwork for a more secure future, you have come to the right place. Let us embark on this journey to financial freedom from debt together.
Bank ruptcy: Reasons for Filing for Bankruptcy
Common financial difficulties
Consumers
Many Canadians who are considering a consumer proposal or personal bank ruptcy filing face similar financial challenges, including:
It’s essential for individuals experiencing financial difficulties to seek professional help, such as credit counselling or speaking to a licensed insolvency trustee (formerly called a bankruptcy trustee), to address their debt and develop a plan for financial recovery.
Businesses
Common financial difficulties Canadian businesses who need to file either a financial restructuring proposal or bank ruptcy often exhibit common danger signals such as:
If a business faces financial struggles, it’s important to, it’s important to consult a licensed insolvency trustee. They can advise on turnaround strategies and help create a recovery plan to tackle these challenges effectively.
Impact of debt on individuals and businesses
Debt can significantly influence both individuals and businesses in various ways. For individuals, the burden of overwhelming debts may result in considerable financial stress, which can manifest as anxiety and, in severe cases, depression. When debt becomes unmanageable, it can hinder one’s ability to meet daily expenses, potentially leading to missed monthly payments, impaired credit scores, and a pervasive sense of despair.
Additionally, consumer debts can restrict an individual’s financial flexibility, making it challenging to make substantial purchases, assume new financial responsibilities, or pursue long-term financial aspirations. Moreover, the strain of financial difficulties can impact personal relationships, as stress related to finances often leads to conflicts and tension among family and friends.
Similarly, for businesses, the implications of debt issues can be equally challenging. Elevated outstanding debt levels can create cash flow issues, complicating a company’s ability to fulfill its financial commitments, including employee salaries, supplier payments, and tax obligations.
Furthermore, substantial debt can curtail a business’s capacity to invest in new opportunities, foster innovation, or expand operations, ultimately hindering growth and sustainability. Understanding debt’s effects is crucial for individuals and businesses to navigate financial challenges effectively and maintain long-term stability.
Bank ruptcy: The Bankruptcy Process in Canada
Obtaining a Free Debt Assessment
If you’re having difficulty keeping up with your debt payments and feeling stressed about your financial situation, you might want to seek help from a licensed insolvency trustee. These professionals are qualified to guide you through the often complicated process of managing debt. One of the key services they provide is a free debt assessment.
This assessment involves a thorough look at your finances, including your income, expenses, assets, and debts. The trustee will work with you to pinpoint the main issues contributing to your debt and help create a personalized plan to get you back on your feet.
The best part is that a free debt assessment from a licensed insolvency trustee is completely free, with no obligation to proceed with any debt relief options. This means that you can get a clear understanding of your financial situation and explore your options without incurring any costs or risks.
During the assessment, the trustee will also be able to advise you on the best course of action to take, whether that’s a debt consolidation loan, a debt management plan, or even bank ruptcy. By taking advantage of a free debt assessment from a licensed insolvency trustee, you can gain the clarity and confidence you need to take control of your finances and start building a brighter financial future.
Necessary Forms to Declare Bankruptcy
The bankruptcy procedure in Canada is a complex and intimidating process, but it’s essential to understand the necessary forms and procedures to navigate it successfully. In Canada, the necessary bankruptcy paperwork is to declare bank ruptcy is prepared by a licensed insolvency trustee, who will guide you through the process and ensure that all required documents are completed accurately and on time.
More than that, the insolvency trustee must be able to explain your options to you and help you feel comfortable that the option you choose, is the best one for your circumstances. The information that the insolvency trustee uses to prepare the forms comes from the initial intake form the licensed trustee provides to you. From that form, the Trustee can then prepare the required documents.
The main documents required to file either a consumer proposal or for bank ruptcy are:
Either the consumer proposal or the assignment in bankruptcy.
The statement of affairs outlines the assets and liabilities of the debtor and includes other important information for both unsecured creditors and the Office of the Superintendent of Bankruptcy Canada to consider.
The debtor’s statement of monthly income and expenses.
The notice to the debtor outlining their responsibilities in the insolvency process chosen, be it a consumer proposal or bankruptcy.
Your licensed insolvency trustee will provide you with these forms and guide you through the process of completing them accurately and submitting them to the Office of the Superintendent of Bankruptcy Canada. By completing these forms and following the necessary procedures, you can ensure that your bankruptcy is processed efficiently and effectively and that you can start rebuilding your financial future.
Role of Licensed Insolvency Trustees
Licensed Insolvency Trustees are essential participants in the Canadian debt relief landscape. These professionals possess specialized expertise in the field of insolvency, and their work is regulated by the Canadian government, which oversees the entire insolvency process and bankruptcy laws in the country. As the only individuals authorized by the federal government, insolvency trustees play a critical role in assisting both individuals and businesses as they navigate the often complex procedures associated with debt relief, including bankruptcy, consumer proposals, and financial restructuring.
Insolvency trustees serve as neutral third parties, allowing them to offer objective advice and support to those experiencing financial challenges. They collaborate closely with creditors to negotiate settlements and develop payment plans, and they can facilitate debt restructuring efforts that lead to a more sustainable financial future.
Engaging the services of a licensed insolvency trustee can provide individuals and businesses with valuable reassurance, as they can trust in the expertise and guidance of these qualified professionals during their journey toward financial recovery.
bank ruptcy
Advantages of Filing for Bank ruptcy in Canada
Filing for a consumer proposal, corporate restructuring or bank ruptcy for individuals or corporate bankruptcy in Canada can provide several advantages, including:
Debt Relief: It provides a fresh start by discharging most of your debts, allowing you to start over financially.
Protection from Creditors: An insolvency process provides automatic protection from creditors, which means they cannot pursue you for payment or take legal action against you.
Stop Wage Garnishments: A consumer proposal or bankruptcy can stop wage garnishments, which is a legal process when judgment creditors take a portion of your paycheque to pay off debts.
Stop Collection Calls and legal proceedings: Upon filing, you can stop collection calls and letters from creditors by referring them to your insolvency trustee. This gives you peace of mind and reduces stress.
Impact on Credit Score: It is true that an insolvency process initially worsens a person’s credit score. However, it allows you to use certain techniques that we teach you to rebuild credit and over time improve your credit rating.
Protection of Assets: A consumer proposal can protect all of your assets. Bankruptcy protects your exempt property. In many cases, it stops your home or car from being seized by creditors.
Simplified Financial Life: The insolvency process simplifies your financial life by eliminating debt and providing a clear plan for moving forward.
Professional Guidance: Insolvency trustees provide guidance and support throughout the process.
Discharge of Debts: Over time, the insolvency process allows you to discharge most debts, including credit card debt, loans, and other unsecured debts.
Fresh Start Perspective: Bankruptcy, a consumer proposal and financial restructuring all provide a fresh start, allowing you to start over and make a new beginning.
Reduced Stress: A successful insolvency process reduces stress and anxiety caused by debt, allowing you to focus on rebuilding your life.
Protection from Tax Debt: It protects you from tax debt which can be a significant burden for many individuals.
It’s important to note that bankruptcy is a serious legal process and should only be considered as a last resort. There are various debt relief options as alternatives to bankruptcy for you to consider before resorting to bankruptcy. It’s essential to consult with a Licensed Insolvency Trustee to determine which of the many options is best for your specific situation.
Bank ruptcy: Resources for Bank ruptcy Information
There are several resources available for bankruptcy information in Canada, including:
Office of the Superintendent of Bankruptcy Canada: The Office of the Superintendent of Bankruptcy Canada is the federal agency responsible for overseeing the bankruptcy and insolvency system in Canada. Their website provides information on bankruptcy, consumer proposals, and other debt-relief options.
Licensed insolvency trustees: They and their websites can They and their websites can provide guidance and advice on bankruptcy and other debt-relief options.
Credit Counselling Services: Legitimate non-profit c services, such as the Credit Counselling Society, provide free or low-cost advice and guidance on managing debt and avoiding bankruptcy. Financial institutions: Many banks and credit unions provide resources and information about bankruptcy and debt relief options.
Government Websites: The Government of Canada’s website provides information on bankruptcy, including a guide to bankruptcy and a list of licensed insolvency trustees.
bank ruptcy
Bank ruptcy Conclusion: Moving Forward After Bank ruptcy
Here is what I tell everyone about moving forward after bank ruptcy to have a successful and stress-free life:
Take responsibility: Acknowledge that you made mistakes and take responsibility for your financial decisions. This will help you to learn from your mistakes and positively move forward.
Continue budgeting: Part of the personal insolvency process involves financial counselling and proper budgeting. A budget shows you what you earn each month and therefore how much you have, after tax, to spend. Allocating your earnings over your essential needs first and sticking to that plan will keep you out of debt trouble in the future.
Establish an emergency fund: It is important to try to save part of your monthly income to create an emergency fund that can pay for unforeseen expenses. This will help you reduce the need for debt when unexpected financial demands arise.
Focus on rebuilding credit: Rebuilding credit takes time, but it’s essential to start building a positive credit history. Make on-time payments, keep credit utilization low, and monitor your credit report regularly.
Support: Finally, It’s important to reach out for support from friends, family, or even a financial advisor. Having a solid support system can keep you motivated and focused on your goals.
I hope you enjoyed this bank ruptcy Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring? 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 bank ruptcy. 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. 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.
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.
I hope you’re safe and well. If your Canadian company can’t pay its debts, it is understandable to worry about what happens next: to the business, its assets, its employees and you personally. Corporate bankruptcy in Canada is one possible route, but it is not the only one. The first step is to understand whether the business can be reorganized or whether an orderly wind-down is the more realistic path.
Corporate Bankruptcy in Canada: Key Takeaways
The first question is viability: can the company operate sustainably if its debt or operations are restructured?
A corporate bankruptcy in Canada is a legal process under the Bankruptcy and Insolvency Act (BIA) administered by a Licensed Insolvency Trustee (LIT). It does not automatically make directors bankrupt.
A Division I Proposal or a proceeding under the Companies’ Creditors Arrangement Act (CCAA) may give a viable business time and legal protection to restructure.
In bankruptcy, the trustee administers the company’s property, subject to valid secured claims and statutory priorities. Ordinary unsecured creditors are generally near the end of the distribution order.
Personal guarantees and certain director liabilities, including some unremitted source deductions and GST/HST obligations, may survive the company’s filing.
Before deciding, gather current financial records and get advice on cash flow, secured debt, tax remittances, employee claims, guarantees and available restructuring options.
Is my company viable, and why does that question come first?
In my first meeting with directors, I ask what the business would look like with a workable debt burden and enough cash to meet its ongoing obligations. I also ask whether there are parts of the business they would rather not continue and whether they could find a way to do that. Those questions help distinguish a reorganization, an attempt to change the company’s finances or operations so it can continue, from liquidation, the sale of assets to satisfy claims and wind down the business.
Viability is not simply whether the company has customers or valuable equipment. We look at realistic cash flow, operating costs, profitability potential, debt, the security granted to lenders, tax arrears, employee obligations and whether new financing or a restructuring plan is achievable. A business can be busy and still lose money on every job. It can also have a sound core business but be overwhelmed by debt, a temporary cash crunch or an unsustainable cost structure.
What owners are usually surprised to learn is that filing for corporate bankruptcy in Canada is not the first decision we have to make. We first need to understand the company’s position and compare realistic paths. That is how we avoid rushing into a process that may not serve the business or its stakeholders.
A corporation is a separate legal entity. When it becomes insolvent, it may make an assignment in bankruptcy under the federal Bankruptcy and Insolvency Act (BIA). Insolvent generally means the company cannot meet its obligations as they become due, has stopped paying current obligations in the ordinary course, or has insufficient property to pay its obligations.
A Licensed Insolvency Trustee is a federally licensed professional authorized to administer bankruptcy and proposal proceedings. In a corporate bankruptcy in Canada, the trustee administers the corporation’s estate (the property and claims dealt with in the proceeding) and distributes available proceeds according to the law. Unlike an individual, a corporation does not receive a discharge that lets it resume life free of old debt. Bankruptcy is usually part of a wind-down, followed by the end of the business once the estate is administered.
The distinction matters for an unincorporated business. A sole proprietorship is not legally separate from its owner, and a partnership can expose partners to personal liability, depending on its structure and circumstances. Those situations may involve personal insolvency, not a corporation’s bankruptcy. The rules and consequences differ.
What are the reorganization paths: Division I Proposal and CCAA?
When a business has a credible path forward, a formal restructuring can provide time to negotiate with creditors and try to preserve value. The two main statutory routes are a Division I Proposal under the BIA and a CCAA proceeding.
A Division I Proposal is a formal offer to creditors to compromise or reschedule debts. It is administered by an LIT and can give the company a statutory stay. A pause on certain creditor enforcement actions. Under the BIA, section 69(1) applies to a Notice of Intention To Make a Proposal, and section 69.1(1) applies to a proposal. A proposal requires approval by the required majority in number and at least two-thirds in value of creditors who vote, followed by court approval. If creditors reject the proposal, or the court refuses to approve it, the company is automatically deemed to have made an assignment in bankruptcy. See the BIA provisions on proposals.
A CCAA proceeding is a court-supervised restructuring generally available to an insolvent company, or affiliated companies, with claims of at least $5 million. The court can grant a stay, appoint a monitor and oversee a plan or other restructuring steps. Creditors vote in classes; approval generally requires a majority in number and two-thirds in value of voting creditors in each class, followed by court sanction. For an overview, see the OSB’s CCAA information.
The CCAA threshold is not a cap on BIA proposals: a Division I Proposal is not limited to companies with less than $5 million in debt. The right process depends on the company’s needs, complexity, creditor structure and ability to fund a restructuring.
An informal workout is a negotiated agreement with creditors outside a formal court process. It may be less disruptive, but a creditor that has not agreed to the arrangement is generally not bound by it.
Which path might fit? This table is a high-level guide, not a recommendation for a particular company. Costs, outcomes and legal effects depend on the facts.
Path
What it is
Who it may suit
Court or court-free?
What happens to the business?
What happens to directors?
Typical cost and main risk
BIA bankruptcy liquidation
Trustee administers the corporation’s bankruptcy estate and realizes available assets.
A company without a viable, fundable restructuring path.
Formal statutory process; court involvement may arise in disputes or applications.
Operations often stop or change; assets may be sold and the company wound down.
Not automatically bankrupt; guarantees and statutory liabilities may remain.
Fees and expenses depend on assets and complexity. Risk: insufficient proceeds and remaining personal exposure.
Division I Proposal
BIA compromise or rescheduling of debts, administered by an LIT.
A company with a workable plan and ability to meet proposal obligations.
Formal process with creditor voting and court approval.
May continue operating while it pursues the proposal, subject to the process and circumstances.
Not automatically bankrupt; director protections or releases are not blanket guarantees.
Professional and administration costs vary. Risk: rejection, failure to perform or deemed bankruptcy.
CCAA
Flexible court-supervised restructuring under the CCAA, generally for claims of more than $5 million.
A larger or more complex restructuring needing court-managed relief.
Court-supervised; a monitor is appointed.
May continue operating, restructure, sell assets or pursue another court-approved outcome.
Directors remain responsible for their own legal obligations; court relief is case-specific.
Usually significant professional and court costs. Risk: plan failure, value loss or unsuccessful financing.
Informal workout
Voluntary negotiation with creditors outside a statutory filing.
A company able to negotiate and obtain necessary creditor cooperation.
Court-free unless a dispute or later proceeding requires court action.
Usually continues operating under agreed terms.
Directors continue managing, subject to duties and any agreements or security rights.
No single standard cost; advisory costs may apply. Risk: a non-consenting creditor may enforce its rights.
Scroll the table sideways to see every column. General information only. The appropriate process depends on the company’s facts, assets, liabilities, financing and objectives.
What actually happens in a corporate bankruptcy liquidation?
Prior to filing a voluntary corporate bankruptcy in Canada, it always begins with a review of the company’s financial position to understand which option is best for the company. Before any formal insolvency process under either the BIA or CCAA, a board resolution authorizing the filing is required. The LIT prepares the required documents, including a statement of affairs, which is a summary of the company’s assets, liabilities and creditors. The LIT files, in this case, a corporate assignment in bankruptcy with the OSB, which issues a Certificate of Appointment confirming the corporate bankruptcy in Canada event date and time, the trustee’s appointment and the date and time of the First Meeting of Creditors.
The trustee takes control of the bankruptcy estate and administers the company’s unencumbered assets. Unencumbered means not subject to a valid security interest or other property right. A secured creditor may have separate rights to its collateral, and those rights must be reviewed rather than assumed away by the filing.
The trustee notifies creditors, reviews claims, realizes on unencumbered assets where appropriate and reports on the administration. A meeting of creditors is held as required by the BIA. The trustee ultimately distributes funds according to the statutory scheme and the circumstances of the estate. The company may stop operating immediately upon filing or sometime thereafter, but the timing and steps depend on whether continuing operations briefly would preserve value or assist a sale.
Who gets paid first, and who is last?
No universal one-line order applies to every dollar or asset. A valid secured creditor generally looks first to the collateral covered by its security. Certain statutory claims can affect priority. For example, unremitted employee source deductions are a deemed-trust claim and rank ahead of secured claims. The treatment of GST/HST is not identical; the specific statute, timing and proceeding matter. In a corporate bankruptcy in Canada, the GST/HST claim becomes an unsecured claim.
After secured and statutory rights are addressed, the BIA provides for specified preferred claims, such as certain employee claims, ahead of ordinary unsecured claims. Suppliers and other ordinary unsecured creditors generally share in any available distribution after higher-ranking claims. Shareholders are last: they receive value only if all prior claims are paid, which is uncommon in an insolvent liquidation.
The Supreme Court of Canada’s decision in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, illustrates why tax priority cannot be assumed in every restructuring: the treatment of a Crown deemed trust depends on the statute and the insolvency proceeding. The practical benefit of a claim-by-claim review is that directors and creditors can make decisions based on actual priorities, not a generic list.
What does company failure mean for directors, guarantees and CRA?
Corporate bankruptcy in Canada does not automatically make its directors personally responsible for every corporate debt. But that does not mean directors are insulated from all consequences.
A director may face personal liability under applicable legislation for unremitted employee source deductions, including income tax withholdings, Canada Pension Plan contributions and Employment Insurance premiums. Directors may also face liability under GST/HST legislation in some circumstances. These claims have statutory conditions, time limits and potential due-diligence defences. The Canada Revenue Agency explains director liability in its information on directors’ liability. Get advice promptly if remittances are behind; delay can make it harder to understand the record and options.
A personal guarantee is different. It is a promise by an individual to pay a corporate debt if the company does not. A corporate bankruptcy in Canada does not by itself erase that promise. The guarantee’s wording, amount, security and the lender’s actions need to be reviewed by legal counsel.
If company shares become worthless, shareholders should also speak with a tax professional. A capital loss or allowable business investment loss may be available only if the relevant tax-law requirements are met. A bankruptcy filing alone does not automatically establish a deductible loss.
If you are a director or shareholder who has guaranteed debt or may face statutory liability, assess your personal finances separately. Personal bankruptcy or a consumer proposal is not automatic after corporate bankruptcy in Canada; it may be considered if personal debts cannot be managed. An LIT can explain the options in light of your own situation.
What alternatives are worth exploring before filing?
If the business may be viable, I recommend testing practical options quickly, not just hoping that cash flow improves. Depending on the facts, the following may be lifelines:
Control cash flow. Prepare a short-term cash forecast, prioritize essential operating costs and identify spending that can be reduced without damaging revenue.
Explore refinancing. New or restructured financing may help, but review its cost, security, guarantees and repayment capacity before committing.
Consider shareholder funding. Additional capital or a shareholder loan may buy time, but it should be documented and assessed against the company’s full debt position.
Negotiate an informal workout. Some creditors may accept revised payments or terms. The company needs to know which creditors must agree and what happens if one does not.
Sell surplus assets. A sale can raise cash, but check ownership, security interests, tax consequences and whether the asset is essential to operations.
If the company is not viable, a secured lender may appoint a receiver under its security or seek a court-appointed receiver. Receivership is not the same as bankruptcy: a receiver generally takes control of specified property of the business for the secured creditor’s purposes, while a bankruptcy trustee administers the bankrupt corporation’s estate under the BIA for the benefit of the unsecured creditors. A receiver may continue operations temporarily to preserve sale value, but this is not a promise that the business will be rescued. The company’s security documents and circumstances determine the scope.
What should I do in the first 30 days?
The right timetable depends on the urgency. If enforcement, payroll or tax remittances are pressing, do not wait 30 days to seek advice. Start here:
Gather the records: recent financial statements, bank statements, aged receivables and payables, tax filings, payroll records, leases, loan agreements and security documents.
List all creditors and guarantees: identify amounts, arrears, collateral, court actions and any personal guarantees.
Reconcile CRA accounts: separate source deductions, GST/HST, corporate income tax and other balances. Do not treat them as interchangeable.
Build a realistic cash-flow forecast: show expected receipts and essential payments over the coming weeks, using realistic assumptions.
Avoid unusual asset transfers or selective payments without advice: transactions made while insolvent may raise legal issues or be challenged.
Speak with an LIT and, where needed, a business lawyer or accountant: ask what can be done immediately, which options are realistic and what each could mean for the company, directors, employees and creditors.
The point is not to create more paperwork. It is to replace uncertainty with a practical sequence of decisions.
What are common frequently asked questions (FAQ) about corporate insolvency?
Question 1 – How can a company come out of corporate bankruptcy in Canada?
Bankruptcy is generally a liquidation process, not a route for a corporation to receive a personal discharge and resume free of its debts. A business seeking to continue should consider a Division I Proposal or CCAA restructuring, if eligible and viable.
Question 2 – Do directors go bankrupt when the company does?
No. The corporation and its directors are separate legal persons. Directors may still have personal exposure under guarantees or specific statutes, but a personal insolvency filing is a separate decision.
Question 3 – What is the difference between bankruptcy and receivership?
A trustee administers a bankrupt company’s estate under the BIA, acting on behalf of the unsecured creditors. A receiver typically acts under a secured creditor’s rights or a court order over specified property or operations. The authority and purpose differ.
Question 4 – Can shareholders recover anything?
Possibly, but only if there is value left after secured claims, statutory priorities and all other creditor claims are satisfied. In a corporate bankruptcy in Canada liquidation, shareholders normally receive nothing.
Question 5 – How long does corporate bankruptcy in Canada take?
There is no single standard timeline. The duration depends on the assets, claims, disputes, tax matters, litigation and required steps to complete the administration.
Question 6 – What happens to employees?
A corporate bankruptcy in Canada automatically terminates the employment of the people by the company as employer. If the trustee continues operations in bankruptcy, a separate arrangement is established by the trustee to protect the trustee while paying the workers. Employees may have wage and other claims, and some eligible unpaid wages may be considered under the federal Wage Earner Protection Program. The facts and deadlines matter.
Can the company keep operating through a proposal? Often, a company continues operating while pursuing a proposal, but it must manage its ongoing obligations and comply with the process. A proposal is not a guarantee that operations can continue indefinitely.
Starting Over, Starting Now
Don’t let financial uncertainty dictate your future. If you or your business is struggling with debt, losing sleep, or facing legal action, contact Ira Smith Trustee & Receiver Inc.today.
We offer a free, confidential consultation to discuss your situation, explain your options in plain language, and help you develop a clear, actionable plan. Our team of Licensed Insolvency Trustees is dedicated to providing the compassionate, professional support you need to regain control and achieve a debt-free life.
Take the first step towards a brighter financial future, call us now.
Ira Smith Trustee & Receiver Inc. is licensed by the Office of the Superintendent of Bankruptcy. Ira and Brandon Smith are members of the Canadian Association of Insolvency and Restructuring Professionals.
Disclaimer: This analysis is for educational purposes only and is based on the cited sources and professional expertise as a Licensed Insolvency Trustee. The information provided does not constitute legal or financial advice for your specific circumstances. Every situation is unique; the outcomes discussed may not apply to your particular case.
About the Author: Ira Smith is President of Ira Smith Trustee & Receiver Inc., a CPA CA and Licensed Insolvency Trustee.
Receivership in Canada: What does receivership mean?
I have just read a decision of the Ontario Superior Court of Justice Commerical List dealing with an important aspect of receivership in Canada. The case is concerned with what happens when two equally applicable provincial laws appear to be working at cross purposes in the context of the receivership in Canada process.
I will explain the case and the process of company receivership in Canada. By understanding the process, the case will make more sense.
Secured lenders may enforce their security to recover loans from borrowers who have defaulted. This remedy available to secured creditors when a borrower, usually a company defaults, is known as receivership.
What does going into receivership in Canada mean?
A receivership is a legal process available to secured creditors, whereby a company’s affairs, business and property are entrusted to a receiver to manage and eventually sell the assets. Secured lenders may enforce their security to recover loans from borrowers who have defaulted. This remedy available to secured creditors is known as receivership.
If a business debtor does not make payments or otherwise defaults on a secured loan, the secured creditor would have the right to appoint a receiver to collect the money owed. Before appointing a receiver, a secured creditor must first issue a “Section 244” notice of intention to enforce security. This is a notification that secured creditors must send to defaulting debtors before appointing a receiver. Section 244 refers to that section number in the Bankruptcy and Insolvency Act (Canada) (BIA).
The notice states that the security covers certain assets, that the company in default owes a specified amount to the secured creditor, and that the creditor may enforce the security after 10 days. The company in default may waive the notice period and consent to the appointment of the receiver.
Under the BIA, only a licensed insolvency trustee (formerly called a trustee in bankruptcy) can be a receiver. No other party is licensed to administer a receivership in Canada.
receivership in canada
Receivership in Canada: What is the difference between a court-appointed receiver and a privately appointed receiver?
A privately-appointed receiver is a licensed trustee who is appointed by a contract between the insolvency trustee and the secured creditor. A private receiver is typically used when there is no dispute to ranking among secured creditors or various claims to ownership of the company’s assets. The powers of a receiver listed in the security document give the privately appointed receiver more limited powers than a court-appointed receiver gets under a court order.
A receiver is court-appointed when the secured creditor makes an application to the court for the appointment of a receiver with more expanded powers. Like a privately-appointed receiver, a court-appointed receiver takes control of a company’s property because of financial distress and when there is a dispute among secured creditors and others as to the ranking of secured claims and ownership of property.
Both kinds of receivers are tasked with protecting and preserving the value of the company or property and are certainly given broader powers by the court to do so.
How is receivership in Canada different from bankruptcy proceedings?
Many people mistakenly use the terms “receivership” and “bankruptcy” interchangeably. However, bankruptcy and receivership are two distinct legal proceedings with different implications.
Bankruptcy vs. receivership can be confusing, but once you understand the key differences between the two, it is fairly straightforward. Whether it is a private appointment or a court-appointed receiver, the differences between bankruptcy and receivership in Canada are the same.
A receivership is a legal remedy available to secured creditors to enforce their security rights against a defaulting debtor. A receiver is appointed to manage the debtor’s property and assets and sell them under a properly run and fair sales process.
The Canadian bankruptcy process is a distinct legal process. An insolvency trustee does not represent secured creditors in bankruptcy proceedings. Instead, under the bankruptcy regime, they represent the unsecured creditors of the bankrupt estate. A corporate debtor may be subject to both bankruptcy and receivership proceedings simultaneously.
One of the major differences has to do with the creditors. In a bankruptcy administration, the bankruptcy trustee must call a meeting of creditors. This is where the insolvency trustee provides its report on the affairs and conduct of the bankrupt debtor and unsecured creditors get to vote on any matters of importance. In receivership, there is no such requirement to hold a meeting of creditors.
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What are the key distinctions between receivership in Canada and liquidation?
So you know what receivership is by now. The federal BIA doesn’t govern liquidation, that’s done under the provincial Business Corporations Act or Wind-Up Act.
A liquidation is for a solvent company where the shareholders, Officers and directors decide to cease business operations. The company puts up its assets for sale and uses the proceeds to pay off its creditors with cash. Any funds left over are then distributed to the shareholders.
A liquidator can be appointed either privately by the company’s directors or by a court order. Liquidation is therefore different from both bankruptcy and receivership in Canada.
Can individuals be placed into receivership in Canada?
The answer is yes. When a secured creditor wishes to take enforcement action upon the security agreement they have against a debtor’s property, as indicated above, they have the remedy of receivership in Canada. This remedy allows them to collect as much of their secured debt as possible.
There are no restrictions as to who can go into receivership in Canada. One of our more famous (infamous?) receivership cases over the years has been the receivership of the assets, property and undertaking of Norma and Ronauld Walton.
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Receivership in Canada: Whose receiver is it anyway?
The business is conducted through two affiliated entities. One owns the property and the other operates the business. This is quite a typical arrangement.
One creditor funded the purchase of equipment and took PPSA security over it. Another creditor funded the acquisition of the real property and has a traditional mortgage security. The security agreements extend over different assets, and the outcome is usually uncomplicated.
However, when equipment that has been purchased is attached to real property, there is disagreement about whether and how it can be removed, and whether such removal will negatively affect the value of both the equipment and the real property. The question is now more complicated: which creditor’s rights should take priority over this matter?
Both the equipment lender and the mortgagee are seeking to enforce their security. The equipment lender has filed a motion with the court to appoint a receiver over both the operating company (Opco) that owns the pledged equipment and the holding company (Holdco) that owns the real estate. This would allow the receiver to manage and sell the assets of both companies in order to repay the outstanding debt.
In this case, Opco was a commercial marijuana operation that was unable to get off the ground due to its heavy debt load and startup problems.
Although the mortgagee began power of sale enforcement proceedings, they do not object to a receiver being appointed over the equipment only. The mortgagee wishes to continue its power of sale proceedings and opposes the receiver being appointed over the building. The mortgagee in possession is of the opinion that the equipment is attached to the building and cannot be removed.
The mortgagee concurred that the court has the power to assign a receiver over the property of both Opco and Holdco according to section 101 of the Ontario Courts of Justice Act. They stated that, if a receiver is appointed, the receiver needs to be a firm chosen by them.
Both the licensed insolvency trustee firm preferred by the mortgagee and the firm nominated by the equipment lender filed a consent to act with the court.
What are the conditions under which a receiver may be appointed?
The court looked at numerous factors in order to make a decision on whether or not to appoint a receiver, and if so, which one, including those that have historically in receivership in Canada cases been taken into account in such determinations:
Although it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation, the court considered if no order is made, will irreparable harm be caused?
The size of the debtor company’s equity in the assets and the need for protection or safeguarding of assets during litigation are important factors to consider when assessing the risk to the security holder.
The kind of property it is.
The potential for the assets to be wasted or dissipated.
The need to safeguard the property until a legal ruling is made.
The parties’ respective balance of convenience needs to be considered when making the decision.
Pursuant to the loan documentation, the creditor has the right to an appointment.
Enforcing the security instrument when the security holder experiences or anticipates difficulties with the debtor.
The principle of appointing a receiver should be approached with caution.
The court will determine whether appointing a receiver is necessary to enable the receiver to carry out its duties efficiently.
The effect a receivership order will have on the parties.
The parties’ conduct.
How long a receivership may last.
The financial impact on the parties.
The likelihood of maximizing return to the parties is increased.
The goal of ensuring the smooth running of the receiver’s duties.
As everyone agreed that all assets of both Opco and Holdco should be sold to maximize recovery for all creditors, but cannot agree on the process by which that should be undertaken, resulting in the entire process being stalled, the judge was satisfied that it is just and convenient to appoint a receiver.
The court found that either proposed receiver was acceptable and decided that the receiver nominated by the mortgagee would be appointed by the court to administer all assets. The receiver would eventually come back to court with a sales plan to maximize the value of all the assets subject to the security of all stakeholders.
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How the entrepreneur can avoid receivership in Canada
As a business owner, the way to avoid the receivership process is long before financial difficulties ever become serious financial problems. Here are a few tips on how to do just that:
Keep a close eye on your finances. This means regularly reviewing your income and expenses, and making sure you have a good handle on your cash flow.
Stay current on your bills. This includes not only making timely payments but also staying on top of any changes in your billing terms or amounts.
Keep good records. This means having up-to-date financial statements and documentation for all of your income and expenses.
Make a plan. If you do find yourself in a financial bind, have a plan in place for how you’ll get out of it. This may include negotiating with creditors, seeking new financing, or making cuts to your expenses.
Seek professional help from a licensed insolvency trustee with commercial insolvency experience. If your business is viable and you seek help early enough, there may be many options. The most common ones are refinancing with or without financial restructuring. Reviewing your business allows us to make restructuring recommendations allowing your viable company to become healthy and profitable once again.
Receivership in Canada summary & speak with a licensed insolvency trustee
I hope you enjoyed this receivership 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.
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.
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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.
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.
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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?
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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.
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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.
