What is Business Bankruptcy?
Business bankruptcy is a legal debt solution that business owners may consider when a business cannot pay its debts.
Business owners should also consider a Business Proposal as an alternative to business bankruptcy. Before filing a bankruptcy or proposal it’s important for business owners and stakeholders to understand the complexities of these processes, including all potential liabilities and repercussions of both unique options.
Because there are different types of business structures, bankruptcy options for business debts can vary greatly. In many cases, the decision of how to proceed with managing business debts will largely depend on what the impact of the debts are to the business owners or directors personally.
Bankruptcy for a Sole Proprietorship or Partnership
If your business is set up as a sole proprietorship or partnership you are not legally separated from your business – essentially the assets and debts of your business are also your personal assets and debts.
A business bankruptcy in this case would amount to a personal bankruptcy, or bankruptcy may be avoided entirely if you the business owner file a Consumer Proposal instead. Filing a personal bankruptcy (or Consumer Proposal) to deal with business (and personal) debts is a relatively straight-forward process. You are not required to shut down your business as part of this proceeding.
The first step in the bankruptcy process is to meet with a Licensed Insolvency Trustee. They are the professionals designated by the Federal Government to help you file bankruptcy – there is no need for you to consult with a lawyer or accountant to start a bankruptcy.
Bankruptcy for a Corporation or Limited Company
If your business is incorporated then by law it is considered its own legal entity. Many people think that by setting up a limited or incorporated business they are fully separating themselves from their business assets and debts, but that is not always the case.
Even if your business is structured as a corporation or limited company there is still a personal liability created for certain debts, such as money owing to employees for wages, and to Revenue Canada for GST debt or payroll source deductions.
Filing a bankruptcy for your corporation does not end the business’ existence; companies are not automatically dissolved because of a bankruptcy filing. However, unless the bankrupt corporation is able to later repay all the debts it owed at the time of the bankruptcy filing, it will ultimately cease to operate.
A Licensed Insolvency Trustee will help you determine which debts would be considered your corporate and personal liabilities and whether a corporate or personal bankruptcy, proposal, or other solution would be most beneficial. For many owners, it may not be necessary to file a business bankruptcy.
What are the Main Steps in a Corporate Bankruptcy?
The following is a very basic overview of the key steps for business owners who want to file a business bankruptcy. It’s important to remember that a personal bankruptcy filing will generally not have the same steps involved:
- Meet with a Licensed Insolvency Trustee
Licensed Insolvency Trustees are the only debt professionals regulated and overseen by the government. To file a corporate bankruptcy you will first need to meet with a Licensed Insolvency Trustee to discuss and evaluate your situation. Generally this first meeting will be to understand:
- The average revenue and profits of the business
- Who the business owes money to, and how much is owed
- Whether any personal guarantees have been signed by directors or stakeholders
- Who the directors, officers and other stakeholders of the company are
The Licensed Insolvency Trustee will explain the general process of business bankruptcy to you and ensure that you fully understand the requirements.
- Sign the Corporate Bankruptcy Documents
If a decision has been made to proceed with a business bankruptcy, the Licensed Insolvency Trustee will prepare official bankruptcy documents for you to sign.
Once you have read and signed all the official business bankruptcy documents the bankruptcy will be registered and your creditors will no longer be able to pursue you for debt payments or continue to attempt collection action.
- Complete the Corporate Bankruptcy Duties Required
Some obligations may be required of the business owner. Some of these duties include:
- Attending a meeting of your creditors
- Your Licensed Insolvency Trustee will hold a meeting of your creditors within three weeks of the date of the business bankruptcy
- This meeting gives opportunity for claims of creditors to be reviewed, and for creditors to vote on some decisions that may need to be made
- Providing information to/help the Licensed Insolvency Trustee
- You may need to provide the Licensed Insolvency Trustee general information about, or assistance with any assets that may be sold under the bankruptcy; or information about the company’s creditors
Once the administration of the business bankruptcy has been completed and there are no further duties required of the Licensed Insolvency Trustee, the Trustee will then apply to the court to be discharged (released), this essentially closes the bankruptcy file and there is nothing else to be done on the part of the business owner or the Trustee.
Corporate bankruptcy filings can be very complex and costly – especially compared to a personal bankruptcy filing. Our Licensed Insolvency Trustees are qualified to administer corporate bankruptcies, ensure all statutory requirements are met and that the business bankruptcy is administered in a cost-effective, professional manner.
We understand that the decision to wind down a business that is struggling financially can be difficult and emotional. Book your confidential free debt consultation with Sands & Associates to discuss your situation, get more information about how to manage business debts and evaluate your legal debt solutions.