Corporate Bankruptcy

Corporate Bankruptcy: What are the steps to take if a company needs to shut down?
Corporate Bankruptcy:
Owning your own business can be overwhelming and all-encompassing. Sometimes, even with the best efforts of staff and management companies can find themselves struggling with debt and a corporate bankruptcy might be considered.  When a business can eliminate some of its debts, often it can survive.  At other times, there is simply too much debt to continue, or the business model is no longer viable.   At those times, the business just needs to stop operating.

Not all business need to go through a formal bankruptcy process with a licensed insolvency trustee.  However, a bankruptcy is often necessary when corporate assets remain.

Corporate Bankruptcy – What is it?

A company declaring bankruptcy means that the company has entered a new legal status.  Comparatively, the state of being bankrupt can be viewed like being married or divorced.  As a legal state.  So, bankruptcy is a legal option where a corporation/company assigns itself into bankruptcy.  As a result, the company then turns over all its assets to a Licensed Insolvency Trustee (LIT).  Afterwards, the company’s assets are sold off and the proceeds are shared with the creditors.

Once bankrupt, companies do not continue to operate. A corporate bankruptcy is usually the final act for a business.  From the assets that are sold, the proceeds are then divided amount the company’s creditors based on a hierarchy of claims.  This hierarchy of claims or “scheme of distribution” is outlined under federal legislation called the Bankruptcy and Insolvency Act. (“BIA”) Some creditors claim rank in priority to others.

A corporate bankruptcy vs sole proprietor “business” bankruptcy

Often people are confused when the talk about owing their own business.  Under Canadian law, a corporation (also called a limited company) is considered a “person”.   The company is also called a ‘business”.  A corporation is a separate individual for insolvency purposes. It can own its own assets and owe its own debts.  A corporation is separate from the person/people that own it legally. (shareholders)

However, many people who operate a “business” are operating as a “sole-proprietor” and do not own a corporation.  For tax and insolvency purposes, a sole proprietor is the business.  They are one in the same.  If a person is a sole proprietor and experiencing debt issues, then they have to consider personal bankruptcy or a consumer proposal.

Licensed Insolvency Trustee and Corporate Bankruptcy

The purpose of having a LIT trustee is to oversee the process to make sure all creditors are treated fairly as outlined under the BIA . The Bankruptcy and Insolvency Act (BIA) governs the corporate bankruptcy process. Trustee’s charge a fee for their services, so there needs to be assets or funds available to pay their fees generally from the assets sold in the bankruptcy.  If there is insufficient assets to pay the trustee fee, then generally there is no need for a formal bankruptcy as there is no benefit to the creditors. (i.e. no money in it for them at the end of the bankruptcy)

How much does a Corporate Bankruptcy cost?

Trustees do charge a fee for this service. Generally  the sale of corporate assets are used to pay the LIT fees.  So, there has to be enough value in the assets of the company to ensure that the Trustee can be paid. If there is not enough to pay the Trustee, the assets can be liquidated by the principles of the company. Sometimes, the secured creditor may seize and sell company assets for their own benefit or choose to appoint a Receiver (Receivership) to do this process for them.

Liquidating your own assets for distribution to creditors can be a daunting. There can be many legal pitfalls and confusing issues to address.  Business owners need to understand what amount if any can be paid to creditors.  Some creditors, like the Canada Revenue Agency CRA, have special rights against corporate assets for specific types of tax debts.  Expert advice is always advised in corporate bankruptcy situations.  Business owners should be cautioned to avoid the preference of one creditor over another.  Especially if one creditor is related to the business opener.    These types of payments can be attacked by creditors as a  fraudulent preference under provincial legislation.

What if company has no assets remaining?

Often business just stop operating with just debts remaining.   This often happens in small business where CRA seizes or shuts down the only bank account being used by the company. Other assets may have been seized by the Canada Revenue Agency for taxes (like GST, source deductions for payroll).

Or a principle of a company just decides that its no longer makes sense to operate.  Shutting down may mean that there is only debts that remain.  As such, if there are only debts, there is no need for a formal bankruptcy.  Since there are no corporate assets remaining, there is no benefit to creditors in a business bankruptcy

First Step in a Formal Corporate Bankruptcy: Meeting with a Licensed Insolvency Trustee

A Licensed Insolvency Trustee will sit down with the business owner and review the types of business debt and the value of the assets of the corporation.
When considering corporate bankruptcy, all debts or future obligations must be considered.

Types of corporate debt include:

Trade creditors:
your basic accounts payable from suppliers etc. to fund daily operations.

Canada Revenue Agency obligations: GST, source deductions, and corporate tax
Provincial tax.

WCB or Worker’s Compensation Board.

Employee obligations: holiday pay, and possible severance pay in lieu of notice.

Contract dispute issues: breach of contract, product deficiency/returns obligations.

Secured debt: these can include lines of credit, overdrafts from banking or other institutions . A General Security Agreement secures corporation’s assets as security in case of default. This means that if the terms of the debt or breached, company’s assets would be liquidated.

Directors’ liabilities: As a director of the limited corporation some debts automatically follow and become personally payable by directors. These director obligations include payroll/source deductions, GST/HST, some portion of employee wages and holiday pay.

Personal obligations of shareholders and directors:

Often in small or medium business, a creditor may require personal guarantees of the owners of the company. This is often true with banks who require shareholders (and often their spouses) to sign personal guarantees for the business debt.  So, if a company stops operating and is not able to pay the corporate debt, then the guarantors will have to pay personally.   Personal guarantees are joint and several with the corporation.

If upon review of the assets and debts of the corporation, that is, if there is sufficient value in the assets above any secured claims or priority charges, then a formal corporate bankruptcy may be the best option to ensure a fair and orderly distribution of funds to the creditors.

Company Closed – but debts remain – who is responsible?

A company will still be considered a legal entity if it files its Annual Corporate return with the Registrar of Companies.  Even if there are assets remaining.  However, in British Columbia, if after 2 years of non-filing, any company will be struck from the registry.  If a company is struck, it ceases to exist legally. (This varies by province). In the meantime, creditors can try to sue the company if they have not been paid, but with no assets remaining, there is no benefit to them of suing

  • Personal Guarantees

    However, creditors can go after directors and others for specific kinds of debts. As mentioned above. banks and creditors often require that personal guarantees from principles of the company.  A personal guarantee results in someone else also being responsible for the corporate debts. (the “guarantor”) The nature of guarantee is outlined in agreement that was signed.

  • Director Liability

    As well, by legislation Director or Officer of a limited corporation are automatically held responsible for some corporate debts.   These specific types of obligations and the individual amounts vary from province to province, but can include such items as:CRA trust claims, (employee remittance),

  • Employee wages
  • Provincial Tax
  • WCB (Workers Compensation)
  • Personal guarantees

Is a Corporate Bankruptcy always necessary?

Steps if you are Shutting Down a Company without a Formal Bankruptcy

  1. Notice to Trade Creditors

If you are a small business owner and your business is not viable, then shutting down may be the only option. As discussed above, you may also be personally liable for some corporate debts and it is best to be clear about your personal exposure.

If there is no need for a formal bankruptcy, we often recommend write a brief letter to each creditor.  This letter or email can outline the difficulties and inform each creditor that no further payments will be forthcoming. Creditors may choose to respond or not.  Creditors may notify you if they feel you owe them personally (personal guarantee). You must respond to them in writing stating your position.  Responding is essential if you are personally named in the legal action.  You should ask to see the signed personal guarantees if you are personally named by a creditor.

  1. Notice to CRA

If you are shutting down a company, as a Director you do have an obligation to file the final outstanding tax returns.  These include corporate returns (T2, GST, PST, T4’s) etc with the Canada Revenue Agency (CRA) and PST and WCB with the provincial authorities.   The last step is to file a request to CRA to cancel your CRA Business Number (BN) once final returns have been completed.

Note, if there is debt remaining to CRA they will not allow you to cancel your business Number. They do this to allow them to collect against the Directors personally.

The company will still legally exist as long as the Annual Returns with the Registrar of Companies if filed each year.  However, after two consecutive years of non-filing, the company will be struck from the Register.  After being struck from the registry, the company will no long legally exist.

        3 .Personal Insolvency

Within a few months of shutting the business, it will become clearer what debts will remain personally either as Director Likability or under a guarantee.  At these times, the principles of the corporation may have to consider the personal debt options.  Personal options for individuals who are burdened by insurmountable debt include  Personal Bankruptcy or Consumer Proposal

Or review recommendations from the Office of the Superintendent of Bankruptcy at

At C.E .Craig & Associates Inc we offer a FREE Consultation where we sit down with you to review both business and personal debt solutions

Call Today at 250-386-8778 to understand your options.

Other Discussion Related to Corporate or Sole Proprietorship Bankruptcy

Director Liability Corporate Insolvency

See, Corporate Bankruptcy vs Division 1 Proposal

Corporate Bankruptcy vs Personal Bankruptcy

Corporate (CRA) Personal Tax debts and Bankruptcy

Receivership Corporate Insolvency

Where to Turn for Accurate Advice?

There are many who will provide debt advice to consumers, so it is so important to seek out a reliable and accurate information.  If you are ever unsure where to turn for accurate information, best to rely on the Canadian Government recommendations.

The Office of the Superintendent of Bankruptcy provided detailed information to Canadians seeking debt advice.  Their site provides information about the Canadian insolvency system and how to find a local. Licensed Insolvency Trustee.  LIT’s are the only professionals licensed in Canada to offer bankruptcy or consumer proposal services.