Corporate Bankruptcy vs Personal Bankruptcy

Canadian Corporate Bankruptcy vs Personal Bankruptcy: What’s the difference?


Quite often as a Licensed Insolvency Trustee and a Chartered Professional Account we deal with small business and their owners who are experiencing financial difficulties. The question that often arises from owners, directors, and shareholders of small and medium corporations is:

“Should I declare a business or corporate bankruptcy, personal bankruptcy or both?”

If you are a business owner, it can be hard sometimes to try to figure out where your company ends and where you, as a person, begins. This is especially true in situations where your personal and business debts and assets have become entwined.

When considering a corporate bankruptcy or financial restructuring by way of a Proposal, that you and your business might possibly be facing, you must consider the nature of the business structure itself and any personal guarantees that you may have signed.

If you are a sole proprietorship, then your personal assets and personal debts cannot be separated from those of the business. If you are a sole proprietor or part of a partnership, and the business that you are operating has debts, then you also personally have debt. In these situations, when you are considering a business bankruptcy, it is the same thing as a personal bankruptcy.

In Canada, either an individual or corporation has financial options when they find themselves insolvent. Both people and companies can either declare bankruptcy or offer a payment plan to creditors by way of a Proposal under the Bankruptcy and Insolvency Act. If a company files a restructuring Proposal to become viable, Proposal can allow companies to shed some debt or other hindrances such unprofitable leases or contracts.

But the creditors must agree to this process and be guaranteed that they will get more money under a Proposal than they would get in a bankruptcy.

If the company is not viable or the creditors do not agree to the restructuring plan, it may be necessary to go through a formal corporate bankruptcy process. This generally only takes place if there is sufficient assets available for distribution to the unsecured creditors

In Canada, if a limited corporation has been created, the company is a separate person or a separate legal entity under the law. Thus, if the company is facing financial difficulties and must consider its legal options, then the assets and debts of the business are considered as separate and distinct from the shareholders’ own personals assets.