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Corporate bankruptcy: Is The Business Struggling with Debt?
Sometimes, even with the best efforts of staff and management companies can find themselves struggling with debt and a corporate bankruptcy might be considered.
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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.
What are the steps to take if a company needs to shut down?
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.
Is a Corporate Bankruptcy always necessary?
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 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.
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.
Canadian Corporate Bankruptcy vs Personal Bankruptcy: What’s the difference?
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. (called 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.
What Are The Types of Corporate Debt?
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.
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