Insolvent Business – Risks to Owners Advice
The first step when faced with an insolvent business, is to seek the advice of an insolvency expert. A Licensed Insolvency Trustee, (“LIT”) will outline the overall process and will help you gain clarity on the situation.. As a business owner, you will need to understand the options. Depending on the severity of the situation, an insolvent business may have personal consequences for an owner.
Fortunately, if your company’s financial problems are addressed early on, the more likely the company can survive. Early options offer greater number of choices. Choice flexibility may stop the business decline and also help to avoid personal liability. Often however, business owners are distracted with daily operations and are unable to respond appropriately to the danger signals.
In order to avert a potential financial crisis, decisive action. First step is to accept that help is needed from an insolvency professional. An experienced LIT will walk you through your options and guide you through the process.
Turnaround options
At the first meeting your LIT will look at your business to determine if the core of the business is viable. The LIT will discuss benefits from using appropriate restructuring options. That initial assessment will often consider informal restructuring options. And informal option allows the owners of the business to remain in charge of daily operations.
Another key issues is the ability of the company to generate cash from operations. The more liquid funds available, the more flexibility the company has when restructuring. Two general sources of cash are internal and external. Internal cash from operations or external from banks or private investment. The more funds available, the longer the company has to come up with a creditor plan.
Being able to unding cash requirements internally is important. The financing options, plus the willingness of current lenders. Will your bank continue to support your business loan? Will your leasing company for assets (or landlord for rental spaces) renegotiate your current rental terms to allow you access to needed cash? This is generally one of the first concerns when a business is struggling, especially when its problems aren’t necessarily chronic, but more down to poor or inconsistent cash flow or liquidity.
Formal restructuring options
If the company has a viable business but simply needs to reduce some of its debts or increase its ability to survive, a formal insolvency proceeding needs to be considered to keep creditors at bay. Specifically if you are facing court actions, seizures, evictions or judgement creditors looking to enforce their rights.
There are several debtor-in-possession procedures that companies can avail themselves of, including proposals under the Bankruptcy and Insolvency Act of Canada (BIA) and the Companies Creditors Arrangement Act of Canada (CCAA) proceedings. Both of these options are used when the company hopes to survive the restricting process and continue into the future.
BIA Proposal (Division 1)
When small-to-medium-sized companies are struggling with cash-flow and debt, they often turn to what is called a proposal under the BIA to help them restructure, instead of CCAA proceedings which are normally more court driven and complex and is limited to companies that have greater than $5 Million in debt.
A proposal allows your company to either file a proposal with your creditors immediately (i.e., the plan that has already been finalized with your LIT), or instead file a Notice of Intent to file a proposal (NOI), which provides you and your company some time to put together a proposal. Under an NOI, there is an initial 30-day “holding period”, (which can be extended up to six months), where a company can begin discussions with lenders and creditors to develop a restructuring plan that will be acceptable to creditors. During the NOI period, all of your creditors are stayed from legal proceedings against you, giving you time to develop a plan without concern about asset seizures, or other legal proceedings, etc. Importantly, filing a proposal does not mean your company is bankrupt; rather it is a debtor in possession alternative which allows you time to formulate a restructuring plan.
Benefits of a NOI or a Proposal under the BIA
- a stay of proceedings
- the ability to disclaim or assign major contracts
- the ability to obtain DIP funding to finance operations while the restructuring takes place
- the ability to conduct a sale and investment solicitation process (SISP) to find an investor or purchaser as part of a restructuring process
- debtor in possession (DIP) funding which may be required to continue operations while a plan is composed
- the ability to disclaim or assign major contracts if deemed integral to a restructuring or sale of the business
Business Bankruptcy
Despite the shareholders and management best efforts, sometimes a plan or agreement cannot be reached with creditors. The creditors vote on the proposal put forth by the company as a group. A proposal has to be accepted by a majority of the creditors to proceed. Alternatively, companies are simply not viable and cannot continue. In these cases, the company may have to consider bankruptcy as way of winding up its operations. Bankruptcy is the last option for an insolvent business. Unfortunately, once a company declares bankruptcy, it cannot continue to operate unless all of the creditors are paid in full.
In a bankruptcy A LIT trustee will be appointed to oversee the process. Ultimately, bankruptcy provides a controlled process for the sale of the corporate assets. From the proceeds, after deducting the trustee fee, the LIT will pay the remaining funds to proven creditors. In this way, the LIT is responsible to adjudicate and rank creditors claims in order of priority under the BIA.
A bankruptcy is a liquidation of the company’s assets. Sometimes, the LIT will opt to sell the business in whole (going concern), or merely sell the company’s assets individually. The trustee has an obligation to get the maximum return for creditors. Under the BIA the distribution ranking of creditor claims is based on the nature of the debts and individual provincial creditor registration obligations, In BC, creditor rights are partially based on a registration of the debt under the Provincial Property Security Act. The bankruptcy trustee can also seek direction of the court regarding the ongoing management of the bankruptcy estate.
The bankruptcy option can also provide insolvent business benefits as follows:
- an automatic stay over creditors – stops all legal court action
- reversing certain priority claims (particularly GST) which could otherwise trump regular creditors
- ability to assign, disclaim contracts
- directors and officers able to resign; minimize Director and Officer liability
- protections from environmental liabilities that could incur post-bankruptcy
- provides finality to the company’s obligations. – annual filings,
- ability to exercise statutory powers to investigate the company’s affairs and examine persons of interest and transactions to potentially enhance recoveries for the estate; (e.g. identify and prosecute acts of fraud, preferences or transfers at less than market value,)
My Business Is Insolvent—What Are My Options?
As a business owner experiencing financial difficulties, the first step is to understand your options. If you recognize there is a problem early enough, engage with an insolvency professional to devise a restructuring plan—there’s a greater likelihood your business can be saved. However, the longer you wait, the more complicated it gets, and the restructuring window narrows significantly.
See other Business Restructuring Information Below:
Insolvent Business Options
Director Liability
Corporate Bankruptcy
Summary of the Canadian Bankruptcy System
Where to Turn for Accurate Advice?
Interestingly, there are many who will provide debt advice to consumers, so it is so important to seek out reliable and accurate information. If you are ever unsure where to turn for accurate information, best to rely on the Canadian Government recommendations. https://www.canada.ca/en/services/finance/bankruptcy.html.
The Office of the Superintendent of Bankruptcy provide 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.
