Insolvent Business Options

My Business is Insolvent - What Options Do I Have?

Advice

The first step where a business is insolvent, either for a company that is facing insolvency or in a personal insolvency situation, is to seek the advice of an insolvency expert – a Licensed Insolvency Trustee. (“LIT”).  The 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 and, depending on the severity of the situation, any personal consequences for you.

Fortunately, if your company’s financial problems are addressed early on, your choices are greater. Greater flexibility may increase your chances of stopping the business decline and affecting a positive turnaround. Often, however, business owners are understandably distracted with daily operations and often unable to prioritize the danger signals from creditors and mounting debt.

To avert a potential financial crisis, decisive action is needed by first accepting 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 and whether your company could benefit from using appropriate restructuring and rescue processes. That initial assessment will often look at turnaround or informal restructuring options, the key driver of which is the amount of liquidity and runway (time) you have.

Liquidity

  • 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.
  • A key consideration for business is the liquidity of the company from both new or interim financing options, plus the wiliness of current lenders. Consider, if your bank will continue to support your business loan.  Often business loans are “demand loans” and can be asked to repaid to the bank immediately if requested
  • Is your cash needs increasing? Often companies unfortunately wait to come to an LIT facing the “slow season” when cash requirements are at their peak.
  • Will your assets leasing company, (or landlord for rental spaces) renegotiate your current rental terms? Longer terms and/or lower payments may free up some needed cash.

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, particularly 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

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 formulated
  • the ability to disclaim or assign major contracts if deemed integral to a restructuring or sale of the business

Bankruptcy

If, despite the shareholders and management best efforts a plan or agreement cannot be reached with creditors (who ultimately get to vote on the proposal put forth by the company) or if the company is simply not viable, a company may have to consider bankruptcy as way of winding up its operations.   This is a last step for a business as once a company declares bankruptcy, it cannot continue to operate unless all of the creditors are paid in full. 

A LIT will be appointed to oversee the bankruptcy process.  Ultimately, bankruptcy provides a controlled process for realization of assets, adjudication and ranking of claims, and payout mechanism for creditor 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 provides 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 Company Is Insolvent—What Are My Options?

If you are 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. 

Licensed Insolvency Trustee