Corporate bankruptcy in Canada
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What is corporate bankruptcy?
Corporate bankruptcy is a legal proceeding where an incorporated entity (rather than a partnership or sole proprietorship) is unable to pay its debts, and file for bankruptcy.
According to the Bankruptcy and Insolvency Act, a corporation is considered a legal ‘person’. As a director of a company, you may be personally liable for certain debts of the corporation. These debts include any outstanding HST, unpaid Source Deductions as well as any loans or leases that have been personally guaranteed.
Chapter 11 bankruptcy, named after the U.S bankruptcy code 11, allows business operations to restructure in order to manage their debt and involves reorganising assets and liabilities. This form of bankruptcy will develop a reorganization plan for bankruptcy proceedings.
In contrast to the US, there isn’t a separate bankruptcy court in Canada and jurisdiction is assigned to provincial courts.
Is corporate bankruptcy worth it?
If you have a corporation that cannot pay off its debts, you will want to get professional assistance in deciding your next steps. Filing for bankruptcy is an option of last resort, but fortunately your liability is limited in your corporation. This means that since corporations are independent legal entities, owners are protected from liability, including debts and financial obligations faced by the corporation. As a result, corporations have business-specific options for bankruptcy.
If your corporation files for bankruptcy, the business won’t continue, and employees will likely lose their jobs although they may be entitled to recover severance. With much at stake, it is important to obtain a consultation with a Licensed Insolvency Trustee (LIT) to find out if you qualify for any alternatives to bankruptcy.
While it is true that a corporation can go bankrupt without involving any of your personal assets, there are two scenarios where your personal assets may be at risk:
If you have a personally guaranteed loan (whereby you put up any personal assets as collateral for the loan like a personal property, then this may be up for forfeiture).
You are in a director position, and the corporation has not made owed payments to the government. These may include unremitted source deductions (income tax, employment insurance, CPP), HST, GST, and more.
Are you eligible to file for corporate bankruptcy?
To be eligible for corporate bankruptcy, you must be able to meet the following criteria:
- Owe at least $1,000
- Have debt greater than the sale value of your assets
- You’re unable to pay debts when they’re due
It’s worth knowing that, even if you meet the above criteria, there are other options available and bankruptcy should be treated as a last resort.
Find out about more alternatives to corporate bankruptcy below:
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What happens when a company files for bankruptcy?
Chapter 7 bankruptcy, also known as liquidation bankruptcy, dictates that a company stops its operations completely and a trustee will be appointed.
What does a bankruptcy trustee do?
A bankruptcy trustee is appointed to manage a company’s assets in the event of a corporate insolvency. They will distribute corporate assets to secured creditors and unsecured creditors according to bankruptcy law and then use the sales proceeds to settle the company’s outstanding debts.
Options to avoid corporate bankruptcy
Corporate bankruptcy should be viewed as a last resort since there are major disadvantages to bankruptcy. Always consider other avenues to take before filing a corporate bankruptcy.
A proposal is used to pay creditors a specified amount of debt over a specified period of time. It’s usually used to extend the time needed to pay the debt. Creditors decide if they will accept your proposal.
Consumer proposal: A consumer proposal is an agreement with creditors, outlining the percentage of the debt you owe them and allowing you to extend the amount of time you can pay back this debt. To file a consumer proposal the debt must be under $250,000.
The payments are made through the Licensed Insolvency Trust (LIT) which will pay the creditors on your behalf. In Canada, consumer proposals are federally regulated which means it’s one of the safest ways to pay down your debt.
Commercial proposal: is an agreement filed through a licensed insolvency trustee available to businesses with no limit to how much money is owed to creditors (this can be higher than $250,000). If all the terms of the proposal are accepted, then the debtor is no longer legally responsible for the debts outlined in the proposal.
Declaring corporate bankruptcy
There are 3 ways your corporation can become bankrupt:
- By a voluntary assignment
- At a creditor’s initiation
- Failing to comply with a Division I proposal
A voluntary assignment is the most common. In a voluntary assignment into bankruptcy, you assign your company’s assets to for the general benefit of your creditors on your own accord. Your company would need to be insolvent.
In a petition for a bankruptcy order (involuntary assignment), your creditors will file a petition in a provincial court to seize your assets. Your creditors need to state in a court application that you have committed an act of bankruptcy within the last six months.
If a restructuring plan is voted down in a Division I Proposal or does not receive court approval, your company will be deemed bankrupt.
Frequently asked questions
Get in touch with Harris and Partners
A Licensed Insolvency Trustee (previously known as a Trustee in Bankruptcy), can conduct a review of your corporate finances to help you determine if there is another option that is suitable besides declaring bankruptcy. Often there is another option available to you even if your corporation has been insolvent for an extended period of time.
If there is no other option but bankruptcy, your trustee will administer the process, complete the necessary forms, and handle all communications with creditors. Company assets will be liquidated to pay creditors as much as possible.
If you need help from those who specialize in solving debt problems, contact us at Harris & Partners Inc. Licensed Insolvency Trustee. Across Canada, our federally Licensed Insolvency Trustees can help you achieve long-lasting financial solutions.