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If you have a limited corporation with significant debts or cash flow issues, there are various options available to the company that may need to be considered. In Canada a limited corporation is considered to be a "person" and as such has specific rights and obligations. The intent of the various provincial and federal legislation that governs corporations, is to keep the financial obligations or debts of the company within the walls of the corporation. In other words a "limited corporation" creates a "corporate veil" to limit shareholders and directors from corporate liabilities.
A limited liability allows companies to carry on business and enter into contractual obligations without personally exposing shareholders and directors. However, over time creditors have attempted to pierce this corporate veil by requiring shareholders/directors to sign "personal guarantees" which will put them personally on the hook financially along with the company. In these cases, shareholders can be left solely responsible for debts of a company if the company stops operating.
In addition to personal guarantees, other governmental agencies have enacted their own legislation that creates a "directors liability" for various types of corporate debts. These debts would include debts for unpaid payroll to employees, un-remitted source deductions (income tax, EI, CPP withheld by the employer), GST/HST etc.
When would a Corporate Bankruptcy be appropriate?
Assigning a company into bankruptcy should be considered a last resort for a company that has done everything it can to stay in business, but is no longer considered viable. Once the company goes into bankruptcy, it cannot operate again UNLESS all of the creditors are paid in full.
Initially the Directors of the corporation would seek the advice and assistance of a federally licensed Trustee in Bankruptcy as a trustee is the only person or firm licensed in Canada to administer the corporate bankruptcy process. The Directors would assign the company into bankruptcy and then the trustee would begin the orderly process of contacting all of the company's creditors and selling all of the company's assets.
Sometimes going through the legal and costly process of bankruptcy is not always necessary, as there is no "net benefit" for unsecured creditors. This situation can happen when the company does not own any assets that could be made available to the unsecured creditors in a bankruptcy. In cases where there are no assets other than assets pledged (i.e. secured) to creditors, or those that are subject to seizure (some Canada Revenue Agency debts, landlord/tennant issues) then there is generally no need to go through a formal bankruptcy process. These businesses can simply stop operating and allow the secured creditors to seize the company assets outside of a bankruptcy.
Quite often small business owners, either those who are operating as a limited corporation or a sole proprietorship, expose themselves to personal obligations and even though the company does not need to go bankrupt, the individual shareholder/director may have to declare personal bankruptcy. These situations can be complex and should be discussed with a Trustee in Bankruptcy to make sure you understand your personal exposure.
There are some situations where a corporate bankruptcy would be deemed necessary. Before bankrupting a company, one must consider if the company has any of the following issues:
Options for Businesses other than Bankruptcy in Canada?
Before filing for corporate bankruptcy in Canada, you must consider all of your options. For most small businesses, the owners, managers and employees have put their blood, sweat and tears into the business and the idea that the company may fail can be heart-breaking. But if a company is a viable business model but just needs to shed some of its operating debts, or get out of contracts or leases that are hindering its profitability, then a Corporate Proposal under the Bankruptcy and Insolvency Act may be an option.
If you have a business and think that a corporate bankruptcy or a corporate proposal may necessary for your business, contact one of our members for a FREE CONSULTATION to discuss your situation.