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Commercial bankruptcy (Ordinary Administration) A commercial bankruptcy would be filed for an insolvent business when the business has ceased operations (or will cease operations) and there are some assets or monies available to be distributed to the Unsecured Creditors. A bankruptcy will allow the proceeds from the sale of assets or other available funds to be distributed to the creditors in a fair and organized manner. All commercial bankruptcies are classified as Ordinary Administration regardless of the value of the realizable assets. A meeting of creditors will be scheduled within 21 days of the filing of the bankruptcy and a Notice of Bankruptcy will be published in the local newspaper. A corporation does not receive a discharge from the bankruptcy (unless all debts are paid in full). Once the administration of the bankruptcy is completed and all assets have been realized on the Trustee will prepare a final Statement of Receipts and Disbursements, distribute any funds available to the creditors, and apply for a discharge of the Trustee. Questions and Answers If a company does not have any assets or any money coming in that would be available to be divided among the creditors would a bankruptcy be necessary?No, the main reason that a bankruptcy would be filed for a company is to have a formal process in place to distribute the available funds to the creditors. If there is enough money to pay something to the creditors but not enough to pay the debts of the company in full it can be complicated to disburse the money without a formal process in place. A bankruptcy can provide a legal process to liquidate the assets and disburse funds in a fair manner. If there are no assets or funds available there would also be no source of funds available to pay the administration costs of the bankruptcy. This means that in order to put the company in bankruptcy the director(s) of the company would have to pay for the costs associated with the bankruptcy. As there would be no benefit for the unsecured creditors it would not be necessary for the director(s) to incur this additional expense. In a lot of situations where the company does not end up filing a bankruptcy the main issue left to deal with relates to the director(s) of the company and their personal liability for certain company debts. The director(s) may end up having to file a personal bankruptcy or proposal to deal with these liabilities. What happens to the assets of a company if it files bankruptcy?A bankrupt company does not have any exemptions. As a result all property is assigned to the trustee for the benefit of creditors. Basically any assets of the company that are not encumbered by a Secured Creditor could be sold to create a distribution for the unsecured creditors. In addition, any accounts receivable payable to the company or any refunds the company was entitled to receive could create a distribution to the unsecured creditors. What is a deemed Trust claim? How does this affect things?A deemed trust is a trust that is established by statute (law) for certain claims, and deemed to be in effect even though there may not be any actual assets or monies held in that trust. For example, the provisions of the Income Tax act create a deemed trust for employee source deductions. The amounts deducted are deemed to be held in trust for the Crown, whether or not the funds have been kept separate and apart from the property of the employer, and notwithstanding any security interest in the property or proceeds thereof. The proceeds are to be paid to the Crown in priority to all security interests. Most deemed trust priorities are reversed when a bankruptcy is filed. For example the deemed trust for GST is no longer in effect when a bankruptcy is filed. The deemed trust for source deductions remains in effect after a bankruptcy is filed. This deemed trust claim puts a charge on all assets. What this means is that CRA will have to be paid in full from the sale of any assets before funds can be disbursed to the unsecured creditors. CRA in effect owns all assets of the company (including assets that are encumbered by most secured creditors). If you are thinking about selling assets on your own to pay debts owing by the company you must be aware of this deemed trust priority. A bankruptcy trustee can help you to ensure that all transactions comply with legal requirements and funds are disbursed in the proper manner. I am the director of a company that has ceased to operate. The company has debts that can not be paid. How will this affect me?There are a number of debts that a director is liable for automatically. These include GST and source deductions, wages to employees, severance pay, and vacation pay. A director will also be personally liable for any debts for which they have signed a personal guarantee. A director of a company that ceases to operate may end up having to file a personal bankruptcy or proposal to deal with these liabilities. These directors’ liabilities will continue to be present if the company files a bankruptcy. If the company files bankruptcy the director will be responsible to carry out the duties required under the Bankruptcy and Insolvency Act. Can a Creditor force a company into bankruptcy?Yes, a creditor can petition a company (or an individual) into bankruptcy if certain criteria can be proven: 1) The creditor is owed at least $1,000; 2) The debtor (or debtor company) has committed an Act of Bankruptcy in the six months preceding the application. Acts of bankruptcy include: making an assignment of property to a trustee for the general benefit of creditors; making a transfer of property that can be classified as a fraudulent preference; leaving Canada with the intent to defeat or delay creditors; showing insolvency on any correspondence or documentation provided to creditors or making a written admission of being unable to pay debts; assigning or removing property with the intent to defraud, defeat or delay creditors; giving notice to creditors that payments will be suspended or that payments have been suspended; defaulting on a proposal made under the Bankruptcy and Insolvency Act or ceasing to meet liabilities as they generally become due. The Court will review the documentation provided by the petitioning creditor and if the required criteria are proven a Bankruptcy Order will be issued. Continued ... |