Despite the best efforts of the owners of a business, a corporation may experience financial distress at any point as part of a normal economic or business cycle, during rapid growth, loss of key management, poor or limited financial records, general misfortune or many other unforeseen events. It is imperative that the company act quickly to maximize the recovery available from the assets and/or avoid increasing debt to reduce the risk to the directors of the corporation for certain statutory and personally guaranteed debts.
What is corporate bankruptcy?
Corporate Bankruptcy is a legal process to allow for an orderly closure or sale of an incorporated business when the continued operation of the company is no longer viable and there are insufficient assets available to pay out the creditors.
It is a voluntary process where all of the directors of the corporation sign a resolution to assign the company into bankruptcy but can also be involuntary where a creditor files a petition in court to obtain an order to place the company into bankruptcy. The trustee takes possession of the assets and records on the date of bankruptcy and the principals of the corporation are no longer in control.
The creditors are generally stayed from taking any action against the assets of the corporation on the filing of the bankruptcy. The trustee will sell the assets or in some cases sell the business as a going concern, subject to the rights of secured or priority creditors. Any funds remaining are distributed to the remaining creditors.
The trustee fees for a corporate bankruptcy are based on the hours spent to administer the bankruptcy. The fees may be recovered from the sale of the assets of the company. In the event that there are insufficient assets to pay the fees, the trustee will likely request a retainer based on the estimated costs.
The corporate bankruptcy has no bearing on your personal credit rating unless you have personally guaranteed the corporate debts or became liable for statutory obligations of the company as a director. If this is the case, these become personal debts of yours and you may be responsible for paying them if the corporation does not.
When a corporate bankruptcy may be recommended?
- The company is experiencing ongoing losses and the business is no longer viable.
- You are unable to obtain statutory licenses, permits or meet other criteria to continue to operate your business.
- You are involved in costly litigation or contract disputes that are depleting your profits and the risk of a successful outcome is low.
- Your lender has demanded repayment of your loan or is unwilling to continue extending or increasing credit.
- You have rent arrears, employee payroll obligations, taxes or seizure of assets for debt that you are unable to meet from your current cash flow.
- You have sufficient assets in the corporation to cover the expenses of a Licensed Insolvency Trustee or funds available personally for a retainer but are unable to pay all the creditors.
Corporate bankruptcy should be your last resort as it involves the closure of your business. If you believe that your business is viable in the long term but is just crippled with excessive debt repayment terms, short-term cash flow restrictions, and/or onerous contracts or leases, you may wish to consider a restructuring option such as a Division I business proposal.
How do I obtain more information?
At D. Kwasnicky & Associates Inc., we offer a free corporate financial assessment where we meet with you to review the options available for your corporation.