Small Business Bankruptcy in Canada

Introduction

For the purposes of this article, “bankruptcy” will mean “personal bankruptcy“. This article is written to address the common misconception that if a business owner files for personal bankruptcy, it will also deal with his business debts. This isn’t necessarily true, as we shall discuss.

Will small business debts be dealt with in a bankruptcy?

The answer is “yes” and “no” depending on whether you incorporated your business.

Small business bankruptcy when you’re a sole proprietor

If you’re operating as a sole proprietor, you business debts are your personal debts. Likewise, your business assets are your personal assets.

So by filing for personal bankruptcy, you will deal with your “consumer” debts like credit cards as well as your “business” debts like unpaid wages, unremitted HST and unremitted payroll taxes.

Once you obtain your discharge from bankruptcy, you’ll be discharged from your business debts as well as your consumer debts.

Small business bankruptcy when your business is incorporated

As a general rule, if you’re operating your business as a corporation, your business debts (and business assets) are separate from your personal debts (and personal assets).

This is because a corporation is a “legal person” – it’s a legal entity that’s separate from you. You are merely the owner of the shares of the corporation and in most cases, you’ll also likely be the corporation’s director.

Therefore, if you file for personal bankruptcy, it doesn’t absolve the obligation of your business corporation to pay its suppliers, unpaid employee wages, unpaid commercial rent, unremitted HST, unremitted payrolls, etc.

Let’s put it another way – suppose you own shares in Apple. If you file for personal bankruptcy, does this imply that Apple has filed for bankruptcy as well? Of course not!

Likewise, you are the shareholder of your business corporation. If you file for personal bankruptcy, does this imply that your business has filed for bankruptcy as well? No, it does not.

Now, with the above being said, if you’re the director of the corporation, you are personally liable for certain statutory debts such as unremitted HST and unremitted payroll taxes. You’d also be liable for any personal guarantees you gave to certain business creditors such as the landlord under a commercial lease or a bank under a business loan agreement. However, these director liabilities and personal guarantees can be dealt with in a personal bankruptcy or consumer proposal proceeding.

Filing a corporate bankruptcy

So how would you deal with your business debts if your business is incorporated? You would need to put the corporation itself into bankruptcy. The process for doing this is as follows:

Meet with a Licensed Insolvency Trustee

You meet with a Licensed Insolvency Trustee to assess your business’s financial situation and your options to deal with it. If you and your Trustee conclude that your business has no financial viability going forward, a corporate bankruptcy could very well be a solution for you.

Provide your Trustee with a guarantee for his fees

Your Trustee will likely ask you for a deposit to guarantee his fees. The amount of the deposit will depend on the complexity of the engagement and hence the number of hours your Trustee will require to administer it. Generally speaking, a business with little or no assets and a small number of creditors will usually require less hours to administer than a business with many assets and many creditors.

Hold a meeting of directors

Assuming you’re the director of your company, you’ll be required to hold a meeting of directors in which you will resolve to file the corporation into bankruptcy. The minutes of that meeting will look something like this.

Sign the bankruptcy paperwork

As director, you and the Trustee will sign two documents:

1. 1. The Statement of Affairs, which is a sworn affidavit as to the financial status of the business corporation. The Statement simply lists the company’s assets and liabilities.
   2. Assignment for the General Benefit of creditors. This is the document which actually renders your business corporation bankrupt.

The Trustee e-files electronic copies of these documents with the Office of the Superintendent of Bankruptcy, which then appoints the Trustee as the Trustee of the corporate bankruptcy proceedings.

Attend the meeting of creditors

As director, you’ll be required to attend a meeting of your company’s creditors. The meeting takes place within 21 days after the corporation files its bankruptcy.

The meeting has three main purposes:

1. 1. It provides your business creditors an opportunity to ask questions about the circumstances that led to your business filing for bankruptcy.
   2. If there are business assets of significant value, it provides a forum where the creditors can provide the Trustee with instructions on how these assets should be liquidated for their benefit.
   3. The Trustee provides a report to the creditors on any “reviewable transactions” he may have uncovered when reviewing the business’s financial records. In particular, the Trustee will be attentive to any dispositions of corporate assets to non-arms lengths parties within the 12 month period prior to bankruptcy.

In most cases where there are no significant business assets and no reviewable transactions uncovered by the Trustee, the meeting of creditors is the last event a business owner has to personally attend. The Trustee will wrap things up after the meeting of creditors by filing a final corporate tax return for the company and will then proceed to close his file.