What is Small Business Bankruptcy? Why Can’t I Wind up the Company Myself?

Small business bankruptcy is a legal process that a company can enter into if a business is having financial issues, trouble repaying creditors and is unable to pay back debts. In a small business bankruptcy, a Licensed Insolvency Trustee analyzes the assets and debts of the business and determines what will happen with the assets, based on the company’s situation. Assets are sold or disposed of and the value of the assets sold is then distributed to creditors.In the vast majority of small business bankruptcy cases, the business operations of the company stop at the date of the bankruptcy. The trustee performs the necessary administrative functions to wind down the business. This includes closing accounts, handling creditors and filing the final business tax returns.

What is a Licensed Insolvency Trustee?

A Licensed Insolvency Trustee is an individual who has completed significant training and passed examinations in order to be registered by the federal government. The federal Office of the Superintendent of Bankruptcy licenses trustees to administer bankruptcy and insolvency proceedings under the federal Bankruptcy and Insolvency Act.

Once licensed, a trustee become an officer of the court. This means that they are held to high ethical standards and that they have an obligation to promote justice and effective operation of the judicial system.

Why Can’t I Close Business Operations Myself?

It is possible for a small business owner to simply close up the business by himself or herself. However, this process is not recommended for businesses that have significant debts and financial obligations. If a Trustee is involved in a bankruptcy, the creditors of the company have the comfort of knowing that an officer of the court is dealing with the sale of the assets and distribution of the proceeds in a fair and proper manner.

The creditors do not have the same level of comfort if the small business owner is winding down the company themselves. As a result, creditors could take legal action against the business and its owners.

There are other reasons why simply closing the business yourself is not recommended.

Tax Implications and the Canada Revenue Agency

A trustee is responsible for several functions related to the closing of a business, including filing final tax returns and closing accounts with the Canada Revenue Agency (CRA), such as HST/GST accounts. The CRA can assess a director of a business for certain company debts, depending on the situation. This includes HST/GST debts as well as payroll source deductions. Therefore, it’s crucial that these accounts are closed and that the CRA is notified of the bankruptcy so that interest charges and penalties do not continue. A Licensed Insolvency Trustee makes sure that all accounts are closed correctly and in accordance with the law.

If a business shuts down without filing for bankruptcy, the HST/GST and payroll source deductions accounts must still be closed and returns must still be filed. In addition, a company’s obligation to file corporate income tax returns does not end unless the company goes bankrupt or it is formally wound down. (Note, a company cannot be wound down if has debts.) This will either result in unnecessary work for the business owner or unnecessary costs due to working with accountants and legal professionals.

Working with Creditors

Creditors and other stakeholders in a business will need assurance that all activities of the business are being handled correctly when a company shuts down. A creditor who is owed money will be (often rightly) quite suspicious if a company that owes them money shuts down without notice of bankruptcy. The creditor will worry about whether or not they will get what is owed to them. When a creditor is told that a business has filed for bankruptcy and that a Licensed Insolvency Trustee is working to sell or dispose of assets and distribute the proceeds to creditors, they have confidence that the process is going according to the law and that they will receive what they are entitled to.

A trustee can also be counted on by creditors to make sure that assets are sold or disposed of in a manner that is best for the situation and that the proceeds from the sale of the assets are distributed in accordance with the law. For example, while most businesses stop operation at the date of bankruptcy, many retail stores may instead hold a “going out of business” sale in order to achieve maximum value for the assets of the business. A trustee will complete this work and therefore enhance the return to creditors.

Creditors may take issue with a business selling assets without a trustee while the company is insolvent. Creditors may feel that they have no course of action other than to take legal action against the business in order to receive what they deserve. This can be costly and time-consuming for a business owner to deal with. When a company files for small business bankruptcy, creditors are not able to commence legal action against the business to collect debts that are owed to them. In addition, any such legal action that is currently underway must also stop.

Filing for small business bankruptcy also dissolves the company and prevents the director(s) from being held personally liable for future debts.

Filing for small business bankruptcy provides appropriate “closure” to a business that has had to shut down due to financial struggles. It saves the business owner from the time, hassle, cost and legal obligations associated with dissolving the company.