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Corporate and small business FAQ

1. What happens after a corporation is bankrupt?

  • The bankruptcy of a company winds it up.
  • After the bankruptcy documents are signed and filed with the Office of the Superintendent of Bankruptcy, the Licensed Insolvency Trustee sells and assets with a realizable value and the proceeds are distributed to the creditors in accordance with the scheme of distribution as set out in the Bankruptcy and Insolvency Act.
  • The trustee deals with outstanding tax returns.

2. Am I liable for my spouse’s corporation debt in Canada?

  • A spouse is not liable for the debts of their spouse’s company unless they are a director of the company or unless they have provided a personal guaranteed on any of the company’s debts.
  • In some circumstances, a spouse will be asked to provide a personal guarantee to the bank that lends money to a company.

3. What application do I need for a corporate bankruptcy?

A licensed Insolvency Trustee will prepare the documents needed for a company to go bankrupt and will file those documents with the Office of the Superintendent of Bankruptcy.

4. Are corporate bondholders the first creditors in line in a bankruptcy?

  • The order of priority of distribution in a bankruptcy in Canada would be: 1st – Canada Revenue Agency in respect of unpaid employee source deductions; 2nd – secured creditors; 3rd – Trustee’s fees, 4th – preferred creditors; 5th – unsecured creditors.
  • The position of the bond holder would depend on whether they have security over the company’s assets.

5. Will the property still have lien on it when a bankruptcy is filed?

  • Once a bankruptcy is filed in Ontario, an automatic Stay of Proceedings is put into place (“Stay”). The Stay provides complete protection from creditors; it prevents creditors from commencing or continuing a legal action.
  • The Stay does not automatically remove a lien from a property, but it makes the lien unenforceable.

6. Are small business owners liable for business debts?

  • A corporation is a separate “person” from the owner or director. The owners or directors are not liable for the corporation’s debts except – directors are liable for unpaid wages, vacation, Employee Source Deductions and GST/HST.  In addition, an owner or anyone else who provided personal guarantees to certain creditors would be liable for those guaranteed debts.
  • Debts that typically (but not always) have a personal guarantee would include a bank debt or a landlord. In rare circumstances, suppliers may require a personal guarantee.
  • The bankruptcy of a corporation has no effect on the owners’ credit rating.
  • A small business owner would be liable for the business’ debts if it is not an incorporated company. e. if the small business is a sole proprietorship or partnership, then the owners are liable for all the debts.

7. How does a small corporation in Canada file for bankruptcy protection?

  • A corporation in Canada can only file for bankruptcy protection with a Licensed Insolvency Trustee (“LIT”). The first step is to meet with a LIT to discuss the options and go over any questions you will have.  The LIT will then work with you to gather the information needed for the LIT to prepare the documents needed for a corporation to file for bankruptcy.  When the documents are signed, the LIT will file them with the Office of the Superintendent of Bankruptcy.  Once the documents are filed, the corporation will be bankruptcy.
  • The bankruptcy of a corporation provides protection from creditors. But a bankruptcy is not the only option.  A bankruptcy will wind up the corporation.  For a corporation that has hit a bump in the road or can become viable if its’ debts are restructured, a Proposal is another option that provides same protection as a bankruptcy, but allows the corporation to continue its’ operations.

8. What is the average cost of corporate bankruptcies in Ontario?

  • The cost of a corporate bankrupt depends on many factors including the nature of the business, the assets, whether operations have shut down before the bankruptcy and the number of employees.
  • In most corporate bankruptcies, the fees and costs are paid from the realizations of the assets.
  • You should consult with a Licensed Insolvency Trustee to discuss the options and costs for your corporation.

9. Does closing a business down provide bankruptcy protection?

  • The bankruptcy of a company winds it up, it provides protection from creditors and prevents them from suing the company. It also deals with the outstanding tax returns and the requirement to file future tax returns.  If the owner has lent or invested money in a company, a bankruptcy is the easiest way to prove that the money cannot be collected, which will allow a portion of the losses to be used to reduce the amount of personal taxes of the owner.
  • Simply closing the business does not provide protection from creditors; even if operations cease, creditors can still sue the company. The closing of a company does not end the requirement and cost to continue to file tax returns.

10. What is the impact of a corporate bankruptcy on shareholders?

  • A corporation and the shareholders are separation “persons”. The shareholder is not liable for the corporation’s debts unless they have provided a personal guarantee to the creditor (e.g. a bank or a landlord).  A shareholder does not have to be a director of a corporation, but if they are, the directors are liable for unpaid wages, vacation pay, employee source deductions and GST/HST.
  • Otherwise, the bankruptcy of a corporation will have no effect on the shareholders and will not affect the shareholders’ credit rating.

11. What does the Bankruptcy and Insolvency Act do?

  • BIA is the federal legislation to governs how bankruptcies, proposals and receiverships are administered in Canada.

12. Does the bankruptcy of a corporation affect the owner’s personal credit rating?

  • A corporation is a separate “person” from the owners or directors. If the business is a corporation, then the owners or directors are not liable for the corporation’s debts except – directors are liable for unpaid wages, vacation, Employee Source Deductions and GST/HST.  In addition, an owner or anyone else who provided personal guarantees to certain creditors would be liable for those guaranteed debts.
  • Debts that typically (but not always) have a personal guarantee would include a bank debt or a landlord. In rare circumstances, suppliers may require a personal guarantee.
  • The bankruptcy of a corporation has no effect on the owners’ credit rating.
  • If the business is not a corporation (i.e. if it is a sole proprietorship or partnership), then the business and the owner are the same “person”. In this case, the owners are liable for all the debts. The bankruptcy of a sole proprietorship or partnership will result in the bankruptcy of the owner.

13. What are the insolvency options for corporations in Ontario?

  • Many people use the term bankruptcy to describe different things.
  • In fact, Bankruptcy is a legal state. It happens when a company assigns itself into bankruptcy or when a credit makes an application to court have the company put into bankruptcy.
  • The bankruptcy of a company provides protection against its’ creditors. It also results in the effective wind up of the company.
  • Another option for a company that is having financial difficulty is a proposal. A proposal also provides protection from creditors, but allows the business to continue to operate. A proposal is an effective option for a business that is viable, but just needs help restructuring its’ debts and/or operations.

14. Are sole proprietors protected in a bankruptcy?

  • A sole proprietorship is a business that has not been incorporated. Because it is not incorporated, there is no distinction between the owner and the business. The debts of the business are also the personal responsibility of the owner.
  • Therefore, the filing for bankruptcy protection for the sole proprietorship would mean a filing for the individual owners.
  • The owner could file a proposal or a bankruptcy.
Business Bankruptcy FAQ was last modified: January 22nd, 2018 by Licensed Insolvency Trustee