What is a corporate bankruptcy, really?

The information provided in this article does not, and is not intended to, constitute legal or professional advice; instead, all information and content in my article is for general informational purposes only.

A corporation is insolvent when it is no longer able to pay its obligations as they generally become due, and the sale of its assets would not be sufficient to enable payment of all its obligations. When a corporation is experiencing financial distress or insolvency, one of the options available to address the debt is bankruptcy. However, bankruptcy is not the only option. There are other options available if business owners seek advice and assistance early. This article will discuss the corporate bankruptcy process and how it generally works.

A corporate bankruptcy is a legal proceeding under the Bankruptcy and Insolvency Act (the BIA) that takes place either voluntarily, when the director of the entity files an assignment of the company’s assets to a Licensed Insolvency Trustee (LIT) for the general benefit of creditors, or involuntarily, when a creditor files a petition in a provincial court for a Bankruptcy Order adjudging an entity bankrupt.

In Canada, only an LIT who has had their license granted by the Office of the Superintendent of Bankruptcy (OSB) can act as Trustee in Bankruptcy.

An assignment in bankruptcy will typically be filed in the locality of the debtor company, meaning where the debtor company carries on the majority of its business. Corporations are separate legal entities, and each is unique. Each corporation will own a different mix of assets and have different debts and obligations. While the bankruptcy process that is followed by the LIT will be the same, no two corporate bankruptcies are exactly alike.

A question our Trustees are often asked is, “How does the bankruptcy process get started?”. The answer is by simply making a phone call or sending an email to an LIT. The LIT will typically provide an initial consultation to discuss the insolvent company’s specific financial situation and then advise about the options available to the company to address its debts. Although filing a bankruptcy does cost money, it does allow for an orderly wind up of the debtor company and provides transparency for stakeholders. If bankruptcy is the best option forward, the LIT will assist with the preparation of the initial filing documents and submit them to the OSB.

Once the corporation has been assigned into bankruptcy or a bankruptcy order is granted by the Court, the LIT will take possession of the company’s assets. This typically includes attending the corporation’s premises, communicating with principals and staff, changing locks, completing an inventory of the assets, ensuring there is sufficient insurance in place and generally securing and protecting assets. Within 21 days of the date of bankruptcy, there is a first meeting of creditors (FMOC) where inspectors can be appointed. Inspectors, generally appointed from the creditors in attendance at the FMOC, act similar to a board of directors and provide direction to the LIT throughout the bankruptcy engagement. The LIT will then run a sales process to liquidate the assets in an orderly fashion. Once all assets have been realized upon, the LIT will distribute proceeds to the corporation’s creditors based on their ranking set out in the BIA.

Insolvency can happen for any number of reasons, from poor or inexperienced management, to major changes within an industry, or an economic downturn. When a company is experiencing insolvency, or is on the verge of insolvency, it is important for that company to reach out to an insolvency professional, whether an insolvency lawyer or an LIT, to discuss options available. The earlier a business owner contacts an insolvency professional the more options there will be to choose from. In an upcoming article we will discuss one of those alternative options, a Proposal.