IntroductionInsolvency is an embarrassing subject and as such, people do not tend to talk about it much. Therefore, there are plenty of misconceptions about the assistance and options available, and the participants in any insolvency or restructuring. We hope to help you understand the basics of Canadian insolvency procedures.
Often there are no right answers in insolvency, merely choices.
Canadian InsolvencyIn Canada, it is safe to assume that if a debt cannot be paid when it is meant to be paid then the company, partnership or person owing the money is insolvent.
Canadian insolvency procedures are largely governed by the federal Bankruptcy and Insolvency Act, although other laws regularly come into play such as the Companies Creditors Arrangement Act, Wage Earner Protection Plan Act, Income Tax Act and various provincial Companies Acts and environmental laws. All these laws interact and can make insolvency seem confusing.
Only Licensed Insolvency Trustees can deal with formal insolvency procedures. These are people who have either passed exacting specialist examinations to gain their federal Licenses, if you need to consider insolvency options then these are the people you must see.
Rarely nowadays, there are some who were “grandfathered” into the profession many decades ago before the examinations, and they retain Licenses too.
Insolvency DifferencesInsolvency is separated into Corporate (company) and Personal (individuals) branches. Each side of insolvency is broadly the same although differences do arise.
Corporate Insolvency deals with the affairs of limited companies. The various scenarios that companies can enter into are informal restructurings, Proposals, Bankruptcies, Plans of Arrangement, and informal wind downs.
Bankruptcies will almost certainly spell the end of a business but depending upon circumstances the other actions may leave a viable enterprise. Restructuring a company’s capital can even avoid the need for a formal insolvency procedure altogether.
Personal Insolvency deals with the affairs of those who are not protected by limited liability. In other words, individual persons with debts, partnerships and some unincorporated businesses. Difficulties are addressed via Proposals, Bankruptcies, Deeds of Arrangement and informal settlements with creditors.
Directors' LiabilitiesCompanies are usually limited liability corporations, which should mean that debts of the company stick with it and that directors (or shareholders) are not responsible for company debts. However, Canadian federal and provincial law have various statutes that impose liabilities on directors in the event of an insolvency, in large part to protect the government and environment.
Baigel Corp. ensures that directors are aware of the liabilities that may possibly affect them, and if necessary, will put a plan together that deals with both the debts of the company and directors.
Insolvency vs BankruptcyThere is often confusion between insolvency and bankruptcy, but insolvency is not bankruptcy.
Insolvency is when a company or person cannot pay their debts once they are due to be paid, or if they have insufficient assets to meet their liabilities. At this time, you still have several options to rescue, protect and preserve your business, assets and family life.
Bankruptcy itself is the formal state of insolvency once a Court Order has been made or the insolvent entity (company or person) has assigned themselves into a bankruptcy. There are legal requirements in order for a bankruptcy to occur, such as more than $1,000 being owed to more than a single creditor.
Bankruptcy itself splits into 2 very different sectors – corporate bankruptcy and personal (also known as consumer) bankruptcy.
Corporate bankruptcy requires a Licensed Insolvency Trustee to realize the value of a company’s assets, and distribute the funds to those who are owed money by the company according to a ranking in the Bankruptcy and Insolvency Act. A close analogy is that you could consider that the company has died and the Licensed Insolvency Trustee is the executor of the will.
Once a corporate bankruptcy occurs, there are limited options for the company, but good advice beforehand can ensure that the directors do not expose themselves to personal liabilities or breaches of their fiduciary duties. Sometimes, we will need to plan for the directors to deal with personal liabilities arising from the company’s affairs once the corporate bankruptcy occurs. Baigel Corp. does not leave directors to fend for themselves after the corporate bankruptcy.
Personal bankruptcy is obviously about people and how to put their lives back together, which is why Baigel Corp. prefers the term “personal” to “consumer”. We never forget that we are dealing with people’s personal lives, and their family’s lives. Approximately 90% of bankruptcies in Canada are personal bankruptcies.