Business Bankruptcy

When can a business go bankrupt?

A business can choose to become bankrupt when it owes over $1,000 and is insolvent. A business is insolvent when it is unable to make payments on its debts as they become due, or if it would be unable to pay off its debts even if the business assets were sold.

How can a business go bankrupt?

A business can go bankrupt in one of three ways. First, a business can voluntarily declare bankruptcy. This is the most common event. Second, a business will become bankrupt if it makes a proposal to its creditors which is not accepted by them.

Third, the creditors of a business can sometimes push the business into bankruptcy by filing a petition with the court. Petitions are very rare.

A business bankruptcy will be handled by a licensed trustee in bankruptcy who will handle the sale of the business’ assets and the distribution of proceeds to creditors. Usually, the assistance of a bankruptcy lawyer is required and the situation should be reviewed with a lawyer before the trustee is engaged.

Effect of bankruptcy

The effect of business bankruptcy will depend on whether the business is a sole proprietorship, a partnership, or a corporation. If your business is a sole proprietorship or a partnership, it is important to recognize that the bankruptcy of your business will result in your personal bankruptcy as well. As a result, most of your personal assets such as your car and home could be sold to satisfy business debts, and the bankruptcy would appear on your personal credit record. If your business is a corporation, your business can go bankrupt without involving your personal assets, unless you have personally guaranteed a loan or you are a director and the company has failed to make payments such as GST, Retail Sales Tax, or remit employee source deductions. Before filing for bankruptcy, make sure you fully understand the effect of your business’ bankruptcy on your personal situation.

During a business bankruptcy, business owners sometimes have an opportunity to buy back the business equipment and start up the business all over again, free of most debts. However, a deliberate failure with a view to buying assets back could be fraud and have criminal sanctions.

When a business goes bankrupt, the trustee takes all of the assets and sells them to pay off as many of the debts owed to the creditors as possible. Often if the business has a secured creditor such as a bank with a General Security Agreement, the bank will appoint someone called a Receiver to conduct the sale and the trustee will merely monitor matters on behalf of unsecured creditors. This is generally done through some form of public sale process, such as a solicitation of bids, tenders or auction, although private sales are also common. This can be a very complicated procedure. Make sure you consult a lawyer or an accountant for specific legal and financial advice before choosing how to proceed.