Facing financial difficulties is a common scenario for businesses, and sometimes, it may lead to bankruptcy. If your business is based in Ontario and you’re considering Ontario Business Bankruptcy as a potential solution, this guide can help shed light on the process, implications, and alternatives.
Introduction
Financial predicaments can occur for various reasons – market downturns, inadequate cash flow, or high levels of debt. In such cases, Ontario Business Bankruptcy might seem like the only way out. But, is it the best choice for your business? Navigating bankruptcy involves understanding its nuances, implications, and alternatives.
The Essence of Bankruptcy
Bankruptcy is a legal proceeding involving a business or individual unable to pay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors. All the debtor’s assets are measured and evaluated, where possible, the assets may be used to repay a portion of outstanding debt.
Business Structures and Bankruptcy
Sole Proprietorship
In a sole proprietorship, the business and owner are the same legal entity. If a sole proprietor declares bankruptcy and wishes to continue the business, they will be treated as a new legal entity post-bankruptcy. Consequently, they may require a new business number for their new Revenue Agency accounts.
Partnership
In a partnership, if one partner declares bankruptcy, the partnership may cease to exist. However, in a larger partnership, if a single partner declares bankruptcy, the partnership may continue to operate, subject to an agreement between the remaining partners.
Corporation
Corporations, unless they can repay all debts owed at the time of bankruptcy, may cease to exist. If you wish to dissolve an incorporated business or start a new one, you will have to contact the government body that governs your corporation’s affairs.
When is Bankruptcy the Right Choice?
Deciding whether bankruptcy is the right choice involves understanding your business’s financial situation and future potential. Bankruptcy might be the best option if:
- The business has ceased operations, and you seek an orderly, legal way to wind it down.
- The business is not profitable, with no chances of profitability in the future.
- The business has irrecoverable debts, and you lack the time or energy to continue with the business, even if the debts were settled through a proposal to creditors.
Bankruptcy Terms
Before we delve deeper, let’s understand some key bankruptcy terms:
Company Insolvency: A company unable to pay bills and debt owed.
Personal Bankruptcy: A legal process that allows an individual who cannot pay their bills to eliminate debt.
Small Business Bankruptcy: A legal process that allows an insolvent small business to eliminate debt.
Corporate Bankruptcy: A legal process that allows an insolvent incorporated business to wind down the company and eliminate debt.
Consumer Proposal: A legal process that allows an insolvent individual to substantially reduce debt or change payment terms.
Division I Proposal: A legal process that allows an insolvent person or corporation to substantially reduce debt.
Licensed Insolvency Trustee (LIT): An individual licensed by the federal government of Canada to draft and file bankruptcy papers on behalf of insolvent individuals or companies.
When to Consider Bankruptcy
Bankruptcy should be considered when a business is insolvent due to various reasons such as loss of income, high levels of debt, inadequate cash flow, or reliance on personal credit to meet business or even household expenses.
How Different Businesses File for Bankruptcy
Sole Proprietorships and Partnerships
For unincorporated businesses such as sole proprietorships and partnerships, the business and owner(s) are seen as one. The assets of the business are personal, belonging to the business owner(s). This means these businesses would file a personal bankruptcy and are personally liable for any debt.
Corporations
For incorporated businesses, the assets and liabilities belong to the business. Here, the business goes bankrupt, not the individual. The legal structure of a corporation protects the individual’s assets in a bankruptcy proceeding.
The Bankruptcy Process
When you decide to proceed with bankruptcy, the first step is to meet with a Licensed Insolvency Trustee (LIT). The LIT provides all the information you need, but the final decision is yours. Once the paperwork has been signed and filed, all collection activity and legal proceedings will stop. The LIT will notify creditors and negotiate solutions that will put your debt troubles behind you.
Role of a Licensed Insolvency Trustee
In Canada, only a Licensed Insolvency Trustee is qualified to help you through the bankruptcy process. They can advise you on the best course of action, protect your interests, and ensure that your creditors are treated equitably.
Alternative to Bankruptcy
If your business’s downturn is temporary, you may want to consider alternatives to bankruptcy, such as a Consumer Proposal or a Division I Proposal. These alternatives can provide you with the breathing room you need to get your business back on its feet.
Bankruptcy is a complex process, and this guide is intended to provide a broad understanding of it. However, the specifics of your situation may differ. It is recommended to seek professional guidance to understand the best steps for your business.
