Navigating Through Rough Waters: Exploring Paths For Financially Troubled Businesses
When a financial tempest leads a company into troubled waters, its survival chances must be evaluated promptly to determine if it’s financially distressed, or in technical terms, insolvent. This state doesn’t feature on any company’s corporate objectives. However, when it does occur, the company, or its creditors, might start seeking protection and solutions provided under bankruptcy and insolvency law. But the triggers of insolvency and the subsequent regulations can be convoluted and intimidating. So, where should one commence?
Understanding Insolvency
The first stride is in comprehending what insolvency entails. Bankruptcy and Insolvency Act (BIA) is the primary law governing insolvencies in Canada. An insolvent entity is defined in the BIA as an individual or organization that:
- Is incapable of fulfilling obligations as they generally fall due;
- Has halted paying obligations as they generally fall due; or
- Whose assets are insufficient to repay all its obligations.
Once a company steps into insolvency territory, it should seek counsel from legal and accounting advisors to understand the implications of insolvency laws on its specific situation. The BIA mandates the appointment of a Licensed Insolvency Trustee (Trustee) to impartially guide companies through formal insolvency procedures and ensure that creditors’ rights are protected. A Trustee often serves as the primary contact for both companies and their creditors as they navigate through insolvency options.
Company directors should be cognizant of the fact that they may be personally held accountable for certain unpaid amounts related to employees, taxes, and other actions that might exacerbate the company’s financial distress. The director’s actions post-insolvency might be scrutinized by unpaid creditors. Therefore, directors are strongly advised to consult their advisors to minimize the risk of personal liability.
The three primary insolvency procedures available to financially distressed companies or their creditors are restructuring, bankruptcy, or receivership. The benefit or impact of these procedures depends on your position relative to the insolvent company.
Restructuring
If an insolvent company can stave off bankruptcy through restructuring or systematic liquidation, a proposal to its creditors under the BIA or the Companies Creditors Arrangement Act (CCAA, used for more complex matters) should be contemplated.
Companies entering a proposal process can take advantage of the “stay of proceedings” which generally halts all parties from taking or continuing action against the insolvent company. Additionally, not all creditors need to agree as the conditions of an approved proposal are binding on all creditors irrespective of their individual vote.
Creditors should contact the Trustee and their advisors to fully grasp the implications of the stay of proceedings, any requirements to continue supplying goods and services, and how their claim is treated under the proposal. Therefore, the period leading up to the vote on the proposal is a crucial time for creditors to negotiate improvements to the proposal made by the insolvent company.
Bankruptcy
Bankruptcy is an option when a company’s viability is no longer feasible. Companies may declare bankruptcy either by assigning themselves into bankruptcy to halt financial drain and minimize director liabilities or by creditors seeking a court order declaring the insolvent company bankrupt.
A Licensed Insolvency Trustee is hired to liquidate the corporate assets and then distribute the resulting funds to creditors according to legal priority. Generally, the Canada Revenue Agency tops the priority list for certain amounts owed to them, followed by creditors with valid security registered against the company assets. The remaining creditors are typically grouped into a pool of unsecured creditors that share any remaining funds proportionately.
Creditors of bankrupt companies should ensure that the Trustee provides them with:
- Notice of the First Meeting of Creditors – the Trustee must conduct a meeting of creditors where an update on the bankruptcy will be given, and votes held. Creditors are not required to attend the
- First Meeting of Creditors, and an update on the bankruptcy process can be obtained by requesting a copy of the Trustee’s Report; and
- Proof of Claim – All creditors must file a proof of claim with the Trustee to verify the amounts owed by the bankrupt company, irrespective of any amounts shown on the original bankruptcy documents. Creditors will not share in any payout from the bankruptcy unless they have filed a proof of claim, and it has been accepted by the Trustee. Any creditor with snique rights such as liens, security, or other concerns should contact the Trustee to discuss how they plan to address these issues.
Receiverships
Receiverships are the main realization option for secured creditors of insolvent companies. Secured creditors must notify the insolvent company 10 days in advance of their intention to enforce their security before appointing a receiver. The insolvent company then has that notice period to negotiate an alternative with the secured creditor, agree to the appointment of the Receiver or initiate a restructuring process which would then stay the secured creditor from proceeding with the receivership appointment.
A Receiver assumes control of the assets and operations charged by the security agreement (or as directed in the appointing court order). The Receiver has a general duty to all parties involved.
Creditors of companies in receivership should contact the Receiver to discuss how the company is being handled and get details about payment expectations. Creditors should note that a company in receivership is often also assigned into bankruptcy, resulting in their claim being dealt with according to the bankruptcy process.
If your business is facing hardships in the current economy, you’re undoubtedly not alone. Every corporate insolvency situation is unique. To determine which of these options will work best for your business, initiate a conversation with a corporate insolvency professional.
