What Happens to a Business When a Shareholder Goes Bankrupt?

Understanding the Effects of Shareholder Bankruptcy on Business Operations

When a major stakeholder in a business operation goes bankrupt, it can stir up a whirlwind of questions and concerns. This article will demystify what happens to a business when a shareholder goes bankrupt?

Can a Shareholder’s Bankruptcy Impact the Business?

A common misconception is that a shareholder’s personal bankruptcy can negatively impact the corporation. However, the business entity and the shareholder are two distinct legal entities. For instance, if a shareholder of a major bank declares bankruptcy, it would not directly affect the bank’s operations or financial standing.

When a shareholder files for bankruptcy, they may need to relinquish their position as a director but can continue to hold their shares. The real question that needs to be addressed is whether it is viable for the business to continue operating if it is the primary cause of the shareholder’s financial strife.

Reevaluating Business Viability

“Should the business continue operations if it’s causing financial strain to its stakeholders?”

 

If the business is a contributing factor to the shareholder’s debt, it’s essential to reassess whether it’s worth continuing operations or if restructuring or even dissolution might be a more feasible option. Banks often consider the financial standing of shareholders while lending to corporations. In most cases, if the company is performing well, the lender will continue to provide financial support.

Shareholder Bankruptcy and Its Impact on the Company

When a shareholder declares bankruptcy, their shares in the company are transferred to the Trustee in Bankruptcy. The Trustee, usually not interested in running the business, calculates the present value of the shares and requires the bankrupt shareholder to compensate the bankruptcy estate based on this value. If the company’s debts surpass its assets, rendering the shares worthless, the Trustee will likely return the shares to the shareholder.

 

“Will my home be seized if I declare bankruptcy?”

 

A commonly asked question is whether one’s residence would be seized in the event of a bankruptcy. The answer to this question depends on various factors and it’s best to seek professional advice in such circumstances.

The Inclusion of Company Debts in Personal Bankruptcy

“If the business ceases operations, your personal bankruptcy will free you from any personal guarantees you’ve provided.”

 

The company’s debts included in a personal bankruptcy depend on whether the business continues post-bankruptcy. If it does, the company remains responsible for all its debts, even after a shareholder’s bankruptcy. However, the shareholder’s liability for company debts, for which they’ve provided a personal guarantee, is limited to the amount of these debts at the time of bankruptcy.

If the business ceases operations, the shareholder’s personal bankruptcy releases them from their personal guarantees to the company’s creditors, as well as director’s liability for unpaid HST and payroll deductions.

Abandoning the Corporation

If the company is the root cause of a shareholder’s financial distress and holds no salvage value, the shareholder might opt to abandon the corporation. In such cases, assets with liens or mortgages will be seized and sold by the creditor holding the lien.

 

“The protection offered by personal bankruptcy doesn’t extend to the company and its creditors.”

 

When a shareholder decides to abandon the company, they must first resign as a director. If possible, they should also settle outstanding HST and payroll returns and close those accounts to avoid unnecessary calls from the Canada Revenue Agency.

The protections offered by personal bankruptcy do not extend to the company and its creditors. Hence, when interacting with the company’s creditors, it’s crucial to inform them that the business has shut down, the shareholder has declared personal bankruptcy, and they no longer work there. The creditor can then legally seek debt collection from the company.

Navigating Through the Challenges

Although none of this process is enjoyable, it’s important to approach these issues with a clear understanding. If you’re looking to start afresh, comprehending these matters and handling them correctly is crucial. An LIT (Licensed Insolvency Trustee) can guide you through these critical decisions.

Bankruptcy Canada is a Licensed Insolvency Trustee, offering practical and personalized solutions for those under significant financial stress.

Our services include:

 

  • Reviewing your debt solution options, including filing a consumer proposal or personal bankruptcy.
  • Helping Canadians with overwhelming debt get a fresh financial start.
  • Dealing directly with your creditors once you file a consumer proposal or personal bankruptcy.

 

Our experienced and supportive team ensures prompt responses and resolution of issues. Contact us for a free consultation to review your financial situation and practical debt resolution options.

We are available over the phone, video chat, or in-person at various locations.

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