16 – Small Business Bankruptcies: When Your Employer Is in Receivership

Wayne  0:04  

Welcome to another edition of the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. And in today’s show, we’re going to be talking about small business Bankruptcies and what to do if your employer lays you off. 

To teach us about this, my guest today, Daniel Maksymchak from LCTaylor, Licensed Insolvency Trustee in Winnipeg, Manitoba. 

Daniel, welcome back. How are you?

Daniel Maksymchak  0:32  

I’m great. Thanks. Thanks for having me back. How are you doing?

Wayne  0:35  

Terrific. This is a big topic where I think a lot of small businesses in Canada are in financial trouble because of what happened with the pandemic. And we’re probably going to see – what do you think? Small businesses are going to be closing at record rates? Not to be dire.

Daniel Maksymchak  0:55  

Yes, unfortunately, I’d say that that’s quite likely. It depends on what kind of support will continue going forward here and how fast the economy recovers. And if people feel comfortable going into stores and restaurants in their normal amounts again. But yes, it’s been tough – coming on two years now that these businesses have had to go through and I’m sure that had a strain on the finances for a lot of them.

Wayne  1:21  

I was talking with one restaurant owner, and he did have some of his employees end up with COVID. So he had to have – he had to close for, I think, three weeks or something. And he said it cost him 80 grand to be closed. And that was still with half capacity or maybe even less. 

That’s a lot of money that businesses have been losing. Are there warning signs that an employer might be in financial difficulty that we as workers can keep an eye on?

Daniel Maksymchak  1:52  

There are, if you know what to look for. It can be helpful to protect yourself and watch out for the worst impacts of that. And of course, the warning signs that are visible to you are going to largely depend on the role that you’re in, in the company. 

Of course, if you’re in the finance or accounting department, you’re probably going to have a much different perspective and more obvious perspective of things than with someone in sales or a server or something like that. So some of the warning signs that you could see, if you don’t have much visibility of the actual finances of the company would be – stuff in your day to day job that are changing. And perhaps reflecting, a decreased cash flow or a decreased ability to fund things on the part of the business. 

So if you notice that stocks are dwindling, the company is not keeping as much inventory, perhaps – it’s because there’s not the cash there to buy the inventory, and the shelves are empty because of that. 

Or if you deal with suppliers, who are maybe complaining or mentioning offhand that they’re not getting paid as quickly, it may be a sign that the business doesn’t have the money to pay them – caretaking, maintenance, that sort of thing. 

Falling behind can be a sign of cash flow issues, as well. The most obvious one, and the one that’s going to impact you personally would be if your employer wasn’t able to pay your payroll on time, or asks you to defer it for a period of time or something like that. Of course, that’s where the risk to you becomes more apparent. Because the nature of the job is you’re providing your services or your labor in exchange for money, and you want to make sure that the money is going to be received when it comes due.

Wayne  3:35  

Any advice on what to do if that situation occurs – where they say, okay, just I don’t have the money this week, but I’ll pay you next week.

Daniel Maksymchak  3:42  

Well, it’s a bit of a balancing act, because you want to make sure that the company survives for the long term, hopefully, so that you do have that employment for the long term, but you don’t want to, if it’s a lost cause, you don’t want to do it at your own expense. 

So if you’re asked to defer your wages or something like that, or the payroll is not made, definitely speak up and find out why and make sure that you get a satisfactory answer for that. And that you’re confident that things are going to be able to turn around and ensure your continued employment if you do agree to that. Otherwise, you’re risking by deferring things you’re risking, that you may or may never get paid for it. If a Bankruptcy or receivership did occur, then that definitely reduces your likelihood of getting paid what you are owed at least in full.

Wayne  4:31  

So I guess we’ve started talking about the employee and trying to watch what’s going on with a business that might be having financial trouble. But now let’s kind of switch over to the employer that is in trouble. They know their business is having a tough time and you mentioned bankruptcy and receivership. Are they the same? What’s the difference?

Daniel Maksymchak  4:52  

No. So they’re often thought of as the same but they are different legal processes. Sometimes they do occur concurrently. But they are, as I said, separate legal processes. 

What a receivership is –  that’s done by a secured creditor – a creditor that has collateral on one or more significant assets of the business, to essentially realize on that collateral or get the best return on that collateral so that they can get paid as much as possible of what they’re owed. Receivership can be that secured creditor taking control of the business or taking control of certain assets of the business. 

And it may be such that those assets are substantial enough that the business can’t continue anymore. So effectively, it causes the business to shut down. Whereas a Bankruptcy is the business shutting down. Usually, it’s the case that the company isn’t viable, and that the company has assets and the unsecured creditors. So the creditors of that business with no specific assets as collateral but are owed money – the Bankruptcy, what it does is it allows for the orderly distribution of the assets of the company to those unsecured creditors, in accordance with the government priorities, and then how they are laid out. 

So they are different processes. But if you’re an employer, if you’re the business owner, essentially, they’re very similar and that your business is often done. And if you’re an employee from the same end, it’s your job that is often done. So legally, they are different processes. But depending on your relationship and your involvement with that company, there may not be much practical difference from your perspective.

Wayne  6:37  

Okay. Now, what about this Bankruptcy that I hear about where they then restructure the company? Is that a different entity on its own?

Daniel Maksymchak  6:46  

Yes. So then those are further proceedings. It could be what’s known as a Division One Proposal, which is a proposal made to your creditors to rather than liquidate the business – to essentially restructure the debt and get it to a manageable amount or manageable repayment terms where the business can continue to function. 

Or for larger companies, there’s something called the CC double A company’s creditors arrangement act, that does the same thing. It’s a court monitored process where the company can try to restructure itself, sell its restructuring plan to its creditors and get approval so that it can rearrange itself and continue to function as a viable entity ideally.

Wayne  7:33  

Okay, I was downtown talking with somebody. And we were mentioning, or they mentioned to me that oh, this barber, next door was doing great, but now they’re having a real tough time. And they’re looking at moving because of this – and they’re looking at declaring Bankruptcy because they have a couple of big debts that they want to get rid of. And I mentioned, well, we have this podcast and talked with all these great experts who can help out business owners. Is a business owner’s Bankruptcy different from a business Bankruptcy? Are they the same?

Daniel Maksymchak  8:10  

It depends. It’s going to come down to if the business is incorporated or not, largely. An incorporated entity is a separate legal entity from its owners. If this barber is an incorporated business, doing the barbershop operation, then that business theoretically could go bankrupt, without the barber himself going bankrupt personally and affecting his personal assets. 

But if the barber is just a sole proprietor – he didn’t ever didn’t incorporate, and he’s cutting hair and operating his business under his own name, then there’s no legal distinction between his barbershop business and him personally. Which means that in a Bankruptcy, not only would the business assets and those assets of the barbershop come into play, but also his personal assets would as well. Perhaps his house or investments that he had or anything that he had, personally not necessarily related to the business.

Wayne  9:07  

Good to know. So when we look at this kind of a situation, is Consumer Proposal available for businesses? Or is it called something different?

Daniel Maksymchak  9:20  

Consumer Proposals are available to sole proprietors – also individuals, as long as they meet the other criteria of the Consumer Proposals. If it’s a corporation, then it’s a different sort of proposal called The Division One proposal in the Bankruptcy and Insolvency Act. And it can be similar. It’s just done by a corporation and it would be the corporation theoretically making payments out of its future income to settle the payments of the debts of the past. 

Wayne  9:52  

I love how I can just throw these things out – and you actually remembering all the different names of these different parts of the government and law legislation. That’s amazing. So, when it comes to Bankruptcies, let’s talk about business owners. They’re having a tough time and all of a sudden they’re just not getting the income to settle their debts. At what point do you appreciate them contacting you?

Daniel Maksymchak  10:15  

The sooner the better. To be honest, the sooner things are in the process, the earlier things are – there’s more options available. Sometimes things get too far along. And by that time, maybe the Canada Revenue Agency is already leaning certain assets or certain creditors may have already repossessed assets, and then there’s less to work with from the perspective of a restructuring.Because there’s less assets available to, to deal with in that situation and to look at selling off parts of the business to save those parts that are still viable, and whatnot. 

So if you want to retain control as a business owner, you are best to speak with a Licensed Insolvency Trustee as soon as possible so that you can have the full suite of options available to you – as opposed to having the creditors kind of drive the bus and have already kind of hived off the valuable parts of the business. Then there’s less viable tools in the toolbox of the Trustee, to perhaps save that business.

Wayne  11:20  

And I think this is one of the main things we want people to learn with the Debt Matters podcast is that they can reach out to a Licensed Insolvency Trustee and get free advice on that first contact. And often that is enough to give them a little roadmap of where they can go and how they can maybe weather the storm.

Daniel Maksymchak  11:41  

Yes, absolutely. And as you say, most Trustees, certainly us here at LCTaylor, offer free consultations for these business owners or anyone else who’s interested in knowing what his or her options are. And making sure that they are fully informed when they’re deciding how to respond to perhaps inquiries from their lender or different creditors, badgering them for payment. It’s good to know what your options are before you go into things that you can’t turn around from.

Wayne  12:11  

And if my employer declares Bankruptcy, or is in receivership, is there anything that I can do regarding my job in that situation? Or do we just continue as normal?

Daniel Maksymchak  12:23  

Well, if it’s a Bankruptcy or receivership in most cases, the job is essentially terminated. So sometimes the Receiver or the Bankruptcy Trustee, depending on the role of the employee, may enter an agreement with that employee to continue offering services after the Bankruptcy –  so as to assist the Trustee and provide better outcomes for the creditors. 

But in most cases, that employee is going to effectively be terminated as a result of the Bankruptcy or receivership. And once that termination is in effect, it’s the same as any other termination from a job legally – you’re still entitled to termination pay, any vacation pay that you might be owed is payable. But the problem is that if the company is bankrupt, or in receivership, it’s one thing to be legally owed this money – and it’s another thing, unfortunately, to be able to collect on that money.

Wayne  13:16  

So can you recover that money? How does that work?

Daniel Maksymchak  13:21  

There are protections in the Bankruptcy Insolvency Act for employees who are unfortunately put in this situation. But they haven’t really kept up with inflation, at least in recent years. It’s capped at $2,000 of the amount that employees owed – is considered to be preferred. And it would rank ahead of many of the other claims in the Bankruptcy. So there’s a good chance that that would be paid out, you’d get your first $2,000 that you owed. But after that any remaining amount that you’re owed is just a regular unsecured claim in the Bankruptcy along with maybe the business’s credit cards or its janitorial contract or any other thing like that – that is owed by the business. You would rank in there, and you would receive your prorated share of that money, which in a Bankruptcy, receivership is usually pennies on the dollar for an unsecured creditor like that.

Wayne  14:17  

Right. Okay. And who knows how long that would even take?

Daniel Maksymchak  14:20  

Ye`, and that’s the other part too. It’s not only are you taking a large loss lightly on the amount owed and which you are also not going to be getting it anytime soon. So it’s not going to help you pay the bills and put food on the table in the meantime.

Wayne  14:33  

Right. I hope that most of the employers that are going through this painful Bankruptcy, and I hope they do have the money set aside for their employees who often help them with the business.

Daniel Maksymchak  14:46  

Yes, and that’s usually – we do see that they try and make sure the employees are taken care of, at least for current wages. But when the Bankruptcy is filed, that also triggers some other monies that the employees are owed for termination pay – now they’ve got to go in and find another job. 

Whereas if they were laid off in the normal course, they would either have gotten notice to allow them to go and find another job, or they would have been paid in lieu of notice, to get them through that period where they’re looking for another job. And in Bankruptcy, they don’t have that ability. 

So without that termination pay, it really becomes an issue for these employees to survive in the meantime until they find another job. And the employers, they pay your current wages many times for what you’ve earned up to the date of Bankruptcy. But sometimes they don’t realize where they simply don’t have the funds to make good on that termination amount that’s owed.

Wayne  15:41  

You can still get employment insurance through this?

Daniel Maksymchak  15:45  

Yes, you would qualify for – I would count as a regular termination for that. And there is another program, it’s called the Wage Earner Protection Program, which was set up essentially to assist employees in this exact situation, who are owed money by a business that’s in Bankruptcy or receivership. But by virtue of the fact that they’re in Bankruptcy or receivership, they don’t have the money to pay this amount that’s owed. 

So what essentially happens is the government will pay the claim on behalf of the business. And then the claim of the employee for whatever amount is owed then becomes the claim of the government. So instead of the business owing you an amount for your termination pay, the business owes the government and the government gives you that termination pay out of public funds. And it’s a very good program. It helps out in these situations. 

It is often more timely than receiving the money through the normal course. But there are some drawbacks in that it is capped. So it’s capped equal to seven weeks of the maximum EI amount payable, which currently is about $7,500. So if you’re owed more than that, you wouldn’t receive the access through that program. 

And as well, it only applies in cases where the company has formally declared Bankruptcy or receivership or entered into another sort of restructuring. If the business just simply shuts the doors and ceases to operate, it doesn’t trigger that legal proceeding of Bankruptcy or receivership which brings this legislation into play.

Wayne  17:13  

Oh, very good information. I did have one question, as you were talking about that. Can a person who is seeing their business now become bankrupt -is it okay for the employee to reach out to an LIT?

Daniel Maksymchak  17:27  

Oh, sure. Yes, there’s no harm in that. We wouldn’t charge for that. You could explain your situation as to what you’re perhaps experiencing with your business. And, you know, we could certainly try to offer advice and how to protect yourself and what’s available to you, as an employee going forward. 

But it would be the responsibility of the Trustee of the bankrupt business that has to reach out to the employees and arrange for this whereas, it is a requirement under the law that the Trustee or Receiver, prepares the necessary paperwork, files, and the necessary claims with the government. And as long as the employee does their part, then the government will transfer that funding to the employee.

Wayne  18:08  

Terrific. Well, that was good to know. So it’s going to happen one way or another, somebody will be in contact with them. This would be great information. Anything else you need to add to today’s topic, Daniel?

Daniel Maksymchak  18:17  

No, I think that’s a good description. I’ll just add, again, if, as you’ve mentioned, if you’re either an employer or an employee in this situation from COVID, or any other kind of circumstance, don’t hesitate to reach out to a Licensed Insolvency Trustee in your area, to discuss what options are available to either as the employer or as the employee to try and limit the damage so to speak. 

I know that employers want to look after their employees. And of course, try to save what they can of their business and the employees want to ensure that they can continue to put food on the table for their families. There’s no harm in reaching out to an LIT to try to make that happen as best as possible given the circumstances.

Wayne  19:01  

Terrific. All right. Well, Daniel, thank you very much for all the information and if somebody wants to reach out to you or the team at LCTaylor, they can go to the website LCTaylor.com. And that’s it for today’s Debt Matters podcast. 

We do ask that you subscribe wherever you get your favorite podcast from and of course if you want more information, you can always check out our website debtmatters.ca Thanks very much for listening.