As Canadians businesses struggle to find their feet in a new post pandemic era, a significant number report their concern over the potential for Bankruptcy. Add to the mix staff shortages, skyrocketing inflation and rising interest rates – it is a critical time for many small businesses.
How does Bankruptcy work for the self employed vs an incorporated or limited company? Derek Chase, Licensed Insolvency Trustee, discusses business Bankruptcy and how it affects individuals within the business.
He also covers:
- The difference in the terminology between the US and Canada
- How various businesses are structured
- The decision making process with a Licensed Insolvency Trustee
- How employees are covered with the Wage Earners Protection Act
- Company Creditors Arrangement Act – Division One Proposals
- Steps for filing a business Bankruptcy
If you are struggling financially with your business, Licensed Insolvency Trustees can help you take control of your debt. They are considered some of the best financial advisors in the country and the only ones licensed by the federal government of Canada.
Read the Transcript
Wayne Kay 00:04
Welcome to 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 talk about business Bankruptcy in Canada.
Now, how does it actually work and what are the different types of business structures in our country that will make a difference to your business Bankruptcy? If your business does go into Bankruptcy, will it affect you personally? How do you go about putting your business into Bankruptcy?
And will your employees still get paid if you declare Bankruptcy for your business?
To walk us through this and more, Derek Chase is joining me from Derek L Chase & Associates Ltd. Licensed Insolvency Trustee serving Vancouver Island, Sunshine Coast and the North Coast of BC.
Derek, thanks for being on the show.
Derek L. Chase 00:56
You’re welcome, Wayne. It’s a pleasure to be here.
Wayne Kay 00:58
Today is a great big topic, business Bankruptcy in Canada. When it comes to these Bankruptcies, do you find that a lot of people think of Canadian Bankruptcies similar to American Bankruptcies? Are they different?
Derek L. Chase 01:13
They’re definitely different in the terminology and the way they unfold. But at the end of the day they are similar in that the business’s assets are typically going out to the creditors.
So in that way it’s similar. But the terminology we often hear references to chapter eleven or chapter seven or the chapter business and that simply just doesn’t exist in Canada. It’s not part of the process.
Wayne Kay 01:40
So if you hear about business Bankruptcy in Canada, that means things are rolling to stop the creditors, whereas in America they have that chapter eleven where they can then just restructure things, I guess.
Derek L. Chase 01:53
Well, there’s still lots of ways to restructure in Canada as well. Sure the labels or the terminology is different and I think probably a good place to go here at this time is just talk about how business is done in Canada, because there’s different business structures and that determines a lot how the Bankruptcy filing is made.
So for example, a self employed person, that person is really acting as an individual unless they’re incorporated or have a limited company. And if they don’t have an incorporated or limited company, their results for their business are going straight on to their personal income tax return. But it can still be classified as a business Bankruptcy. And that’s a little bit different than when you get into a setting where you have a company and now that company is like a separate legal entity.
It’s got its own tax return, it can own its own property, it enters into leases. So that’s a different setting and that’s sometimes hard for people to get their head around. They change those terms back and forth, but it definitely makes a difference as to what sort of filing is available to you.
Wayne Kay 03:14
Can we actually back it up even more than that? How does business Bankruptcy in Canada actually work?
Derek L. Chase 03:20
Well, if you’re self employed as an individual business, Bankruptcy works very much along the lines of personal Bankruptcy and that the individual is making the Bankruptcy filing.
Now in a corporate setting where you have a company that’s incorporated or limited company, the directors of that company are assigning the company into Bankruptcy and the Trustee will come in and take control of the assets of the business and sell it or continue to operate it or wind it down.
In both events, the creditors are getting notice of the Bankruptcy, the creditors are getting access to assets that are free and clear. So it’s form versus substance here. It’s just a bit of a confusing point as to how the business is actually operating. Whether it’s a self employed individual or whether it’s a corporation, it does make a difference.
Wayne Kay 04:21
And if it’s a corporation, it does not affect the owner or does it?
Derek L. Chase 04:26
That’s what a lot of people think and we should spend a couple of minutes on that because creditors are smart. They’ve been around the block more than once and they’ve been stung and had their bad debt. So what most creditors will do is even if they’re dealing with the corporation and that’s where the account is set up, they will get a personal guarantee on that account as well.
And that personal guarantee is typically signed by either the President or a director or someone that’s involved in that company. So even if the company all of a sudden just stopped and there were no assets to recover, that creditor can then look at their paperwork and say, AHA, I’ve got the President here as a personal guarantor, I’m going to go collect from them now. So they dance around that corporate structure to be able to still collect.
Wayne Kay 05:20
What about if you’re like the solopreneur then and your business goes into Bankruptcy, I guess it would affect you personally the same way an individual would declare Bankruptcy or how does that work?
Derek L. Chase 05:34
Well, if you’re the owner of a business that’s doing business through a company, the company discontinues or goes into Bankruptcy and the creditors potentially come after you personally, then you have the same choices that any individual would have to be able to do either a Consumer Proposal or a Bankruptcy filing to get relief from the debt that’s following you.
So it’s kind of a two stage decision making process. You look at the business, you say, is this business worth saving? Should this business do a proposal or should it just close or should it be assigned into Bankruptcy? If the answer is to close it or put it into Bankruptcy, then the second stage decision is what does that mean for me personally? Am I going to have too much debt coming at me personally because I’ve guaranteed all these things in regards to the corporation if it had lots of income tax debt, that type of debt doesn’t need to be guaranteed.
If the income tax department wants to raise an assessment against a director being the President or Vice President or something like that, they can just do it and then all of a sudden that shows up on your personal notice of assessment. So that two stage process of decision making is one that we like to step through though, to firstly decide what’s going to happen to this company or business right now.
Wayne Kay 07:08
What about when it comes to restructuring you mentioned can this company be saved or not be saved? Is that something that you get involved with when somebody comes to you and says OK, my business is in trouble?
Derek L. Chase 07:22
Yes, that’s a hard one to generalize because there are so many different types of businesses. A lot of times we see businesses where they’re really quite small businesses. It could be just an individual who has incorporated a company and they’re flowing sort of their regular work as a drywaller or a faller in the logging industry and that money is just flowing through that company very quickly. There’s no assets in the company to speak of and the money is taken out as soon as it goes into the company.
That’s quite in contrast to a company that’s got stores all across Canada or a company that’s got all sorts of equipment and employees. The Bankruptcy and Insolvency Act applies equally to both those settings but they’re drastically different situations.
So if you have that setting where it’s a national company, there’s a lot more restructuring in the sense of getting different lenders involved. And in that setting there’s usually big lenders and you could end up with what’s called a Receivership which is when the lender takes control because they’ve got a general security agreement.
Wayne Kay 08:46
Now, you actually mentioned the term employees. If you go into Bankruptcy, business goes into a Bankruptcy, do the employees still get paid?
Derek L. Chase 08:56
Well, there’s been quite a controversial point over the last number of years and the government has brought in a program to help employees get paid in those settings. It’s called a Wage Earners Protection Act and it will take a backward looking lens as to how much the employees can get paid and employees would have to file evidence of their time and file a claim with the trustee.
But there is a process in larger settings, larger business Bankruptcies mainly, where employees can get some pay that they were owed. And if you’re an employee of a big company that has recently discontinued and is in Bankruptcy or Receivership, all I would say there is get in touch with the Trustee inquire about this wage Earner Protection plan and file your claim because if you don’t file that claim you’re not going to see any money.
Wayne Kay 09:59
Well, and knowing how tough it is for so many Canadians right now, if you’re actually working for somebody and this happened and you missed out on some of that money that could be quite detrimental to a family.
Derek L. Chase 10:12
Yes, for sure. It’s money that’s owed to you and you should get it. But you do have to take some action. It’s not going to just automatically come to you. You have to have to be in touch with the Trustee and file.
Wayne Kay 10:28
We’ve got some time here. Can you explain to me how somebody puts their business into Bankruptcy? What are the steps?
Derek L. Chase 10:38
Well again it’s two different settings really. If it’s self employed as an individual the steps are very much like any personal Bankruptcy. You’re in touch with the Trustee. You provide the Trustee with the information and then the Trustee prepares the documents and the individual would sign them and that’s when the protection starts.
For a business that’s a corporation, you do have to get the permission of the directors to assign the company into Bankruptcy and that’s a setting where if you have a smaller corporate entity that is closely controlled can be pretty easily done. If it’s a bigger company there’s more things to consider.
But at the end of the day with the corporation the director is given permission to assign it into Bankruptcy and then the company is providing the Trustee office with the information as to what are the assets, what are the debts you know the pertinent information in order to prepare the forms. The forms are then drafted up and the authorized director will sign it into Bankruptcy.
Wayne Kay 11:57
Does the ‘too big to fail’ saying ever hold true to maybe the bigger corporations that might be in financial trouble?
Derek L. Chase 12:06
Yes, I think so. I think for the national outfits that have lots of assets you typically see some sort of restructuring where they come out of it still operating. In our office we’re not involved in any national filings so I can’t speak to that through experience.
But you do see that where a company will be in some type of insolvency setting and it will still continue to operate and it will still continue to function.On the other side of the insolvency filing there’s another term in Canada when you have a company that has more than $5 million of debt that’s called the Company Creditors Arrangement Act.
So there are different ways for a corporation to restructure its debts or do a Corporate Proposal. Another one is called a Division One Proposal. So there are ways for some of these big operating companies to do that and lots of times that has a lot of attention from insolvency lawyers and it’s a national setting but it happens.
Wayne Kay 13:26
And when you say a corporate proposal is that the same as a Consumer Proposal for myself or any individual?
Derek L. Chase 13:34
It’s the same concept where you’re making an offer to the creditors. There are a number of differences in the structure of that. Probably the main one is if Division One proposals voted down there’s a deemed Bankruptcy filing right away. There’s no choice as to what happens next. Whereas in a Consumer Proposal there’s more choices.
Wayne Kay 13:59
Got you. I love watching some different business shows where they have a business person go in and they start looking at the books and they realize how upside down a company is and then they look at restructuring and they make this thing successful. Do you find that there is hope for businesses who are having a tough time? Maybe it’s that solopreneur who’s listening that they just need some accounting help.
Derek L. Chase 14:27
Yes, it could be a setting where part of a person’s business is unprofitable and another part is highly profitable and you just need a sort of a fresh set of eyes to point that out and you get rid of the unprofitable side of things and turn it around. So it’s never a bad idea to have another set of eyes, take a look at a situation and provide some ideas or thoughts about ways to move on to greener pastures. For sure.
Wayne Kay 14:54
Okay, good. So there is hope for us is what you’re saying.
Derek L. Chase 14:58
There’s always hope for us.
Wayne Kay 15:01
I think a lot of people get a little stressed out thinking, what if I can’t turn this around? What am I going to do? And just the whole emotional feeling of the business because oftentimes that is their child. I mean, they created this. It’s got to be so tough to let it go.
Derek L. Chase 15:17
I don’t think you can say that loud enough. Because for the self employed person that’s just living at every waking moment sort of thing, and thinking about it before they go to bed and when they wake up and they put so much effort and sweat and time into building this business and then all of a sudden you get COVID or all of a sudden you get some other macroeconomic event that could just change everything. And, yes, entrepreneurs are a pretty special breed of people to keep getting up and keep swinging.
Wayne Kay 15:55
Yes, and we thank them for what they do because they make the world go round. Absolutely. Derek, any final words of advice?
Derek L. Chase 16:03
Well, business Bankruptcy in Canada, it’s there, it happens, it happens in different formats and it’s a good structure. It’s well worth finding out about if your business is needing some advice.
Wayne Kay 16:17
Terrific. Derek, thanks very much for all this information today on the show.
Derek L. Chase 16:25
You’re more than welcome.
Wayne Kay 16:35
My guest today, Derek Chase, and you can learn more or you can schedule that free consultation with Derek at Bankruptcytrusteebc.ca.
And that is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information you can always check out debtmatters.ca. Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.