Purpose

As the president of a struggling corporation facing insurmountable debts, you find yourself considering bankruptcy. This playbook outlines the steps you need to take during the bankruptcy process in Canada. Remember to consult legal and financial professionals for personalized advice.

Players

1. The President (Player):
   • Role: The president of the struggling corporation.
   • Responsibilities:
     • Decision-Maker: Ultimately responsible for deciding whether to declare bankruptcy.
     • Communication: Communicates with stakeholders (shareholders, directors, employees).
     • Cooperation: Collaborates with professionals (LIT, lawyer, accountant).
     • Personal Liability: Evaluates personal guarantees and potential personal liability.
     • Reflection: Reflects on lessons learned post-bankruptcy.
2. Licensed Insolvency Trustee (LIT):
   • Role: An independent professional licensed by the government.
   • Responsibilities:
     • Guidance: Assists throughout the bankruptcy process.
     • Assessment: Evaluates the corporation’s financial situation.
     • Asset Liquidation: Identifies and sells assets to generate funds.
     • Debt Distribution: Ensures fair distribution to creditors.
     • Discharge: Facilitates the discharge process.
3. Lawyer:
   • Role: Legal advisor specializing in insolvency and bankruptcy law.
   • Responsibilities:
     • Legal Guidance: Provides legal advice to the president.
     • Document Preparation: Assists with bankruptcy paperwork.
     • Personal Guarantees: Advises on personal liability.
     • Legal Compliance: Ensures adherence to legal requirements.
4. Accountant:
   • Role: Financial advisor with expertise in accounting and taxation.
   • Responsibilities:
     • Financial Assessment: Assesses financial records and tax obligations.
     • Tax Compliance: Ensures proper handling of corporate taxes.
     • Financial Planning: Helps manage financial aspects during bankruptcy.

Remember, each player has a critical role in navigating the bankruptcy process effectively. Their collaboration and expertise are essential for minimizing losses and ensuring a smooth transition.

Play

1. Assess the Situation

• Understand the corporation’s financial health:
  • Review financial statements, tax records, and outstanding debts.
  • Consult with accountants or financial advisors.
• Determine if bankruptcy is the best course of action.

2. Consult Legal and Financial Advisors

• Seek professional advice:
  • Licensed Insolvency Trustee (LIT): Appoint an LIT to guide you through the process.
  • Lawyer: Consult a lawyer specializing in insolvency and bankruptcy law.
  • Accountant: Work with an accountant to assess financial implications.

3. Pre-Bankruptcy Preparation

• Gather necessary documents:
  • Corporate records (articles of incorporation, bylaws, etc.).
  • Financial statements.
  • Tax returns.
  • Contracts and agreements.
• Inform key stakeholders:
  • Shareholders, directors, and employees.
  • Notify creditors of the impending bankruptcy.

4. Declare Bankruptcy

• File for bankruptcy:
  • The LIT will assist with the paperwork.
  • The corporation becomes the bankrupt entity.
  • A stay of proceedings prevents legal actions by creditors.

5. LIT’s Role

• Collaborate with the LIT:
  • Provide all relevant information.
  • Cooperate during the assessment process.
  • Attend meetings as required.

6. Liquidation of Assets

• The LIT:
  • Identifies and values assets (inventory, equipment, real estate).
  • Sells assets to generate funds for creditors.
  • Prioritizes secured creditors (e.g., banks with liens).

7. Distribution to Creditors

• Proceeds from asset sales are distributed:
  • Secured creditors (mortgages, liens).
  • Unsecured creditors (suppliers, contractors).
  • Shareholders (if any remaining funds).

8. Personal Guarantees

• Assess personal guarantees:
  • If you provided personal guarantees for corporate debts:
    • You remain personally liable for those obligations.
    • Consult legal advice on managing personal liability.

9. Discharge

• After completing the bankruptcy process:
  • The corporation receives a discharge.
  • Most debts are legally forgiven.
  • The corporation ceases to exist.

10. Post-Bankruptcy

• Inform stakeholders:
  • Notify employees, suppliers, and customers.
  • Address any remaining loose ends.
• Reflect on lessons learned:
  • Understand the reasons for the corporation’s financial difficulties.
  • Plan for the future.

Corporate Bankruptcy Schedule

Week 1: Pre-Bankruptcy Assessment and Preparation

1. Day 1 (Monday):
   • Morning:
     • Assess Financial Health:
       • Review financial statements, tax records, and outstanding debts.
       • Consult with accountants or financial advisors.
   • Afternoon:
     • Consult Legal and Financial Advisors:
       • Appoint a Licensed Insolvency Trustee (LIT).
       • Consult a lawyer specializing in insolvency and bankruptcy law.
       • Work with an accountant.
2. Day 2 (Tuesday):
   • Morning:
     • Gather Documents:
       • Collect corporate records (articles of incorporation, bylaws, etc.).
       • Compile financial statements, tax returns, contracts, and agreements.
   • Afternoon:
     • Inform Stakeholders:
       • Notify shareholders, directors, and employees.
       • Inform creditors of the impending bankruptcy.

Week 2: Declaring Bankruptcy and Initiating the Process

3. Day 8 (Monday):
   • File for Bankruptcy:
     • Complete necessary paperwork with the LIT.
     • Corporation becomes the bankrupt entity.
4. Day 9 (Tuesday):
   • LIT’s Role:
     • Collaborate with the LIT:
       • Provide all relevant information.
       • Attend meetings as required.

Week 3: Asset Liquidation and Debt Distribution

5. Day 15 (Monday):
   • Liquidation of Assets:
     • LIT identifies and values assets.
     • Begin selling assets to generate funds for creditors.
6. Day 16 (Tuesday):
   • Distribution to Creditors:
     • Prioritize secured creditors (e.g., banks with liens).
     • Allocate proceeds to unsecured creditors and shareholders (if any remaining funds).

Week 4: Personal Liability and Discharge

7. Day 22 (Monday):
   • Assess Personal Guarantees:
     • Evaluate personal guarantees for corporate debts.
     • Seek legal advice on managing personal liability.
8. Day 23 (Tuesday):
   • Discharge:
     • After completing the bankruptcy process, receive a discharge.
     • Most debts are legally forgiven.
     • Corporation ceases to exist.

Week 5: Post-Bankruptcy and Reflection

9. Day 29 (Monday):
   • Inform Stakeholders:
     • Notify employees, suppliers, and customers.
     • Address any remaining loose ends.
10. Day 30 (Tuesday):
    • Reflect and Plan:
      • Understand reasons for financial difficulties.
      • Plan for the future.

Remember to consult the provided references and seek professional guidance throughout the process . Good luck!

References:

1. Office of the Superintendent of Bankruptcy Canada
2. Canadian Bar Association – Bankruptcy and Insolvency Law
3. Licensed Insolvency Trustee Directory

Please note that this playbook provides a general overview. Consult professionals for personalized advice based on your specific circumstances.

Appendix

1. Dissolution vs. Bankruptcy:
   • Dissolution: A corporation can apply for dissolution when it has no property or liabilities. This process ends the corporation’s existence. However, if the corporation is bankrupt, it cannot request dissolution under the Canada Business Corporations Act (CBCA). Bankruptcy does not automatically dissolve a corporation.
   • Bankruptcy: If a corporation is insolvent and unable to meet its financial obligations, it may choose to go bankrupt. Bankruptcy involves legal proceedings and is typically handled by a licensed insolvency trustee. It does not necessarily lead to dissolution.
2. Steps for Dissolving a Corporation:
   • Approval by Shareholders:
     • If the corporation has shareholders but no property or liabilities, shareholders can approve dissolution by special resolution.
     • If there are multiple classes or groups of shareholders, each class must pass a special resolution.
   • No Shareholders:
     • If no shares were issued (thus no shareholders), the directors can pass a resolution to authorize dissolution.
   • Dissolving with Property or Liabilities:
     • A corporation can be dissolved only after distributing its property and discharging its liabilities.
     • Two Approaches:
       1. Liquidation before Dissolution:
          • Shareholders pass a special resolution authorizing directors to distribute property and discharge liabilities.
          • Directors then dispose of property and liabilities before applying for a certificate of dissolution.
       2. Starting Dissolution before Liquidation:
          • If the corporation will cease business during liquidation, it can apply for a certificate of intent to dissolve.
          • Shareholders authorize liquidation and dissolution by special resolution.
          • The certificate of intent serves as public notice that the corporation is no longer active, except for necessary liquidation activities.
3. Liabilities:
   • Corporate Tax: Before dissolution, ensure all tax obligations are met. File any necessary tax returns and pay outstanding taxes.
   • HST (Harmonized Sales Tax): Settle any HST liabilities with the Canada Revenue Agency (CRA).
   • Other Debts: Discharge all other debts and commitments.
4. President’s Role:
   • The president’s responsibilities during dissolution include:
     • Ensuring proper procedures are followed.
     • Coordinating with shareholders, directors, and legal advisors.
     • Overseeing the distribution of assets and settlement of liabilities.

Remember, it’s essential to seek legal advice to navigate the dissolution process effectively and meet your corporation’s specific needs

In the unfortunate scenario where a corporation is facing insurmountable tax debts and is heading towards bankruptcy, several important considerations come into play. Let’s address your questions:

1. Corporate Tax and HST Liabilities:
   • Corporate Tax: The corporation is responsible for paying its corporate income taxes. If the corporation owes a significant amount of corporate taxes, it must address this obligation. Failing to pay corporate taxes can lead to legal consequences.
   • HST (Harmonized Sales Tax): Similarly, the corporation is liable for any outstanding HST payments. The HST collected from customers must be remitted to the Canada Revenue Agency (CRA). Failure to do so can result in penalties and interest.
2. Bankruptcy Process:
   • When a corporation goes bankrupt, it initiates a formal legal process. Here’s what happens:
     • Licensed Insolvency Trustee (LIT): The corporation appoints an LIT to oversee the bankruptcy proceedings. The LIT assesses the corporation’s financial situation, liquidates assets, and distributes proceeds to creditors.
     • Stay of Proceedings: Once bankruptcy is declared, a stay of proceedings prevents creditors from pursuing legal actions against the corporation. This gives the corporation some breathing room to reorganize or wind down its affairs.
     • Liquidation: The LIT sells the corporation’s assets (such as inventory, equipment, and property) to generate funds for creditors.
     • Distribution to Creditors: The proceeds from asset sales are distributed among creditors according to their priority (secured creditors, unsecured creditors, etc.).
     • Discharge: After completing the bankruptcy process, the corporation receives a discharge, officially releasing it from most of its debts.
3. President’s Liability:
   • The president of the corporation is not personally liable for the corporation’s debts unless they have provided personal guarantees or engaged in fraudulent activities.
   • However, if the president has personally guaranteed any corporate debts (e.g., loans), they remain personally responsible for those obligations even after bankruptcy.
   • The president’s role during bankruptcy includes cooperating with the LIT, providing necessary information, and ensuring a smooth process.
4. Avoiding Personal Bankruptcy:
   • To prevent personal bankruptcy, the president should:
     • Avoid Personal Guarantees: Refrain from personally guaranteeing the corporation’s debts whenever possible.
     • Seek Legal Advice: Consult legal professionals to explore options for minimizing personal liability.
     • Separate Personal and Corporate Finances: Maintain clear separation between personal and corporate finances.

Remember that bankruptcy is a complex legal process, and seeking professional advice is crucial. An LIT can guide the corporation through bankruptcy while protecting the president’s personal interests. If you’re facing this situation, consult with legal and financial experts promptly.

Working with a Licensed Insolvency Trustee (LIT)

Let’s delve into the details of working with a Licensed Insolvency Trustee (LIT) during the corporate bankruptcy process:

1. Role of the LIT:
   • An Independent Professional: The LIT is an impartial third party, licensed by the government, who oversees the bankruptcy proceedings.
   • Objective Advisor: Unlike company insiders, the LIT provides unbiased guidance and ensures compliance with legal requirements.
2. Responsibilities of the LIT:
   • Guidance and Support:
     • Assistance Throughout: The LIT assists the corporation from the initial bankruptcy filing to the discharge.
     • Educates the President: Helps the president understand the bankruptcy process, rights, and obligations.
     • Communication Bridge: Acts as a liaison between the corporation, creditors, and other stakeholders.
   • Financial Assessment:
     • Evaluates Financial Situation: Reviews financial records, statements, and tax filings.
     • Determines Insolvency: Assesses whether the corporation is insolvent (unable to meet its financial obligations).
     • Identifies Assets and Liabilities: Determines the value of assets and outstanding debts.
   • Asset Liquidation:
     • Identifies Marketable Assets: Works with the president to identify assets that can be sold to generate funds.
     • Maximizes Recovery: Ensures efficient liquidation of assets (inventory, equipment, real estate).
     • Prioritizes Secured Creditors: Sells assets in a way that prioritizes secured creditors (e.g., banks with liens).
   • Debt Distribution:
     • Fair and Equitable: Ensures that proceeds from asset sales are distributed fairly among creditors.
     • Categorizes Creditors:
       • Secured Creditors: Those with collateral (e.g., mortgages, liens).
       • Unsecured Creditors: Those without collateral (e.g., suppliers, contractors).
     • Follows Legal Hierarchy: Distributes funds based on legal priorities.
   • Discharge Process:
     • Facilitates Discharge:
       • Guides the corporation through the final stages of bankruptcy.
       • Ensures all requirements are met for a successful discharge.
     • Officially Ends Bankruptcy:
       • Once discharged, the corporation is no longer legally obligated for most debts.
       • The corporation ceases to exist as a legal entity.

Remember, the LIT plays a crucial role in managing the bankruptcy process efficiently, protecting the interests of both the corporation and its creditors. Their expertise ensures compliance with legal procedures and maximizes recovery for all parties involved.

Assets

Let’s explore the types of assets that a Licensed Insolvency Trustee (LIT) identifies during the bankruptcy process and address whether personal assets like cars, laptops, and boats are at risk:

1. Identifying Assets:
   • The LIT’s role involves assessing the corporation’s assets to determine their value. These assets may include:
     • Physical Assets:
       • Inventory: Goods held for sale or production.
       • Equipment: Machinery, vehicles, tools, etc.
       • Real Estate: Land, buildings, offices, warehouses.
       • Accounts Receivable: Outstanding payments from customers.
     • Financial Assets:
       • Bank Accounts: Funds in corporate bank accounts.
       • Investments: Stocks, bonds, mutual funds.
       • Intellectual Property: Trademarks, patents, copyrights.
     • Other Assets:
       • Contracts and Leases: Agreements with suppliers, clients, landlords.
       • Tax Refunds: Any pending tax refunds owed to the corporation.
2. Personal Assets and Bankruptcy:
   • Corporate vs. Personal Assets:
     • The LIT’s focus is primarily on corporate assets, not personal assets.
     • Personal assets (owned by individuals, including the president) are generally not part of the bankruptcy estate.
   • Exemptions:
     • Personal assets are protected by exemptions under provincial or territorial laws.
     • Common exemptions include:
       • Necessary Household Items: Furniture, appliances, clothing.
       • Tools of the Trade: Tools required for employment (e.g., laptop for work).
       • Personal Vehicles: Up to a certain value.
   • Exceptions:
     • If personal assets were used as collateral for corporate debts (e.g., a personal guarantee for a business loan), they may be at risk.
     • Fraudulent transfers of personal assets to avoid creditors can also be challenged.
3. Specific Examples:
   • Car: If the car is essential for personal use (e.g., commuting), it is likely exempt.
   • Laptop: If the laptop is necessary for work (e.g., managing the corporation), it may be exempt.
   • Boat: Personal boats are generally not part of the bankruptcy estate unless they were used for business purposes.
4. Consult Legal Advice:
   • The LIT will not take personal assets without proper legal grounds.
   • If you have concerns about personal assets, consult a lawyer to understand your rights and exemptions.

Remember that the LIT’s primary focus is on corporate assets to satisfy creditors. Personal assets are generally protected, but individual circumstances vary. Seek professional advice to navigate this complex process effectively.

Car

If the car is worth $40,000, its treatment during bankruptcy depends on several factors. Let’s break it down:

1. Exemption Limits:
   • In Canada, personal assets are protected by exemptions under provincial or territorial laws.
   • These exemptions allow individuals to retain certain assets even during bankruptcy.
   • Common exemptions include necessary household items, tools of the trade, and personal vehicles.
2. Car Value and Exemption:
   • If the car’s value is $40,000, it may exceed the exemption limit.
   • The specific exemption for personal vehicles varies by province or territory.
   • Some provinces have a maximum value (e.g., $5,000 to $6,000) for exempt vehicles.
   • If the car’s value exceeds the exemption, it may be at risk of being sold to satisfy creditors.
3. Consult Legal Advice:
   • To determine the impact on your car, consult a lawyer or the Licensed Insolvency Trustee (LIT).
   • They can provide guidance based on your province’s laws and your individual circumstances.
   • If the car is essential for your daily life (e.g., commuting to work), exemptions may apply.

Remember that legal advice is crucial in understanding how bankruptcy affects personal assets. Seek professional assistance to make informed decisions.

CRA

When dealing with bankruptcy in Canada and the Canada Revenue Agency (CRA) as a creditor, here’s what you need to know:

1. CRA Debt and Bankruptcy:
   • Treatment of Tax Debt: When you file for bankruptcy, your tax debt (including amounts owed to the CRA) is included in the bankruptcy process.
   • Discharge: If you are successfully discharged from bankruptcy, all your tax debt will be cleared, and you can move forward without the burden of these debts¹.
2. CRA Collection Process during Bankruptcy:
   • Special Powers of the CRA: The CRA has special powers for collecting unpaid taxes. These may include wage garnishments, freezing bank accounts, seizing investments, or placing liens on property.
   • Bankruptcy Impact: However, when it comes to the Bankruptcy & Insolvency Act, the CRA is treated like any other creditor in a bankruptcy or consumer proposal.
   • Stopping the Claim: Filing for bankruptcy stops the CRA’s collection process against your assets. You won’t have to worry about the CRA taking your Canada Pension Plan (CPP) or other personal assets²³.
3. CPP and the CRA:
   • CPP Claim: The only creditor that can claim your CPP is the CRA.
   • Protection in Bankruptcy: Filing for bankruptcy stops the CRA’s claim against your CPP. Other creditors cannot seize your CPP, but they can garnish payments from your bank account³.
4. Consult with Professionals:
   • Always consult with a licensed insolvency trustee (LIT) or legal advisor to understand your specific situation.
   • They can guide you through the bankruptcy process and ensure your rights are protected.

Remember that bankruptcy provides relief from most debts, including tax debts, but seeking professional advice is crucial to navigate the process effectively⁴⁵.