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Corporate Bankruptcy

April 20, 2018

Corporate bankruptcy proceedings can be very alarming for people involved. They usually entail job losses, loss of revenue for shareholders, losses to customers and suppliers as well as other service providers including those in the professional service industry.

When large corporations file for bankruptcy they often get a lot of media coverage, for example Sear Canada has received a lot of media heat since it filed a CCAA. Sears paid out significant bonuses and dividends to shareholders and board executives in recent years, even on the cusp of insolvency. Yet, they left the employees pensions underfunded. It is clear to see who the winners and losers are in such a scenario.

However, it is not always so clear in the case of smaller “mom & pop” type corporate bankruptcies. Many small businesses are set up as corporations on the advice of lawyers and accountants. Often a corporation serves little purpose for small businesses beyond creating work for accountants, another tax filing (T2) and a job for lawyers. The reasons are that many small corporations earn relatively little money and taking advantage of corporate tax breaks becomes a mot point and the “limited liability” protection disappears into personal guarantees and directors’ liability claims.

Imagine if a small incorporated widget manufacturer ran into financial problems, it doesn’t always make sense for the company to file for bankruptcy. The company may have few or no assets or have all its tools and equipment encumbered by banks or leasing companies. The directors have signed personal guarantees and the CRA may be pursuing them for a directors’ liability claim for outstanding taxes.

Bankrupting the company can be costly and the corporation’s owners may not have the resources to pay the trustee’s fees. This is especially so when the assets of the company are encumbered (liened). The best recourse may simply be to quit claim the assets and make a personal assignment into bankruptcy to deal with the guarantees and tax liabilities.

Bankruptcy, or any other insolvency proceeding for that matter can leave a bad taste in the mouth of creditors who have lost money. The losses may be in the form of retainers for incomplete work, half finished shipments of goods, inability to make returns or other effects from the broken contract. Customers often feel they have been “ripped off” or taken advantage of but while that may be the effect of the insolvency it is rarely the intent of the business owner.

Entrepreneurs usually have rosy coloured glasses, let’s face it, if they didn’t they probably wouldn’t be in business. They always hope that the next big thing is just around the corner and they forge ahead. It with that view that company owners carry on business right up until the moment they close the doors. Although company closure means that some customers lose goods or services the decision is rarely made with malicious intent. Even in the case of Sears Canada, which hurt many people’s lives, the actions taken were deemed to be in the best interests of the company given its current state of financial affairs.

Naturally the impact on other small businesses or customers dependent on the goods will be felt far more significantly than it would if the client itself were a larger wealthier business and could afford the write off. As insolvency trustees we are often the middleman we stand between the creditors and the debtors in our day to day administration of the legislation. Debtors feel that we represent creditors and creditors feel that we represent debtors. In fact, neither is the case, we simply administer the rules and regulations of the Bankruptcy & Insolvency Act.

Sometimes, creditors, especially unsophisticated ones, feel that they have been wronged, in fact they often feel that, somehow, they have been defrauded, without properly understanding the implications of such accusations. Fraud must be precisely argued, it not sufficient for a so called “badge of fraud” to be present, there must also be an intent to defraud.

So if you handed over a retainer to a company for goods or services and they filed a corporate bankruptcy you would probably not expect to get your money back, and that would not necessarily mean that you had been defrauded, even if the occurrence happened on the eve of bankruptcy.