What to Expect If You Claim Insolvency 

If your business in or around Toronto, Canada, is struggling financially and falling back in payments to creditors, the federal government has established two main legal avenues for resolving your problem. One is through the Bankruptcy and Insolvency Act (BIA), which suits small to medium businesses well, and the other is through the Companies’ Creditors Arrangement Act (CCAA) for those with larger debt loads. 

In 2021, according to the Office of the Superintendent of Bankruptcy, there were 2,480 business insolvencies, down from 2,786 in 2020 and 3,680 in 2019. 

If the business facing financial problems is a sole proprietorship or a partnership, then the owner or owners are liable for any outstanding debt obligations. If the business is incorporated, then all assets and debts belong to the business, and the owners or founders will not generally be personally liable. 

If your business in or around Toronto, or in Hamilton, London, or Ottawa, is struggling financially and you need to explore your options under insolvency, contact Matthew R Harris Law P.C. Lawyer Matthew Harris has built his practice around helping businesses resolve issues facing them and move forward in confidence. He will meet with you, review your debt and asset issues, and advise you of the best possible course going forward. 

Is Insolvency Necessary? Balance Sheet or Cash Flow Calculations 

Generally speaking, insolvency refers to a state in which you or your business are unable to meet your obligations as they come due. Remember, if you own the business yourself or with partners, you are personally liable for any debts. 

That being said, there are generally two calculations or assessments to be made when considering bankruptcy as the way to settle your predicament. One is called cash flow insolvency. This is the state where you have difficulty paying your debts as they come due, generally because your business is not attracting enough customers and revenue. This is also known as illiquidity. 

The other is called balance sheet insolvency. In other words, your liabilities exceed your assets. So, even if you sell all your assets, you cannot pay off your creditors. This is also sometimes termed as a technical insolvency. 

The Bankruptcy and Insolvency Act (BIA) 

The Bankruptcy and Insolvency Act is federal legislation covering bankruptcies, consumer proposals, commercial proposals, and receiverships. The BIA also established the Office of the Superintendent of Bankruptcy to oversee insolvencies in Canada. 

If your business finds itself cash-strapped and under water in debt, you can use the BIA to make a Proposal to Creditors to pay off your obligations over time and on better terms. On the other side of the spectrum, you can just declare bankruptcy and liquidate. The first option, obviously, may be the best way to stay in business. Bankruptcy will involve seizing your assets and selling them to pay creditors. Another option is receivership, which generally means creditors take over your business. 

The Companies’ Creditors Arrangement Act (CCAA) 

The Companies’ Creditors Arrangement Act is for companies whose debts are tremendously large. To use the CCAA, your business must have $5 million or more in outstanding obligations. The CCAA allows the company to continue operating while it seeks to obtain approval from creditors for a reorganization of debt, that is, for better or longer terms or both. 

Reorganizing Your Business 

Depending on your debt load, you can use either the BIA or CCAA to restructure your operations and seek approval from creditors for a new repayment plan. Creditors will often agree to a reorganization of debt because a bankruptcy will generally leave them with next to nothing in terms of repayment of the debt. 

Once your creditors agree to your proposal, you will then have to commence making ongoing payments until the debts are repaid under terms of the agreement. Sometimes, a lump-sum payment may also be in the picture. 

Trusted Legal Counsel in Toronto 

When your business faces cash flow or balance sheet problems and insolvency looms, you need to seek experienced and knowledgeable legal advice. Lawyer Matthew Harris has been helping businesses restructure for survival and future prosperity throughout his legal career. Contact Matthew R Harris Law P.C. as soon as you sense your financial picture tightening. Chart a course for you and your business that encompasses continued viability and a return to prosperity.