Options in Insolvency: Can I keep the Company?
January 14, 2025
When a Canadian corporation becomes insolvent and can no longer meet its obligations, the natural result is that the creditors come knocking. When this scenario arises, creditors and corporations have options to deal with the issues between the parties. The Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”) exist to aid companies and creditors in dealing with insolvent corporations, and the options under the acts will be discussed below.
An insolvent company is defined within the BIA as an organization who:
- Is unable to meet obligations as they generally become due;
- Who has ceased paying obligations in the ordinary course as they become due; or
- Whose assets are not sufficient to pay all of its obligations.
When a corporation becomes insolvent, three options exist under the BIA to deal with the debt issues: bankruptcy, receiverships and restructuring.
Bankruptcy
Bankruptcy should be considered when a corporation is no longer viable as a going concern. Bankruptcies can arise either by corporations assigning themselves into bankruptcy in order to “stop the bleeding” or by creditors petitioning for a court order declaring the insolvent company bankrupt. All assets of the corporation are sold in the process, and the corporation ceases to exist. Both secured and unsecured creditors participate in the bankruptcy process, with the bulk of the process being for the benefit of the unsecured creditors.
Receivership
Receiverships are the primary realization option for secured creditors of insolvent companies. Generally, the goal of a receivership is to continue the business as a going concern, usually through the sale of the business or some of its assets to meet its obligations. However, this may not always be the case, and the corporation may be required to cease operations as all assets must be sold to meet their obligations. This process deals specifically with the secured creditors as they are the party that initiate the proceedings through enforcement of their security. Under a receivership, the assets of the corporation, including operation of the business, is placed in the care of the receiver who will maximize value for the secured creditor who is calling their security.
Restructuring
Companies have two options for restructuring, provided they meet the requirements of the CCAA to gain the benefit of that act. To qualify for restructuring under the CCAA, the insolvent corporation must have debts in excess of $5 million. Where an insolvent company can avoid bankruptcy by restructuring or through an orderly liquidation, a proposal to its creditors under the BIA or the CCAA for more complex matters can allow it to maintain viability and come through the insolvency as a going concern. Corporations who qualify under the CCAA can benefit from its flexibility compared to the BIA. If a corporation hopes to restructure, a review of the options under the two acts should be undertaken to determine the most appropriate path. Of note, corporations should be alive to a major distinction between the CCAA and BIA paths, being that under the BIA, if the proposal is not accepted by the creditors, the company is automatically deemed bankrupt, which doesn’t occur in CCAA. Special attention should be paid by the corporation in determining the appropriate path based on the outcome of a denied proposal.
Insolvency can be a complicated and difficult situation for any corporation. Knowing the options for dealing with insolvency is important for making an informed decision.
About the Author:
Taylor L. Wilcox is an associate lawyer in the Saskatoon office. He practices primarily in the areas of civil litigation, construction law and foreclosure matters. Taylor holds specific knowledge with regards to condominium law and is a member of the Canadian Condominium Institute – North Saskatchewan chapter.
About McKercher LLP:
For nearly 100 years, McKercher LLP has grown deep roots across Saskatchewan, serving the community from offices in Saskatoon and Regina. Now, as one of the province’s largest and most established full-service law firms, we proudly carry on this legacy – following a client-first philosophy as we provide legal services and real solutions for the people who rely on us.
This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances. Counsel should be consulted concerning your own situation and any specific legal questions you may have.