Business bankruptcy in Ontario is governed by the federal Bankruptcy and Insolvency Act (BIA). It provides a legal framework for businesses that are insolvent, meaning they are unable to meet their financial obligations. Bankruptcy can help businesses either restructure and recover or wind up operations and liquidate assets to pay creditors.
Types of Business Bankruptcy
- Voluntary Bankruptcy: Initiated by the business when it cannot pay its debts.
- Involuntary Bankruptcy: Initiated by creditors who file a court application to declare a business bankrupt.
- Proposal Process: An alternative to bankruptcy, allowing businesses to negotiate with creditors for debt restructuring or repayment plans.
Signs of Insolvency
- The business is unable to pay its bills when due.
- The value of liabilities exceeds the value of assets.
- The business has received a demand notice or other legal actions from creditors.
The Bankruptcy Process
- Filing for Bankruptcy: A licensed insolvency trustee (LIT) helps the business file for bankruptcy by preparing necessary documents.
- Automatic Stay of Proceedings: Filing triggers an automatic stay, preventing creditors from pursuing legal actions or collecting debts.
- Asset Liquidation: The LIT sells non-exempt assets of the business to repay creditors.
- Distribution to Creditors: Proceeds from the sale of assets are distributed to creditors based on priority.
- Discharge of Debts: Once the process is complete, the business may be discharged from its debts, depending on the circumstances.
Alternatives to Bankruptcy
- Division I Proposal: Allows larger businesses to restructure their debts and avoid bankruptcy.
- Consumer Proposal: For small businesses, offering a negotiated repayment plan to creditors.
- Receivership: Appointing a receiver to manage or liquidate assets.
- Informal Arrangements: Negotiating directly with creditors outside the legal process.
Priority of Creditors in Bankruptcy
Creditors are paid in a specific order:
- Secured creditors (e.g., banks with collateral).
- Preferred creditors (e.g., employee wages up to a limit).
- Unsecured creditors (e.g., suppliers, service providers).
Impact of Bankruptcy on a Business
- Loss of control over assets and operations.
- Negative impact on credit and reputation.
- Possible restrictions on starting another business.
When to Consult a Licensed Insolvency Trustee (LIT)
An LIT is a federally regulated professional who can assess the financial situation, explain options, and guide businesses through bankruptcy or alternatives.
Last Reviewed January 2025