CORPORATE
BANKRUPTCY
Please refer to the list of documents and
information below to be brought to your first meeting with
the trustee.
Background of a Corporation
Corporations are a separate legal entity created by law that
have all of the duties, rights, obligations, etc., that an
individual has. A corporation can sue and be sued in it's
own name separate and apart from the directors, officers,
and shareholders of the corporation. A lawsuit against the
corporation may result in a corresponding lawsuit against
the shareholders or directors of the corporation but it is
not always the case. Please note that because a corporation
is an artificial entity created by law, a lawsuit against
a corporation must be served upon an individual (usually the
president). When receiving a writ or other legal document,
please clarify whether it is the corporation being served
with the delivery to an individual or, whether or not that
individual is also being sued.
Insolvency of corporation
A corporation becomes insolvent when it reaches a stage where
the debts of the corporation are no longer being paid on the
terms agreed upon with the suppliers of the goods or services.
It is not uncommon for a corporation to be insolvent for an
extended period of time before the corporation files an assignment
in bankruptcy, or make a proposal to its creditors.
Meeting with the trustee in bankruptcy
When it become apparent that the corporation can no longer
continue to carry on business and an assignment in bankruptcy
is one of the options to be considered, the initial meeting
with a trustee in bankruptcy takes place. The normal information
that is reviewed between the trustee and the shareholders/directors
of the corporation would include the following;
- most recent financial statement available for discussion
(either prepared internally or by external accountants).
- a list of all assets of the corporation showing the book
value of the assets but also showing the cash value or current
liquidation value of each asset.
- a list of all liabilities of the corporation broken into
the following categories;
- any leases for premses or equipment
- Those debts that are government claims (payroll deductions,
GST, Ontario Sales Tax, WSIB, etc.)
- Those liabilities that are secured on the assets of the
corporation (eg. a bank loan secured on accounts receivable
or a mortgage on real estate).
- All unsecured trade debts.
- Debts owing to shareholders and other non-arms length
parties (which are considered deferred creditors).
- Any liabilities which can result in the personal exposure
to liability of a director or officer.
The initial meeting with the trustee will focus on the current
cash flow from the operation of the business and it's availability
to meet current expenses. As an alternative to continuing
in business, what cash would be raised if the business ceased
and the assets were liquidated? Will there be sufficient cash
raised in order to discharge all legal obligations of the
business? In situations where goodwill is still present, the
business may be sold as a going concern generating a higher
cash value than liquidating the assets of the business. In
the initial meeting, options other than bankruptcy - eg. proposal
to creditors, refinancing, converting debt to equity, etc.
will also be reviewed.
Bankruptcy
If the decision is made to proceed with bankruptcy, the trustee
will normally prepare all required documents. This will consist
of a Statement of Affairs (consisting primarily of a summary
of the assets and liabilities of the corporation), an assignment
for the general benefit of creditors (being the broad admission
of the insolvency by the company), a resolution of the Board
of Directors authorizing one person to sign all of the documentation
necessary to place the corporation into bankruptcy and any
other appropriate documents as required by law. The director
who assumes the responsibility for signing all of the documentation
necessary to file the assignment in bankruptcy will be given
those sections of the Bankruptcy & Insolvency Act as are
necessary for him to be aware of any duties that he might
have with respect to the bankruptcy process. That director
will have the obligations for full disclosure of all assets
and liabilities and will be required to attend at the Office
of the Superintendent of Bankruptcy to discuss the cause of
the bankruptcy and history of the company with an Official
Receiver and also attend a meeting with the creditors. The
individual signing all of the documents with respect to the
bankruptcy should be the most senior director available who
is fully conversant with in all operations of the company.
During the Term of Bankruptcy
We would be pleased to discuss the ongoing events that take
place during the bankruptcy with you at our initial meeting.
Please give us a call to discuss your specific situation.
The initial meeting is at no charge to you. It's purpose is
to give you sufficient information for you to make an informed
next move. Please feel free to bring your professional advisors
(accountant, laywer etc.) to any meetings.
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