By Gordon Sands
Toys ‘R’ Us has dominated headlines in 2018 as news spread of its bankruptcy and ultimate demise across the U.S. and Europe. The Toys ‘R’ Us Canada division, however, was able to pull through its Chapter 11 filing, allowing stores to stay open nationwide.
Bankruptcy, and the options that surround it, can be useful tools in a few key business scenarios. Before you consider using the options below, make sure you’ve read up on managing your debt and you know for certain that basic strategies aren’t going to cut it.
Bankruptcy isn’t the only way to deal with your debts. Keep in mind that each of these options come with an immediate court order that stops all creditor collection activity once you file, giving you some much-needed breathing room to regroup.
Plan of Compromise
If your company’s liabilities exceed $5 million, you’ll have to reorganize using a Plan of Compromise, also known as a Plan of Arrangement. This option allows you to craft a proposal for restructuring your company’s debts as well as its overall operations to restore financial stability. In general, this includes points such as:
- Extending loan terms
- Offering settlements
- Liquidating assets
- Securing investors
The plan is presented to your creditors who then vote on it suitability. If the creditors representing at least 2/3 of your total debt amount agree, the court will impose the plan accordingly.
Division 1 Proposal
These proposals work the same way for businesses carrying less than $5 million in debt. One main difference is that all debt payments are made to the court-appointed insolvency trustee who distributes the funds to creditors.
Sole proprietorship businesses with less than $250,000 in debt can utilize a similar strategy via a consumer proposal. Like it’s corporate-based counterpart, this option allows you to develop an affordable plan to pay off your company’s debts.
The security agreement between secured creditors and debtors allows creditors to petition the court and appoint a receiver to take possession of and liquidate your company’s assets. This includes the secured property in question as well as inventory, accounts receivable, property and other assets. These funds are then given to the secured creditor to sure the debt.
You can either file bankruptcy yourself or be forced into it by your creditors. In either case, the court will seize and sell your company’s inventory, accounts receivable, property and other assets and divide the resulting funds among your creditors to pay off as much debt as possible. All of your company’s liabilities will then be cleared, even if your assets don’t cover the full amount.
There are caveats to how the business can continue once your company comes out of bankruptcy, however. Incorporated companies must either restructure into sole proprietorships or the directors involved in the bankruptcy must resign, as corporate directors are prohibited from serving while bankrupt.
While each of these options has their place, deciding which one may be the most beneficial to your business depends on the circumstances.
When You Experience Temporary Cash flow Issues
These are financial hardships that could be remedied with a bit of restructuring, such as short-term market or economic downturns. If you believe your company can survive its current financial woes, your best bets would be a Plan of Compromise, a Division 1 proposal or a consumer proposal, depending on your company structure and debt load. These options allow you to avoid full bankruptcy and the risk of losing both business and personal assets.
When You’re Over-leveraged
It’s a bit more serious if your company’s debt has become unmanageable and you have missed or are on the verge of missing payments. At best, debt is a growth-killer, draining your business of financial resources. In the worst-case scenarios, however, one or several of your company’s creditors can obtain a court order that forces you into receivership or bankruptcy.
Exploring pre-bankruptcy restructuring options is key to keeping your doors open and your revenue flowing. But if these preliminary steps are unworkable, allowing a secured creditor to go through with a receivership can eliminate troublesome debt, especially if you have the assets available.
When You Experience Tax Issues
Your company can utilize many of the available insolvency options if you’re facing tax trouble. Restructuring agreements may reduce your tax debt and make the Canada Revenue Agency the top priority for repayment. Bankruptcy is a similar option for bigger issues, putting the CRA at the top of the list for funds from the liquidation of assets. These options are especially helpful if you have little to no other debt.
Keep in mind that even if a company files bankruptcy and is ultimately absolved of the tax liability as a corporation, current and former directors may be held personally liable for unpaid income, employment and sales taxes.
When the Situation is Terminal
Businesses that are facing mounting debt with no ability to repay it in the foreseeable future have few options. Reorganization may help but, in many cases of long-term or considerable financial problems, there simply isn’t much to restructure.
If you’ve exhausted all other alternatives and still find your business in financial trouble, bankruptcy may be your only option. Companies may also have to file bankruptcy if attempts to reorganize the debt under a Plan of Compromise, a Division 1 proposal or a consumer proposal have failed due to a lack of creditor support or an inability to adhere to the plan’s provisions. Despite the significant hit your business will take, a bankruptcy can ultimately eliminate your debts and allow you to start again with a clean slate.
Gordon Sands is an experienced financial writer, and president of Bankruptcycanada.com. Having worked alongside his father for over 8 years in the bankruptcy field, Gordon Sands has written numerous articles about debt relief and money management in hopes of helping readers take back control of their finances and lives.