Insolvency and Your Personal Business

2015-05-07   minute read

Many business owners reach out to me for restructuring advice. On every consultation my first question is “is your business incorporated?” This blog is for you if you operate any kind of unincorporated business and find your business finances, your personal finances or both are financially constrained. Examples could include any kind of business that produces some or all of your personal income such as a self-employed tradesperson or a freelance writer. While you may keep your business finances separate (perhaps with separate bank accounts, lines of credit or credit cards) from your personal finances (which is a very good idea), the reality that is you and your business represent one and the same legal entity for the purposes of insolvency proceedings. It should be noted that if your business is incorporated, the business would be a separate legal entity from yourself. The effect of being the same legal entity is that your “business” creditors can pursue your personal assets and income. Similarly, your personal creditors can pursue your business assets and income. For a deeper discussion on the topic of business structures, please refer to our blog entitled “Can I Keep My Business if I Declare Personal Bankruptcy” dated March 31, 2015.

Because you and your business are the same entity, an assessment by a Licensed Insolvency Trustee in Bankruptcy addressing your need to file either for bankruptcy or a proposal to your creditors, will encompass a review of all assets and liabilities, both personal and business. The route chosen can and will certainly look at all ways to save the business if it can be a profitable business in the future. The good news is that the route decided will be a complete solution to your entire financial situation. The bad news is your business creditors such as employees, suppliers and perhaps even customers, may decide not to support the business moving forward.

The Effect of Bankruptcy on Your Business

Upon filing for bankruptcy, all of your personal and business assets vest in the Trustee (this means the Trustee becomes the owner of the assets). However, certain assets are exempt from seizure by a Trustee. The list of seizure exemptions vary by Province. In Manitoba for instance, there is a “tools of trade” exemption of $7,500 as follows: “the tools, implements, professional books and other necessaries, not exceeding in value the aggregate sum of $7,500”. In the event your tools of trade exceed $7,500 in value, there would likely be the ability to keep and “buy them back” from the Trustee based upon an agreed repayment plan. The other thing that happens upon filing for bankruptcy is a stay of proceedings immediately takes effect against all of your creditors. This includes your business creditors. All of your business debts would be frozen, including employee wage arrears, income tax, GST and payroll deduction arrears to Canada Revenue Agency. All stayed creditors can file a claim with the Trustee against your bankruptcy estate and certain claims, such as source deductions and employees, may have different priority claim rights against other creditors. The effect of all of this will mean that moving forward you will need to communicate directly with your key employees and suppliers in order to “get them onside” to do business with you in the future.

The Effect of a Proposal on Your Business

Upon filing a proposal or consumer proposal to your creditors, your assets do not vest in the Trustee or Administrator as they do in a bankruptcy. Rather the proposal will be an offer by you to your creditors to compromise your total debts. Similar to a bankruptcy, the proposal encompasses all of your business and personal creditors and implements a stay of proceedings against them until the acceptance of the proposal is determined. Similar to a bankruptcy, you can continue to operate your business, but again, communication with your key creditors regarding arrangements to acquire the products and services your business needs moving forward will be necessary.

This blog really just scratches the surface on the issues of business insolvency. Please ensure you consult with your accountant, your lawyer, and / or an experienced licensed Trustee in Bankruptcy to ensure that all factors pertaining to your business are considered.

Gord Neudorf is a Bankcruptcy Trustee within our Winnipeg location. To learn more about insolvency in business, or how MNP Debt can help you, contact our local office at 204.336.6167