The difference between business and personal bankruptcy

There seems to be much confusion in the minds of many people as to the difference between personal and business bankruptcy.

Generally, there are three types of business organization; a sole proprietorship, a partnership, and a corporation.

If an individual runs a sole proprietorship, there is no difference between them and the business. If that person files for bankruptcy (or makes a proposal) then the business is included, the assets vest in the Trustee (subject to Provincial exemptions) and the debts of the business will be discharged at the end of the process.

The same comment is essentially true for a partnership, although it is theoretically possible for a partner to file bankruptcy, without the partnership becoming bankrupt. Generally, however, if the partnership is bankrupt, the partners will have to file bankruptcy as well, since they are jointly and severally responsible for the debts of the partnership. (As a side note, some partners seem to think they are only responsible for their proportionate share of the partnership debt, this is incorrect).

However, when we are dealing with a corporate situation, it is possible for the corporation to file bankruptcy without the shareholders having to file, or vice versa. This is because a corporation is like a separate "legal person". Shareholders and directors are generally not liable for the debts of the corporation, except in certain specific cases set out in various laws, or if they have made themselves liable by signing personal guarantees.

If a shareholder files bankruptcy, the trustee will usually become the owner of the shares, and will attempt to sell them if they have any value.

As always, with any complex situation please contact one of our insolvency team for a free, initial assessment of your particular situation.

Ian Schofield
MNP Regina