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Bankruptcy, Receivership, and Creditor Proposals

What you need to know if your business is in trouble

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Many businesses fail. Small business bankruptcy is a risk every entrepreneur takes. There are many reasons why a business fails or why a business declares bankruptcy. Most business get into trouble because debt owed to secured creditors like banks and lenders or unsecured debt owed to vendors, suppliers and/or the government becomes unmanageable. The options available to businesses that find themselves in trouble include: bankruptucy, receivership or a division 1 proposal.

 What is does bankruptcy mean for a business?

Bankruptcy is a legal procedure that provides businesses with relief from creditors when a business has become insolvent or incapable of paying its debts and obligations. A Trustee is appointed after a business voluntarily makes an assignment of its property to creditors or by one or more creditors making an application to Court to have the business declared bankrupt.

 What is insolvency?

If a business is unable to pay its debts to banks, creditors and others, it is insolvent. Insolvency means that a business does not have the money or assets needed to cover its obligations and debts. Once a company becomes insolvent, they may decide to file for bankruptcy or pursue other options including filing a Division 1 Proposal.

 What is a trustee?

A Trustee is appointed to manage the bankruptcy process including taking possession of the property or assets a business may have and selling them so that any money received is distributed to secured and unsecured creditors according to the Bankruptcy and Insolvency Act (also known as “BIA”).

 What is receivership?

Receivership is a legal method that secured creditors can use to recover money owed to them by a business. If a business defaults on a loan obligation, then a secured creditor can appoint a Receiver if their security documentation allows for it or they can apply to Court to have a Receiver appointed. A Receiver only acts on behalf of the creditor it was appointed for and will only realize on the assets or security that they were given by a business. A Receiver has the authority to take possession of any assets that were pledged under the security documentation and sell them to repay the outstanding debt.

 What is a receiver?

A Receiver is appointed by a creditor or a Court to take possession of assets and sell them to satisfy a debt.

 What is a Notice of Intention to Make a Proposal (also known as an “NOI”)?

A Notice of Intention to Make a Proposal (also known as an “NOI”) is a step or process that a business will take to restructure their affairs for a period of time. A business would file an NOI to get protection from legal action from creditors while it works towards preparing a Proposal. The initial period of time that protects a business from creditors once an NOI has been filed is 30 days (also known as a “Stay”) and can be extended under certain circumstances.

 What is a Division 1 Proposal?

A Division 1 Proposal is an agreement between a business and its creditors. It is meant to help a business reorganize itself and its finances so that it can continue to operate and repay creditors in an orderly and timely fashion. When a business files a Division 1 Proposal, creditors cannot begin or continue any legal action against the business.

 Is Your Company Going Into Receivership?

If you think your company might go into receivership you have options you can explore. You can take steps to protect yourself and your business but you cannot afford to wait - the sooner you act the sooner you will be able to get your business back on track. Banks, lenders, investors and creditors are prepared to work with companies that have a reasonable plan for repaying them. You may need to adjust your expectations or make some difficult decisions but you have options.

 Things to Consider

  • Bankruptcy vs. Receivership?
  • Receivership vs. Division 1 Proposal?
  • Division 1 Proposal vs. Bankruptcy?

The decision you make for your business really depends upon what options it has available to restructure, reorganize and repay its creditors. Getting help or advice is important to make sure that you have explored all of your options.

 Bankruptcy vs. Receivership

If you think your business is not going to succeed no matter what happens then you will want to consider small business bankruptcy. If you think your business may be able to succeed but your creditors have already taken legal action against you, then you may need to consider small business receivership. Bankrupting your small business may be inevitable but there is work you can do to find out whether or not working through a small business receivership would be a better option compared to working through a small business bankruptcy.

 Receivership vs. Division 1 Proposal

If you believe that your small business does not need to claim bankruptcy then the next thing to consider is whether or not to allow your business to go into receivership or whether or not you should issue a proposal to creditors. Having your company go into receivership means that a third party will be appointed by a court to run your business versus issuing a proposal to creditors which means you can run your business with the oversight of a trustee.

 Division 1 Proposal ("NOI") vs. Bankruptcy

An NOI is the exact opposite option when compared to small business bankruptcy. Issuing a Notice Of Intention to your creditors means that you believe there is an opportunity to repay the business debts whereas bankruptcy means you don't believe there is an opportunity to repay the business debts.

 Receiver vs. Trustee

A Receiver will act in the interests of a particular secured creditor(s) whereas a Trustee acts to protect the interests of both secured and unsecured creditors. It is important to note that Receivers and Trustees may not be able to give advice on what your business needs to do to avoid or prevent a bankruptcy, receivership or division 1 proposal.

 Who Is Helping Your Business?

Who will act on your behalf to give you the direction your business needs to make the best decision? Should your business consider bankruptcy? Should your business allow itself to go into receivership or should it issue a proposal to creditors?

Let's work together to and understand how your business got into this position, what it has to work with and what needs to happen to get out of this position.

How did your business get here?
Is your business broken?

  • Does your business make money?
  • Did the market change?
  • Are you waiting to collect money?
  • Did you lose a customer or contract?
  • Unforeseen events?

What do you have to work with?
Let's take a look at the following:

  • List all assets and liablities
  • List all accounts payable and receivable
  • Review and edit operating costs
  • Build a cash flow tool to use daily/weekly
  • Execute on sales plan

What needs to happen to clear all debts?
Build and manage a plan

  • Bankruptcy? Receivership? Division 1 Proposal?
  • Communicate with creditors
  • Reporting to all parties involved
  • Make adjustments as necessary
  • Address daily/weekly cash flow issues

Get the strategies and tools you need to deal with the challenges your business is having.