Understanding Corporate Bankruptcy in Canada
Corporate bankruptcy in Canada is a structured procedure intended for incorporated businesses struggling to meet their financial commitments, which can result in business bankruptcy. The implications of declaring bankruptcy differ significantly for corporations, sole proprietorships, and partnerships. While a corporation undergoes corporate bankruptcy, an individual declares personal bankruptcy.
While corporations cease to exist without fully settling their debts, the personal assets of small business owners are usually not impacted unless there are personal guarantees on loans or liability for the debts. On the other hand, the bankruptcy of a sole proprietorship or partnership is akin to personal bankruptcy, potentially jeopardizing the owners’ personal assets.
When a business is incorporated, it takes on a new identity, becoming a separate legal entity known as a corporation. This separation means that the corporation is responsible for its debts and obligations, and the shareholders are typically protected by limited liability. However, under certain conditions, owners and directors may incur personal liability for specific debts, affecting their personal credit.
Incorporated companies undergoing bankruptcy follow a distinct set of steps that may entail either dissolving the company via corporate bankruptcy or restructuring it according to pertinent laws.
In Canada, corporate bankruptcy proceedings take place in provincial courts, overseen by the Bankruptcy and Insolvency Act (BIA) guidelines and the Companies’ Creditors Arrangement Act (CCAA). Key to this process is the Licensed Insolvency Trustee (LIT), who collects and verifies the personal and financial information of the business and provides federally regulated professional advice.
Creditors can initiate bankruptcy proceedings through the court or agree to a voluntary bankruptcy proposed by the business.