Bankruptcy is a process governed by the Bankruptcy and Insolvency Act (BIA). It is initiated when a company that is unable to honour its financial obligations has exhausted all other available options to try to turn its situation around.
At the end of this process, the insolvent company’s assets are vested in a Licensed Insolvency Trustee ("LIT" or "Trustee"). He or she will liquidate them and give the money obtained to the creditors in the order of priority set out in the BIA.
There are a number of considerations in determining whether bankruptcy should be explored, so it is advisable to promptly consult a Trustee or a Chartered Insolvency and Restructuring Professional ("CIRP") to discuss the matter.
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What are the main steps in the bankruptcy process?
To start, the company's problems must be identified. They may be operational, financial or both. The Trustee or the CIRP will first look at possible solutions to try to avoid bankruptcy such as:
- informal turnaround, which involves implementing corrective measures and reaching agreements with creditors without going through the BIA or the Companies' Creditors Arrangement Act (CCAA)
- formal turnaround, which involves implementing corrective measures and reaching agreements with creditors through the BIA or the CCAA
This process gives the company a protection period to prepare a proposal to its creditors. During this period, lawsuits and seizures of assets are temporarily suspended. A Trustee is also involved to ensure that the process is fair to all creditors.
If these options are not possible or have failed, the company will usually be placed into bankruptcy. The company's management can make this decision, but a creditor can also put the company into bankruptcy. The company may also be forced into it if the creditors reject its proposal.
Under the BIA, one of the following requirements must be met for a company to initiate a bankruptcy process.
- It is unable to meet its obligations as they generally become due.
- It has ceased paying its current obligations in the ordinary course of business as they generally become due.
- The aggregate value of its assets would not be sufficient to enable payment of all its obligations, due and accruing due.
What happens when the company initiates the bankruptcy process?
Once a company is declared bankrupt, its operations will generally be suspended, its employees will be laid off and its assets will be liquidated. The Trustee is responsible for this process but may request the assistance of certain staff members or the management of the bankrupt company to help liquidate the assets.