Bankruptcy

How BC law treats it

Bankruptcy and insolvency are federal matters under the Constitution Act, 1867, s. 91(21), so the same rules apply in BC as elsewhere in Canada. Under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA), a debtor can make a voluntary assignment into bankruptcy, or a creditor can apply to the court for a bankruptcy order. The debtor's property vests in a licensed insolvency trustee, most unsecured creditors are stayed from suing, and the trustee realizes the assets and pays creditors in the order the BIA sets. Bankruptcy is liquidation. Businesses that want to survive restructure instead, either through a proposal to creditors under Division I of the BIA or, if claims against the debtor exceed $5 million, under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA). In Century Services Inc v Canada (Attorney General), 2010 SCC 60, the Supreme Court of Canada confirmed the broad discretion of CCAA courts to supervise restructurings. Secured creditors can also appoint a receiver to sell their collateral. Bankruptcy does not end every liability. Secured creditors generally keep their security, and directors can remain personally liable for unremitted source deductions, GST and unpaid wages. The trustee can attack preferences and transfers at undervalue made before the bankruptcy.

What it means for your business

Owners of a struggling business need to know their options before cash runs out: negotiation, a BIA proposal, a CCAA filing for larger companies, a receivership, or bankruptcy. Creditors need to understand how a customer's insolvency affects their claims, security and contracts. Buyers can acquire assets from a trustee or receiver, often at a discount but with limited warranties. Directors should act early to manage personal exposure for statutory remittances. Example: A Vancouver supplier learns that a customer owing it $80,000 has filed a notice of intention to make a proposal. The supplier files a proof of claim with the proposal trustee and notes that its right to repossess goods delivered in the 30 days before would arise only if the customer becomes bankrupt or enters receivership.

Risks and common mistakes

Treating bankruptcy as the only option, when a proposal or restructuring may save the business. Paying favoured creditors or related parties shortly before filing, which a trustee can reverse. Directors letting source deductions and GST go unpaid, creating personal liability. Creditors missing the deadline to file a proof of claim or to exercise a supplier's repossession right. Assuming a guarantor is released when the company goes bankrupt.