Personal Bankruptcy, Corporate Bankruptcy or both?

Many small businesses have struggled as a result of the pandemic and according to a study done by the Canadian Federation of Independent Business (CFIB), the average small business has taken on approximately $170,000.00 in COVID-19 related debt.

Unfortunately, many small businesses may not be able to survive the extra debt burden combined with a pro-longed period of reduced revenue as the pandemic continues.  If you are a small business owner struggling to stay afloat, you might be wondering what your options are.

Sole Proprietorships:

If you are a sole proprietor, you as an individual and your business are of the same legal entity.  Therefore, assets of the business are assets of the individual owner and debts of the business are also debts of the individual owner.  If you can no longer service your personal debt and/or debt related to your business, you might consider a personal bankruptcy or proposal as a means to achieve debt relief.  In most cases, a person filing a personal bankruptcy or a Consumer Proposal can keep their mortgaged home or financed/leased vehicle provided they can still afford to continue and maintain payments for their home or vehicle.

As an individual, you would have access to a tool of trade exemption for assets used in the business which are not pledged to a secured lender.  Exemption amounts differ by province and in New Brunswick, the tool of trade exemption is $6500 and it applies to tools of trade you may require to continue earning a living; either as an employee for another company, or for use in a new business venture.  After a personal Bankruptcy or Consumer Proposal has been filed, an individual is permitted to continue operating as a sole proprietor, however, an individual filing personal bankruptcy is not permitted to be the director of a corporation until after a discharge from Bankruptcy has been granted.  An individual filing a Consumer Proposal is permitted to be or continue to be a director of a corporation.

Corporations:

A corporation is a legal entity separate from the individual owner(s)/director(s).  A corporation can have its own set of assets and debts which are separate from the individual director(s) of the corporation.  Whether a director of a struggling corporation might need to consider a personal Bankruptcy/Proposal, or a corporate Bankruptcy/Proposal depends on the nature of the corporate debt — how much, if any, would the director of the corporation be personally liable for?

The director of a corporation can be held personally liable for payment of the following corporate debts:

1. Un-remitted employee payroll deductions to CRA
2. Un-remitted GST/HST to CRA
3. Un-paid wages to employees of the corporation
4. Any corporate loan or other debt for which the director was required to provide a personal guarantee of payment in the event the corporation can no longer pay

If a corporation has a substantial amount of debt for which the director would be held personally liable, the filing of a personal Bankruptcy or Consumer Proposal will provide relief regarding the payment of personal debt and corporate debt for which the director would be held personally liable.  Generally, a director filing personal Bankruptcy or a Consumer Proposal to deal with their personal debt and corporate debt for which they are liable to pay often does not need to consider a corporate Bankruptcy as their personal filing will usually provide the debt relief they are seeking.  If a corporation has minimal or no debt for which the director would be held personally liable, a corporate Bankruptcy or Proposal might be a viable option to wind up the corporation.  A corporation with debt but is still viable long term, might consider a corporate proposal filing (Division 1 Proposal) as a means to restructure corporate debt.

If you are a small business owner and would like more information regarding your options for debt relief, please do not hesitate to contact our office for a free consultation.