What Happens When a Canadian Company Goes Bankrupt

An insolvent company is a company which is not capable of paying all of its debts. Bankruptcy is a legally declared inability of an individual or an organization to repay its creditors. In Canada, the Bankruptcy and Insolvency Act (BIA) and Companies' Creditors Arrangement Act (CCAA) are the two important laws that have been established by the federal government to deal with insolvent or bankrupt individuals and corporations. All provinces have their own bankruptcy related laws that apply only to the individuals and corporations residing or carrying out business there. Bankruptcy laws are designed to preserve the rights of both insolvent debtors and their creditors who have a financial interest at stake. They also facilitate the insolvent debtor to resolve his debts through the division of his assets among his creditors. Federally incorporated banks and insurance companies are excluded from the BIA and CCAA and are dealt with under the Federal Winding-up and Restructuring Act. The following articles discuss some of the important bankruptcy provisions in the BIA and CCAA.  They also discuss the impact and remedies available to creditors and shareholders in the event of default by an insolvent corporate debtor during the bankruptcy proceedings.

Bankruptcy and Insolvency Act

The provisions in the Bankruptcy and Insolvency Act (BIA) set out the rights and responsibilities of all individuals and institutions involved in the affairs of a bankrupt person or a corporation.  The BIA excludes railways, savings banks, loan companies and building societies. Until 1992, the BIA focused solely on liquidation, providing a legislative framework for the liquidation of assets of an insolvent individual, corporation or partnership, and the distribution of the proceeds among the creditors. In 1992, the scope of BIA was broadened to provide ways for insolvent debtors to avoid bankruptcy by negotiating reorganizations. The act governs all bankruptcies in Canada and serves the following general purposes:

1. To provide for the financial rehabilitation of insolvent persons and corporations
2. To permit an honest but unfortunate debtor to secure a fresh financial start
3. To provide for an orderly and a fair distribution of property of a bankrupt among his or her creditors
4. To allow for the investigation of the affairs of the bankrupt or insolvent person
5. To permit the setting aside of preferential or other fraudulent transactions so that all ordinary creditors may share equally in the realizations from the bankrupt's assets.

Companies Creditors Arrangement Act

The Companies' Creditors Arrangement Act (CCAA), is similar to Chapter 11 of the U.S. Bankruptcy Code. It is a federal bankruptcy law in Canada that governs the insolvency of only companies and corporations and not individual debtors. The primary purpose of this act is to preserve the rights of an insolvent company and its creditors so that a plan can be arranged and implemented for the benefit of all parties. While the BIA allows for both the reorganization and liquidation of insolvent businesses and individuals, the CCAA deals only with reorganization of corporations. The CCAA applies to a company with liabilities in excess of C$5 million.

Canadian companies file for protection from their creditors under CCAA which essentially gives them time to try and work out their financial difficulties with their creditors including unpaid suppliers and bondholders. As long as a CCAA order remains in place, creditors are not allowed to take any action to collect money owed to them. They can't seize the company's property or petition it into bankruptcy. Meanwhile, the company can try to strike a deal with its creditors to find a compromise . While the company’s management generally remains in charge as a debtor in possession, a monitor is appointed by the court and has certain authority at the company.

What happens when a company goes bankrupt?
The process of Bankruptcy
Different types of creditors
Priority of claims in a business liquidation
Secured and unsecured creditors
Amendments to the BIA and CCAA