Some businesses reach a point in their life cycle when they are saddled with debt and there simply isn’t enough cash to go around. Some of these businesses are able to generate enough cash to work with their creditors to get through the cash crunch. Unfortunately, others are not.
There are many reasons why a business could find itself in a financial conundrum including, the protracted illness of a key employee, a drastic shift in economic factors beyond the control of the business such as a sharp increase or decrease in the Canadian dollar, a Canada Revenue Agency reassessment, theft by an employee, and many others.
The occurrence of one or more of these events can cause a business to become unprofitable and to start burning through cash. During this period of time, which can range from several months to a year or longer, the business is walking a financial tightrope and will allocate its resources very strategically in order to keep its creditors at bay. To state the obvious, this strategy is not a long-term solution and usually comes to an abrupt end once a triggering event occurs.
The triggering event may be a lawsuit filed by a large creditor which the company is financially unable to defend, a garnishment by the Canada Revenue Agency of the company’s operating account which starves the business of its working capital or the inability of the company to obtain further credit from a critical supplier.
Given the vulnerable status of the business, the triggering event overwhelms the business owner and the idea of dealing with its creditors once and for all becomes the immediate priority.
Under the Bankruptcy and Insolvency Act, a business can get immediate protection from its creditors by filing a legal notice advising of its intent to make a future deal with its creditors. This notice must be filed by a Trustee in Bankruptcy licenced by the Canadian Government. The result is the immediate implementation of legal stay of proceedings which prevents creditors from continuing their collection actions against the business. To be clear, after the notice is filed the business is not bankrupt; the business continues to operate while at the same time a plan to pay back a portion of its outstanding debts is devised.
To address the triggering events noted above, once the notice is filed, in most circumstances, creditors who have initiated legal action against the business would be prevented from continuing their action and Canada Revenue Agency would be required to immediately remove its garnishment from the business’s bank account. Further, although critical suppliers would not be required to extend further credit they are prevented from terminating supply contracts with the business for the sole reason that the business is in financial difficulty.
The main point of this discussion is that when a business is at its most vulnerable there are tools available to immediately protect the company from its creditors. The initial process of filing the notice can be done within a day and, thereafter, the company has the protection it needs to begin to formulate its plan to return to profitability.
Author: Tom McElroy, CPA, CA, CBV, CIRP, LIT
About Albert Gelman Inc.
Albert Gelman Inc.’s corporate and consumer insolvency group has over 100 year of combined experience assisting individuals and businesses who are experiencing financial difficulty. Please feel free to call us to discuss your client’s financial situation.
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