Area of Law: Credit, Debt and Bankruptcy
Answer # 0278
Involuntary business bankruptcy: Proposals & PetitionsRegion: Ontario Answer # 0278
A business can go bankrupt in one of three ways:
- A business can voluntarily declare bankruptcy. This is the most common event.
- A business will become bankrupt if it makes a proposal to its creditors which is not accepted by them.
- The creditors of a business can sometimes push the business into bankruptcy by filing a petition with the Court. Petitions are very rare.
Proposal to creditors
A formal proposal is an offer under the Bankruptcy and Insolvency Act made by a business to it’s creditors to settle debts under conditions different than the original terms. Your LIT will help you and the creditors negotiate new terms that you both find reasonable.
The proposal must first be accepted by two-thirds of your creditors at a meeting of creditors. If it is accepted by the creditors, it must then be approved by the Court. If your proposal is not accepted, your business will automatically become bankrupt.
Another form of involuntary business bankruptcy occurs when a creditor forces a business into bankruptcy by filing a petition in court for a receiving order to seize the debtor’s assets. This is known as being petitioned into bankruptcy.
A creditor can petition a debtor into bankruptcy:
- if the debtor has total debts of at least $1,000, and
- if the debtor has committed an “act of bankruptcy” within the preceding 6 months.
Acts of bankruptcy are defined in the BIA. Examples include:
- the creditor has a court judgment against the debtor and has been unable to collect on the judgment,
- in a meeting of creditors, the debtor has shown the creditors a statement, in writing, of assets and liabilities that shows the debtor has insufficient assets to pay debts,
- the debtor has given notice to any creditor that the debtor has suspended or is about to suspend payment of debts, and
- the debtor has hidden or removed assets (or attempted to do so) with intent to defraud, defeat or delay creditors of the assets.
In a business bankruptcy an LIT will handle the sale of the business assets and the distribution of proceeds to creditors. Usually, the assistance of a bankruptcy lawyer is required. The situation should also be reviewed with a lawyer before the LIT is hired.
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