Business Wind-Downs

This post is for informational purposes only and does not constitute legal advice.

Deciding to close a business is rarely easy especially if it is the result of financial pressures. But how you close matters just as much as the decision itself for your stakeholders including creditors, your employees, and your own personal exposure. If structured as a sole proprietorship there is no separation between in the individual and the business. For companies incorporated through provincial or federal legislation, there are some additional considerations before deciding to walk away. The focus of this post is on winding down the incorporated company.

The path forward depends almost entirely on one question: can the business pay everything it owes? The answer to this question changes the approach.

Closing a Solvent Business

If the business is incorporated and it can satisfy all of its debts in full, you are looking at a dissolution under the BC Business Corporations Act.

The two main options are:

A voluntary dissolution is the simplest route. The shareholders pass a resolution, a director swears an affidavit confirming there are no outstanding liabilities, and the company files for dissolution with the Registrar of Companies. This works well for businesses that have already settled their affairs and distributed their assets.

Where the company’s affairs are more complex such as uncertain liabilities, multiple creditors, or assets that need to be realized, then a voluntary liquidation with an liquidator (by resolution or by court order) provides a more structured process. The liquidator will then be appointed to collect assets, settle debts, and distribute any surplus to shareholders under the framework set out in the BCBCA.

A third option is where a company fails to file its annual reports for two consecutive years, the Registrar of Companies can strike the company from the registry and the company will be dissolved for failure to file annual returns. This is sometimes treated as a shortcut, but it is a breach of the BCBCA, and the consequences, including the loss of all corporate assets to the Province, make it a poor substitute for a proper dissolution.

Closing an Insolvent Business

If the business cannot pay what it owes, voluntary dissolution (without a liquidator) is not available.

One of the other available options is the insolvency regime under federal legislation and the principal options include a Division I Proposal under the Bankruptcy and Insolvency Act (a court-supervised compromise with creditors), an assignment in bankruptcy (where a Licensed Insolvency Trustee liquidates the company’s assets for distribution to creditors), or a receivership initiated by a secured creditor.

The critical point for business owners: once the company crosses the line into insolvency or where there are insufficient assets to repay liabilities and creditors, the procedural changes entirely, and the risk of personal liability for directors increases significantly.

The treatment of priorities may be complicated to navigate if there are multiple unpaid creditors including unpaid taxes, loans from banks and suppliers with security interests or personal guarantees.

Finally, there are ongoing obligations for tax filings, Worksafe BC and other reporting that is required for companies before they formally close. It is important to obtain appropriate advice from an accountant to ensure the company's financial reporting is managed and updated appropriately with the tax authorities. If the company's books and records are in poor shape and there is complex reconstruction of financial and accounting records required, it might be appropriate to obtain advice from an accountant and lawyer about whether it is possible to bring the company's finances into compliance or to place the company into bankruptcy.

Director Liability: Five Things to Watch

The separation of corporation identity from the shareholders and directors' personal identify has limits, and the timing of a business closure is when those limits are most often tested. Directors should be aware of the following (non-exhaustive) concerns:

• Unremitted source deductions. Directors are personally liable under the Income Tax Act for payroll deductions that the company has failed to remit. The CRA pursues these aggressively and the due diligence defence

• Unremitted GST/HST. A parallel provision under the Excise Tax Act creates personal liability for directors that failed to remit.

• Unpaid wages. Directors are jointly and severally liable for up to six months of unpaid employee wages earned during their tenure.

• Preferences and transfers at undervalue. Payments favouring related creditors or asset transfers to insiders in the months before insolvency can be unwound by a trustee in bankruptcy, and can draw personal liability for the individuals involved. This can also include distributing dividends to shareholders while the company is insolvent or repaying shareholder loans or personal debts incurred on behalf of the company.

• Continuing liability after dissolution. Dissolving a company does not extinguish director liability. Statutory obligations for source deductions, GST/HST, wages, and environmental liabilities survive dissolution and can be enforced as if the company still existed subject to certain timing rules

  
  

Getting It Right

The common thread in every business closure that goes sideways is the same: the owner waited too long to get the right advice, or decided to close the business themselves, and then had creditors, CRA or other stakeholders pursue them after the business closed. Or perhaps they decided to reuse equipment or inventory from their closed business for their next entrepreneurial endeavour not recognizing that those assets were covered by a charge by CRA for unremitted payroll/GST or a lien under the Personal Property Registry pursuant to a general security agreement.

Whether you are a business owner considering closure or an advisor working with one, the most valuable step is to assess the solvency position early, consider directors' liability and involve experienced counsel before the situation narrows options.

Cody Reedman is an experienced insolvency lawyer and commercial litigator, founder and owner of Reedman Law, a Vancouver based law firm focused on insolvency, restructuring, and commercial litigation and disputes.

Since 2018, he and his team have helped hundreds of business owners and their financial advisors work through difficult financial transitions from out of court and straightforward wind-downs to complex restructurings under the Bankruptcy and Insolvency Act (BIA) and Companies' Creditors Arrangement Act (CCAA).

Cody is licensed to practice in British Columbia, Alberta and the Yukon. He is currently completing an LLM in Financial Law at Osgoode Hall Law School and also holds a TEP designation from the Society of Trust And Estate Practitioners (STEP) and has a Graduate Certificate from BCIT in the Forensic Investigation of Fraud and Financial Crime. This post is for informational purposes only and does not constitute legal advice.