We wrap up this first interview with Jordan Rumanek who is a licensed Trustee in Bankruptcy and Administrator of Proposals, whose firm Rumanek & Company Ltd. processes well over a thousand insolvency files each year in the GTA.
Today we want to understand how bankruptcy affects people who have a failed business on their hands.
Ross: Many people fall into debt troubles because of a failed business. Should they be declaring a bankruptcy of the business or should they only be seeking personal relief?
Jordan: That depends on a number of factors. First, if the business is a sole proprietorship, it does not exist separate from the owner, so if bankruptcy becomes necessary, it will be a personal bankruptcy of the business owner. A corporation is a separate entity, so then we would then discuss whether a corporate bankruptcy is worthwhile.
Ross: What do you mean, worthwhile?
Jordan: Well, there are two main issues here, the assets of the company and the liability of the business owner. Let’s look at the situation of most small businesses. A person has a business idea, registers the corporation, becomes the Director, and goes to the bank for funding. The loan is secured against the inventory, receivables, and equipment of the company, and the owner signs a personal guarantee for good measure.
If loan payments are far enough behind, the bank may initiate a receivership to seize and sell those assets. If there are no assets left after a receivership to speak of, or if there aren’t any to begin with, there is nothing to generate the funds that a trustee would need to cover the costs of a bankruptcy. In that case, a trustee will often recommend that a company be left to die quietly.
Ross: Ok, that’s the assets issue. What about that personal guarantee?
Jordan: The personal guarantee remains in place. If the business has been struggling for some time, it is not uncommon for business owners to retain employee source deductions and collect HST, and use those funds to keep the business afloat. The Director is liable for those remittances. In a receivership, the CRA amounts must be paid out of the first proceeds of sale (as an aside, if the CRA amounts are high, sometimes a bank will also initiate a bankruptcy to change the order of priority). If the sale of assets does not cover the CRA and the bank loan, the Director is still on the hook for outstanding amounts.
Ross: What are you saying?
Jordan: Often people see a trustee with the intention of bankrupting their company, but in the end it is the individual who has to file the assignment in bankruptcy.
Ross: There must be another option.
Jordan: Sometimes there is, though of course, every situation is different. If the company is still viable but is under heavy pressure from creditors, often a Division 1 Proposal will provide the necessary time and opportunity to essentially negotiate terms with the creditors. Any remaining personal guarantee amounts or Directors’ liabilities may become much more manageable for the business owner.
Ross: I sometimes meet clients who still wish to operate their business even after a personal bankruptcy. Is that possible?
Jordan: Often, yes. Again, this would be determined on a case-by-case basis. What are the objectives of keeping the business running? Does it employ all of the owner’s children, who would be unemployed without it? Is the debt trouble a result of a temporary problem? Or, maybe the problem is one of pressure from a single creditor, who will only negotiate terms in the context of insolvency proceedings. Finally, is the business truly viable, or is the owner too close to let it go? It really all depends on what is going on behind the door of each individual owner’s door.
Ross: Tons to think about. Thanks Jordan
Interview with a trustee (I) – when to consider a consumer proposal or bankruptcy
Interview with a trustee (II) – be very careful if a pitch sounds too good to be true
Interview with a trustee (III) – working with a trustee is not just for low income people
Interview with a trustee (IV) – alternatives for homeowners
Karen has contributed to the educational materials and development of the national CIRP Qualification Program for trustees, and conducts seminars on bankruptcy and consumer proposals for CAMH’s Problem Gambling Institute.