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Hot Topics: Corporate Debt

A company’s ability to file a Proposal to Creditors that is both viable and acceptable to creditors depends a great deal on timing. Here’s what can happen if you wait too long to get advice or take action:

  • Creditors may start collection actions.
  • The company’s assets and working capital may be further decreased.
  • You have fewer options and less time for pre-proposal planning.
  • The company’s reputation and performance with existing customers is often affected.

Good advice is often timely advice. To prepare for a meeting with our insolvency professionals, please consider these four questions.

Are your financial records up to date?

In order for you to properly manage your business or for anyone to give you proper financial advice, you need up-to-date and complete financial information. Monthly and year-to-date income statements allow you to analyze the profitability of the business, review the gross margins, and determine trends. These records also help you to assess whether the company is viable.

With complete and accurate accounting of the business debt (including government debt and secured creditors), you can zero in on potential problems and devise a priority payment plan. On the other hand, inaccurate or out-of-date accounting records hide business problems and hinder you from making good decisions.

In assessing whether your business is viable, make sure you consider the wages that should be paid to yourself.

There is no sense in trying to save a non-viable business.

Have you considered what happens to you personally if your company fails?

When a company fails, the owners are often directly affected by “director liabilities” for unpaid employee wages, payroll deductions, GST, and so on.

You also need to consider what guarantees you may have given to your bank or other secured creditors, key trade creditors, your landlord, and others.

Most importantly, do you have a plan to replace the income you have been previously taking from your business?

Do you understand the consequences of ignoring the Canada Revenue Agency’s collection actions?

Unremitted payroll deductions

The interest and penalties charged by the Canada Revenue Agency (CRA) for unremitted payroll deductions can be onerous, and the balance owed can quickly get out of control. CRA is fairly aggressive in its attempts to collect this debt. It will issue “Requirements to Pay” to your bank and customers. The balance of this type of claim (principal + interest + penalties) has a “super priority” in any potential proposal to creditors. It is important that you minimize this type of debt, as it cannot be compromised or settled for less than the full amount owed.

Unremitted GST

The late-filing penalties charged by CRA for unremitted GST increase by the number of months you are late in filing. It is extremely important to file on time or as quickly as possible; otherwise, the penalties plus interest can become onerous.

If CRA demands that you file a return and you do not do so, a further non-compliance penalty of $250 will be charged.

CRA can be aggressive in collecting this debt. It can issue a “Requirement to Pay” to your bank and customers. This type of collection action can be stopped by filing a Proposal to Creditors.

Unremitted GST is normally considered an unsecured creditor. The amount owed can be settled by a Proposal to Creditors. However, if CRA issues an “Enhanced Requirement to Pay,” any funds that had been owing to you (receivables) become the property of CRA. That portion of the GST debt, in essence, becomes a secured debt that cannot be settled.

If your company is viable, can you restructure the business debt?

The answer to this question is based on several factors:

  1. Your ability to identify the reason for your insolvency (preferably non-recurring)
  2. The projected cash flow generated by the company and your assessment of how your customers/sales may be impacted by filing a proposal to your creditors (restructuring plan)
  3. The balance of any unpaid payroll source deductions (super priority)
  4. The anticipated loss from disputed customer accounts and the timing of collection of accounts
  5. How your bank will react: Are you presently in default of the lending agreement? What security does the bank hold in relation to the balance of the bank debt?
  6. Your need for working capital and ability to inject capital into the business as part of the proposal
  7. Your ability to continue to operate and obtain product/supplies: Are there key suppliers who may refuse to do business with you?

A completed proposal that settles government claims can release the directors from potential personal liabilities.