The six essential steps for salvaging
a bankruptcy
BY CHARLES MANDEL

Not every new business hits the mark and yours might have been one that missed. Now the creditors are barking at your door, your employees are wondering if they're going to get paid, and you haven't the first clue about what to do. Bankruptcy is never pretty or pleasant, but shutting down your business doesn't have to be a nightmare either. Bankruptcy trustees say following certain steps will allow you to come out of the process gracefully, if a little lighter.

Nor should you feel alone if your enterprise is sinking. In 2006, 8,179 Canadian businesses bit the dust. Of those, 6,756 went bankrupt, while 1,423 underwent proposals to renegotiate their debt. Was yours among them? Is it time to turn out the lights? We spoke with three trustees, William Assini, a partner with PricewaterhouseCoopers; Elizabeth Fleming, a vice-president with PricewaterhouseCoopers; and William Courage, a senior vice-president with BDO Dunwoody Ltd. about the best way to deal with the worst scenario.

Let's not go there
Got that sinking feeling? The best thing you can do is seek help before it's too late. All the bankruptcy trustees agree the last thing they want to do is close down your company and sell off the assets. Courage says by the time a business owner concludes he needs to file for bankruptcy, he's probably taken too long to figure things out. If calls from creditors are cropping up and you've run through your line of credit, then seek help sooner than later. The potential exists to restructure the business. The first person you should consult - someone you could end up seeing a lot of over the next while - is a Chartered Insolvency and Restructuring Professional, members of the Canadian Association of CIRPs and who represent 95 per cent of licensed bankruptcy trustees. Assini notes that "if the company is starting to get into trouble, you need to build a little war chest in order to plot out a proper financial strategy."

You thought going bankrupt would be free?
If the business is beyond saving, several professionals will immediately become involved. Accountants validate the fact the firm is floundering and prepare papers to that effect, while a lawyer draws up any necessary legal agreements. The good news is that the bankruptcy trustee gets paid out of any asset sales (a lump sum equal to their hourly work); nonetheless, they're still going to want some payment up-front. In return, the trustee will pull together a statement of affairs, detailing information on whom you owe money to, what assets you might own, estimates on the value of the assets, where the assets are located, and details about the business such as its legal and operating names and the names of the shareholders and board of directors.

Breaking the bad news
If you have a board, you need to tell them so they're aware of any liabilities they may be facing. You will also have to face your creditors within 21 days to let them know where things stand. By now, you'll be working with the trustee to shut down the business and the latter can begin making independent decisions about how things are done. Fleming advises the trustee inform the employees once it's certain the business is going under. After an introduction to employees, the trustee can inform them when they will be terminated, and how matters such as pension plans and vacation pay will be handled. Hold a question and answer session and make the trustee available for individual appointments. Adds Assini: "You're got to put some finality to it, but you've got to let them know exactly where they stand."

Who gets what
The next step is to try and get as much as possible out of the failed business to satisfy the creditors. In order of importance, the money from an asset sale goes to secured creditors, such as banks if you had a security agreement with them; next to Revenue Canada; then to preferred creditors, who are the salaried employees; and finally to unsecured creditors. Fleming says the assets can either go in a "fire sale" or sometimes the firm can be sold as a turnkey operation.

Selling it off
Trustees may direct assets to be sold through tender, by auction or in a private sale. Beforehand, experts will appraise the assets, helping set the sale price. Although trustees aren't obliged to take out advertising, they normally will in order to attract attention to the sale and to try and get the most money possible. If they're unable to sell the assets, they may turn to a shareholder or someone else involved in the company and ask them for an offer.

Life after debt
Courage says the stigma of bankruptcy is relatively short-lived and that Canada's bankruptcy legislation is designed to help small business owners move forward in their lives and rebuild. Assini agrees that as long you use integrity and honesty in dealing with creditors, and come prepared to answer questions, you stand to build a substantial amount of goodwill that could help you in your next venture. Adding some perspective, Fleming says: "There's definitely life after bankruptcy. It's not a death sentence."