Can I sell a failing business before going bankrupt?

The restriction in the Bankruptcy and Insolvency Act on selling assets outside the ordinary course applies to an insolvent person who has filed a notice of intention or a proposal. Before then, the main check works backwards: once a bankruptcy begins, or a proposal that does not exclude the Act’s review rules, a trustee can examine earlier dealings. The useful question for an owner is therefore not whether the sale is allowed but whether it would survive that review.

Paying creditors from the proceeds

The Office of the Superintendent of Bankruptcy defines preferential treatment as a payment or security that benefits some creditors over others. Under the Act, a payment or transfer by an insolvent person to a creditor dealing at arm’s length is void against the trustee if made with a view to giving that creditor a preference in the period beginning three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy. Where it has that effect, the intent is presumed unless there is evidence to the contrary, and evidence of pressure is not admissible to support the payment.

Paying insiders and guarantors

For a creditor not at arm’s length, the Act reaches back 12 months and asks only whether the payment had the effect of preferring that creditor. Its preference rules also treat a surety or guarantor as a creditor, so favouring a relative who guaranteed a loan can fall within them. For sales below value, see how long a trustee can challenge a sale.

Filing first as an alternative

A Division I proposal, which an insolvent person may file, is, the OSB says, a compromise that becomes binding on all unsecured creditors once creditors and the court approve it, and after a notice of intention or proposal is filed creditors generally may not begin or continue legal action to recover a provable claim, subject to exceptions in the Act. A sale outside the ordinary course during that process needs court authorization, as selling out of insolvency explains.

Before you sign

The OSB points people to a Licensed Insolvency Trustee for financial advice. Bring the numbers: a written valuation, how the buyer was found, and where each dollar of proceeds will go. Keeping that record means you have evidence of the price and of where the proceeds went if a trustee later reviews the sale.