Can I sell my business out of insolvency?

Insolvency does not by itself stop a sale. What it changes is who must approve the sale and how closely it is examined. The Bankruptcy and Insolvency Act defines an insolvent person as someone not bankrupt who resides, carries on business or has property in Canada, with provable debts that reach a small statutory minimum, and who cannot meet obligations as they generally become due, has stopped paying current obligations in the ordinary course as they generally become due, or whose property, at a fair valuation or if sold at a fairly conducted sale under legal process, would not pay all obligations due and accruing due.

Before you file anything

The Act’s court-approval rule for sales, in section 65.13, covers an insolvent person who has filed a notice of intention or a proposal, so it does not yet apply. The risk comes later: if a bankruptcy follows, or a proposal that does not exclude the Act’s review rules, a trustee can review the sale, as selling a failing business before going bankrupt explains.

After a notice of intention or proposal

From then on, selling assets outside the ordinary course of business needs authorization from a court, and the insolvent person must give notice to the secured creditors likely to be affected. The court weighs, among other things, whether the sale process was reasonable, whether the trustee approved it, whether the trustee reported that the sale would be more beneficial to creditors than a sale in bankruptcy, whether creditors were consulted, and whether the price is reasonable and fair given market value.

If the buyer is connected to you

A sale to a person related to the insolvent person faces a harder test. That includes a director or officer, anyone who has or had control in fact, and people related to them. The court may authorize it only if good-faith efforts were made to sell to unrelated persons and the price is superior to any other offer made in the process.

If a bankruptcy happens instead

On a bankruptcy order or an assignment, the bankrupt ceases to have any capacity to dispose of their property, which passes to the trustee subject to the Act and to the rights of secured creditors. The Office of the Superintendent of Bankruptcy notes that a proposal can instead help a viable business restore its finances and let its owners keep an interest in it.