A Trustee’s Guide to Restructuring a Business Drowning in Debt in Canada

The feeling is unmistakable. It’s a knot in your stomach that tightens every time the phone rings. It’s the dread of opening bank statements, knowing that cash outflow is eclipsing everything coming in. As a business owner, you’re used to pressure, but this is different. This is the weight of a business drowning in debt, and the standard advice to simply “cut costs and increase sales” feels hollow and inadequate when you can’t even make payroll.

Many business owners believe their only options are to work harder or declare bankruptcy. They spend sleepless nights trying to figure out which supplier to pay, who to put off, and how to find one more cash injection. This frantic, isolated struggle is where costly mistakes are made. The reality of the Canadian financial landscape is that formal restructuring is not just a last resort; it’s a powerful strategic tool. The challenge is that the rules are specific, and the timing of your actions is everything. The path to survival requires more than grit; it demands a clear understanding of the legal framework designed to help viable businesses recover.

But if this is a path designed to help, why does it feel so complex? Because the system must balance the rights of the business owner with the rights of creditors. My role as a Licensed Insolvency Trustee (LIT) is to navigate this balance. This guide moves beyond the legal definitions. It’s built from years of experience sitting across the table from owners like you. We will focus on the critical decision points, the irreversible actions to avoid, and the strategic “when” and “why” behind each step. This is your roadmap to navigating the process as a strategist, not just a victim of circumstance.

To help you understand the path ahead, this article breaks down the crucial stages and strategic choices you’ll face. From understanding the difference between insolvency and bankruptcy to knowing the exact moment to make that critical call for help, each section is designed to empower you with clarity and direction.

Why Insolvency Does Not Automatically Mean Bankruptcy in Canada?

The first and most critical distinction to understand is that insolvency and bankruptcy are not the same thing in Canada. This is not just a matter of semantics; it is the foundation of your entire recovery strategy. Insolvency is a financial state: it means your business is unable to pay its debts as they come due, or that your liabilities exceed the value of your assets. It’s a reality facing a growing number of companies, with 6,188 business insolvencies in 2024, a significant increase from the previous year. Many of these businesses, however, will never go bankrupt.

Bankruptcy, on the other hand, is a legal process. It is the formal assignment of your company’s assets to a Licensed Insolvency Trustee for liquidation and distribution to creditors. It typically marks the end of the business as a going concern. The fundamental difference is that insolvency is a problem, while bankruptcy is just one possible—and often avoidable—solution. The Canadian Bankruptcy and Insolvency Act (BIA) provides a powerful alternative specifically designed to save viable businesses.

This alternative is a formal restructuring known as a Division I Proposal. Filing a Proposal allows a business to seek a legal, binding compromise with its creditors to repay a portion of its debt over time. The moment a Proposal (or a Notice of Intention to file one) is filed, the company receives an immediate and automatic Stay of Proceedings. This legal shield stops all creditor actions—lawsuits, collections calls, and asset seizures—giving you the breathing room to stabilize operations and develop a viable plan. You have two primary paths from the state of insolvency:

• Path 1: Restructuring. File a Division I Proposal under the BIA. This initiates the Stay of Proceedings, protects the company from creditors, and allows management to remain in control while working with a Trustee to present a viable recovery plan.
• Path 2: Liquidation. Proceed directly to a formal bankruptcy. This involves the orderly wind-down of the business, liquidation of all assets by the Trustee, and does not offer protection to continue operations.

A crucial factor in this decision is the director’s personal liability. Unpaid payroll deductions or GST/HST owed to the Canada Revenue Agency (CRA) can become the personal responsibility of the company’s directors. A Proposal can often include a plan to deal with these specific debts, which bankruptcy does not always resolve. The choice depends entirely on whether the core business is viable. If there is a path to future profitability, a Proposal is almost always the superior strategic choice.

How to File a Notice of Intention to Make a Proposal?

Once you and a Licensed Insolvency Trustee determine that your business is viable and a Proposal is the right strategic path, the first formal step is often to file a “Notice of Intention to Make a Proposal” (NOI) with the federal Office of the Superintendent of Bankruptcy (OSB). Filing an NOI is a powerful move; it immediately triggers the Stay of Proceedings, giving you a 30-day shield from creditors while you and your Trustee formalize the restructuring plan. This is not a step to be taken lightly and requires thorough preparation.

Before an LIT can file the NOI on your behalf, a complete and transparent financial picture is required. The Trustee’s role is to assess the situation and ensure the future Proposal will be both credible to creditors and achievable for the business. This involves gathering a specific set of documents to form a clear picture of the company’s financial health.

The meeting with your Trustee, as depicted above, is about laying all the cards on the table. You will need to provide a comprehensive list of all creditors, detailed financial reports, and realistic projections for the future. The pre-filing checklist typically includes:

• A complete list of all creditors with their addresses and the current amounts owed.
• Accounts receivable and accounts payable aging reports for the last three months.
• Recent financial statements (balance sheet, income statement) and filed tax returns.
• A detailed list of all business assets with their estimated liquidation values.
• Cash flow projections for the next six months, demonstrating a path to recovery.

After the NOI is filed, the clock starts ticking. The initial 30-day period is intense and structured. The Trustee’s team will work closely with you to develop the formal Proposal, which details how and what creditors will be paid. This plan is then presented to the creditors for a vote. The timeline provides a framework for this critical period.

Key Milestones in the First 30 Days After an NOI Filing

Day	Action	Key Requirement
Day 1	Stay of Proceedings begins	All creditor actions frozen
Days 1-5	LIT notifies creditors	Copy of NOI sent to all creditors
Days 1-20	Develop proposal with LIT	Work on viable restructuring plan
Day 21	File proposal	Must show ability to pay portion of debts
Day 30	Extension possible	Court can grant additional time if needed

Informal Workout vs. CCAA: Which Path Saves the Business?

While a Division I Proposal under the BIA is a common path for small and medium-sized enterprises (SMEs) in Canada, it’s not the only way to restructure. Two other options exist at opposite ends of the spectrum: the informal workout and a formal filing under the Companies’ Creditors Arrangement Act (CCAA). Choosing the right path depends entirely on the scale of your debt, the number of creditors you have, and your need for privacy versus legal protection.

An informal workout is essentially a private negotiation. You, often with the help of your accountant or a consultant, approach your key creditors one-by-one to request new payment terms. This could involve asking a lender for an interest-only period or a supplier for an extended payment schedule. Its main advantages are privacy and lower cost, as it avoids court filings and legal fees. However, its success is entirely voluntary. Any creditor can refuse to participate and continue legal action, making it a fragile solution if you have many disparate creditors.

At the other end is the CCAA, a federal law designed for large corporations with debts exceeding $5 million. Like a BIA Proposal, a CCAA filing provides a court-ordered stay of proceedings. However, the CCAA process is far more flexible and powerful, supervised directly by the courts. It allows for complex restructurings, including selling off divisions, securing large-scale debtor-in-possession (DIP) financing, and dealing with intricate legal claims. The case of Target Canada, which used the CCAA to orchestrate an orderly liquidation and create a trust for employees, shows its flexibility. However, this power comes at a significant cost in legal and monitoring fees, and the entire process is public. The decision between these formal and informal routes is a strategic one, as outlined in the matrix below.

Decision Matrix: Informal vs. CCAA in Canada

Factor	Informal Workout	CCAA
Debt Threshold	Any amount	Must exceed $5 million
Privacy	Private negotiations	Public court process
Cost	Lower legal fees	High legal/monitor costs
Creditor Control	Voluntary participation	Court-enforced stay
Timeline	Flexible	Initial 10-day periods (formerly 30)
Best For	Small/medium business	Large corporations

For most SMEs, the choice is not between an informal workout and the CCAA, but between an informal workout and a BIA Proposal. If your business has a small number of cooperative creditors, an informal approach may work. But if you face pressure from multiple sources, including the CRA, the legal protection and structure of a BIA Proposal is almost always the more effective path to survival.

The Payment Mistake That Trustees Will Reverse During Bankruptcy

In the stressful period leading up to a formal filing, it’s natural for business owners to try to “clean things up.” This often involves paying off certain creditors—a friendly supplier you have a long relationship with, a loan from a family member, or a debt you personally guaranteed. From a business owner’s perspective, this feels like the honourable thing to do. From a legal perspective, it’s a critical error known as a preference payment, and it’s an action a Trustee is legally obligated to reverse.

The core principle of Canadian insolvency law is the equitable treatment of all creditors of the same class. When an insolvent company chooses to pay one unsecured creditor but not others, it gives that creditor an unfair “preference.” If the company subsequently enters a formal Proposal or bankruptcy, the Trustee has the power to review all payments made in the period leading up to the filing. This “lookback period” is typically three months for arm’s-length creditors (like regular suppliers) and 12 months for non-arm’s-length creditors (like family members or related companies).

A Trustee will meticulously review the company’s financial records for these transactions. If a preference payment is identified, the Trustee will demand that the recipient (the supplier or family member you paid) return the money to the company’s estate. This action, known as “clawing back” the payment, is often shocking and distressing for everyone involved. The money recovered is then pooled and distributed proportionally among all the unsecured creditors. To avoid this, it’s vital to halt certain activities the moment you know your business is insolvent.

To avoid creating these difficult situations, directors of insolvent companies must adhere to strict guidelines. As outlined by legal experts at firms like Blakes in their guide for Canadian businesses, there are several key actions to avoid:

• Do NOT selectively pay off friendly suppliers or preferred unsecured creditors.
• Do NOT repay personal loans you or family members made to the company.
• Do NOT transfer company assets to yourself, family, or related parties.
• Do NOT sell company property for less than its fair market value.
• Do NOT pay unusual bonuses or dividends to shareholders or management.

Understanding this rule is not about being unfair; it’s about protecting the integrity of the process and ensuring all creditors are treated equitably under the law. The best course of action when insolvent is to conserve cash and seek professional advice before making any significant payments.

When to Contact a Trustee: The Point of No Return

This is perhaps the most crucial question a struggling business owner faces: when is the right time to make the call? Many wait too long, hoping for a miraculous turnaround, and in doing so, they burn through remaining cash and eliminate viable restructuring options. In my experience, the decision to contact a Licensed Insolvency Trustee should not be seen as an admission of failure, but as a strategic move to preserve the business. There is a “point of no return,” or a viability threshold, beyond which even the best restructuring plan cannot succeed.

You should not wait until the bank account is empty. The right time to call is the moment you identify a clear trend that is irreversible without drastic intervention. It’s when the fundamental mechanics of your cash flow are broken and your relationships with key stakeholders are fracturing. These are not vague feelings of anxiety; they are concrete business events that serve as bright red flags. When these events occur, you are no longer in a temporary slump; you are in a crisis that requires expert navigation.

Waiting until a creditor initiates legal action puts you in a reactive position, forcing you into a corner. Acting when you first see these triggers allows you to be proactive, control the narrative, and access the full range of restructuring tools, like an NOI filing, while the business still has operational capacity. Procrastination is the single biggest threat to a successful turnaround.

If any of these events have occurred, the time for “wait and see” is over. Each of these is a sign that the business has crossed a critical threshold where informal solutions are unlikely to succeed. This is the precise moment when the expertise of a Licensed Insolvency Trustee becomes your most valuable asset to preserve what you’ve built.

How to Liquidate Assets Quickly to Generate Cash in 48 Hours?

When a business is in a severe liquidity crisis, the immediate need for cash can be overwhelming. Sometimes, you need funds within 48 to 72 hours to make payroll or appease a critical supplier. In these high-pressure situations, traditional bank financing is not an option. You need to look at strategies for rapid cash generation by leveraging the assets your company already owns. This is not a long-term solution, but a form of emergency financial triage to create a small window of opportunity to implement a broader restructuring plan.

The fastest way to generate cash is typically through your accounts receivable. Many businesses have tens or hundreds of thousands of dollars in outstanding invoices. Asset-based lenders and factoring companies specialize in providing immediate loans against these receivables. As an example from a BDO Canada case study, companies can secure bridge financing where the lender advances 75-85% of the value of eligible receivables, often within a few days. The lender takes a fee and collects the invoices, but you get immediate cash to solve the crisis. This is faster than collecting them yourself and can be a lifeline.

Beyond receivables, other strategies exist, though they may be more complex or costly. A sale-and-leaseback on unencumbered equipment or commercial property can generate a large cash infusion. You sell the asset to a financing company and then immediately lease it back, allowing you to continue using it in your operations. For excess inventory, industrial auction platforms like Ritchie Bros. can facilitate quick sales. While you may not get full retail value, the goal here is speed, not maximum profit. The key is to act quickly and explore multiple avenues simultaneously.

Here are some of the most effective strategies for generating emergency cash, which, as experts from firms like MNP Debt suggest, should be explored with urgency:

• Contact asset-based lenders for receivables factoring or an asset-based line of credit; same-day funding is sometimes possible.
• Arrange a sale-and-leaseback of key equipment or your commercial property.
• Offer significant immediate payment discounts to your customers (e.g., a 2-5% discount for payment within 48 hours).
• List excess, non-essential inventory or equipment on specialized Canadian auction platforms.
• As a last resort, explore a merchant cash advance, which provides funds against future sales but comes at a very high cost.
• Contact the Business Development Bank of Canada (BDC) or Export Development Canada (EDC) to see if you qualify for any emergency bridge financing programs.

These are emergency measures. They often come at a premium and are not sustainable. Their sole purpose is to buy you time—time to negotiate with your bank, time to meet with a Trustee, and time to develop a formal, long-term restructuring plan that addresses the root cause of your debt problem.

How to Restructure Corporate Debt to Improve Monthly Cash Flow?

Once you have created some breathing room—either through an emergency cash injection or the legal protection of an NOI—the focus must shift to a sustainable, long-term solution. The goal of debt restructuring is simple: to realign your debt payments with your company’s realistic ability to pay. This almost always involves negotiating with your primary lender, typically the bank, to alter the terms of your existing loans to improve your monthly cash flow.

Approaching your bank for concessions can be intimidating, but it is a standard part of the restructuring process. You cannot simply walk in and ask for a break; you must present a credible case. This means going to the meeting prepared with a clear understanding of your current financial situation and a realistic forward-looking plan. Your goal is to show the banker that providing temporary relief will increase the chances of them being repaid in full over the long term, whereas denying it could push the company into formal insolvency, where they would likely recover less.

There are several common restructuring options you can propose. The most immediate relief comes from an interest-only period, where the bank agrees to let you pause principal payments for 6-12 months. This can reduce your monthly loan payment by 50% or more, providing significant cash flow relief. Another common strategy is to re-amortize the loan over a longer period. Extending the amortization from 5 years to 10, for example, will lower your monthly payments permanently. These are not signs of failure; they are smart business adjustments to new realities. To succeed, your negotiation must be structured and professional.

Here is a step-by-step script for negotiating with your bank, based on advice from Canadian legal and financial experts:

1. Schedule the Right Meeting: Contact your commercial account manager to schedule a formal meeting. Do not deal with the collections department, whose mandate is different.
2. Present a Credible Plan: Bring updated financial statements and, most importantly, realistic cash flow projections that show how the requested changes will lead to recovery.
3. Request Interest-Only Payments: Propose a temporary switch to interest-only payments for a defined period (e.g., 6, 9, or 12 months) to create immediate cash flow relief.
4. Propose Re-Amortization: As an alternative or additional step, ask to extend the loan’s amortization period to permanently lower the required monthly payment.
5. Leverage Government Support: If you have loans supported by the BDC or EDC, gently emphasize their mandate is to support Canadian businesses through difficult cycles.
6. Get it in Writing: Do not leave the meeting without a written summary of any agreement reached. A verbal “okay” is not binding.

Successful negotiation is about demonstrating that you are in control of the situation and have a viable plan. By presenting a well-researched case, you transform the conversation from one of desperation to one of strategic partnership.

How to Survive a Liquidity Crisis When the Bank Freezes Your Line of Credit?

There are few events more terrifying for a business owner than the bank freezing your operating line of credit. This single action can paralyze a company overnight, making it impossible to pay suppliers, meet payroll, or fund operations. This is the ultimate liquidity crisis, a “Code Blue” for your business. In this moment, panic is your worst enemy, and swift, strategic action is your only path to survival. With recent data showing up to 375 insolvencies per day in Canada, it’s clear that many businesses face this cliff-edge moment. Surviving it requires an immediate and disciplined triage.

Your first instinct might be to call the bank manager and plead, but this is rarely effective. The decision has likely been made at a higher level, based on risk assessment. Your immediate priority is to understand your legal position and protect the company from complete collapse. This is not the time for guesswork; it’s the time for an emergency response plan. Within hours of the bank’s action, you need to make three critical calls to assemble your professional crisis team.

While a bank freeze feels like a final blow, options still exist. As some case studies show, non-bank lenders can be a source of emergency financing. Asset-based lenders may provide funds against receivables or inventory within days, and private investors might offer bridge loans. These are expensive, high-risk options, but they can provide the immediate cash needed to stabilize the situation while you deploy a more formal strategy, such as filing an NOI for stay protection. Your actions in the first 24 hours will determine whether the business has a fighting chance.

This is the emergency triage plan every business owner should have in their back pocket, as recommended by seasoned trustees at firms like Hoyes Michalos:

• Call 1: Your Corporate Lawyer. You need to immediately understand the bank’s legal rights under your General Security Agreement (GSA). Can they seize assets immediately? What are your rights? Your lawyer provides the legal shield.
• Call 2: A Licensed Insolvency Trustee. The LIT is your offensive weapon. They can advise if filing an NOI is the right move to trigger an immediate Stay of Proceedings, which would legally halt the bank’s actions and give you breathing room.
• Call 3: Your Accountant. You need a precise, real-time picture of your cash position, burn rate, and obligations. Your accountant provides the critical financial data needed for your lawyer and Trustee to act.

Document every conversation and get all advice in writing. In a liquidity crisis, you are no longer just running a business; you are managing a turnaround. Every decision is critical, and professional guidance is not a luxury—it is essential for survival.

Facing overwhelming debt is one of the most stressful experiences a business owner can endure. But remember, the Canadian legal system provides structured paths for recovery. The key is to act decisively, avoid common mistakes like preference payments, and engage professional help at the first sign of serious trouble. By shifting from a reactive to a strategic mindset, you can navigate this challenge and give your business the best possible chance of survival. If you are experiencing the warning signs discussed here, the next logical step is to seek a confidential consultation with a Licensed Insolvency Trustee to understand your specific options.