Dealing with a Company in Financial Difficulty

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The topics in the Dial-A-Law series provide general information on a wide variety of legal issues in the Province of Alberta.  This service is provided by Calgary Legal Guidance funded in part by the Alberta Law Foundation.

This topic discusses things to consider when dealing with a company that is in financial difficulty.

If you have given a company a cash down payment for goods or services and you have not heard from that company for several weeks, the company may be having financial difficulty.  Financial difficulty means the company may have just closed its doors, gone into receivership or is bankrupt.

If the company has closed its doors, you should contact a lawyer to assist you in recovering your cash down payment immediately.

If the company has gone into receivership that means that company’s assets will be sold, and the company managed and operated, to pay debts it can’t repay otherwise.  This process is done and overseen by a receiver.  You can find out who the receiver is by calling Service Alberta’s Corporate Registry Office.

Finally, a company in financial difficulty may also be bankrupt. Bankruptcy is a legal process where a person, called a trustee, is appointed to collect and sell the assets of a company or individual.  The trustee will notify the creditors who are entitled to be paid from the sale proceeds.  You are entitled to be paid from the sale proceeds if you have paid or lent the company money and received no goods, services or repayment in return. Contact the Corporate Registry Services at any Registry Agent, or the Bankruptcy Clerk at the Court of Queen’s Bench, to determine who is the trustee in your matter.

As a creditor, you are entitled to attend a meeting of the creditors to find out how many creditors there are and the likelihood of getting paid.  There are no guarantees that there will be enough money to pay everyone.  Generally, you will be paid according to whether you are a secured creditor or a non-secured creditor and a more specific system of ranking the priority of creditors laid out in the applicable legislation.

A secured creditor is a creditor that has taken security or collateral for the debt.  For example, banks provide mortgages for property, and secure that debt against the property in question so if they don’t get paid, they get the property.  Other creditors with relatively high priority include the trustee, municipal and federal tax departments, the bankrupt company’s employees, and the company’s landlord.  Most creditors are unsecured creditors who have no security for the money they gave to the company.  You are most likely unsecured.  If the company goes bankrupt the unsecured creditors have no specific rights to the company’s assets and get paid last from what remains of the sale of the company’s assets.

You can take a number of steps to protect yourself from companies that might find themselves in financial difficulties in the future.  Call the Better Business Bureau before you do business with a new company.  They can tell you of any complaints made against the company and how the complaints were handled.  Do business only with reputable companies.  Find out how many years the company has operated and if the company is in good standing with trade associations.  A lawyer can also make a number of searches and inquiries on your behalf.  If possible, avoid giving money to a company before work or services are provided or goods delivered.  If the company requests a down payment or deposit before they provide goods or services,  offer to give as little a down payment or deposit as possible or take your business elsewhere.