Belly up

by Jane Mundy

In the 1990s Gail Winkelmann became co-owner of a commercial and residential garbage disposal business in Surrey, B.C. The client list, including construction companies, grew steadily during the first two years, generating enough work to require five trucks and five full-time employees. But a series of unfortunate circumstances involving a partner resulted in thousands of dollars being siphoned out of the company. The bills mounted, and when the partners finally split up in April 2000, the company’s debt load was $180,000, largely to the GVRD for landfill fees and to Canada Revenue for unpaid GST and payroll remittances.  She was responsible for these debts as she had personally guaranteed the indebtedness of the company or under the income tax act, directors of a corporation are personally responsible for any unpaid GST or source deductions.

Winkelmann’s house in Surrey was in foreclosure. She was now a single mother with four kids aged five to 18 to support, the sole proprietor of a company whose finances were bled dry. Given her staggering debt, she wondered if she could salvage the business without forfeiting the family home.
A trustee she found in the Yellow Pages offered her only one option: declare bankruptcy. “He told me how to go personally bankrupt and open the business the next day under another name,” she says. “[But] it seemed crooked to me. Even though I knew people did it, I didn’t feel safe.”

She started operating as a sole proprietor because she had to start anew. Her  debts were an accumulation of personal liability (credit cards) and guarantees and directorship responsibilities to the former company.

Winkelmann became a sole proprietor to keep the business going, so basically she started all over again.

Thousands of people do it every year, in fact. From 1966 to 2002, the number of insolvency cases filed with the Office of the Superintendent of Bankruptcy Canada (OSB) increased an average of 8.8 per cent annually. Since the mid-’70s, most of those have been personal or consumer bankruptcies. In B.C. in 2004, out of 10,642 total cases reported, 8,378 were personal bankruptcies. That represents a 56-per-cent increase in consumer cases in this province in the past decade (4,747 British Columbians declared personal bankruptcy in 1996).
As defined by federal law, bankrupt describes someone whose debts exceed his or her assets or ability to pay. Facing complete financial ruin, the bankrupt person agrees to a legal proceeding under the bankruptcy and insolvency act. A trustee is appointed. The credit bureau is notified. Assets are liquidated. Creditors line up to receive whatever remains. The bankrupt person receives counselling. Barring objections from unhappy creditors, an automatic discharge of the bankruptcy takes place after nine months, canceling any remaining debts. Then, five more years must pass before the bankruptcy proceeding is wiped from the credit bureau record.

The business stopped operating, she went into proprietorship and the only thing that she became responsible for, out of the large indebtedness in the former corporation, was the personal guarantees given to suppliers or by legislation.

It won’t resolve the debts of her business; the corporate debt continues and it doesn’t change. The corporation is still liable, but there are just no assets to realize on. That is why people ask for personal guarantees and that is why there are legislations, making directors liable. Personal guarantees are often required by suppliers and others in order to cover indebtedness that may occur in the corporation that could result in debts being unpaid.

“Yes, but we didn’t file a proposal for the corporation because there was no benefit in keeping the business operating,” says Deane Gurney of Sands & Associates.

Winkelmann, though, was reluctant to throw in the towel. “I thought down the road something would come back to haunt me. Ninety per cent of my business is with property management companies and I didn’t want to do anything that would affect them. I was afraid that if I changed the name [of the company], I would lose their contracts because they could just go somewhere else.” 
Time for a second opinion. A friend took Winkelmann to Deane Gurney, a trustee at Sands & Associates in Surrey. He pointed out that her business was still viable, with sufficient cash flow to qualify her for a form of debt relief known as a proposal.