What is the difference between dissolving a corporation and it going bankrupt?
Dissolution and bankruptcy are very different outcomes, though both end a corporation's existence.
Voluntary dissolution is a controlled, deliberate process initiated by the shareholders when the business is done and its affairs can be wound up in an orderly way. Before dissolving, the corporation must pay or make adequate provision for all known debts and liabilities, file outstanding tax returns, and distribute any remaining assets to shareholders. Ontario corporations can be dissolved voluntarily under the Business Corporations Act by filing articles of dissolution. If the process is followed properly, the shareholders generally walk away with remaining assets and no lingering obligations.
Bankruptcy, by contrast, occurs when a corporation is insolvent — unable to meet its obligations as they come due or when its total liabilities exceed its assets. Under the federal Bankruptcy and Insolvency Act, an insolvent corporation can make an assignment in bankruptcy (voluntarily) or be petitioned into bankruptcy by creditors. A trustee in bankruptcy is appointed to liquidate assets and distribute the proceeds to creditors according to their priority. Shareholders typically receive nothing, as they are at the bottom of the priority waterfall.
A corporation can also be struck off the provincial registry for failing to file annual returns — this is administrative dissolution, not bankruptcy, and does not extinguish debts.
Key takeaways
- Voluntary dissolution is an orderly wind-down of a solvent corporation after debts are paid.
- Bankruptcy applies when the corporation is insolvent and creditor claims drive the process.
- Shareholders receive nothing in a bankruptcy; they may receive distributions in a solvent dissolution.
- Administrative dissolution for failure to file annual returns is distinct from both.