What is the difference between a company’s dissolution and its bankruptcy?

First of all, bankruptcy and dissolution are two very distinct concepts that are not the same situation.

Bankruptcy is a legal means by which creditors’ proceedings are suspended while the company’s responsibilities are transferred to a trustee. The trustee is responsible for liquidating the assets and, if applicable, for distributions to creditors. The trustee also respects all the legal and tax terms and conditions associated with this role.

The dissolution of a company consists of the legal cessation of its legal existence. In other words, if the shareholders have decided to do so, it is the voluntary closing of the company.

Bankruptcy and dissolution each have important legal consequences on the shareholders and creditors that you should be aware of in order to make the appropriate decision based on your situation. Here is a summary of what you need to know.

Consequences of dissolution 

In the case of a sole shareholder without a prior liquidation:

Upon dissolution of a company by a sole shareholder without prior liquidation, all of the company’s rights and obligations are transferred to the shareholder. In other words, the shareholder is responsible for all administrative and legal obligations in lieu of the company. Among other things, the shareholder must sign a declaration attesting to these responsibilities, which is then submitted to the Registraire des entreprises. This means that:

• should the dissolved company be sued, the lawsuit will be brought against the shareholder;
• any debt incurred by the company will become the shareholder’s responsibility without any limit.

If the dissolution occurs after liquidation:

If the liquidation has taken place, the liability may be limited to the amounts and property received by the shareholder in the liquidation.

Additionally, if the director and shareholder liquidate the company before dissolving it, they may have to take on an important role in the liquidation of the assets, management of the creditors and legal and tax filings (tax returns, commodity taxes, deductions at source, CNESST, etc.). By opting for bankruptcy, they will avoid having to perform all these tasks and, above all, avoid the consequences of any errors.

Dissolving a company involves significant risks that every entrepreneur should be aware of. We strongly recommend that you seek legal advice before resorting to this option to ensure that you are aware of all your legal obligations and that you act in an informed manner, particularly with regard to the statutory documents to be filed. You can also consult the online guide to better understand what a dissolution is and what steps you need to take in order to use it. In a dissolution, you will have to complete all missing tax returns (tax returns, sales taxes, payroll deductions, etc.).

Consequences of bankruptcy

Commercial bankruptcy generally results in the liquidation of the company’s assets so that the proceeds of realization are distributed to the creditors, according to their respective rights. However, it does not automatically close the company. If the company has to be closed, the trustee will proceed with a cancellation from the Registre des entreprises.

Above all, if the company is unable to pay its debts, the sole shareholder or director are not personally liable (except in the case of liabilities resulting from a personal guarantee of the shareholders or directors).

Furthermore, a bankruptcy provides for:

• the suspension of any legal action taken against the company;
• protection against possible legal proceedings initiated by creditors;
• management of the company’s assets, debts and creditors by a trustee.

Depending on your situation, as a business owner, it may be more advantageous and less risky to file for bankruptcy than to dissolve the company. You will be protected from personal liability while being able to manage your debts.