When a Business Customer Files for Bankruptcy or a Proposal: A Canadian Creditor's First-Move Playbook
The notice arrives by registered mail, by courier, or as a forwarded email from the customer's accountant. Your business customer has filed a Notice of Intention to Make a Proposal, filed an assignment in bankruptcy, or been placed in receivership. The unpaid invoice sitting in your accounts receivable is now part of a formal insolvency process governed by federal law.
What you do in the days that follow shapes how much, if anything, you will recover. Creditors who react quickly and correctly often preserve options that creditors who wait, panic, or take the wrong action lose entirely. This playbook walks through what changes the moment a customer enters insolvency, what a Canadian creditor should do first, and where the real recovery opportunities usually sit.
The three Canadian insolvency processes you will encounter
Almost every B2B creditor in Canada will, sooner or later, deal with one of three formal processes under the federal Bankruptcy and Insolvency Act:
Notice of Intention to Make a Proposal (NOI). A debtor's signal that it intends to file a proposal to its creditors. The NOI is often the first thing you receive. It buys the debtor a stay of proceedings for thirty days, which can be extended in five-day increments to a maximum of six months. During the stay, you cannot start or continue collection action.
Division I Proposal. A formal compromise offered to the debtor's creditors, typically offering a percentage of what is owed in exchange for the rest being released. Unsecured creditors vote on the proposal at a meeting of creditors. If the required majority approves, the proposal binds all unsecured creditors, including those who voted against it.
Bankruptcy. Either a voluntary assignment by the debtor or a court-ordered bankruptcy. A licensed insolvency trustee takes possession of the debtor's assets, liquidates them, and distributes the proceeds according to the priority rules in the Bankruptcy and Insolvency Act.
Receivership is a separate process, usually initiated by a secured creditor under its security agreement or by a court order. It operates outside the proposal and bankruptcy framework but can run alongside it.
Larger, more complex insolvencies are sometimes handled under the Companies' Creditors Arrangement Act rather than the Bankruptcy and Insolvency Act. The CCAA gives debtors broader restructuring tools and longer timelines. The strategic considerations for creditors are similar but the procedural details differ. For most B2B creditors, the Bankruptcy and Insolvency Act is the framework that applies.
What changes the moment a filing happens
The single most important consequence of any filing is the stay of proceedings. The stay is automatic, immediate, and broad. From the moment the filing is effective, creditors cannot:
Start or continue a lawsuit against the debtor.
Enforce an existing judgment.
Garnish wages or bank accounts.
Repossess goods unless specifically permitted by the trustee or the court.
Send demand letters that look like collection activity.
Direct a collection agency to continue pursuing the account.
Violating the stay is taken seriously by courts. Beyond the legal exposure, it can damage your standing in the proceeding and undermine your eventual recovery. The first phone call after a filing arrives is almost always to whoever is handling collections on the file, internal or external, with instructions to stop immediately.
Your first 72 hours
The early days of an insolvency matter more than the months that follow. Three things should happen quickly:
Verify the filing. Insolvency filings in Canada are recorded with the Office of the Superintendent of Bankruptcy. The notice you received will identify the licensed insolvency trustee handling the file. Confirming the filing protects you from acting on incorrect information and tells you who to contact for further details.
Identify your status. Your recovery depends almost entirely on where you sit in the priority structure. Are you a secured creditor with valid registration? Are you an unsecured creditor with no collateral? Do you have a claim to trust funds under provincial construction or trust legislation? Do you hold a personal guarantee from a director or officer? The answers determine which playbook applies.
Stop collection activity and notify everyone involved. Internal staff, collection agencies, lawyers, and any third parties acting on your behalf need to know within hours, not days. The stay binds you regardless of who is carrying out the collection work in your name.
Where unsecured creditors actually recover money
Most B2B trade creditors are unsecured. They sold a product, delivered a service, and invoiced on standard terms with no security taken. Recovery for unsecured creditors in a bankruptcy is usually modest, often in the range of a few cents on the dollar, and sometimes zero. Recovery under a proposal is generally better, because the entire purpose of a proposal is to offer creditors more than they would receive in a straight bankruptcy.
But unsecured status in the bankruptcy is not always the end of the conversation. Several other paths can deliver meaningful recovery, and they are frequently overlooked:
Personal guarantees. A corporate bankruptcy does not extinguish the personal liability of a guarantor. If a director or officer signed a personal guarantee, the corporate filing does not protect them. The creditor can pursue the guarantor directly while the corporate proceeding runs in parallel.
Director liability for source deductions and GST/HST. Directors of a corporation can be personally liable under federal tax legislation for unremitted employee source deductions and certain unremitted GST/HST. While this is primarily a Canada Revenue Agency claim, the existence of director liability often creates leverage for negotiated settlements.
Trust claims. In construction, certain provincial statutes treat money received by a contractor for a project as a trust held for the benefit of subcontractors and suppliers. If the trust can be traced, the trust claim ranks ahead of unsecured creditors. Other industries have analogous trust provisions in narrower contexts.
Reviewable transactions and preferences. If the debtor transferred assets or paid certain creditors in the months before filing, the trustee may have the power to reverse those transactions. While this primarily benefits the estate as a whole, it can increase the pool available to unsecured creditors.
A creditor that limits its analysis to "we are unsecured, so we will recover almost nothing" frequently leaves real money on the table.
Filing a proof of claim, correctly and on time
To participate in the proceeding at all, an unsecured creditor must file a proof of claim. The proof of claim is a formal document, prescribed under the Bankruptcy and Insolvency Act, that sets out:
Who the creditor is.
The amount owed and the date the debt was incurred.
The basis for the claim, with supporting documents.
Whether the creditor is claiming secured, preferred, or unsecured status.
The trustee provides the form and the deadline. Filing late is the easiest way to be left out of the distribution entirely. Filing incomplete is the easiest way to have the claim challenged and reduced. The proof of claim is not a place to be casual about documentation. Invoices, statements of account, contracts, and signed delivery confirmations should all be attached where they exist.
If you are voting on a proposal rather than waiting for a bankruptcy distribution, the proof of claim is also your voting right. Without it filed by the deadline, you cannot vote, and proposals that should not pass sometimes do because uninformed creditors fail to participate.
A word about payments received in the months before the filing
If your customer paid you in the three to twelve months before the filing, those payments may be reviewed. The Bankruptcy and Insolvency Act gives the trustee tools to reverse preferences that improperly favoured one creditor over others, and to reverse transactions at undervalue. The look-back period and the analysis vary depending on whether the parties were dealing at arm's length.
Most ordinary-course trade payments are safe. Payments made in unusual amounts, payments made under pressure, payments made when the customer was clearly insolvent, and payments to related parties are the ones that draw scrutiny. If you receive a letter from a trustee questioning a payment you received, take it seriously and get advice before responding.
Frequently asked questions
What is the difference between a proposal and a bankruptcy? A proposal is a compromise offered to creditors that allows the business to continue operating. A bankruptcy ends the corporate entity's operations and liquidates its assets. Both are formal processes under the Bankruptcy and Insolvency Act.
Can I still collect from a personal guarantor if the corporation files for bankruptcy? Yes. A corporate bankruptcy does not affect the personal liability of a guarantor. The guarantor is a separate party with a separate contract.
How long do I have to file a proof of claim? The trustee will set the deadline based on the proceeding. In a proposal, the deadline is usually tied to the meeting of creditors. In a bankruptcy, claims can generally be filed at any time before final distribution, but voting and early-stage participation require timely filing.
What if the customer paid me right before they filed? The trustee may review payments made before the filing under the preference and transfer-at-undervalue rules in the Bankruptcy and Insolvency Act. Ordinary-course payments are usually safe. Unusual payments, payments to related parties, or payments at a time when the customer was clearly insolvent are more likely to be challenged.
Do I need a lawyer for an insolvency claim? Not always. Straightforward proofs of claim can often be prepared internally with the right documentation. More complex situations, especially those involving trust claims, director liability, personal guarantees, or significant amounts, generally benefit from professional advice.
The bottom line
Insolvency is not the end of recovery. It is a moment that reshapes how recovery happens. The creditors who recover the most in Canadian insolvency proceedings are not necessarily those with the largest claims. They are the ones who reacted quickly, identified their priority position correctly, filed their documentation on time, and remembered that personal guarantees, director liability, and trust claims often deliver more than the bankruptcy distribution itself.
When a customer files, the first instinct of many businesses is to write off the receivable and move on. That is sometimes the right answer. Often it is not. A careful look at the file, the documents, and the people behind the corporation can reveal recovery paths that do not appear in the trustee's first letter.