The quarterly financial statements arrived on the desk of the managing director of a metal fabrication company based in southern Ontario, and the figures confirmed what the 3 directors had suspected for months. The company, incorporated under the Canada Business Corporations Act 12 years earlier, had operated profitably for its first decade, employing 47 workers at its peak and supplying custom components to automotive parts manufacturers across the region. The business model depended on long-term supply contracts with 4 major customers, relationships that had generated predictable revenue and justified the $2.1 million in equipment financing the company had undertaken 5 years ago to expand its production capacity.

The trouble began 18 months earlier when the company's largest customer, representing 38 percent of annual revenue, terminated its supply agreement with 90 days notice following a corporate restructuring of its own. The remaining customer base could not absorb the lost volume, and the company's fixed costs—including monthly lease payments of $34,000 on its facility and equipment loan payments of $28,000—continued regardless of production levels. The directors initially responded by drawing on a $400,000 operating line of credit and deferring payment to several long-standing suppliers, a strategy that bought time but created a growing accounts payable balance that now exceeded $620,000. The company had also fallen 3 months behind on its remittances to the Canada Revenue Agency for employee source deductions, an amount totalling approximately $87,000.

The 3 directors—2 of whom also served as the company's only shareholders while the 3rd was an independent director recruited 4 years ago for governance purposes—now faced a decision that required them to understand obligations they had never previously confronted. The company's most recent balance sheet showed assets of approximately $1.8 million, consisting primarily of equipment with uncertain liquidation value, against liabilities of $2.4 million owed to secured lenders, unsecured trade creditors, and the federal government. Cash flow projections prepared by the company's accountant indicated that without new capital or a significant reduction in debt obligations, the company would be unable to meet payroll within 6 weeks.

The directors scheduled a meeting to determine whether the company could be restructured, whether it should be wound up voluntarily, or whether bankruptcy had become inevitable. They also needed to understand what obligations attached to them personally as directors during this period of financial distress, what protection—if any—the corporate structure still offered them, and what steps they were legally required to take regardless of which path forward they chose. The decisions made over the coming weeks would determine not only the fate of the corporation but potentially the personal financial exposure of each director and shareholder involved.