During the winter of 1854 James Sykes raised £50,000 in England for extensions on either side of the C&G. In May 1855 he tried to return to Canada with the funds in cash. He never made it; his ship was lost with all aboard during a storm just off Portland, Maine. The main supporters, including de Bergue, withdrew after this tragedy. The contractors were in trouble. The loss of the £50,000 badly damaged the company’s credit and they had to meet payrolls and pay for the land and materials used. There was also the matter of unpaid stock subscriptions. Of the individual subscriptions of £24,600 only £930 had been paid up.

When the Montreal office of Sykes, de Bergue and Company failed to receive money for work already done, William Sykes illegally took possession of the railway on August 1, 1855 and tried to operate the completed section for his own benefit. The Montreal & Bytown Railway took exception to this and on Sept. 21, 1855 had the Superior Court issue a Writ of Attachment and Saisie Revindication. A Bailiff by the name of Robert Stuart travelled to Carillon and between Sept. 22nd and 26th seized the locomotive and cars and put them in the sheds at Carillon. James Barclay was appointed guardian. The line was to lay idle for a year. The Montreal & Bytown Railway and the contractors were ruined. The unfortunate remaining Sykes brothers moved to Toronto where they found employment in a machine shop.

In the fall of 1856 the railway was handed over to the Wardens of Ottawa and Argenteuil counties as security for a loan of £6,000 to reimburse the farmers who had not been paid for the right of way. Railway operations resumed at this time. In August, 1858, a second locomotive, No. 2 Grenville was received. It was a 4-4-0 built by Daniel C. Gunn of Hamilton.

The English bondholders whose funds had gone down at sea were unhappy because the interest payments on their bonds were in default. The principal instigators of legal action were Henry Rodgers, William Henry Rodgers and Alfred Charles Twentyman all of Wolverhampton, England and doing business under the name of Henry Rodgers and Sons. They held 183 bonds with a par value of ₤100 each.

On June 28, 1858, Henry Rodgers and Sons had a judgement rendered by the Superior Court that declared that the Montreal and Bytown Railway Company was insolvent and "en etat de Disconfiture." Then on July 17 they obtained a Writ of Execution from the Superior Court to try to force the Canadian stockholders who had not paid up their subscriptions to do so. This move failed as the writ was returned to the Sheriff on September 7 "unsatisfied either in whole or part." On November 18, they took action before the Superior Court to take possession of the line but this too was unsuccessful.

In January 1859 the line was put on the block at a Sheriff’s auction with the proceeds to be divided among the various claimants. John J. C. Abbott, the solicitor for the old company and who would go on to be Canada’s first Canadian-born Prime Minister, paid $21,200 for the railway. The line had cost $400,000 of which $100,000 had been paid so the creditors received about seven cents on the dollar for their claims.

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