Author: Brandon Smith

Brandon Smith is a licensed insolvency trustee and Senior Vice-President of Ira Smith Trustee & Receiver Inc. The firm deals with both individuals and companies facing financial challenges in restructuring, consumer proposals, proposals, receivership and bankruptcy.

They are known for not only their skills in dealing with practical solutions for individuals and companies facing financial challenges, but also for producing results for their clients with realistic choices for practical decision-making. The stress is removed and their clients feel back in control. They do get through their financial challenges and are able to start over, gaining back their former quality of life.

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THE SAVVY FIRST MORTGAGEE: SOMETIMES YOU CAN’T ALWAYS GET WHAT YOU WANT

first mortgagee
first mortgagee

First mortgagee: What is the definition of a mortgagee?

A mortgagee is a person or company who gives a loan and uses the property as security for the debt. The mortgagee is the lender. The property owner who borrows the money is called the mortgagor.

I have acted in many real estate receivership matters. Real estate receiverships in Ontario normally involve a court-appointed receiver. The reason is usually that there are many competing parties and perhaps competing claims. The best way to resolve these disputes and for the party that purchases the real estate from the receiver is through court supervision.

In this Brandon’s Blog, I describe a recent decision of the Court of Appeal for Ontario involving a real estate receivership and the claim of the first mortgagee. I and my Firm are not involved in this matter.

What is the definition of a first mortgagee?

A first mortgage is a loan that is secured by real estate property in priority to any other loans registered against the real property. In the event of default, the first mortgage loan has priority over any other loans that are secured by the property. The first mortgagee is the mortgagee that holds that first mortgage for that mortgage loan.

first mortgagee

Institutional First Mortgagee Definition

The term “institutional first mortgagee” refers to a lending institution that provides financing for a first mortgage loan. Such mortgage lenders are typically a banking institution, credit union, or company that specializes in mortgage lending.

The institutional first mortgagee typically offers the lowest interest rate and best terms for the mortgage loan, especially if they are going to hold an institutional first mortgage. However, this is not the case if the institutional lender is one that deals with harder-to-finance properties or sub-prime mortgage loans.

Is it possible to have more than one mortgage at the same time?

There are instances where multiple mortgages may be an option. However, it is no secret that mortgages can be difficult to obtain. Financial institutions are often hesitant to approve multiple mortgages for fear of the borrower’s ability to repay. It is quite possible that to get more than one mortgage a borrower may have to look at the secondary mortgage market to accomplish that second or third mortgage transaction on the same property.

Every lender is different. One lender may see an opportunity where another would deem it too risky. The terms and pricing being offered will match the lender’s risk assessment. Remember, there can only be one first mortgage. Each subsequent mortgage will be more expensive and may have more onerous terms as each subsequent mortgagee is taking on more risk than the first mortgagee lending against the same real property.

Adding another mortgage may only exacerbate your financial difficulties if you are already struggling to make payments on one. Before making a decision, it is important to carefully weigh all of your options.

first mortgagee
first mortgagee

The case I am about to describe highlights the dangers of having an institutional first mortgage and then having a subsequent mortgagee holding the second mortgage when the owner’s business plan for the commercial real estate does not work out.

First National Financial v. Golden Dragon: You can’t always get what you want

The case before the Court of Appeal for Ontario is an excellent instance of not always obtaining what you want. The Rolling Stones stated it best in their 1969 tune, “You Can’t Always Get What You Want.”

The Court of Appeal decision that I describe below may seem fairly obvious. First National Financial GP Corporation v. Golden Dragon Ho 10 Inc., 2022 ONCA 621, stands for the proposition that in order for a first mortgagee (or any mortgagee) to make a claim for accelerated interest on the entire debt, or any other claim a mortgagee may make when a mortgage goes into default, you first must look at the mortgage terms to see what exactly they are entitled to.

The first issue to be addressed is a priority dispute between the first mortgagee, First National Financial GP Corporation (First National), the second mortgagee, Liahona Mortgage Investment Corporation (Liahona); and the mortgagors, Golden Dragon Ho 10 Inc. (GDH 10) and Golden Dragon Ho 11 Inc. (GDH 11) (collectively referred to as the mortgagor). The primary concern of this appeal is whether the trial judge erred in deciding that First National, as the first mortgagee, is entitled to payment of a future, unearned, interest to the end of the term of its closed mortgages.

Additionally, Golden Dragon appealed the receiver’s fee and costs approved by the lower court. The Court of Appeal for Ontario quickly dismissed their appeal.

First mortgagee: Should You Take Out a Second Mortgage?

When it comes to your finances, taking on more debt is generally not considered a good idea. However, there are some situations where taking out a second mortgage charge on title can make sense.

Opting for a second mortgage entails some risks. If you’re unable to keep up with all the mortgage payments, you could lose your property through the power of sale proceedings.

Golden Dragon used to own two residential apartment buildings that were next to each other in Ottawa. When they bought these properties, they assumed three closed registered mortgages: the first mortgage on one building, a first mortgage for the second building, and a second mortgage for the second building. All three mortgages were held by First National. Its second mortgage ranked pari passu with its first mortgage.

Despite being required to give notice to First National under its mortgages, Golden Dragon subsequently placed a second mortgage on the first building without giving any notice. This new subsequent mortgage was held by Liahona.

Golden Dragon took out a second mortgage to get access to funds to use to renovate the apartments. However, Golden Dragon was unsuccessful in renovating the properties and became insolvent. As of December 2016, the Liahona second mortgage was in default and no further payments were made.

Liahona issued a notice of sale for the property of Golden Dragon and obtained a default judgment, and a judgment to take possession of the property.

As of June 2017, the First National mortgage charges on title were in default. Their mortgages included cross-default provisions, meaning that a default under one was deemed to be a default under all three First National mortgages. On August 17, 2017, First National made a formal demand that Golden Dragon pays the arrears and cure the non-monetary defaults and delivered notices of intention to enforce security pursuant to s. 244 of the Bankruptcy and Insolvency Act. Golden Dragon was unable to cure the borrower defaults and the court appointed the interim receiver after considering the circumstances of default.

first mortgagee
first mortgagee

The interim receiver ensured the properties were stable and increased the rental income. Rather than the first mortgagee or second mortgagee selling the properties by way of a power of sale, the court then expanded the interim receiver’s role to marketing and selling the apartment buildings. The interim receiver requested the court’s approval for the sale of the properties. The court found that the approval conditions were met, the sale was approved, and the properties were sold.

 

What can the first mortgagee claim if the mortgaged properties are sold?

The trial judge’s ruling found that the First National registered mortgages did not give it the right to claim the disputed “yield maintenance penalties,” which included an acceleration of all amounts due until the end of the mortgage terms.

Although the mortgages contained a provision allowing Golden Dragon to redeem the mortgages by paying a “yield maintenance” penalty calculated according to a formula set out in the provision, this privilege only applied if Golden Dragon was not in default under the terms of the mortgages. Since Golden Dragon was in default, it no longer enjoyed the privilege of prepayment of the mortgages. As a result, First National was not entitled to charge a yield maintenance penalty.

Despite this, the trial judge decided that First National was entitled to the amounts it claimed as a condition of payout:

  • under a common law rule that a mortgagee is entitled to all accelerated interest owing to the date of maturity when a closed mortgage is vested off the title before the end of the term; or
  • in accordance with an implied contractual entitlement to interest on the unpaid balance, the trial judge read into the First National mortgages.

Liahona submitted to the trial judge that the first mortgagee was not entitled to accelerated interest under their mortgages unless there was a specific clause in the mortgage authorizing such a claim. The trial judge rejected that argument and concluded that the accelerated interest under the mortgage became due when the registered mortgages were terminated prematurely upon being vested off title pursuant to the court-supervised sale.

What the Court of Appeal for Ontario decided

Liahona and Golden Dragon appealed the trial judge’s decision in interpreting the basics of mortgagee clauses for the following issues:

  • Whether the trial judge was correct in finding that the first mortgagee claim for priority for the accelerated interest under its mortgages under common law.
  • If the trial judge erred by implying a contractual term in the First National mortgages that didn’t exist.

The Court of Appeal for Ontario differed from the lower court’s ruling concerning the mortgagee clause relating to accelerated interest. The appellate court noted that the lower court misapplied the law as well not taking into consideration the full scope of the contracts. It further stated that a loan agreement is interpreted according to standard principles of contract interpretation.

The Court of Appeal for Ontario vacated the trial judge’s ruling. Even though First National objected, the appellate court decided that the first mortgagee was only entitled to the principal and interest, plus costs up to the day of the sale of the properties that the court authorized.

First mortgagee: The main point

The main point of this court case is that if you negotiate and bargain for a certain set of contractual terms set out in writing, the court will look at the rights and responsibilities of the parties to the contract. This includes any mortgagee clause it bargained for.

I hope you enjoyed this Brandon’s Blog on what this first mortgagee rights and what it was entitled to from the court-supervised sale of the properties. Are you or your company in need of financial restructuring? Are you or your company insolvent due to a contract you may have entered into? Can you or your business not able to afford to make all your necessary debt payments, including mortgage payments?

The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

first mortgagee
first mortgagee

 

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STALKING HORSE BIDDER: OUR SIMPLE YET GREAT STEP-BY-STEP GUIDE FOR SELLING DISTRESSED COMPANY ASSETS

stalking horse bidder

What is a stalking-horse bidder?

A stalking horse bidder is basically a potential buyer who’s interested in making a public bid for an insolvent company’s assets. The stalking horse bidder gets to be the first one to check out the assets and enter into an agreement to purchase them. The agreement negotiated with the licensed insolvency trustee acting as the court-appointed officer sets the lowest price the company’s creditors would get if sold in the receivership or bankruptcy.

If the stalking horse bidder enters into an agreement, and no better offers come in, they’ll be able to purchase the company’s assets. If someone offers more than the stalking horse bidder during the auction and that higher offer is the one that gets court-approved and completed, then the stalking horse bidder is entitled to receive compensation for allowing their bid to be public.

In this Brandon’s Blog post, I describe a case we are currently working on that describes what the stalking horse process is all about, and how the stalking horse bidder either ends up with the assets it bid on or gets paid for not being the successful bidder.

What are the benefits of being a stalking horse bidder?

There are several key benefits and potential advantages to being a stalking horse bidder. For one, you get to negotiate the sale terms (both legal and financial) with the seller, compared to other potential bidders who are presented with a court-approved form of agreement that has already been negotiated for the assets for sale. As the stalking horse bidder, you also have the advantage of being the first bidder in line, which could give you a better chance of winning the auction.

The stalking-horse bidder is allowed to complete due diligence before any other competing bidders, giving them the advantage. This is a privileged position that allows them to make a bid they believe gives them the best chance of success. This includes taking the time to review the company’s financial records and talk to the management and employees, in order to gain a better understanding of the business.

The stalking horse bidder also has the opportunity to engage critical suppliers and large customers to gauge their willingness to work with the stalking horse bidder if its bid is successful.

The stalking-horse bidder is protected from incurring costs as the first bidder. It can negotiate the terms of its break-up fee and expense reimbursements for costs incurred to hire legal and financial advisors, conduct due diligence, and other expenses incurred in formulating its offer.

The costs of the stalking horse bidder are reimbursed from the sale of the assets of the company, but this is subject to the approval of the court. If the stalking horse bidder is not a successful purchaser, the reimbursement will take place.stalking horse bidder

When is it appropriate to use the stalking horse bidder as an option?

My firm has been appointed by the court as the receiver of a green technology financially distressed company. We are currently in the process of developing a stalking horse sales process in order to sell the assets of the company. Once we have received court approval, we will be able to implement the plan.

We are still developing the entire sales process, including the bidding procedures. As we don’t have court approval yet, I can only describe how we’ll recommend it to the court, and I can’t mention any real names.

As the court-appointed receiver, we took possession of the assets and found that a fair amount of deferred maintenance limited the revenue-generating capability of the assets. However, we were able to borrow certain funds from the secured creditor Applicant in the court process. The cash flow generated from running the business, combined with the borrowing, allowed us to take the time to have a fair amount of the deferred maintenance completed.

Now that we had done as many revenue-improving activities as funding allowed, it was time to develop a sales process to take to the court for approval. The main value of the assets is a function of their revenue-generating capability over their useful life and what the maintenance costs in the future will be. At the same time, we had a party who operates in the same industry approach us advising us they wish to be a purchaser.

We have improved the assets to a fair degree, we are aware of other potential purchasers, and we have the luxury of time to run the business. We thought that a stalking horse bid process would work well to set a floor purchase price for the assets. We did our own calculations for what we thought the purchase price could be, but we wanted to see what an experienced industry player would say. They of course usually build in their own discount, so we were curious.stalking horse bidder

After some discussion, we decided that proceeding with a stalking horse bid process would be best if an industry player was willing to act as a stalking horse bidder. So we asked them if they would be willing to take on that role, and after giving it some thought, they agreed.

This stalking horse bidder has now completed their due diligence and we have received their letter of intent. We are now negotiating all the terms to come up with an asset purchase agreement. The agreement will set out the sales price and other terms and conditions, including the break-up fee and reasonable expenses reimbursement for its due diligence costs if they are not the successful bidder. Before being able to sign the asset purchase agreement we will need bankruptcy court approval.

We will also have to prepare the terms and conditions of the sale. A stalking horse bidding process is a competitive bidding process where the stalking horse bidder‘s sale price is the auction sale process reserve price. The stalking horse is the winner of this auction-type process if its bid remains the best one.

We will select the bid that provides the greatest value for the assets if there are higher bids. In such a scenario, the stalking horse bidder has the choice to participate in a competitive auction process round to see if it will end up being the purchaser at a higher price than its initial bid. If the stalking horse bidder chooses not to get into a further auction additional bidding and therefore its offer is not accepted, they are entitled to a break-up fee to compensate them for its time and costs.

The court must first approve all of these terms and conditions, including the break-up fee as well as the sales process itself.

The stalking horse bidder: Why would the court approve a stalking horse receivership sale process?

When applying to the Court for authorization of this sort of sales process, the stalking horse agreement is just one part the Court must look at. There are numerous variables the Court thinks about when being asked to approve a specific sales process.

The main considerations are:

  • Is a sale warranted at this point in the court-supervised insolvency administration?
  • Will the entire “economic community” benefit from such a proposed sale?
  • Do any of the debtor’s creditors or major stakeholders have a valid reason to object to a sale procedure for the business?
  • Does a better sensible alternative exist?

A stalking horse sales process may be recommended by a receiver in situations where the receiver believes it would be advantageous. The benefits generally are:

  • It cuts down on delays and expenses, which helps out the main stakeholders.
  • The court-appointed receiver will be able to oversee the sales process and make sure that any superior bids are known, thus protecting the fairness of the process.
  • A well-advertised sales process will determine the pool of prospective bidders who will ask to see the initial sales package and perhaps may even choose to invest time and money in performing due diligence within the bidding process timeline.
  • There are bidding protections because If higher bids come in, the conditions for closing the deal proposed by the stalking horse bidder won’t be met, and the receiver will have to tell the court. So, approving the deal wouldn’t prejudice any stakeholders.
  • If there aren’t any better offers, then there won’t be a need for the time delay and extra cost associated with another sale approval hearing.

Although our specific situation is a receivership administration, a stalking-horse bid process and its terms and conditions, including a breakup fee, could also work for a bankruptcy estate in a bankruptcy proceeding. In a bankruptcy, bankruptcy court approval is required for this kind of bankruptcy sale.stalking horse bidder

Some important things to remember

I hope you enjoyed this Brandon’s Blog on what a stalking horse bidder is and this kind of court-supervised auction. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.stalking horse bidder

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HOW TO FILE BANKRUPTCY ONLINE: OUR KNOCKOUT STEP-BY-STEP GUIDE

file bankruptcy online
file bankruptcy online

File bankruptcy online: You can file bankruptcy online in Canada!

Can I file bankruptcy online in Canada? This is a question we’ve been getting a lot lately. And the answer is yes, you can file bankruptcy online in Canada; just not by yourself.

The only ones the federal government authorizes in Canada to do bankruptcy filings are licensed insolvency trustees. Since March 2020, the process for meeting with a bankruptcy trustee to discuss bankruptcy has changed and can be done online. This may be helpful if you’re considering bankruptcy for your individual situation.

In this Brandon’s Blog, I explain how, with the help of a licensed insolvency trustee, you can meet all the legal requirements and file bankruptcy online for the Canadian bankruptcy process.

Why you can file bankruptcy online in Canada

There’s virtually nothing you can’t do online these days. The lockdowns increased our reliance on online shopping for things like groceries, clothes, office supplies, and even toilet paper.

The internet also includes a wealth of knowledge on any subject you can think of, including financial topics. I find that anyone contacting me who is struggling with their, or their company’s financial problems, has already looked into the various options available to them in dealing with debts like income taxes and credit cards.

Although people may not be familiar from their online research with all the ins and outs of insolvency and bankruptcy, this is to be expected. However, callers are generally well-informed about different options for dealing with secured creditors and unsecured creditors.

Nowadays, people expect to be able to do everything online – including filing for bankruptcy in Canada. Those who think bankruptcy might be a solution for them, are curious to understand if they can declare bankruptcy online. Thanks to the COVID-19 pandemic, online everything is a way of life.

file bankruptcy online
file bankruptcy online

Why you should file bankruptcy online

The Canadian government oversees the administration of the insolvency process in Canada through the Office of the Superintendent of Bankruptcy Canada (OSB). The OSB is part of Innovation, Science and Economic Development Canada (Industry Canada). They ensure that consumer proposals, corporate financial restructuring and bankruptcies are handled in accordance with federal law. This process protects the rights of both debtors and creditors and helps to ensure a fair and orderly resolution to financial difficulties.

The OSB is responsible for administering Canadian bankruptcy law under the Bankruptcy and Insolvency Act (BIA), as well as certain duties under the Companies’ Creditors Arrangement Act (CCAA). They license and regulate the insolvency profession, ensure an efficient and effective regulatory framework, and supervise stakeholders. The OSB is independent of the Government of Canada in carrying out its regulatory, administrative, and supervisory duties.

As a result of the outbreak of COVID-19, the OSB issued guidance to Trustees on how certain aspects of the Canadian bankruptcy and insolvency process have changed. This document, entitled Temporary Guidance for LITS During the COVID-19 Pandemic, provides direction on how to navigate these changes.

As concerns about COVID-19 grew in Canada, licensed insolvency trustees took action to reduce in-person meetings. The OSB supported the Trustee community in these initiatives while maintaining the stability of Canada’s insolvency system.

Many of the same temporary measures remain in place today. Most clients find it more convenient and less stressful to continue filing for bankruptcy online. So how do we file bankruptcy online in Canada?

Assessing your financial situation and considering bankruptcy alternatives

No matter what form of insolvency process we are discussing to deal with a specific debt situation calling for either financial restructuring with a debt settlement payment plan through a consumer proposal or Division I Proposal, or personal bankruptcy, the process always starts in the same way. It’s not important what type of bankruptcy or insolvency process we’re talking about if we are dealing with a limited liability company or with someone considering bankruptcy for individuals.

When it comes to corporate insolvency, it’s important to have a clear understanding of the company’s current financial position and what its chances are for a successful financial restructuring. In consumer insolvency cases, the first step is to assess the debtor’s individual situation.

When a person contacts me to discuss their personal financial situation, we would have our initial chat. If the person wished to explore their available options in more detail, I would need to collect additional information from them to enable a proper assessment. Before we discuss which actual filing may be appropriate, it is important for me to know things like their assets and liabilities, their monthly income, and their household size.

If they would like me to continue our no-cost consultation and provide them with a proper assessment, I email them our standard intake form called the Debt Relief Worksheet. I ask them to please make sure to fully complete it and include any backup documents that are requested.

The backup documents we typically request are quite standard – a copy of their most recent bank statement, their last filed tax return, and the notice of assessment. Once I have a chance to review everything and ask any follow-up questions, I’ll be able to provide tailored advice based on their unique situation.

The counseling before filing bankruptcy that we give is perhaps even more important than any counselling sessions after filing. So far, we’ve been able to do everything over the telephone and online.

file bankruptcy online
file bankruptcy online

Is filing bankruptcy online an option for getting rid of debt?

Now that I have all the necessary information, I can perform the rest of the initial assessment. There could be several options available for those struggling with debt, and filing for bankruptcy may be an option for some. However, it’s important to understand the process and what it entails before making a decision.

Continuing with the online model, I meet with the person and do the rest of the assessment by phone or video meeting. I explain what I see as the realistic debt relief options for the person, explain why and discuss what is involved with each option and answer any questions they may have.

At the end of the meeting, I provide the person with a list of resources that can help them make their decision. I’m always available to answer any questions they may have throughout the process. Filing for online bankruptcy may very well be an option for getting rid of debt, but it should be the last option.

Something else to remember is that an insolvency proceeding will lower your credit score as it appears on your credit report. Declaring bankruptcy will have a worse effect than a debt management plan through a BIA-approved financial debt restructuring program repayment plan.

What documents do you need in order to file bankruptcy online?

To discuss what documents you need for a bankruptcy application in order to file bankruptcy online in Canada, we will assume that the person chose the bankruptcy option. By now, I have enough financial information to prepare all the necessary bankruptcy documents.

Examples of statutory bankruptcy forms which are part of the bankruptcy paperwork include the:

  • statement of affairs, indicating both the person’s eligible assets and those exempt from seizure under provincial law with related bankruptcy schedules;
  • list of creditors that is used for the creditor mailing list to send out the notice to creditors;
  • person’s statement of monthly income and expenses;
  • bankruptcy assignment
  • notice to bankrupt of their bankruptcy duties; and
  • estate information summary.

We schedule a video meeting with the debtor once all the statutory and financial documents are ready for signing. We can either email the documents or upload them to our secure signing portal and provide the debtor with a private, secure link. We’re happy to use online technology to have our meeting and explain all the documents, witness their signing, and get the signed documents from them.

We take the signed documents and file them in the Industry Canada OSB electronic online filing system. The OSB issues the bankruptcy certificate once the electronic filing is accepted. The day and time of the certificate is the exact moment the person is officially bankrupt.

file bankruptcy online
file bankruptcy online

Duties during bankruptcy include credit counselling sessions

The duties of a bankrupt person are set out in section 158 of the BIA. They include:

  • to identify all of their property and allow the Trustee or anyone authorized by the Trustee to take possession of all the debtor’s property;
  • to give the Trustee all books, records, documents and papers related to their property or affairs, including, but not limited to, title papers, insurance policies, and tax records and returns;
  • providing full disclosure of all assets and liabilities;
  • helping the trustee when required with assistance from time to time;
  • if one or more creditor meetings are required, you must attend; and
  • attending the two mandatory bankruptcy credit counseling sessions run by the Trustee.

We can meet with the bankrupt person over video meetings to provide counselling sessions and help them to fulfil their online bankruptcy duties.

Is it always going to be possible to file bankruptcy online in Canada?

The OSB has extended the option to conduct online service delivery of the Canadian insolvency options available under the BIA. Licensed insolvency trustees can continue to use online methods. It has provided some peace of mind for many people.

The OSB has been consulting with the insolvency community on potential amendments to relevant directives, with the goal of implementing an online alternative to meeting in person. While allowing flexibility, the changes they are contemplating would emphasize that while trying to be flexible, the changes being contemplated would emphasize that debtors will have the choice to either meet in person or online.

It looks like the OSB is warming up to the idea that remote filing through online resources, whether we are talking about BIA-approved debt repayment plans or bankruptcy may very well be here to stay. The OSB is trying to balance the benefit to debtors as well as the bankruptcy process continuing to be for the benefit of creditors. Can it all continue to be accomplished by online resources and technology? So far the average person, be they Canadian debtors or Canadian creditors, seem to want to continue with the choice of having insolvency administration online.

file bankruptcy online
file bankruptcy online

Are you deep in debt? We can help!

I hope you enjoyed this Brandon’s Blog on how to file bankruptcy online. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

file bankruptcy online
file bankruptcy online

 

 

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ENTREPRENEURIAL CANADIAN BUSINESS BANKRUPTCIES: THE TIP OF A HUGE ICEBERG?

business bankruptcies
business bankruptcies

Insolvency for business including business bankruptcies

In the last two Brandon’s Blogs, I wrote about personal bankruptcy. The topic was the class of debts not released by a person’s discharge from personal bankruptcy. In this Brandon’s Blog, I discuss insolvency for business, and specifically, business bankruptcies, as a result of the recent report by the Canadian Federation of Independent Business (CFIB).

If a business is incapable to pay its financial obligations as they come due, it might deal with some negative effects, including legal action. However, this does not have to damage a business’s credibility forever, if management is prepared to take the required corrective activity before it is far too late.

If a business that is unable to pay its debts cannot turn itself around, it may be forced to declare business bankruptcies, which can have a devastating impact on the business and its employees.

What will happen to the company if it is insolvent?

If your company is financially troubled, it may need to assign itself into bankruptcy. Nonetheless, business bankruptcies are not always the automatic result of being insolvent. If your business is experiencing financial problems, it is essential to speak to a bankruptcy lawyer or a licensed insolvency trustee to review all of your realistic choices. Bankruptcy should be the last choice when nothing else will work.

Case in point, the recent report issued by the CFIB on small business insolvency says that its survey finds that only 10% of business owners would certainly declare bankruptcy if they were to shut down completely.

The CFIB report is meant to give a more comprehensive view of Canadian business insolvencies (bankruptcies + proposals). The data indicates that the number of businesses filing for bankruptcy has been on the rise and is now at the highest level of business insolvencies in two years.

As we recover from the COVID-19 pandemic, Canadian small businesses face a number of challenges in returning to normal operations, including debt from necessary pivots, increased costs of doing business and trouble finding employees to work.

The CFIB study found that half of the businesses (54%) are still seeing below-normal revenues, and over 60% are carrying unpaid debt from the pandemic. Small businesses are under significant financial pressure, with little room to maneuver.

Insolvency fears among Canadian small businesses are alarmingly high, and the true scope of the problem may be even greater than what is reflected in official statistics. Business owners have a range of options available to them when faced with financial difficulties, and bankruptcy is only one of these.

The CFIB recently released report details the different ways the surveyed small businesses in Canada said they would take if they had to shut down as follows:

  • 46% – Just ceasing all operations permanently.
  • 27% – Selling or transferring ownership to another party.
  • 10% – Filing for business bankruptcies or business bankruptcy protection.
  • 10% – Unsure at this time.
  • 7% – Exploring all options.

Interestingly enough, recapitalizing the legal entity or taking on more business debt by way of loans was not one of the answers. That should tell you how tapped-out Canadian small business shareholders are and that the businesses have no borrowing base room left on their assets to increase their bank borrowings.

business bankruptcies
business bankruptcies

Business bankruptcies: The insolvency of a business – First steps

The first step for the Directors is to consult with a business bankruptcy attorney/lawyer and a licensed insolvency trustee (formerly called a bankruptcy trustee) (sometimes referred to as “Trustee”). The lawyer can confidentially discuss the situation with the Directors and develop a proposed plan to deal with the situation.

The licensed insolvency trustee will review the company’s financial position and proposed game plan, and consider all options available to the company and its Directors. In Canada, the only party licensed to run the administration of bankruptcy, or any formal insolvency process, is a licensed insolvency trustee.

The licensed insolvency trustee will want to understand fully the company’s assets and liabilities. With a clear understanding of the company’s financial status, the Trustee can explain how best to implement the plan to either restructure or liquidate the company. If necessary, the Trustee can tweak the game plan.

The next question is whether the business is viable. Does it produce goods or services that are still in demand in the marketplace? If not, one option to consider is selling the business to another company that has complementary lines of business. Would the business fit in neatly with the buyer’s existing operations?

Could it perhaps be integrated in some way that would make your standalone business, which is not currently viable, become viable? Keep in mind for this to be an option, the company would need to have a solvent business.

If you can’t sell your unprofitable but still solvent company, you could always explore the option of a statutory liquidation. This would involve liquidating all the company assets, paying off any outstanding liabilities, and then distributing the remaining amount to shareholders.

Companies under business bankruptcy protection

If your business is struggling financially but still has potential, you may be able to restructure it through business bankruptcy protection. In Canada, there are two main possible federal statutes to restructure under; (i) the Bankruptcy and Insolvency Act (Canada); and (ii) the Companies’ Creditors Arrangement Act. One of these restructuring legal proceedings is an alternative to business bankruptcies.

A proposal under the Bankruptcy and Insolvency Act (Canada) (“BIA”)

The BIA is the canadian bankruptcy legislation containing all the rules and regulations in Canada’s bankruptcy regime. However, it also includes bankruptcy options such as a Division I Proposal for debtors who owe more than $250,000. This kind of financial restructuring allows the company to remain in business while it restructures. The essence of a BIA Proposal restructuring is that the company is offering a contract to its unsecured creditors to pay less than the total it owes those unsecured creditors in return for eliminating all of its unsecured debt.

To ensure that the company can successfully implement a proposal and pay its post-filing debts, the licensed insolvency trustee will need to be satisfied that all relevant information has been obtained and that the company has a good chance of success. The company’s cash flow will need to be monitored to ensure that it is sufficient to run the business and pay for the goods and services it needs going forward.

The Trustee will send all known creditors a copy of the proposal, a portion of the company’s statement of affairs listing the company’s assets and liabilities, a list of creditors, a proof of claim form, a voting letter and the Trustee’s report providing additional information and the Trustee’s recommendation.

The meeting of creditors is then held and if the proposal is accepted by the required majority of unsecured creditors, the licensed insolvency trustee takes the proposal documentation to Court for approval. If the proposal is accepted by creditors and approved by the court, the company is now bound by the proposal.

If the companies successfully complete their financial restructuring proposal, they will avoid business bankruptcies. However, if the company fails to get creditor or court approval, or fails to successfully complete the proposal, it will automatically go into bankruptcy under the BIA.

Financial restructuring under a Companies’ Creditors Arrangement Act (“CCAA”) plan of arrangement

Restructuring through a CCAA plan of arrangement is a financial restructuring process that provides companies with a way to restructure their debts and other obligations. This process can help companies to avoid the business bankruptcy process and to continue operating while they repay their creditors. It is very similar to a BIA proposal. The main difference is that it is only for companies with debts of $5 million or more, it is much more court-time intensive and there is no automatic business bankruptcy provision. In a CCAA, the licensed insolvency trustee acts as a monitor under the CCAA to administer the restructuring process.

When you hear when a company files for protection, or bankruptcy protection, in Canada it is usually under the CCAA. In the United States, it is under Chapter 11 of the US Bankruptcy Code.

business bankruptcies
business bankruptcies

Licensed insolvency trustees say if companies are insolvent and not viable the best option may be business bankruptcies

We still want to know if the business is viable when it is insolvent. If it is viable, then we could look at doing a restructuring as outlined above. After the company is restructured, we could either keep running it or look to sell it. If there are impediments to a successful restructuring, the approach we take even through business bankruptcies will be different than if it is not a viable business model any longer.

If the business is not viable and insolvent, then there is not much that can be done. The business is financially unhealthy and the marketplace no longer wants the product or service this business provides. Therefore, we are looking at bankruptcy if there is not a secured creditor who is going to enforce their security through a receivership. Receivership is a whole topic unto itself which is for a different day.

As a licensed insolvency trustee, I am responsible for understanding all the issues in business bankruptcies and preparing the necessary documentation for limited companies to assign themselves to business bankruptcies. A meeting of directors must be called for them to resolve that the company should put its business into bankruptcy and appoint one of the directors to be the designated officer.

The officer designated by the board should be the director with the most intimate knowledge of the company’s affairs. This officer will sign the bankruptcy documentation and be the company’s representative at the first meeting of creditors.

The Trustee attends the director’s meeting and prepares the meeting minutes, or the minutes will be prepared by the directors and provided to the Trustee. Then, the licensed insolvency trustee prepares the bankruptcy documents which include the statement of affairs, which is the listing of assets and liabilities, names addresses and amounts owing to each creditor. The designated officer then attests to the truthfulness of the information and signs it all.

The companies are insolvent and have to go into business bankruptcies

The Trustee files the necessary documentation with the Superintendent of Bankruptcy, who issues a certificate of bankruptcy and appoints the Trustee. That’s when a company is officially entered into the bankruptcy process and the bankruptcy proceedings begin. This is the process of a company filing an assignment into bankruptcy.

So in a commercial bankruptcy administration, the Trustee has several responsibilities. The Trustee has to deal with the assets. The Trustee has to first determine are the assets subject to the security of a lender. Is that lender’s security good and valid?

business bankruptcies
business bankruptcies

What happens when the certificate is issued for business bankruptcies?

If every one of the assets is covered by a lender’s valid security which makes the security cover the assets in priority to the rights of a Trustee, then the bankruptcy trustee would not take steps to handle the company’s secured assets unless the secured lender particularly requests the Trustee to do so separately either as Receiver or Agent of the secured lender.

So let’s simply take the case where in bankrupting the company, the Trustee is handling the assets either due to the fact that they’re not secured or because the secured financial institution wants the Trustee to handle the secured assets within the bankruptcy (which is not normal, but not unheard of either).

The Trustee needs to make certain that the corporate assets are safeguarded, that they’re appropriately insured and that the Trustee has carried out an inventory of those assets.

The Trustee then needs to figure out how is it going to offer those business assets for sale. The Trustee must do a risk-reward analysis to see if it makes good sense for the Trustee to run the business. If so, is the Trustee looking for a sale of assets as a going-concern business sale or just shut down the business and liquidate the assets once the reasons for running the business have been met?

If it doesn’t make sense for the Trustee to run the business, the Trustee will close it down and take a look at the alternatives available. The assets can be sold by public auction, private sale or by tender sale separating the assets up into blocs. If the assets are such that they would attract a retail audience where consumers would pay more than if it was sold in lots to wholesalers, then a retail sale would be the way to go. The nature of the assets will identify what sort of sale of assets the Trustee runs.

Business bankruptcies: How will I know what’s going on?

The Trustee alerts all of the company’s creditors listed in the sworn statement of affairs of the bankruptcy in a mailing. The Trustee includes a proof of claim form so that all creditors can file their claim. The Trustee examines the claims and holds the first meeting of creditors.

After the first meeting, a meeting of inspectors is held. Inspectors are creditor representatives who assist the Trustee in providing approval for the Trustee’s recommendations and actions it wishes to take. This includes any approval of asset sales the Trustee recommends after making an informed decision. Inspectors also need to approve the Trustee’s Final Statement of Receipts and Disbursements near the end of the administration of all business bankruptcies.

business bankruptcies
business bankruptcies

Finding a Licensed Insolvency Trustee

I hope you enjoyed this Brandon’s Blog on business bankruptcies. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

If you would like our free e-Book, “Closing A Business Without Going Bankrupt” CLICK THE PICTURE BELOW

business bankruptcies
business bankruptcies
Categories
Brandon Blog Post

FRAUDULENT MISREPRESENTATION: OUR AUTHORITATIVE GUIDE ON WHAT (REALLY) GOES INTO FRAUDULENT MISREPRESENTATION

fraudulent misrepresentation
fraudulent misrepresentation

An overview of fraudulent misrepresentation

Fraudulent misrepresentation can be incredibly damaging for the victim, both emotionally and financially. It occurs when someone makes a false statement about a material fact with the intention of inducing another person to rely on that statement, and the reliance causes damages.

Fraudulent misrepresentation is a civil wrong (tort) that can be the basis for a lawsuit. It can also be a crime, depending on the circumstances.
Anyone accused of fraudulent misrepresentation must speak to an experienced lawyer to discuss their case and the possible defences they may have.

Last week’s Brandon’s Blog, “MORTGAGE FRAUD IN CANADA: CANADIAN BANKRUPTCY CAN’T RELEASE YOU FROM A CORRUPT DEBT YOU CREATED“, I wrote about what mortgage fraud is and how it is perpetrated. I also described a recent decision of the Court of Appeal for Ontario on how anyone found guilty of mortgage fraud and had damages awarded against them will not be able to remove that debt by filing an assignment in bankruptcy.

I described how that kind of debt will not be discharged in bankruptcy because it is one of the exceptions outlined in section 178(1) of the Bankruptcy and Insolvency Act (Canada).

In this week’s Brandon’s Blog, I describe a recent decision of the Ontario Superior Court of Justice, Bank of Montreal v. 1886758 Ontario Inc., 2022 ONSC 4642. This case is about fraudulent misrepresentation, why that kind of debt will also not be released by the guilty individual’s discharge from bankruptcy and the court’s attitude to that issue.

What are the three types of misrepresentation?

Over the years, misrepresentation legal issues have been tried in court and the law has developed such that misrepresentation can be divided into 3 types; innocent, negligent and fraudulent. If there are no consequences for lying or omitting important information when entering into a contract, then agreements between parties to conduct business would become meaningless. The concept of misrepresentation is important in contract law.

The differences between the 3 types of false misrepresentation are as follows:

  1. Innocent misrepresentation is when someone makes a false claim or untrue statement but honestly believes that the representation is true.
  2. Negligent misrepresentation: this is when someone makes a false claim without realizing that it is not true. They did not fulfill their duty of care when making statements to make sure they were not true.
  3. Fraudulent misrepresentation: this is when someone makes a false claim deliberately to deceive others.

    fraudulent misrepresentation
    fraudulent misrepresentation

When you make a false statement, you may face civil or criminal consequences. Common examples of making a false statement are:

  • to obtain or deny benefits arising from a contract, you may be guilty of fraud;
  • making a false statement under oath in court, you may be charged with perjury;
  • a false statement made that harms another person, you may be sued for defamation; and
  • to commit or help someone who committed a crime, may be obstruction of justice or criminal conspiracy

In civil case matters, the party who has suffered damages as a result of the misrepresentation will be awarded a monetary award by the court.

The court case: What’s the process for suing someone for fraudulent misrepresentation?

The process used by the Plaintiff, Bank of Montreal (“BMO”) was a legal claim by starting a claim for misrepresentation and recovery of the debt owing by way of a Statement of Claim for a default judgment and related relief against 1886758 Ontario Inc. operating as Rejuv Medical (“Rejuv Medical”) and its Director, who was a guarantor of the loans to Rejuv Medical, in a debt collection and fraud action by BMO.

The aggrieved party, BMO, filed its motion seeking:

  • An Order granting the Plaintiff default judgment against the Defendants is issued under Plaintiff’s Statement of Claim. This includes a judgment in the aggregate sum of $442,723.36 as of June 29, 2021, plus accruing pre- and post-judgment interest from that date.
  • Claims for damages seeking an award for punitive damages of $150,000.
  • Substantial indemnification for all related costs, charges, expenses, and fees, including legal fees.
  • Sole possession of the assets of Rejuv Medical.
  • A declaration attesting that any amounts awarded by the court are debts resulting from obtaining property by false pretenses or fraudulent misrepresentation.

    fraudulent misrepresentation
    fraudulent misrepresentation

The evidence of fraudulent misrepresentation

BMO and Rejuv Medical entered into a letter agreement on November 16, 2020, under which BMO will provide three credit facilities:

  • The first loan was for $350,000 under the Canada Small Business Financing Act, with interest at BMO’s prime rate plus 3.00% per annum.
  • BMO provided a $120,000 operating loan to Rejuv Medical, payable on demand with interest at the bank’s prime rate plus 2.15% per annum. This loan is in addition to the existing business account and will help with short-term operating expenses.
  • The third facility was a $30,000 commercial credit card agreement with an interest rate of 21.00% per annum.

BMO will only advance loan proceeds to eligible businesses for prescribed purposes, in accordance with the Canada Small Business Financing Act and its regulations. Accordingly, a loan applicant must specify and confirm how it will satisfy one of these prescribed purposes.

The principal of Rejuv Medical and guarantor of the proposed BMO credit facilities signed a Declaration on its behalf. The Declaration stated that the Borrower understands that, under the Canada Small Business Financing Regulations, loans cannot be made for certain purposes and under certain circumstances. To assist in the determination of whether a loan to the Borrower would be permitted under these regulations, the Borrower provided information to show that the first facility loan did qualify.

BMO learned later that the representations made were false and that the invoice provided as proof of purchase of qualifying equipment was a fabricated document.

At the time BMO determined that there were materially inaccurate and false representations made by Rejuv Medical and its Director the guarantor, Rejuv Medical defaulted on its obligations to BMO for the loans.

What are the potential damages that could be claimed for fraudulent misrepresentation in this case?

The motion judge stated that the Borrower and guarantor being noted in default and not defending the action are taken to be an admission that Rejuv Medical and its Director:

  • Never intended for the funds advanced to be used to purchase the equipment specified in the government loan program application process or the produced invoice.
  • Had no record of purchasing the equipment specified in the invoice, or any comparable property or asset.
  • Never intended to purchase the equipment in the manner represented, or at all.
  • Did not establish the small business with the intention of operating it for an extended period of time or making a profit.
  • Made false representations and declarations, knowing that they were false, without belief in their truth, or recklessly indifferent to whether the representations and declarations were true or false.
  • Making this fraudulent misrepresentation caused damages as BMO suffered losses and damages, including the amounts owing for the loans.

Concerning the debt collection aspect of this case, the evidence established that the loans in question have gone into default and have not been repaid. Thus there was a breach of contract.

Based on this evidence, it is clear that Rejuv Medical owes and is liable to pay BMO $442,723.36 as of June 29, 2021, plus accruing pre-and post-judgment interest. As a fraud case, in addition to the amount of the loans and accrued interest to be paid, the court also awarded BMO $150,000 in punitive damages.

fraudulent misrepresentation
fraudulent misrepresentation

What are the 5 elements of a fraudulent misrepresentation claim?

The court emphasized that the five elements of a fraudulent misrepresentation claim are:

  1. a defendant made a false statement;
  2. with full knowledge that the statement was false, or with complete indifference to its truthfulness, the statement was made;
  3. the intent to deceive;
  4. the false statement being material and inducing the Plaintiff to act; and
  5. the plaintiff has suffered damages.

BMO did not seek a direction that its claim would survive a bankruptcy discharge, as the debt would fall within s. 178 of the Bankruptcy and Insolvency Act (Canada) (“BIA”). BMO made it clear that in the event the Defendants declare bankruptcy, it intends to rely on section 178 of the BIA.

You will recall from last week’s Brandon’s Blog, that section 178(1) of the BIA is the listing of the types of debts that are not released by a personal bankruptcy discharge. So if the guarantor ever declares bankruptcy, BMO’s debt will survive his discharge.

Section 178(1)(e) of the BIA specifically states that any debts or liabilities resulting from obtaining property or services through false pretenses or fraudulent misrepresentation will not be discharged through bankruptcy.

If the guarantor files for bankruptcy, BMO will seek an amendment to its judgment to declare that the debt still needs to be paid, and based on section 178(1) of the BIA, the debt will survive a discharge from bankruptcy. From my Brandon’s Blog of last week, it is evident that should the time come, BMO will get that further declaration.

You are not alone in this – get help from a Licensed Insolvency Trustee

I hope you enjoyed this Brandon’s Blog on fraudulent misrepresentation and how bankruptcy will not help the guilty defendant. Are you or your company in need of financial restructuring? Have you suffered damages because of reliance on false or misleading statements in business contract terms? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

fraudulent misrepresentation
fraudulent misrepresentation

 

Categories
Brandon Blog Post

MORTGAGE FRAUD IN CANADA: CANADIAN BANKRUPTCY CAN’T RELEASE YOU FROM A CORRUPT DEBT YOU CREATED

mortgage fraud

Mortgage fraud: What everyone needs to know

There are 2 kinds of mortgage fraud. One is usually associated with identity theft. Someone steals your identity and has enough of your personal information to make a mortgage loan application and get approved for a mortgage loan registered against your property.

They take the money and don’t make any mortgage payments. The mortgage quickly goes into default and an innocent person is left with a mortgage they never applied for registered against their home and in default. This is a serious problem, but, not the one I am writing about in this mortgage fraud Brandon’s Blog.

As you can see, both an innocent person and a lender can become a victim of mortgage fraud. In this Brandon’s blog post, I will describe it a bit more and tell you about a recent decision of the Court of Appeal for Ontario about a civil mortgage fraud case.

Through this case discussion, you will learn why someone who is caught perpetrating a fraud scam cannot use the Canadian bankruptcy system to get out of the debt. Rather, that debt will follow them for life.

Mortgage fraud: Seriously though, one in five?

The Financial Services Commission of Ontario advises everyone to be vigilant against mortgage fraud. They state that it usually occurs when people falsify, misrepresent, or exaggerate information on their mortgage applications in order to obtain financing that they would not otherwise be eligible for.

It can be the person’s own idea and action or, they could have filled out their application truthfully and then were coached by one or more mortgage brokers or real estate professionals. They are told that without modifying the application they will not be approved for the mortgage and will not be able to buy a home.

A study by Equifax Canada found that suspected fraudulent mortgage applications have increased by 52 percent in Canada since 2013, with Ontario seeing the majority. The rising cost of homes has made it difficult for many people to afford one, which has led some to resort to fraudulent means in order to get the necessary mortgage funding.

According to a 2017 study from Equifax Canada, 13% of Canadians believe that telling a little white lie is perfectly acceptable if it means getting the house they want. Equifax Canada also reported that in 2019, 23 percent of millennials said it was totally acceptable to lie about their annual income when applying for a mortgage. I wonder what the percentage of people looking to score their dream home and are not afraid of bending the truth a little would be today?

As interest rates go up and borrowing rules get stricter, it becomes harder for people to achieve their homeownership goals. It’s estimated that 20% of all mortgage applicants engage in some form of mortgage fraud.mortgage fraud

What are the most common schemes that can be classified as mortgage fraud?

One person’s little white lie that might not seem like a big deal to them, could be another person’s idea of a mortgage fraud scam. It all comes down to everyone’s honesty and conscience. When looking at residential mortgage fraud, which is a serious issue, there are generally three main schemes.

In Canada, do lenders check for owner occupancy?

Not really. Owner occupancy may not be as it seems. It is easier to get a mortgage approved for an owner-occupied home than for a rental investment property. Owner occupancy fraud is a common scheme.

Forging owner occupancy is pretty easy for a home buyer. All they need to do is tick the “yes box” when asked on the application if the home will be owner-occupied. The person will also need to be OK with swearing a false affidavit that the home will be owner-occupied. After that, the person should be good to go.

Once the loan is made and the real estate transaction is complete, there’s no need to worry about anyone checking up on the borrower or the property. There’s no need to try and create the illusion of owner occupancy. Foreign buyers have been known to either hire the services of a person or use a relative resident in Canada to act as a straw buyer.

Shady mortgage brokers or crooked mortgage agents

Falsified documents for employment and income are often fabricated by mortgage brokers/agents in a way that will pass the approval process of certain private lenders or certain institutional mortgage lenders.

You probably remember that in 2015, Home Capital Group stopped using 45 brokers because their business activities were found out that those brokers had engaged in fraudulent activities committing $2 billion worth of mortgage fraud using these techniques.

Debt shell game

People with too much debt may not be able to qualify for a mortgage because of those debts. They take out a loan from family or friends and pay off those debts. The new debts replacing the old ones don’t show up on a credit search or anywhere else. They don’t include those new loans on their mortgage application. This causes their financial ratios to look much better than the reality. They look good enough to qualify for that mortgage loan.

The problem of course with this kind of mortgage fraud is that a person who rearranges their debt like this and completes a false mortgage application may not be able to keep up with their mortgage payments as they will also be under pressure to repay their friends and family first. The eventual mortgage default may not be a problem for the lender in a rising real estate market, but that kind of market is not always the case.

This mortgage fraud case may be of interest to you

This court case about civil mortgage fraud you are really going to like. The Court of Appeal for Ontario released its decision on July 28, 2022. The defendants appealed the decision of the motion judge. I was astonished to see the lengths these defendants went to, which the court determined constituted a consumer mortgage fraud scheme not released by a discharge from bankruptcy.

It is the fascinating case of M.O.S. MortgageOne Solutions Ltd. v. Heidary, 2022 ONCA 561 (CanLII). The mortgagee originally provided funds to the mortgagor which were secured by a third mortgage that was ranked behind the first mortgage held by Manulife Financial. There were also various Minister of National Revenue (MNR) liens that were registered on the title against the property.

The mortgagor asked the mortgagee to provide additional funds to him to help with the payment and consolidation of his debts. The parties agreed that the mortgagor would use the funds to pay off the MNR liens so that the mortgage would now become a second mortgage.mortgage fraud

The income tax arrears real estate fraud

The mortgagor directed the mortgagee’s representative to an individual, “Dave Erwin”, whom he represented as his Canada Revenue Agency (“CRA”) collection officer. This referral came as a result of the mortgagee’s need to independently confirm the amount of the MNR liens and arrange for payment, before making any advances.

After speaking with “Dave Erwin”, the mortgagee advanced the amount of $296,418.73 to the MNR. However, after the respondent advanced these funds, it was discovered that the so-called “CRA agent” was an imposter. The amount still owing and needed to discharge all the MNR liens was an additional amount of outstanding liens totalling $316,566.36. Consequently, the respondent’s mortgage remained in 3rd place.

It seems to me that the mortgagor was only able to commit this type of mortgage fraud because the mortgagee didn’t do their due diligence properly. Maybe they were just too eager to jump from third to second place. I don’t know, because I’m not involved in this matter.

Why wasn’t this mortgage fraud detected?

This mortgage fraud was not detected because the mortgagee was satisfied to rely on the confirmation supplied by “Dave Erwin”, including certain false documentation that did not reach the level of proper due diligence. How could it have been detected before advancing funds? Very simple. The mortgagee should have asked to see the original copy of the collection letters from CRA. That would have shown them the proper amount owing and the name and number of the real collections officer.

Alternatively, a simple search of the real property title would have uncovered the liens and their total amount. I am also not sure how you negotiate a priority agreement without the real amount owing ever having been discussed. Regardless, it happened.

There was still the additional amount ranking ahead of the mortgagee, and they were not in the position they thought they bargained for. From the mortgagor’s perspective, he bought some time with CRA since they received a significant paydown. He just traded one debt for another, but he obviously must have felt that owing CRA less and the mortgagee more was worth it.mortgage fraud

The court case involving the detection of mortgage fraud

The mortgagee issued a statement of claim against the mortgagor, seeking various elements of relief including possession of the property due to the default under the priority agreement. The mortgagee also sought a declaration that any judgment against their borrower will survive any subsequent assignment in bankruptcy which will not be released by his bankruptcy discharge.

The mortgagor served a notice of intent to defend but never filed a statement of defence because the parties ultimately agreed to a consent judgment. Both parties were represented by counsel. The October 10, 2018 judgment required the mortgagor to pay $784,250 to the mortgagee. It did not have any wording that the claim would survive a discharge from bankruptcy.

The mortgagor then filed an assignment into bankruptcy and any enforcement by the mortgagee under the judgment automatically stayed under the provisions of the Bankruptcy and Insolvency Act (Canada) (BIA). The mortgagee brought a motion seeking a declaration that the debt to the consent judgment survived the bankruptcy and the stay proceedings were no longer effective with regard to the judgment. The motion judge, who had also granted the consent judgment, found that the pleadings raised the issue of fraud and granted that motion.

The bankrupt appealed this finding.

Why is section 178(1) of the BIA so important?

In the next section, you’ll see how section 178(1) of the BIA becomes so important. I’ve written about this section of the BIA many times before. In the simplest of terms, this is the section of the BIA that outlines the kinds of debts that aren’t discharged when the person gets his or her discharge from bankruptcy.

Any outstanding debt included in this section will remain with the debtor indefinitely. The only debts that will be discharged are those that are not included in this section of the BIA.

In the next section, you will see that sections 178(1)(d) and (e) are being argued over. You should know that a bankruptcy discharge does not extinguish certain debts, such as:

  • Any debt or liability as a result of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity (178(1)(d)).
  • If you obtain property or services by means of false pretenses or fraudulent misrepresentation, that incur debt or liability, other than one that arises from an equity claim (178(1)(e)).mortgage fraud

What happens if you commit this kind of mortgage fraud and then go bankrupt, according to the Court of Appeal for Ontario?

In his appeal, the bankrupt submitted that the motion judge erred in declaring that the mortgagee’s judgment debt was not released pursuant to s. 178(1)(e) of the BIA. The mortgagee had only pleaded relief under s. 178(1)(d) of the BIA and it was unfair to him to grant relief not contained in the statement of claim.

Additionally, the bankrupt contended that the motion judge was incorrect in concluding that he had admitted to fraud by consenting to judgment, as the judgment itself made no mention of fraud or that the judgment would remain valid after he was discharged from bankruptcy.

The bankrupt maintained that, unless fraud was pleaded, it could not support a finding that a debt was not released by the debtor’s bankruptcy under s. 178(1) of the BIA. In any event, the bankrupt argued that fraud is not a reasonable inference arising from the pleadings.

The appellate court ruled against the bankrupt. The three-justice panel decided that the motion judge did not make any errors in providing relief under s. 178( 1 )(e) of the BIA. The decision was consistent with the pleadings and consent judgment. There was no unfairness to the bankrupt.

In order to obtain a declaration that a judgment survives a bankrupt’s discharge under s. 178(1) of the BIA, the claimant does not need to specifically refer to s. 178 in the pleadings on which the judgment is based. They relied on a 2018 decision of the Court of Appeal for Ontario to make this finding.

The bankrupt’s mortgage fraud and bankruptcy scheme was an abysmal failure. He was dealt a heavy blow.

What are the consequences of mortgage fraud debt in Canadian bankruptcy?

As outlined above, any debt falling under section 178(1) of the BIA will not be released when the bankrupt gets his or her discharge. The debt arising from mortgage fraud will follow the debtor for life.

This fraudulent activity is also a criminal offence. If you are being tempted or persuaded to commit mortgage fraud, you should get proper legal advice from a legal professional before making any decisions.

I hope you enjoyed this Brandon’s Blog. Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring.

However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.mortgage fraud

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Brandon Blog Post

UNDISCHARGED BANKRUPTS: WHAT ALARMING RESTRICTIONS ARE PLACED ON CANADIAN UNDISCHARGED BANKRUPTS?

undischarged bankrupts
undischarged bankrupts

Undischarged bankrupts: Declaring bankruptcy may not make all of your debts disappear

What? I thought the point of filing bankruptcy was to make all of a person’s debts go away.

For many years, people have used debt repayment strategies such as the debt snowball, debt avalanche and debt stacking to pay off their credit card debts and other unsecured liabilities. Each strategy has its own set of pros and cons in attempting to straighten out your financial affairs.

If you’re struggling with too much debt and you feel your financial affairs are in a mess, you can always try financial restructuring. This involves working with a licensed insolvency trustee to reorganize your finances. It is a sensible next step people take when they’re trying to get their debt under control.

Deciding to file for bankruptcy is never very easy, however, it may be the most effective choice for getting a fresh start to straighten out your financial affairs. If a do-it-yourself or restructuring method is not an option for someone after that bankruptcy will certainly be the required action.

Nobody likes to think of the possibility of personal bankruptcy, yet it is essential to understand the procedure. In this Brandon’s Blog post, I’ll discuss the insolvency process, what limitations are placed on individuals that have actually filed for bankruptcy and are still undischarged bankrupts, and also when in bankruptcy is the time financial obligations are gotten rid of.

Undischarged bankrupts: How bankruptcies work in Canada

The Canadian bankruptcy legislation is designed to help insolvent and not viable companies, or insolvent, honest but unfortunate people, obtain relief. Subject to trust claimants’ rights and the rights of secured creditors, the company or person is assigning all of their unencumbered assets to the licensed insolvency trustee.

After going through bankruptcy and being discharged, most of your debts will be gone. There are a few exceptions, but for the most part, you will be relieved of a great financial burden.

undischarged bankrupts
undischarged bankrupts

Undischarged bankrupts: Are there any debts not forgiven when I get my discharge from bankruptcy?

It’s crucial to remember that once undischarged bankrupts are released from bankruptcy, they are no longer responsible for the financial obligations they had at the time of bankruptcy. The discharge is a key part of this process, and it helps to give individual bankrupts a fresh start.

A bankruptcy discharge provides relief from most debts, except for:

  • support payments for a former spouse or your children;
  • penalties and fines assessed by the court;
  • any financial debts resulting from fraud or fraudulent breach of trust; and
  • student loans within the last seven years before your date of bankruptcy while you were a part-time or full-time student.

Additionally, the debts owing to secured creditors holding valid security fall outside of the bankruptcy process. Those secured loans must stay current or else the secured creditor can look to the default provisions of its loan in order to preserve their rights to collect.

Problems for undischarged bankrupts – What are the consequences of a bankrupt not being discharged?

The implications of not being discharged from bankruptcy are significant for undischarged bankrupts.

Being unable to obtain credit

If you are bankrupt (i.e., not discharged from bankruptcy), you may only borrow $1,000 or less without informing the lender (e.g., credit card company) that you are an undischarged bankrupt. If you fail to do this, it is an offence under the Bankruptcy and Insolvency Act Canada (BIA) and you could be fined and/or imprisoned.

Being unable to work in certain jobs or professions

Undischarged bankrupts in Canada, will not be able to work in certain jobs or professions. Examples are:

  • If possible employment requires you to pass a security clearance, you may not be able to pass it. If you cannot pass, then you will not be hired.
  • As someone who is not yet discharged from bankruptcy, you are not able to serve as a Director of a company.
  • You cannot operate a trust account so that is a problem for certain professions such as real estate brokerage or lawyer.
  • If you’re bankrupt and haven’t been discharged, you won’t be able to get bonded. So any jobs that require that are out of the question.

How long the information lasts on your credit report

The six to seven years AFTER your bankruptcy discharge that your bankruptcy information stays on your credit file is like a stain that just won’t come out. For undischarged bankrupts, the clock hasn’t even started ticking yet. Your credit score is negatively affected for anyone who goes bankrupt, especially for undischarged bankrupts.

Being subject to certain restrictions in relation to their property and finances

While you are an undischarged bankrupt, your property and finances are in play.

While you are an undischarged bankrupt, your property and finances are up for grabs! You cannot have any assets other than those allowed for by the exemptions allowed in the province where you live. So if you acquire any before your discharge from bankruptcy, they belong to your licensed insolvency trustee!

The most often cited examples are things that are out of your control, such as a windfall, like winning the lottery or getting an inheritance.

An undischarged bankrupt may be subject to having to make surplus income payments to their licensed insolvency trustee. The Office of the Superintendent of Bankruptcy Canada sets a minimum threshold in bankruptcy proceedings based on the person’s family income and the number of people in the household. That minimum threshold is essentially the Canadian poverty line. Any monthly income earned by an undischarged bankrupt above that minimum threshold set is subject to surplus income payments.

Essentially, one-half of the person’s monthly income, net of income tax, above the minimum, must be paid over. A licensed insolvency trustee administering the personal bankruptcy must recalculate the person’s obligation to pay, up or down, as the person’s income changes. The longer you remain an undischarged bankrupt, the longer your ability to keep all that you earn is restricted.

undischarged bankrupts
undischarged bankrupts

What is the meaning of undischarged bankrupts?

As soon as you declare personal bankruptcy, the individual bankrupt’s status is that of an undischarged bankrupt. People that have actually not yet gotten their discharge from personal bankruptcy are called undischarged bankrupts.

How does an individual bankrupt person get their discharge? By completing all of the required duties, including making full disclosure of all assets and liabilities to the licensed insolvency trustee and delivering non-exempt assets to the Trustee. You are expected to attend the two mandatory counselling sessions and any other meetings that may be called.

You are entitled to an automatic discharge after 9 months if you are a first-time bankrupt and do not need to pay surplus income. This assumes that you have met all of your obligations as an undischarged bankrupt, fully cooperated with the licensed insolvency trustee and that no creditor is opposing your discharge.

If you are a first-time bankrupt and subject to surplus income, you must pay it for 21 months before you are entitled to a discharge. Longer timelines apply if you are a second or more time bankrupt.

Suppose the Trustee has evidence that the bankrupt has not been forthcoming and cooperative, or has committed one or more bankruptcy offences. In that case, the Trustee needs to oppose the bankrupt’s application for discharge. Such undischarged bankrupts are not entitled to an automatic discharge. Unsecured creditors who have filed a proof of claim in the person’s bankruptcy on account of their unsecured liabilities may also object.

If your income tax debt is equal to or more than $200,000 and 75% or more of your total debt, you are not entitled to an automatic discharge either. If you have been bankrupt before, the Office of the Superintendent of Bankruptcy Canada may object. This would happen if they believe the person is abusing the Canadian bankruptcy system.

If you’re a secured creditor, you’re usually not affected by bankruptcy. That’s because bankruptcy is designed to help unsecured creditors with unsecured liabilities, not creditors who have a security interest in some or all of the bankrupt debtor’s assets. Secured creditors have the right to enforce their security, take possession of the asset(s) covered under the security, sell the asset(s) and get paid back all or a portion of their secured debt. Secured creditors who are not repaid in full after the sale of the secured asset(s), can file a claim in the person’s bankruptcy as an unsecured creditor for the unpaid unsecured liabilities.

Undischarged Bankrupts in Canada – Your Options

The Trustee is only responsible for filing an undischarged bankrupt’s application for discharge once in the bankruptcy proceedings. The system requires that the Trustee make the first application on their behalf. It is ultimately the responsibility of the bankrupt person to ensure that their application is filed.

If either the Trustee or one or more unsecured creditors oppose your application for discharge, the matter will need to go to a hearing in bankruptcy court. This will essentially put a hold on the bankruptcy proceedings until the court hearing.

Undischarged bankrupts are never sure what to do next. This is understandable, so, here are a few options to consider:

1. Contact your Trustee – They’ll be able to help you understand your options and what’s best for your situation. You’ll need to speak to your licensed insolvency trustee to find out why they’re opposing your discharge. It might be something as simple as not having had your second counselling session yet, or forgetting to give the Trustee some information or a document.

If the Trustee or creditor opposes your discharge for any reason, it may be more difficult to remedy the situation, but the best place to start is by talking to the Trustee and getting a copy of any notice of opposition filed.

This way, undischarged bankrupts can understand the issues preventing them from getting an automatic discharge from bankruptcy.

2. Get in touch with a bankruptcy lawyer – They can give you more specific advice about your options and what might be the best course of action for you. Undischarged bankruptcy may need to retain a bankruptcy lawyer for advice and representation in court.

3. File a consumer proposal – this is another option that might be available to you, depending on your circumstances. A consumer proposal filed by a bankrupt person that makes a sufficient offer to the unsecured creditors that is accepted and fully performed acts to annul the person’s bankruptcy. By doing this, the need for a bankruptcy discharge hearing is eliminated.

undischarged bankrupts
undischarged bankrupts

You owe money—The 5 types of bankruptcy discharges available to undischarged bankrupts

Automatic discharge from bankruptcy –

After you file for bankruptcy, you will be automatically discharged nine months later from your bankruptcy proceedings if:

  • this is the first time you were ever bankrupt;
  • unless your trustee, creditors, or the Office of the Superintendent of Bankruptcy oppose it;
  • you have gone to your 2 mandatory counselling sessions;
  • your income tax debt is less than $200,000 and less than 75% of your total debt; and
  • you have not been told to pay surplus income to the bankruptcy estate.

If you do have to make payments, and you qualify for an automatic discharge, you will get it after 21 months of payments.

If this is your 2nd bankruptcy, after 24 months of bankruptcy, you may be eligible for an automatic discharge if you don’t have to make payments of surplus income.

If you need to pay surplus income and are bankrupt for the second time, you must pay this money to your Trustee for 36 months. After that, you qualify to be automatically discharged.

If you do not get an automatic discharge, then you are required to attend a bankruptcy court hearing to consider all the evidence to decide what type of discharge you are entitled to. The court has various options available.

Absolute order of discharge –

As part of the bankruptcy proceedings, there are many factors the bankruptcy court will consider when you apply for discharge. Some of these may include:

  • What was your conduct before and during bankruptcy, as set out in the Trustee’s Section 170 Report?
  • Did you attend the financial counselling sessions and pay any required surplus income to the Trustee for your creditors as agreed?
  • How much do you earn annually?
  • Do you have any assets that are exempt from seizure (such as RRSPs)?
  • Do you have just one creditor, such as the Canada Revenue Agency or a litigation creditor?

The court will issue an absolute order of discharge if it is satisfied that there are no factors that would disqualify you from receiving your bankruptcy discharge immediately.

Conditional order of discharge –

If the court feels that your discharge should be conditional on you meeting certain conditions to obtain an absolute discharge, the court will order a conditional discharge.

This usually involves paying a certain amount of money over a set period of time. The court may also impose other conditions. Once you’ve met all the conditions, you’ll be given an absolute discharge.

Suspended order of discharge –

A suspended discharge is one that delays the absolute discharge to a later date. It can also be combined with a conditional order of discharge.

Refused discharge –

If the evidence demonstrates that the bankrupt individual is taking advantage of the bankruptcy process, has not worked cooperatively with the licensed insolvency trustee, or their conduct is deemed unacceptable, the court can refuse to grant a discharge.

In this instance, undischarged bankrupts must take measures to improve the situation before being able to apply again to court to hear the bankrupt’s application for discharge.

Undischarged bankrupts summary

I hope you enjoyed this Brandon’s Blog on undischarged bankrupts. Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

undischarged bankrupts
undischarged bankrupts
Categories
Brandon Blog Post

LIQUIDATION OF COMPANY ASSETS: WHEN SHAREHOLDERS ARE INTENT ON CRUSHING EACH OTHER WHAT CAN A VOLUNTARY LIQUIDATOR DO?

liquidation of company
liquidation of company

Liquidation of company assets: What is the liquidation of a company?

In business and the law, liquidation is the process of bringing a company to an end and distributing its assets to creditors. This usually happens when a company is financially solvent and can pay all of its debts after all its assets are sold or collected.

When a product is not selling well, retailers may choose to liquidate it by selling it at a discounted price. This process called a liquidation sale can help them clear out slow-moving inventory. This is not the process I am talking about today.

If you want to learn more about the types of liquidation in Canada, then you’ve come to the right place. In this Brandon’s Blog, I will explain everything about the liquidation of company assets and give you a real-life example that my Firm is currently involved in. This real case is an example of what can be done when shareholders who originally agreed to a voluntary liquidation (defined below) can no longer agree on the liquidation of company assets or anything else, even how to pay them the cash the shareholders are entitled to receive!

Why would a company want to have liquidation of company assets?

There are a few reasons why companies pick a liquidation process, including:

The business is solvent yet no longer practical to operate

Possibly time has actually passed the business by. Technological adjustments have made the products or services the limited company offers unneeded as well as no longer relevant. The shareholders want to call it quits now, sell off the corporate assets and properties, repay creditors and also distribute the leftover funds to the shareholders.

The shareholders do not intend to or think it is possible to convert the business to make it viable again. They do not feel it deserves the investment of time and resources, as well as to endure ongoing losses in turning the business around so that it ends up being pertinent again.

Shareholder disputes

The shareholders in a private entrepreneurial company no longer get along. The dissident shareholder(s) cannot or refuse to buy out the remaining shareholders or vice versa. Alternatively, certain shareholders are willing to do a buy-out but either cannot agree on the price or balk at paying the amount calculated under the formula prescribed in the shareholder agreement.

The company is not saleable

The limited company’s business is not viable anymore. Nobody wants the company’s products or services and the company never moved forward with new product offerings that are in demand. Therefore, nobody wants to buy the company or its assets. So while it is still solvent, the shareholders decided to realize all the assets, distribute the cash first to pay off all of the company’s debts in full, make a distribution to shareholders for what is left over and formally dissolve the corporation.

To avoid bankruptcy

If the company is not wound up, it will eventually become an insolvent corporation. The shareholders realize that it is much better to now agree to a voluntary liquidation while there still can be a distribution to the shareholders after all the business assets are sold or collected and all creditors are paid in full. The shareholders wish to get this value and avoid a corporate bankruptcy filing.

liquidation of company
liquidation of company

How a liquidation of company assets begins

If shareholders wish to have a dissolution process for a corporation, they may do so by passing a special resolution to begin the liquidation process. In such cases, the company would call a meeting of shareholders in accordance with the corporate bylaws. Shareholders must be given notice of the meeting in advance. Alternatively, a court may make an order for the liquidation of company assets and the winding-up of the corporation. More on this below. This is how the liquidation of company assets and the winding-up of the company begins.

Shareholders will be given notice of the meeting where the special resolution authorizing the dissolution process will be considered. At the meeting, shareholders can vote to approve or disapprove of the special resolution for the dissolution of the company by special resolution.

Liquidation of company assets: What are the 2 types of liquidation in Canada?

When a company is struggling, it’s common to see a sale take place. When this happens, all of the assets of the company may be sold to pay off creditors. This process of selling off the company’s assets is known as “liquidation.” In Canada, there are two main types of liquidation: “compulsory liquidation” and “voluntary liquidation”.

Voluntary liquidation or voluntary dissolution begins with the shareholders agreeing to a special resolution for the liquidation of company assets, the distribution of the cash first to all creditors and then to the shareholders. When the liquidation is completed, the company is then would up.

Compulsory liquidation is when a court order is made directing the liquidation of company assets and the winding-up of the company.

In Canada, the laws under which a solvent company is liquidated depend on the laws under which the company was incorporated. If federally incorporated, then the Canada Business Corporations Act (CBCA) is the relevant statute. If provincially incorporated, then it would be the law of that particular province. In Ontario, it is the Ontario Business Corporations Act (OBCA). This is the statute that I will focus on in this Brandon’s Blog.

liquidation of company
liquidation of company

Liquidation of company assets: What is the OBCA process for liquidation?

The Ontario Business Corporations Act is a piece of provincial legislation that is designed to govern the formation, administration, and dissolution of corporations in Ontario. In reality, most liquidations filed in Ontario are voluntary. This means that the company shareholders decide to seek liquidation.

Part XVI of the OBCA sets out the process for the liquidation of company assets in Ontario. The OBCA provides a comprehensive framework for the voluntary winding up of corporations. Sections 193 to 205 of the OBCA set out the procedures and requirements for the voluntary winding up of corporations.

As I have previously stated, the OBCA requires shareholders of a corporation to vote for a voluntary winding up of the company as the first step in liquidation of company assets and ceasing business. The shareholders’ requirement is evidenced by a special resolution made at a properly convened meeting of shareholders.

At the meeting, shareholders will appoint one or more people as liquidators of the company. These people may be directors, officers, or employees of the company. Their job will be to wind up the company’s affairs and distribute its property. Shareholders may also provide other instructions at that meeting or at any subsequent meeting.

It’s also common for shareholders to appoint a third party experienced in winding up corporations, like a licensed insolvency trustee. Even though the company isn’t insolvent, shareholders see the advantages of keeping a professional experienced in liquidating assets on board.

A corporation voluntarily winding down will cease carrying out business operations, except where doing so would be beneficial for the winding down process. All transfers of shares, except those made with the approval of the liquidator, taking place after the commencement of the winding down are void.

The OBCA provides for a stay of proceedings when an Ontario company is being liquidated and wound up. After a voluntary winding up has begun,:

  • no legal action can be taken against the corporation; and
  • no seizure, sequestration, distress or execution can be carried out against the corporation’s assets or property.

You will need the court’s permission before taking any action. The court will then decide what terms to set.

Liquidation of company assets: Special considerations in a compulsory or court-supervised liquidation

The court may dissolve the corporation if:

  • If the court finds that the actions or inaction of a corporation or any of its affiliates has resulted in or will result in an outcome that does not consider the interests of any security holder, creditor, director, or officer fairly, it may order the dissolution of the corporation.
  • All shareholders agree that dissolution should occur after a specific event, and that event has occurred.
  • Proceedings have begun to wind up the corporation voluntarily.
  • The court finds that if the actions or inaction of a corporation or any of its affiliates has resulted in or will result in an outcome that does not consider the interests of any security holder, creditor, director, or officer fairly, it may order the dissolution of the corporation.
  • It is best for those who would have to contribute to a company’s assets in the event of its dissolution, and for those who are owed by the corporation, that the court supervises the dissolution process.
  • The corporation cannot continue its business because of its debts and it is advisable to end its operations other than by bankruptcy.
  • The shareholders vote by special resolution to wind up the corporation through a court-supervised process.

Who can apply to the court for a court-supervised liquidation of company assets and the winding-up of the corporation? If you want to dissolve a corporation through a court-supervised process, you can do so by filing an application with the court. Shareholders, a contributory or creditor having a claim of $2,500 or more, or a voluntary liquidator can all apply to have the corporation wound up.

In the section below titled “Liquidation of company assets: Real-life example when voluntary had to become court-supervised” I describe a file that my Firm is involved in the liquidation of two companies, and we were forced to use the right of a voluntary liquidator to apply to the court to turn the voluntary liquidation into compulsory liquidation.

liquidation of company
liquidation of company

Liquidation of company assets: How does the distribution of assets during liquidation work?

When a company is liquidated, its assets are sold off and the proceeds are distributed to creditors. The distribution of assets is first used to pay off secured creditors, then unsecured creditors, and finally shareholders.

The liquidator first needs to gain an understanding of all of the company’s assets and liabilities. The financial statements and the books and records of the company are a good place to start. The liquidator will put together a plan to collect and sell the assets of the company.

The liquidator then needs to put together a list of all creditors, and identify if they are secured creditors or unsecured creditors. This is necessary because the creditors need to be paid in order of priority. Any remaining funds will then be distributed to the shareholders.

The liquidator will keep company management and shareholders informed every step of the way. The liquidator would be very wise to get management and shareholder approval for all of the liquidator’s decisions. The liquidator will also need to make sure that the preparation of the company’s financial statements and income tax returns are kept current and that all government filings and payments are made on time.

The fee of the liquidator must be agreed to by the shareholders. The OBCA also provides for the court to be able to assess the fee charged by the liquidator. In doing so, the court will no doubt look at the steps and acts of the liquidator that were taken.

These are the main steps that every liquidator must carry out. Even in a compulsory liquidation done by court order, the practical steps involved in the liquidation of company assets are the same.

Liquidation of company assets: Real-life example when voluntary had to become court-supervised

The shareholders of two affiliated companies, each one a private company, passed special resolutions in August 2021 for both companies to begin liquidating their assets, winding up the corporations, and appointing Ira Smith Trustee & Receiver Inc. as the liquidator of both corporations. The desire to wind up both companies came from the very acrimonious litigation between family members.

We were very successful in helping the warring factions, through their respective legal representatives, make adequate provisions so that agreements could be reached in each crucial step of the liquidation process from August 2021 through April 2022. Unfortunately, we hit a snag in May 2022. The shareholders were unable to resolve their impasse due to the pertinent issues regarding the liquidation of both companies. Without court intervention, the stalemate would never end.

We knew that we could still provide value in helping these shareholders, but given their bitter disagreements, it could only be done under a court-supervised compulsory dissolution. Therefore, we prepared a report for the court and first circulated a draft to the stakeholders and their lawyers. We did so for two reasons:

  1. we wanted to make sure that we did not make any factual errors; and
  2. by circulating a draft in advance, we gave everyone the chance to consider consenting to our application to turn the voluntary liquidation into a compulsory dissolution.

We then had our legal counsel set up a court date, which they were thankfully able to get for mid-July. All stakeholders consented to the court-supervised liquidation of one of the two companies. One side also consented for the other company to enter a court-supervised process, but the other side opposed it.

The court made an order to convert the voluntary liquidation into a compulsory liquidation for the one private company that all shareholders consented to. It also set a hearing for mid-September, which will allow the opposing party to present their case, and for the consenting party and the liquidator to do the same. This provision in the OBCA allowing a voluntary liquidator to make the court application definitely prevented a less favourable outcome.

liquidation of company
liquidation of company

Liquidation of company assets: Difference between insolvency and liquidation

There is a big difference between insolvency and liquidation, just as there is a difference between insolvency and bankruptcy. Being insolvent is a very difficult financial condition to be in. When a company or individual cannot pay their bills, debts, or liabilities, it is insolvency. This often leads to either restructuring or bankruptcy.

The liquidation of a corporation under the CBCA, OBCA or respective provincial legislation is a legal process that can be undertaken when the company is not insolvent but the shareholders wish to end the life of the company for other reasons.

In a liquidation, the company’s assets are sold and the proceeds are used to pay off creditors. The remaining funds are distributed to shareholders. This is not the case for an insolvent company, which may be forced to close its doors through an insolvency process such as bankruptcy.

The first step in determining the solvency of a company is to look at its most recent set of financial statements.

Key point takeaways on the liquidation of company assets

I hope you found this liquidation of company assets Brandon’s Blog interesting. The key takeaways from this blog, in my view, are:

  • Liquidation and winding-up of a company must be considered when a company is still solvent but is facing insurmountable problems such as its business is no longer viable or internal fighting makes its survival doomed.
  • While value still remains in the company, it is in the best interests of all stakeholders to get that value for everyone.
  • A liquidator can be very helpful to shareholders in a private company who no longer can effectively manage the companies on their own and there is value to be obtained for them.
  • A voluntary liquidator can apply on its own to court to turn a voluntary liquidation into a court-supervised compulsory liquidation.

Among the many problems that can arise from having too much debt, you may also find yourself in a situation where bankruptcy seems like a realistic option.

If you are dealing with substantial debt challenges and are concerned that bankruptcy may be your only option, call me. I can provide you with debt help.

You are not to blame for your current situation. You have only been taught the old ways of dealing with financial issues, which are no longer effective.

We’re passionate about permanently solving your financial problems with you and getting you or your company out of debt. We offer innovative services and alternatives, and we’ll work with you to develop a personalized preparation for becoming debt-free which does not include bankruptcy. We are committed to helping everyone obtain the relief they need and are worthy of.

You are under a lot of pressure. We understand how uncomfortable you are. We will assess your entire situation and develop a new, custom approach that is tailored to you and your specific financial and emotional problems. We will take the burden off of your shoulders and clear away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We realize that people and businesses in financial difficulty need a workable solution. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost consultation.

liquidation of company
liquidation of company
Categories
Brandon Blog Post

INSOLVENCY TRUSTEE: TURNS OUT CERTAIN ACTIONS AGAINST THE TRUSTEE CANNOT BE UNLEASHED WITHOUT COURT PERMISSION

What does an insolvency trustee do?

In simple terms, the only professional who can help you with a government-regulated insolvency proceeding that may allow you to be discharged from your debt is an insolvency trustee. This may be the best solution for individuals with significant financial difficulties.

An insolvency trustee is responsible for carrying out the administration of an insolvency file in accordance with the requirements of the Bankruptcy and Insolvency Act (Canada) (BIA). The insolvency trustee is responsible for ensuring that both creditors and the public interest are protected during the debt relief options of bankruptcy, consumer proposal, or Division I proposal process. This includes ensuring that assets are properly managed, sold and the cash distributed and that the bankruptcy or insolvency process is carried out in a fair and orderly manner.

A licensed insolvency trustee is federally regulated

The Office of the Superintendent of Bankruptcy (OSB) licenses and provides ongoing oversight for insolvency trustees, who must adhere to federal standards of practice, including the Code of Ethics for Trustees.

If you have a problem with a licensed insolvency trustee (formerly called a bankruptcy trustee) that you can’t solve, you can file a complaint with the OSB. Your complaint will be reviewed and assessed. You may even want to consider taking legal action against the insolvency trustee if your situation is extreme.

Section 215 of the BIA states:

“Except by leave of the court, no action lies against the Superintendent, an official receiver, an interim receiver or a trustee with respect to any report made under, or any action taken pursuant to, this Act.”

The BIA recognizes that a party may have a legitimate grievance against an insolvency trustee for something that was done or not done during a bankruptcy administration. The BIA tries to balance the need to protect legitimate claims against the Trustee with the need to prevent parties from using the threat of litigation to gain leverage.

insolvency trustee

Who is a person of insolvency?

The above is an introduction to today’s insolvency trustee Brandon’s Blog. In June of last year, I wrote about this bankrupt person in the blog TRUSTEE IN BANKRUPTCY: CERTAIN ACTIONS AGAINST TRUSTEE CAN BE UNLEASHED WITHOUT FIRST REQUIRING COURT PERMISSION. That Brandon Blog dealt with a decision of the Ontario Superior Court of Justice.

The person of this insolvency was a serial bankrupt, filing bankruptcy four times in 12 years: 2004, 2006, 2011, and 2016. Each time he used the same insolvency trustee. He operated a sole proprietorship painting business. So technically, each time he went bankrupt, a new sole proprietorship began.

The plaintiff alleges that the licensed insolvency trustee (LIT) was negligent, committed fraud, breached their fiduciary duty, and was unjustly enriched, starting with the confidential consultation and throughout each personal bankruptcy administration. The bankrupt discovered during his 4th bankruptcy that his former spouse had misappropriated substantial sums from his business between 2003 and 2018. Ultimately, he determined that the amount of the misappropriations was approximately $206,000.

The bankrupt’s fourth bankruptcy was annulled by filing a consumer proposal with a different insolvency trustee that was accepted by his creditors. He and his current spouse then commenced an action not against the corporate licensed insolvency trustee of record who handled all four bankruptcies, but rather against the person, who is a licensed insolvency trustee, who carried out the individual bankruptcy processes.

The bankrupt person and his new spouse are seeking relief against the individual as though he were the Trustee of record. The central allegation is that he, as the “Licensed Insolvency Trustee” providing bankruptcy services for each of the bankruptcies, ought to have detected the misappropriations and, once told about them, he should have sued the former spouse. So they are blaming the Trustee for the bankrupt businesses with debt problems!

The plaintiff went to court to determine whether they needed the court’s permission to proceed with their case under section 215 of the BIA against the bankrupt person’s insolvency trustee. The plaintiff believed they did not need permission, but if they did, they should be granted it. The defendant Trustee argued that permission was needed and should not be granted. The judge ruled that the plaintiff does not need to get permission from the court to start this legal process.

Insolvency trustee appeals lower court decision

On July 13, 2022, the Court of Appeal for Ontario released its decision of the three appellate judge panel on the insolvency trustee‘s appeal of the lower court decision. The OSB obtained intervener status and was represented by legal counsel on the appeal. The OSB supported the insolvency trustee‘s position.

The motion judge, sitting in the bankruptcy court, determined that permission was not required under s. 215 to commence the legal action. However, she expressly did not determine whether, if permission were required, it should be granted. Therefore, she did not address whether the person’s status as an undischarged bankrupt would impact the decision.

The motion judge found that the litigation did not require permission under section 215 for two reasons:

  1. she believed that actions against trustees in their personal capacity do not require permission; and
  2. she found that actions that allege omissions do not require such permission.insolvency trustee

Is the appeal as of right, and if not, should leave to appeal be granted?

The Court of Appeal for Ontario first had to decide if the licensed insolvency trustee has an automatic right to appeal the lower court decision and if not, should leave to appeal be granted?

The appellate court stated that it would be willing to grant leave to appeal because the proposed appeal, falls within the proper scope of section 215 of the BIA for 3 reasons:

  1. This case raises an important issue – the circumstances in which an insolvency trustee can be sued without leave of the court – that is of general importance to the practice in bankruptcy/insolvency matters.
  2. The case is prima facie meritorious.
  3. The appeal would not unduly hinder the progress of the person’s bankruptcy proceedings.

The Court of Appeal for Ontario, therefore, gave the Trustee the opportunity to appeal the lower court’s decision.

Insolvency trustees and bankrupts are obliged to work with the court

The lower court found that the action did not require leave under section 215 of the BIA. This is because the judge decided it was against the Trustee in a personal capacity. The Trustee was now appealing this decision. The Trustee argued that section 215 of the BIA applies when a director, officer, or employee of the corporate trustee is sued for the Trustee’s conduct, just as it would if the corporate trustee were sued. The appellate court agreed, relying on a decision from the Supreme Court of British Columbia.

The purpose of BIA section 215 is to ensure that the bankruptcy process is not obstructed by the Trustee being hindered by actual or threatened vexatious lawsuits in connection with the administration of the bankruptcy.

In Canada, most licensed insolvency trustees are corporations. The BIA imposes numerous duties on them. A corporate entity can only discharge its duties through its directors, officers and employees. If the scope of section 215 were limited to protecting only the corporate trustee, then Trustees would be unable to properly carry out their duties.

The Court of Appeal for Ontario in this cased determined that this type of distinction between the corporate trustee and its staff would contravene the clearly expressed will of Parliament as evidenced by the statutory language. To allow such would be to subvert the fundamental purpose of section 215.

The key question in determining whether s. 215 applies is whether the connection contemplated by the section is present. This question is answered by examining the relationship between the alleged wrongdoing complained of in the Action and the role of a trustee. The appellate court looked at the proposed action by the bankrupt person and his current spouse and saw that there was the required connection. Therefore the Court of Appeal for Ontario agreed with the position of the Trustee and the intervener in finding that section 215 does apply in this case.

The other reason the motion judge came to her conclusion was that the action also alleged omissions. The lower court judge determined that a claim for omissions is not covered by section 215. The appellants and the intervener argued that action may fall outside of section 215 only when the crux of the action is the failure to do something expressly and specifically required by the BIA.

The common law claims here arise from alleged failures to act, rather than from failures to do something specifically and expressly required by the BIA. The Court of Appeal believes that section 215 applies to this action, and the motion judge was incorrect in concluding otherwise.

The Court of Appeal for Ontario sent this case back down to the bankruptcy court to decide whether the former bankrupt and his current wife should be allowed to sue the Trustee.insolvency trustee

What you need to know about LITs

Neither myself nor my firm has any kind of involvement in this issue. I have not read any of the pleadings in this action. I wish to be clear with you and let you know, based only on the information available to the public from the court decisions, what I would certainly have done in carrying out the personal bankruptcies if I was the Trustee.

If you’re experiencing financial difficulties and are considering insolvency, the first step is to consult with an insolvency trustee. During this consultation, the Trustee will collect information about your financial affairs and make recommendations about the best course of action for you.

The individual conducting the assessment must inquire about the debtor’s property and financial affairs. They shall prepare a statement of the debtor’s financial affairs, including their assets and liabilities, based on the information obtained from the debtor.

It is also necessary to get a clear and up-to-date monthly income and expenditure statement, which details all income (gross and net), all expenditures (including special needs, alimony, support or maintenance payments, and medical and prescription expenses). The debtor must also be prompted to provide information on all transfers under value they may have made concerning their assets.

There are a few options available to debtors who are struggling financially and looking to improve their financial situation. These debt relief programs include:

  • non-legislative debt solutions such as debt consolidation or financial counselling sessions performed by credit counselling agencies (insolvency trustees must provide two mandatory credit counselling sessions with the debtor as part of either a proposal or bankruptcy);
  • consumer proposals under Division II of the BIA;
  • a proposal under Division I of the BIA for those that do not qualify for a consumer proposal; and
  • as a last resort, bankruptcy.

What are the duties of an insolvency trustee?

Each debt management plan option has different rights and responsibilities for both the debtor and the creditors. It’s important for the debtor to understand all of the available debt management solutions. I would discuss each one with the debtor and help them choose the one that would be the best for their individual situation. In this particular case, I would want to drill down with the debtor to have him identify the causes of their insolvency. This inevitably would lead to a discussion with this debtor as to why his business seems to be losing so much money every year.

In order to fulfill my duties, I would want to drill down with the debtor to have him identify the causes of their insolvency. This inevitably would lead to a discussion with this debtor as to why his business seems to be losing so much money every year. If the debtor had been able to afford the monthly payments for a consumer proposal to annul his fourth bankruptcy using a different Trustee, could he have avoided filing for bankruptcy a fourth time altogether? I don’t have enough information to know the answer to that question.

I am required to review the bankrupt’s banking transactions for the 12 months prior to the date of bankruptcy as a Trustee. I am looking for any large or unusual transactions, especially large amounts of cash being paid to relatives or friends. This is important in bankruptcy proceedings because the Trustee has a duty to keep creditors updated on any legal proceedings, reviewable transactions, and preference payments. The Trustee needs to consider taking action against anyone to recover funds or, at the very least, opposing the bankrupt’s absolute discharge.

This review is only possible if the bankrupt has accurate records. In this case, if the bankrupt had the records and I reviewed them, I would have either found or not found any unusual transactions. If I did the review, it may have uncovered the alleged fraud.

The former bankrupt claims that the insolvency trustee should have sued the former wife for taking cash out of his business fraudulently. As a Trustee, I must first determine whether there are sufficient funds available to do so. If there are funds available, I must then carefully consider whether pursuing legal action is in the best interests of the estate.

This also assumes that the Trustee’s lawyer has given the opinion that this is a strong case to pursue. The Trustee must be very cautious because if the case is lost, the Trustee will be responsible for the other party’s legal costs awarded by the court. If the bankruptcy estate has insufficient funds, the Trustee will be held personally responsible. This is not a desirable outcome.

If I had found evidence of the alleged fraud and I either did not have sufficient funds to launch a legal action or I did not think it was a wise use of estate funds, there is one more thing I could do and would have done.

I would write to all known creditors and the bankrupt to advise that there is a potential asset in the form of litigation against the bankrupt’s former wife. However, the Trustee does not have sufficient assets to begin the litigation and as a result, I must refuse to pursue this asset. I would also explain section 38 of the BIA. This section allows creditors to obtain court approval to pursue legal action in their own name. If successful, they are able to keep their costs and the full amount of their claim from the recovery. This could be a great option for creditors who wish to fund the legal action.

If the facts that come out align with my explanation of the steps I would have taken, then my prediction is that the former bankrupt and his current wife will not be successful in persuading the court to allow them to continue their action against the Trustee. I will keep watch.insolvency trustee

The insolvency trustee is here to help you with your problem debt

I understand that you’re struggling with debt and I’m here to help. I am an insolvency trustee and I want to help you find a way to shed your debt, eliminate your challenging debt issues, improve your financial future and get all that stress and worry out of your life, Starting Over Starting Now.

I hope you found this insolvency trustee Brandon’s Blog interesting. Among the many problems that can arise from having too much debt, you may also find yourself in a situation where bankruptcy seems like a realistic option.

If you are dealing with substantial debt challenges and are concerned that bankruptcy may be your only option, call me. I can provide you with debt help.

You are not to blame for your current situation. You have only been taught the old ways of dealing with financial issues, which are no longer effective.

We’re passionate about permanently solving your financial problems with you and getting you or your company out of debt. We offer innovative services and alternatives, and we’ll work with you to develop a personalized preparation for becoming debt-free which does not include bankruptcy. We are committed to helping everyone obtain the relief and financial wellbeing they need and are worthy of.

You are under a lot of pressure. We understand how uncomfortable you are. We will assess your entire situation and develop a new, custom approach that is tailored to you and your specific financial and emotional problems. We will take the burden off of your shoulders and clear away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.insolvency trustee

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Brandon Blog Post

CANADA RECESSION: 8 ESSENTIAL SMART STEPS TO KEEP YOUR BUSINESS GOING IN A DOWN ECONOMY

canada recession

Canada recession: Can you operate a business if there is a recession in Canada?

During slow economic growth and economic downturns in the Canadian economy, companies cut costs and especially labour costs. I wrote about Canadians’ fears of the Canada recession two weeks ago. Job losses go hand in hand with tough times. For many people, gaining new meaningful employment is very tough and sometimes impossible. For those people with dim economic prospects in the Canadian labour market, starting a small business in tough economic times is really their only option.

Despite the challenges a weak economy and the current recession fears may pose, starting a small business can be a rewarding experience with the proper amount of planning. In this Brandon’s Blog, I provide my 8 best tips for either changing parts of your business or starting a small business during tough economic times and maybe even a Canada recession.

How must business owners respond to a Canada recession?

Right now, no economist is prepared to forecast the Canada recession risk. Will it be a mild recession, a severe recession or will we even have one at all? The current and forecasted monetary policy of the Bank of Canada with its overnight rate hikes to its benchmark rate has financial markets, Canadian businesses and Canadian households all on edge. It is not just Canada as the heads of the central banks of all advanced economies reacted to the pandemic the same way and are now all acting in concert with rate hikes in an attempt to curb the now persistent inflation.

We are in somewhat of new territory as this period of time is very different than previous recessions and financial crises. We are experiencing economic shocks due to the COVID-19 pandemic and the shutdown and restarting of the Canadian economy. There is not a lot of either business confidence or consumer confidence in the marketplace right now. The consumer price index is increasing due to rising inflationary pressures and the inflation rate in Canada.

Small business owners need to have a well-crafted business plan, especially during an economic downturn. This is because it can be more difficult to get financing from lenders when money is tight. Therefore, starting a small business during a recession can be challenging. If you want to have success in your business, new or established, you need to put some serious effort into cash forecasting and knowing your bottom line. This means understanding how much money you need to bring in, what your operating costs are, and ideally how to make a profit.

canada recession
canada recession

How to financially prepare my business for a Canada recession

Here are some methods that can help ensure your business does well during challenging financial times. Whether you’re just starting or need to make some adjustments to your existing company, these pointers can help you survive as well as also grow.

You can even find success at some level during turbulent economic activity. The reasons are as follows:

  • You may find that there is less competition during this time. This is because most people tend to start businesses when the economy is doing well.
  • You may find certain things are cheaper, the overhead costs of things that you need for your business to run. Think about working from home or renting a location that has been vacant for a while. Think of used furniture and materials, which you can buy at a discount or maybe even from a bankruptcy sale.
  • If you service your customers you gain during this time well, your good relationship will be a good reason why they will be more likely to stay in touch with you when the economy improves. This is especially important if you can offer them a more affordable option than the competition.
  • More mature businesses tend to stifle or prevent innovation during downturns. You can use this time to come up with new ideas that might be missed and give you a better position when you open doors, real or virtual.

The success of your company is based on how well you study the actual domestic demand for your product or service in the marketplace. It is just as important to comprehend what target price you need to reach in order to make sales. Furthermore, you need to understand what sales level you need to hit to both break even and also to be profitable.

Canada recession financing

It’s always an excellent idea to have someone you trust assess your business plan and cash flow forecast before trying to obtain financing. This will help you catch any essential issues you might have missed or inaccurate assumptions you have actually made as it relates to your business and its capital requirements. Some resources you might wish to turn to for help before looking to financial institutions for a loan include:

  • friends who have their own business;
  • someone at the bank where you do business with who you have a good relationship; or
  • your accountant

The Canadian economy could be pushed into a recession by the federal government’s reaction to the COVID-19 pandemic. If you’re considering starting a new business during these challenging times, you need to be very cautious. Your ability to develop a financial backup plan for your business and personal finances if you don’t meet your initial revenue target is more important than your ability to borrow money. It is normal for any new business that you will not be able to draw a salary during the 1st year of your new business.

You should also have a personal cash reserve so you have enough to live on for ideally the first 12 months of a new business. Make sure you budget carefully so you can keep making your most critical payments: rent/mortgage, insurance, utilities, and food. Finally, check your gut and your bank balance to make sure you’re ready to embark on your new adventure.

canada recession
canada recession

Canada recession: Sell ​​shrewdly

Starting a new business at a time of sharp economic downturn and turbulent economic activity requires creativity and resourcefulness. Marketing is critical to staying ahead of the competition. Make sure your business plan really fleshes out the marketing process: What exactly are you trying to sell? Who is your target customer? How will you price your product or service? What is your business promotion plan?

Dividing your original customer base into smaller pieces or niches is another strategy to allow any business to market more strategically. For example, if you are offering professional services for women, are you able to narrow it down to women in a specific age group, occupation type, or geographic location? Or, can you tier your product offering so that there is a relatively low-cost entry point product to allow new customers to try out your business and to allow you to then move them up to higher-priced and more profitable product offerings?

Can you think of ways to expand your customer base? For example, if you have a business shipping recipes and ingredients on a subscription basis for people to cook their own dinners without having to go do the shopping, could you also offer packaged dinners to customers who just want the convenience of heating and eating?

Canada recession: Ongoing competitive analysis

Be informed of your competitors’ movements in terms of marketing and product design. Are they enhancing the product? Devaluing the price? Utilizing original promotional methods? Knowing your competitors’ standings will help you formulate a unique selling proposition and grow your market.

Think about which segments your competitors are not serving, or which leads they are missing, and then fill that gap.

canada recession
canada recession

Canada recession: Start small…with a plan to expand

As you start your business, be mindful of both your expectations and expenses. Try to be conservative in your estimates and plans, then adjust as your business grows. Review your business plan periodically and reconsider what is truly necessary to get started. For example, could you open in a smaller or cheaper location? Or, could you avoid the need for physical space by staying virtual?

When you have found the most cost-effective space for your business, think about your staffing needs. Before hiring permanent staff, you could use independent contractors as temporary or part-time workers.

If you are aware of a similar business that is failing, you may be able to find some great people who are willing to be paid less than in a more active market. Offer fewer employee benefits initially and then increase them as your profits grow. You don’t want to offer all sorts of great benefits at first and then find out you can’t afford them later. Taking away benefits is much worse than not having given them in the first place.

Immediate business growth in a challenging economy is unrealistic. An aggressive approach in a Canada recession or a down economy is unwise. You should be looking for sustained business growth over time.

Canada recession: Leverage technology to your advantage

The right tools are essential for business success. Utilizing modern technology can help you to stay organized, connected with customers and effectively market your company. CRM systems help you track your customers’ interests, so you can focus on products and services that best meet their needs.

The latest technology gives entrepreneurs more options for selling online and through multiple channels. You can save on advertising costs by doing email marketing, blogs, podcasts and of course optimizing your website for SEO instead of opting for more expensive electronic or print ads. And when you need inspiration, you can turn to social media and online publications and groups focused on helping entrepreneurs.

canada recession
canada recession

Canada recession: Your network

Building a strong network is essential for anyone looking to advance their career or grow their business. Getting involved in local business groups and networking events is a great way to meet other like-minded individuals and make valuable connections. Joining professional associations or local clubs and organizations related to your industry is also a great way to expand your network and get your name out there.

Canada recession cost reduction ideas

With inflation pressures causing rising prices, cost reduction needs to be a key element of running your business. A gloomy economy can actually mask some great ways to save money. Creative ideas to reduce your start-up costs include:

  • Be very careful when making capital investments due to their mid and long-term nature. Leverage the economic situation and negotiate everything. You may be able to get a sharp drop in prices if you can demonstrate that you can afford to pay the lower price in full and on time.
  • Buying supplies from businesses that are about to go out of business or need to reduce inventory, especially bulky items like electronics and office furniture.
  • Barter with other business owners to find business alliance possibilities and suggest trading in products or services to offset costs.
  • Initially, do your own legal, financial and business homework through free online resources.
  • Compare business credit cards for the best deals.
  • Find a bank account that meets your small business needs including access to brick-and-mortar and online services as well as attractive rates and incentives.

    canada recession
    canada recession

Canada recession key takeaways

Before seeking financing, consult with another business owner or friend to review your business plan. Develop a marketing strategy tailored to your business goals. Start small and expand when you see improvements. Secure your network and find ways to keep costs down by utilizing available technology.

You should begin with small steps and then increase your efforts when you start seeing improvements. Make sure your network is secure and look for ways to reduce costs. Make use of appropriate existing technology.

Although it may be challenging, there are benefits to starting or running a business during an economic downturn. By being thoughtful and strategic about cost-cutting measures while still providing value to customers, you can set your business up for success.

Canada recession conclusion

I hope you found this Canada recession Brandon’s Blog interesting. Among the many problems that can arise from having too much debt, you may also find yourself in a situation where bankruptcy seems like a realistic option.

If you are dealing with substantial debt challenges and are concerned that bankruptcy may be your only option, call me. I can provide you with debt help.

You are not to blame for your current situation. You have only been taught the old ways of dealing with financial issues, which are no longer effective.

We’re passionate about permanently solving your financial problems with you and getting you or your company out of debt. We offer innovative services and alternatives, and we’ll work with you to develop a personalized preparation for becoming debt-free which does not include bankruptcy. We are committed to helping everyone obtain the relief they need and are worthy of.

You are under a lot of pressure. We understand how uncomfortable you are. We will assess your entire situation and develop a new, custom approach that is tailored to you and your specific financial and emotional problems. We will take the burden off of your shoulders and clear away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We realize that people and businesses in financial difficulty need a workable solution. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost consultation.

canada recession
canada recession
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