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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Brandon Blog Post

LICENSED INSOLVENCY TRUSTEE FEES: WHAT UNDENIABLE EVIDENCE IS NEEDED FOR COURT APPROVAL OF INSOLVENCY TRUSTEE FEES?

Licensed insolvency trustee fees: How is a licensed insolvency trustee paid?

Are your debts or your company’s debts and financial situation causing you so much stress that you are considering speaking to a licensed insolvency trustee (formerly called a bankruptcy trustee or trustees in bankruptcy), but you are worried about the licensed insolvency trustee fees? Are you concerned about the professional fees to be paid because you think that businesses with debt problems already cannot afford to hire professionals? Your concerns are valid and relevant but you should not let that stop you from your initial inquiry. An insolvency trustee will always provide you with a no-cost initial consultation, discuss realistic options and explain the cost of each option to you.

Licensed insolvency trustee fees are set by bankruptcy laws and rules contained in the Bankruptcy and Insolvency Act (Canada) (BIA). They are reviewed by the Office of the Superintendent of Bankruptcy and must be approved by the bankruptcy court. Fees are either drawn from the funds accumulated in the insolvency file from the sale of assets in the receivership or bankruptcy administration or the monthly payment funding of the restructuring proposal. If there are insufficient assets in the insolvency file, then the insolvency trustee gets its fee from a third-party retainer.

In this Brandon’s Blog, I describe how licensed insolvency trustee fees are calculated. Then, I review a recent Ontario court decision to show what kind of evidence the Trustee needs to provide the court in order for its fees to be approved.

Licensed insolvency trustee fees: Disbursements included in a streamlined personal insolvency process

Licensed insolvency trustees offer a range of services for both individuals and businesses. For individuals, there are two streamlined insolvency processes:

  • summary administration personal bankruptcy; and
  • consumer proposals.

    licensed insolvency trustee fees
    licensed insolvency trustee fees

Licensed insolvency trustee fees in a summary administration personal bankruptcy

The summary administration personal bankruptcy process applies when the assets of the bankrupt person to be sold are expected to sell for $15,000 or less. Licensed insolvency trustee fees for a summary administration personal bankruptcy are set by a formula called a tariff.

In a summary administration bankruptcy, the fees that insolvency trustees are entitled to are calculated as follows:

  • 100 percent on the first $975 or less of receipts;
  • 35 percent on the portion of the receipts exceeding $975 but not exceeding $2,000;
  • 50% of receipts exceeding $2,000;
  • for counselling fees of $75 per session, totalling $150; and
  • an allowance for administrative disbursements of $100.

The reason the formula refers to receipts (of cash) rather than net proceeds from asset sales is that, in any personal bankruptcy, there are two types of cash receipts: 1. from the sale of assets; and 2. surplus income payments made by the bankrupt person, if any.

Licensed insolvency trustee fees: How much will it cost me to file a consumer proposal?

The calculation of the amount you need to offer your creditors in your consumer proposal has no relation to what the licensed insolvency trustee fees will be. Licensed insolvency trustee fees for a licensed trustee acting as the Administrator in the consumer proposal process is also governed by a tariff. It is calculated as follows:

  • $750 on the filing of the proposal with the official receiver;
  • $750 on the approval or deemed approval by the court;
  • 20% of moneys distributed payable on distribution; and
  • counselling fee of $75 for each counselling session for a total of $150.

In a consumer proposal, administrative disbursements are paid out of the above fee calculation.

In both summary administrations and consumer proposals where the licensed insolvency trustee fees are only the tariff, there is no need for court approval.

licensed insolvency trustee fees
licensed insolvency trustee fees

What factors influence licensed insolvency trustee fees in other administrations?

There are no streamlined provisions for any corporate insolvency administration. In addition to administering summary administration bankruptcies and consumer proposals, licensed insolvency trustees also can provide the following services:

  • business review of a company to identify its solvency and future prospects so that financial advice can be given
  • ordinary administration personal bankruptcy
  • commercial bankruptcy
  • personal Division I restructuring proposal to creditors (for consumers who cannot qualify for a consumer proposal)
  • corporate Division I restructuring proposal
  • private corporate receivership
  • court-appointed corporate receivership
  • winding-up corporate liquidation, either voluntary or court-supervised
  • corporate restructuring under the Companies’ Creditors Arrangement Act

In all of the above government-regulated insolvency proceedings/insolvency procedures, there are only two factors that influence the licensed insolvency trustee fees. They are:

  1. Hours spent by the level of staff working.
  2. The professional hourly rate of the staff.

Licensed insolvency trustee fees: How does an insolvency practitioner receive compensation?

In all of the non-streamlined insolvency processes, I just described, how the licensed trustee gets the fees it is charging requires approval. In private appointments, the licensed trustee needs the approval of the client. In a court appointment or administration for bankruptcy services or any other mandate under the BIA, the licensed trustee needs court approval.

What evidence do licensed insolvency trustees need to provide to prove the time that was spent doing the work? The documentation expected of a licensed trustee is the same that is expected from an insolvency lawyer or any other kind of lawyer. What is expected are detailed time dockets, so that everyone can see who spent what time, on what day on what activity.

But what if proper dockets are not kept? Well, that is exactly what the court case I want to describe to you is all about.

licensed insolvency trustee fees
licensed insolvency trustee fees

Licensed insolvency trustee fees: How do practitioners of insolvency get compensated – it takes a Final Statement of Receipts and Disbursements

I am writing this Brandon’s Blog to be informative, not to embarrass anyone. So I will not be providing the case reference of the case I am now going to describe. This is actually the second such case in Ontario that I am aware of in the last 12 months.

The case deals with a bankruptcy trustee who submitted its final statement of receipts and disbursements (SRD) to the court for approval. Contained in this final statement is amongst other things, the line item for the fee and disbursements the Trustee is seeking court approval for. The court expects to see a sworn affidavit from someone on the insolvency trustee’s staff who has knowledge of the time spent and the fee charged outlining what was done and why it was necessary. The court also expects to see detailed time dockets.

In this case, and the very similar one that came before it, the insolvency trustee’s material did not include detailed time dockets. Both Trustees applied for taxation of their SRD in an individual debtor’s Division I Proposal. In both cases, the Office of the Superintendent of Bankruptcy issued clean letters of comment. The primary issue raised on this taxation is whether the insolvency trustee’s fees are to be approved. In the ordinary course, the debtor and the creditors have not been given notice of the taxation but it would appear that there is unlikely to be any objection.

The taxation raises the question of how the Trustee is supposed to establish its entitlement to fees when there is no time dockets kept or otherwise available to support the trustee’s claim. In this case (and the one before it), the Trustee is relying solely on the terms of the proposal. The proposal contains the methodology for calculating the fees to be taken by the Trustee in administering the proposal. The Trustee is relying on the fact that a Proposal is a contract between the debtor and its creditors, the court has already approved the Proposal and the Proposal includes the Trustee’s remuneration.

Licensed insolvency trustee fees: Bankruptcy trustees – why not keep accurate time records?

The Trustee requested fees (plus HST) based on the formula set out in the debtor’s proposal. While the Trustee provided an affidavit in support of its taxation, the Trustee did not provide any evidence of actual time spent at each staff level. The taxation came before the Associate Justice on September 1, 2021. She adjourned the taxation and requested time dockets.

The Trustee filed a report in response to the September 1, 2021 endorsement and request for time dockets, supporting the taxation and approval of the fees claimed, but no time dockets were included. In its report, the Trustee noted that it did not keep formal, detailed time records, as the terms of the Trustee’s fees and expenses are set forth in the Proposal as a “fixed fee” formula. This fee formula was accepted by creditors and approved by the Court. Therefore, the Trustee is relying upon that in not keeping time dockets.

The Trustee advised that its rationale for the development of a fixed fee formula to be charged by the Trustee, and for its decision to eliminate time docketing in such Division I proposals containing a formula for fixing a fee, were as follows:

  1. The fixed fee formula was designed by the Trustee to provide more certainty about the costs of administration for the Division I proposal. This formula also takes into account contingencies such as the time needed to negotiate the terms of the proposal and to verify the debtor’s financial information.
  2. The fixed fee formula was designed to make billing and accounting more efficient by eliminating the need to track chargeable time.
  3. The fixed fee formula was based on the consumer proposal tariff, to a certain extent.
  4. The fixed fee formula’s structure helped the Trustee keep initial costs low, so creditors could start getting dividends from the debtor’s monthly payments sooner.
  5. The fixed fee formula was designed to minimize unexpected increases in costs of administration and a resulting decrease in dividends.
  6. Not once has a creditor balked at the Trustee’s fixed fee.
  7. The court approved the proposal with the fixed fee formula, so the Trustee did not keep time dockets.
  8. There are many proposals whose administration is underway or completed that the Trustee has relied upon the fixed fee formula, and therefore has not maintained time dockets.
  9. The trustee’s fees, as claimed under the fixed fee formula, have not been objected to by the Office of the Superintendent of Bankruptcy Canada.

    licensed insolvency trustee fees
    licensed insolvency trustee fees

Licensed insolvency trustee fees: The court’s analysis and decision

The BIA provides for the determination of a Trustee’s remuneration in section 39. The Associate Justice said that s. 39(5) of the BIA provides the jurisdiction to increase or reduce the remuneration claimed by a Trustee. Further, the court was not a “rubber stamp” obliged to approve the fees claimed by the Trustee merely because they were in the Proposal. The court noted that it is common for Trustees to request remuneration based on the time spent and hourly rates charged. The burden is on the Trustee to convince the court that the amount claimed for remuneration is warranted.

The Associate Justice listed the following principles that must be considered when it comes to taxation:

  • Trustees should be given proper compensation for their services.
  • Prevent unjustifiable payments for Trustee fees that harm the insolvent estate and its unsecured creditors.
  • The efficient and conscientious administration of an estate for the benefit of creditors and, to the extent that the public is concerned, in the interests of the proper carrying-out of the objectives of the BIA, should be encouraged.

This Associate Justice also dealt with the previous case I mentioned above, which involved the taxation of a statement of receipts and disbursements in a Division I proposal where no time dockets were kept. In that case, she held that the lack of time dockets was not fatal to the approval of fees. She said the court is in a difficult position when there is no corroborative evidence as to the time and effort spent in the administration of the proposal.

So due to the lack of evidence justifying the time spent by the various staff members of the Trustee firm at their normal hourly rates, the Associate Justice was forced to look at the entirety of the Trustee’s administration. She found issues with it and therefore concluded that the Trustee was not entitled to the full fee being requested, based on the formula contained in the Division I Proposal. The Associate Justice determined, with the benefit of hindsight as to how the Division I Proposal turned out, that the debtor could have filed a consumer proposal and the creditors would have then been better off with a higher dividend distribution.

The Associate Justice ruled that, in this case, fees and disbursements will be set on a consumer proposal tariff basis. The proposal fund totalled $31,500. Using the formula for a consumer proposal, the Trustee was therefore entitled to fee and disbursements of $7,620 (plus HST) and not the $9,973.46 fee and $14,252.01 of disbursements (plus HST) formula amount.

The Associate Justice was also very critical of the Trustee’s administration and she had strong words overall for Trustees coming to court without proper evidence of the time spent when requesting approval for fees and disbursements at taxation. Her warning was that she did not accept the Trustee’s submissions that:

  • The court’s jurisdiction over approving the SRD and the fees to be claimed by the Trustee is replaced by the approval of the creditors and the OSB. Creditor and OSB approval are not determinative when it comes to taxation, but their approval is still relevant.
  • The appropriateness of the Trustee’s fees is not considered in an application for court approval of a Division I proposal. The court is not prevented from taxing the Trustee’s fee and disbursements upon the taxation of the SRD.
  • Any benefits to having a set fee remove the court’s jurisdiction to approve the Trustee’s fees. If the Trustee decides to save time by not documenting their hours worked, they do so at their own risk. The responsibility is always on the Trustee to justify their fees.
  • Creditors who want to know how much the Trustee’s fee will be cannot override the Trustee’s responsibility to explain to the court why the fee is fair and reasonable.

The court directed the Trustee to redo its SRD on the basis decided by the court, resubmit it to the Office of the Superintendent of Bankruptcy for its comment letter and then resubmit the entire package to the court for the taxation order.

A tough day in court to be sure.

Licensed insolvency trustee fees: Call us for debt-free solutions

I hope you found this licensed insolvency trustee fees 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 or your business are dealing with substantial debt challenges and are concerned that bankruptcy may be your only option, call me. I can provide you with debt relief advice in setting up one of various possible debt management plans using debt relief options for you or your company.

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 are debt professionals who know how to use the new innovative tools to solving debt problems while avoiding a bankruptcy filing.

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 and improving your financial future, let us know. Starting Over, Starting Now.

Call us now for a no-cost consultation to find out what your debt relief options are.

licensed insolvency trustee fees
licensed insolvency trustee fees
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Brandon Blog Post

IS CANADA IN RECESSION? MOST CANADIANS SAY YES TO AN INTENSE RECESSION

Is Canada in recession?

Statistics Canada recently released data showing that inflation rose to 7.7% year-on-year in May, up from 6.8% in April. This was the highest reading since January 1983 and well above the 7.3% expected by economists. The inflation index rose 1.4% from the previous month, with gasoline prices, hotel prices and car prices being the main reasons for the rise in May.

Many economists believe core measures are a better indicator of underlying price pressures, as it excludes food and energy costs. The recent average of this measurement, according to Statistics Canada, increased to 4.73% which is the highest level in the last 32 years! The worst news, their inflation expectations are not stopping.

In this Brandon’s Blog, I discuss is Canada in recession and look at what effect it might have on Canadians.

Is Canada in recession? What is a recession?

In the most basic terms, a recession is not only when economic growth is curtailed but is a period of economic decline marked by a contraction in economic activity. Most governments define a recession as two straight quarters in which the economy contracts by at least 1.5 percent. Economists define it as negative gross domestic product (GDP) growth. This definition doesn’t take into account consumer sentiment, but that’s an important metric to pay attention to since it affects consumer spending.

Fears of a recession have been rising in recent weeks as central banks around the world try to bring inflation down from the highest in decades by raising interest rates quickly. A new poll finds that nearly 8 in 10 Canadians believe the Canadian economy is in or near a recession. More than half of those Canadians are starting to cut back on spending to cope with the recession.

According to a recent survey of 1,517 Canadians by Yahoo and pollster Maru Public Opinion, a whopping 78 percent of respondents believe Canada is now in a recession or approaching a recession. Of those, 23% believe Canada will enter a recession within the next three months, while as many as 55% believe the Canadian economy is now in a recession.

is canada in recession
is canada in recession

Is Canada in recession right now? What the economists say

Canadian economists were surveyed by Finder on their inflation and economic recession expectations. Most said Canada has recession risk and is heading for a recession. They say we can expect it to happen anytime between 2023 and the first half of 2024. Most thought it would happen in the first six months of 2023, another quarter thought it would take a year to manifest. Economists have pointed to the pandemic, inflation and interest rate hikes as the reasons for the recession in Canada (isn’t the hot money only flowing into the housing market the reason for the recession?).

Finder explains how economists try to time recessions. Canada is headed for a normal summer as pandemic restrictions are lifted, but a new variant of the COVID-19 pandemic could emerge in the fall that could tip us into a Canadian recession by this time next year. What they cannot tell us is whether it will be a mild recession or a deep recession.

Why Is Canada likely to experience a recession?

In a single word – inflation. Inflation is rising and our federal government is doing nothing to quell the inflation expectations. This is causing the Bank of Canada to try to tame inflation by raising interest rates. This increases the risk of a recession. In fact, many economists told Finder they expect “aggressive” rate hikes in the coming year. Most of those polled believe there will be at least four more rate hikes this year.

Fears of a recession have been rising in recent weeks as central banks around the world try to bring inflation down from the highest in decades by raising interest rates quickly. The Bank of Canada is one of the central banks trying to restore soaring inflation to its target range of 1% to 3%. On June 1, the Bank of Canada announced a rate hike of 0.5%.

The timing of the recession is not easy to grasp, and much depends on what happens with Russia’s invading Ukraine. Murshed Chowdhury, an associate professor at the University of New Brunswick, expects the recession to continue into the first half of 2024. How long the supply-side problems will last and the escalation of the Russian-Ukrainian war will play a big role in deciding how things turn out.

The rise in prices causing inflation can be attributed to a number of factors, including poor fiscal management by the federal government. Other factors include record highs in commodity prices such as oil and wheat. Unfortunately, wage growth for most Canadians has not kept pace with inflation. Wages have risen 2.7% over the past two years, compared with inflation of 3.4% over the same period.

is canada in recession
is canada in recession

Is Canada in recession? What will happen to the economy of Canada?

Consumer prices in Canada accelerated to their highest level in 40 years, Bloomberg reported, adding pressure on the Bank of Canada to continue aggressively raising interest rates in the coming weeks.

Markets are almost entirely confident that the Bank of Canada will raise interest rates by 75 basis points next month, which will lift its policy rate to 2.25%. The rate is expected to be as high as 3.50% by the end of the year. The preferential loan interest rate offered by commercial banks is usually more than 2 percentage points higher than the policy interest rate.

Prime Minister Justin Trudeau’s government has also come under pressure from opposition parties and economists to do more to contain inflationary pressures and help households offset the cost of living, though the Trudeau government has been wary of any new measures.

Like other countries, Canadian households have been hit by record gasoline prices and soaring food prices. After a slight pullback in April, gasoline prices surged again in May, rising 12% for the month and 48% from a year earlier. Food prices rose by a smaller 0.8% in May but were up 8.8% from a year earlier.

Given that gasoline prices rose further in June, the 7.7% annual figure may not even be representative of the peak annual price increase. There were more signs that imported inflation was affecting domestic prices, with the cost of services rising 5.2 percent from a year earlier, the fastest pace of growth since 1991.

The cost of living is rising twice as fast as the average Canadian wage, creating significant headwinds for the economy. Unfortunately, the Canadian government and the Bank of Canada are treating this as if inflation is all caused by domestic factors when it is really global. Raising interest rates aggressively, an old tool, cannot solve a globally induced imported inflation spike.

The inflation we are experiencing now is a result of all the shocks to the Canadian economy: COVID-19, monetary policy-induced recession factors when the Bank of Canada kept interest rates at their lowest ever levels during the COVID-19 pandemic, the supply side problems because every major world economy effectively shut down for the better part of 2 years, the war in Ukraine causing shortages and therefore price spikes. None of it is a Made In Canada problem, yet the Bank of Canada and the federal government are treating it as if it was homegrown.

Is Canada in recession? What happens if we experience a recession?

Canadians’ purchasing behaviour is already beginning to change. A poll conducted by Nanos Research for Bloomberg News indicates:

  • 52% of Canadians surveyed say they have adjusted their spending habits, set stricter priorities and started consciously spending less in the past month.
  • The majority of Canadians expressed concern about the state of the economy, with 62 percent of Canadians believing that the Canadian economy was on the wrong track.
  • Rising prices have led 32 percent of Canadians to believe they are in a worse financial position than they were the previous month. Only 8 percent of Canadians said their situation had improved.
  • Regionally, the poll showed that residents of Atlantic Canada and Western Canada are particularly concerned about the economy.
  • In the Atlantic region, 75% of respondents believe the Canadian economy is heading in the wrong direction; in Manitoba and Saskatchewan, 77%; in Alberta, 66% of people hold this view.
  • 41 percent of Canadians said they were in a worse financial position today than they were last year. This is the second-highest reading since 2008.

This consumer sentiment, runaway inflation and the Bank of Canada and the federal government using old tools to fix a new problem will have negative consequences for Canadian businesses. Consumer spending which previously fueled the Canadian economy, now reduced consumer spending, this will most likely place is Canada in recession.

Lower company sales will lead to job losses and our record low unemployment rate will increase possibly to a new high when the current job market changes for the worst during a recession. Business investment will be reduced and what investment is made, will be more in systems and technology than people. There will be a resultant drop in GDP. Certain asset categories will drop dramatically in price as capital flees places like the Canadian stock market for investments seen to be safer.

is canada in recession
is canada in recession

Is Canada in recession? How to protect yourself from a recession

Our spending and investing habits directly impact the economy. This year so far, it’s been a rough ride. However, the majority of how a recession affects us is within each of our own control. The rest of it, the minority is because of forces beyond our control.

The economy will vary from year to year. Our spending, saving and investing habits directly impact the economy. It is important for all of us to make smart financial decisions now so we can weather the storm when the economy dips. Is Canada in recession? Based on the above, not right now, but, it could be soon. Here are my tips on how to protect yourself from a recession.

It’s important to have an emergency fund

When a recession hits, you can get fired and the value of your investments can plummet. One of the best ways to protect yourself from financial distress or additional debt is to increase your emergency savings.

That way, even if there are unexpected expenses, or your income is affected, you’ll have a cushion to protect yourself and your family. I always recommend having an emergency fund that allows you to survive for a 6-month period.

Boost your employment prospects

When a recession hits, job security can be at risk. To safeguard your income, you should consider finding a side hustle in addition to your regular job. This can serve two key purposes—helping you grow your emergency fund and providing you with extra income.

You should focus on developing job skills that will help improve your chances of not being laid off. Time management, communication, and attention to detail are all important skills to focus on.

Budgeting

Look at your family household expenses. Cut back on anything that is not necessary spending. If necessary, use cash to pay for purchases and not a credit card. We tend to spend less when we have to count it out in cash rather than tapping or swiping a card.

That way your money will go much further. Remember, during a recession, cash is king!

Pay down debt

Do everything you can to pay down your debt before a recession hits. The more debt you have, the more of your money goes to interest payments. If you have variable rate loan debt, as the Bank of Canada continues to crank up interest rates, the cost of that debt increases.

If you have fixed-rate debt and it comes up for renewal time, say like your house mortgage, you will be forced to renew at a higher interest rate. So, by paying down debt, you are insulating yourself as best as possible against the negative effects of the recession on your outstanding debt.

The economy may or may not slip into a recession but based on what the economists believe, more likely than not, eventually, it will. Recessions can last for a long time, or they can end quickly. However, the more prepared you are, the lower your chances of suffering a prolonged financial shock in the aftermath.

You may also want to read 2 other Brandon’s Blogs:

Is Canada in recession? What if your debt is too much for you?

I hope you found this is Canada in 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.

is canada in recession
is canada in recession
Categories
Brandon Blog Post

ONLINE SPORTS BETTING: DISCUSSION IN ONTARIO IS ABOUT WHETHER IT COULD LEAD TO ALARMING ADDICTION

Private gaming websites that have gone through the province of Ontario licensing process are allowed to start taking wagers as of April 4, 2022. This new online platform marketplace is being run by iGaming Ontario, a subsidiary of the Alcohol and Gaming Commission of Ontario. Right now, online sports betting sites are the heaviest in advertising spending.

The Canadian government made single-game betting legal in Canada last summer, but Ontario didn’t fully open until 12:01 a.m. April 4, 2022. The province of Ontario is expected to generate about $800 million in total revenue this year from the online gambling market. Ontario with a population of approximately 15 million, is equal in size to the state of Pennsylvania, the fifth-largest state in the United States by population.

Who is responsible for monitoring online casinos in Ontario?

The Alcohol and Gaming Commission of Ontario is responsible for monitoring the new online casino market run by online casino operators. They were already monitoring the land-based casinos such as Casino Windsor run by Caesars Windsor, Fallsview Casino Resort in Niagara Falls and Casino Rama. Now they are in the online casino game too. They have a mandate to ensure that Ontario’s alcohol, gaming, horse racing and cannabis retail sectors operate with honesty and integrity, in the public interest. The federal government allowed for single-game betting and now the Ontario provincial government has implemented its licensing system for online sports betting.

The question now is whether online sports betting and other wagering sites will lead to an increase in gambling addiction. In this Brandon’s Blog, I explore the issue and describe why people who become insolvent because of addiction must be treated differently than others who have run-up debt.

online sports betting
online sports betting

Welcome to the exciting world of iGaming in Ontario!

Welcome to the exciting world of Internet gambling in Ontario! Here you’ll find all the hottest games and biggest jackpots, the most popular casino games, all just a click away! So come on in and start winning today!

The government of Ontario has officially launched its new online gaming market, which includes online casinos and esports betting sites. This marks the first time a Canadian province has run a private market for online betting, and predictions are that it could be worth billions of dollars.

The new regime in the province has raised many eyebrows and people are anxious to see how it will play out. The province has stated that it would like to bring some of the illegal, grey-market players into the fold by promising lower taxes (for the operators) and enforcing responsible gambling standards and anti-money laundering practices. This would, of course, generate new revenue from taxes.

What is the Ontario gambling age?

Both online sports betting and online casino gaming are available online in Ontario to anyone of legal betting age which is19 years or older. It didn’t take long for someone to bet on Ontario’s online sports betting industry.

PointsBet announced 50 seconds after the start that its “first big bet” in the province was Monday night’s NCAA men’s basketball finals in which North Carolina beat Kansas and the Toronto Maple Leafs beat the Tampa Bay Lightning.

Initially, 16 gaming operators, including sports betting operators, for each to become a provincially licensed operator to open operations in the province. More companies have registered with the Alcohol and Gaming Commission of Ontario, but have yet to reach an agreement with iGaming Ontario.

One is online game operator FanDuel, which signed a multi-year deal with TV station TSN. FanDuel will integrate with TSN across platforms, including in-game broadcasting, digital marketing, mobile apps and co-branding opportunities.

The service means that people in Ontario can now place bets on a wide variety of casino games, and sporting events, including single-event sports, betting, betting, and other gambling through online websites, smartphone apps and online casino apps that operate in the province’s regulated markets. The many gamblers in the province who have been active in the so-called “grey market” for years will find this appealing.

online sports betting
online sports betting

Is the Woodbine Casino available online?

But not everyone is excited about its launch. Jim Lawson, chief executive of Woodbine Entertainment, worries that the growing online sports betting market could have a detrimental effect on the horse racing industry and Woodbine Casino.

Woodbine, Canada’s largest bookmaker, has been unable to integrate its homogeneous horse racing business into legal online sports betting. “We don’t seek exclusivity, we don’t seek protection,” Lawson said. “We just want to be a part of it…all we’re asking for is having the operator host our product.”

“We knew almost from the beginning that they (sports betting platforms) were all very interested in horse racing, and if they wanted it, they had to buy it from Woodbine. That’s the premise that we’ve been pushing. And putting our content on their platform is a good thing for racing because that’s going to give it a huge exposure.”

Lawson hopes horse racing will soon be included in this newly competitive market of gambling sites with its wide range of betting options to allow the horse racing gambler to bet online, but he admits that being forced to do so after the game’s release isn’t ideal.

“I think it hurts us because we’re not on the starting line with everyone else,” he said.

Do online sports betting lead to gambling addiction?

The Ontario government of course hopes that everyone will only be involved in responsible gaming, but we all know that not everyone will. The early stages of the COVID-19 pandemic saw a shift from offline gambling to online gambling, including online sports betting, for many people. Offline gamblers became online gamblers. While most people see gambling as nothing more than a form of entertainment and will not be a seriously impacted gambler, the epidemic has led to an increase in gambling addiction.

Gambling addiction is a problem that is on the rise for women in the United Kingdom since the onset of the coronavirus pandemic. This addiction can lead to mental health problems, cognitive problems, relationship problems, and in some cases, bankruptcy and crime.

Unlike alcohol and drug addiction, gambling addiction does not have obvious physical symptoms or physiological manifestations. However, gambling problems have a huge impact. According to the latest estimates from the World Health Organization, players worldwide lost a total of $400 billion per year since 2016.

The current diagnosis of gambling disorder is based on the Diagnostic and Statistical Manual of Mental Disorders published by the American Psychiatric Association. Treatment and management guidelines for gambling disorders are being developed by the National Institute for Health and Care Excellence. Cognitive behavioural therapy and self-help groups are currently the most effective treatments for gambling disorders. These methods can help change thinking patterns and behaviours associated with gambling.

The key to addressing gambling disorders is early detection and treatment. This is essential in order to keep everyday activities enjoyable and prevent the brain’s reward system from being distorted.

If an addiction has taken over someone’s life, causing them to borrow money they can never repay, or divert money from family needs to feed their online sports gambling addiction, bankruptcy may be an option for them to get out of debt. However, a licensed insolvency trustee must deal with the bankrupt person whose causes of insolvency include addiction in a specific manner different than bankruptcies not caused by addiction.

online sports betting
online sports betting

Can you file bankruptcy for online sports betting debts?

People in debt because of addiction are usually dealing with personal loans, lines of credit, credit card debt, and maybe even income tax debt. They don’t have the money to repay and don’t have to repay your debts in full.

Filing an assignment in bankruptcy for gambling debts is possible, but it is not going to be easy. Different concerns must first be taken into consideration by people with gambling dependencies and financial obligations resulting from gambling.

The key issues are:

  • Your assets.
  • What is your annual income?
  • Have you ever been bankrupt before?
  • Full disclosure of all your debts, not just money owed as a result of gambling.
  • Have you been avoiding paying taxes because of gambling money?
  • Do you qualify for financial restructuring to avoid bankruptcy by filing a consumer proposal or a Division I proposal?
  • If you’re struggling with a gambling addiction, there are many resources and programs available to help you get the treatment you need. Gamblers Anonymous is one of the most well-known programs, but there are also many therapists and counsellors who specialize in gambling addiction who can help you in the long term.
  • To get a bankruptcy discharge, it is crucial for the person to show both financial rehabilitation as well as showing that their treatment is successfully stopping them from continuing to gamble. This involves the bankrupt revealing they have regularly attended therapy sessions and have ceased their addictive behaviour. They must also prove they are now capable of managing their finances responsibly.

Online sports betting: There are many other issues that need to be addressed besides just getting gambling addiction debt help

If you are insolvent and decide to file for bankruptcy, you will face several challenges.

Your non-exempt assets or equity in non-exempt possessions will be transferred to your Trustee. For example, if you own your marital residence with your partner, your share of the asset will be given to the Trustee and your partner will have to buy your interest back.

In a bankruptcy, if your regular income exceeds the poverty line, you will have surplus income to pay to the Trustee. If you have never been bankrupt before and have surplus income, you will have to make a regular monthly payment for 21 months before you can seek bankruptcy discharge. If you have been previously bankrupt, the 21 months becomes 36 months.

When the Trustee reports that your financial problems are due to a gambling addiction, they may try to block your discharge in bankruptcy. You will need to show not only that you have fixed your finances, but also that you have gotten help for your addiction. The Trustee has an obligation to make sure you have it as part of your overall rehabilitation.

online sports betting
online sports betting

Online sports betting, gambling addiction and getting a bankruptcy discharge

If you have a large unpaid income tax balance with the Canada Revenue Agency, they will likely oppose your discharge from bankruptcy. Your Trustee needs to oppose your discharge from bankruptcy if your bankruptcy is due to gambling. The facts that make it impossible to get an absolute discharge from bankruptcy are under the Bankruptcy and Insolvency Act (Canada) (BIA).

Section 172 of the BIA permits the Court to make an order of discharge which is either absolute, conditional, suspended, or even refused. The purpose of section 172.1 of the BIA is to prevent bankrupts who owe (1) $200,000 or more in personal income tax debt, and (2) at least 75 percent of all unsecured proven claims in the form of personal income tax debt, from receiving an automatic discharge from bankruptcy.

If a fact under s. 173 of the BIA is proven, the absolute discharge is not possible. The acknowledged fact that gambling addiction can bring on or contribute to bankruptcy is an s. 173 fact (BIA, s. 173(e)) that precludes an absolute discharge. This is why your Trustee would oppose your discharge from bankruptcy. The Court and Trustee require that any decision on your discharge maintain the integrity of the Canadian insolvency system. Your discharge will be contingent upon you paying a certain amount of money to your Trustee. A bankruptcy discharge suspension for a period of time after you pay the condition is also possible. If your behaviour was especially egregious, your discharge could be refused.

At the discharge hearing, you will need to demonstrate that you are taking active measures to end your addiction and are receiving counselling and therapy for gambling addiction. You will also need to show that your financial situation is improving.

Fantasy sports is one thing but an online sports betting addiction is real

I hope that you found this online sports betting Brandon’s Blog interesting. Among the countless problems that can arise if you have too much debt, you may also find yourself in a situation where you are seriously considering bankruptcy as a realistic option.

If you are concerned because you or your business are dealing with substantial debt challenges, whether you need online sports betting debt help or just plain old debt help and you assume bankruptcy is your only option, call me.

It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties with debt relief options as alternatives to bankruptcy. We can get you the relief you need and so deserve. Our professional advice will create for you a personalized debt-free plan for you or your company during our no-cost initial consultation.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow 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 understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do as we know the alternatives to bankruptcy. We help many people and companies stay clear of filing an assignment in bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need to become debt-free, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

online sports betting
online sports betting

 

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Brandon Blog Post

CERB CANADA: THE ENORMOUS DEBT PROBLEM NOW FACING CANADIANS

The Canada Emergency Response Benefit (CERB Canada) has been closed but is not over

The government is ramping up its efforts to verify CERB Canada eligibility for payments made under the Canada pandemic support program. Many Canadians have been told to return some or all of the funds received in the past. The Canada Revenue Agency (CRA) and Employment and Social Development Canada are working together to ensure that those who received COVID-19 pandemic individual benefits were eligible for them. CRA also announced that they are sending out Notices of Redetermination to Canadians who were ineligible for some or all of the CERB Canada benefits they received.

The CERB Canada benefit was rolled out quickly and there was a lot of confusion about who was eligible for it. It was created to help those in Canada who the COVID-19 pandemic directly impacted. The program provided financial assistance to employees and self-employed workers. The benefit was worth a maximum of $2,000 every 4-week period for up to four months.

The issue that troubles me is that the benefit was mostly paid to people who otherwise would not have been able to afford rent or food. The CERB Canada benefit money was spent immediately and a long time ago. So if CRA and Service Canada have now determined that some people should not have gotten that benefit, what are those people supposed to do if CRA demands the money back?

In this Brandon’s Blog, I discuss what the options may be for people who receive a demand for repayment of the CERB Canada benefit.

Who was eligible for CERB Canada?

To qualify for the CERB payment from the government support program, you must have met certain conditions during the period you applied. The Government of Canada stipulated the following eligibility criteria:

  • You did not look for or receive, CERB Canada or Employment Insurance benefits from Service Canada for the same qualification period.
  • You did not stop your work willingly on your own. You were forced to stop your work by someone else.
  • You are a Canadian resident who is at least 15 years old.
  • You must have earned at least $5,000 (before taxes) in the preceding 12 months, or in 2019, from one or more of the following:
    • job income
    • self-employment income earnings
    • benefits relating to pregnancy or parental leave from the province

The program was designed to help Canadian employees and self-employed Canadians who lost their jobs or saw a significant decrease in income due to the COVID-19 pandemic and the COVID-19 lockdown order resulting in business shutdowns. The program came to an end on December 2, 2020.cerb canada

Sending your CERB Canada payment back

If you have received a letter from Service Canada asking you to repay an overpayment, the CRA says you need to follow the instructions on the letter to return the payment.

You will have the opportunity to provide more evidence to support your claim that you were entitled to the CRA’s full CERB benefit payment. Based on your responses, you may need to repay the full amount you received.

If you received any CERB Canada payments and they now say you didn’t fit into the group of eligible workers, you have the option to pay back what you owe in full right now or over time. They expect you to repay it in full either way.

Now consider this. The federal government paid nearly $12 million in CERB Canada payments to more than 1,600 people with foreign addresses during the first seven months of the pandemic! How did that happen if one of the criteria of this program was you had to be a resident of Canada?

The way the CERB Canada benefit is taxed is by taking it out of your paycheque – wasn’t that enough?

The CERB Canada benefit was not a grant or any other kind of freebie. Anyone who received it had to include it in their taxable income. That is fair because the benefit was meant to replace lost income.

In April 2020, Prime Minister Trudeau announced that the Government of Canada would be taking extensive and decisive action to support Canadians and businesses who were struggling due to the COVID-19 global pandemic through an expansion of this program.

The Prime Minister went on to say that no Canadian should have to choose between protecting their health, putting food on the table, paying for their medication or caring for a family member. He said this is why the government introduced the CERB Canada Benefit, a taxable benefit.

There have even been CRA, Employment and Social Development Canada and court decisions confirming that the CERB Canada payments are taxable and that it was definitely not a free ride. The demand for repayment of benefits from Canadians who CRA and Service Canada now feel were not eligible workers seems totally anti-social. The program was rolled out hastily and under unclear, confusing circumstances, and Canadians have been paying income tax on the benefits they received. Surely our federal government has better places to spend its time clawing back wasteful spending.cerb canada

Mom was shocked when her maternity leave benefits were cut in half due to the CERB Canada benefit

A mother was shocked to see that her most recent parental benefits instalment had been cut in half. She said that maternity and parental benefits are paid to parents so they can take time off from paid work to do another kind of work: care work.

She was receiving half of her parental leave benefits for three weeks, which were already about half of her regular earnings. The reason for the reduction was because it was determined that the CERB Canada benefit she received for every four-week period, increased her income to the point where the reduction was warranted.

Then she received a demand for repayment. She hadn’t expected to have to repay the benefit. Shortly after the COVID-19 outbreak hit in March 2020, she was let go from her work because there wasn’t enough work to go around. She thought she qualified under the eligibility requirements for the CERB Canada benefit.

She couldn’t repay the full amount in one shot so she tried to arrange a repayment plan with CRA. She said that she had to fax about a dozen documents and field several questions from federal government employees to prove she is experiencing “financial hardship” in order to qualify for a payment plan. I don’t understand why payment plans have to be approved rather than just being automatically set up. These are not rich people that they are demanding repayment from, so why make them jump through hoops?

The British Columbia court has ruled that the CERB Canada payment must be deducted from the damage award for wrongful dismissal

Here is another example that the CERB Canada benefit is not a tax-free payment or a non-taxable grant. In Reotech Construction Ltd. v Snider, 2022 BCSC 317 the trial judge awarded the employee damages for a 4.5-month reasonable notice period and declined to deduct his CERB Canada payments.

After reviewing the case, the Supreme Court of British Columbia decided that the original trial judge was incorrect in choosing not to reduce the damage award by the $9,000 in benefits received. The court decided that these payments should be deducted from the award.

There was no indication that the employee would have to repay the CERB Canada benefit to the government. If the CERB payments are not deducted, then the employee would be in a better position than if there had been no breach of the employment contract. The employee would not have received the benefit if he had not been dismissed, making the benefit an indemnity for the wage loss caused by the dismissal.cerb canada

How to repay the CERB Canada benefit

If you received the CERB Canada and now find out that you did not meet the eligibility requirements, as shown above, you must repay the money. There are a few different ways that you can repay the amount demanded.

The easiest way to repay the CERB Canada amount is through your online service CRA My Account. You can log into your account and select “Repay CERB” under the “My Account” tab. If you do not have a CRA online account, you can repay the amount you owe either by sending a cheque through Canada Post to the CRA mailing address you can find online. You can also pay it at your financial institution using the government-issued remittance form.

But what if you are just one of the many hard-working Canadian workers living paycheque to paycheque? What if you do not have the money to repay what they say you owe, either all at once or by taking an amount out of each of your future paycheques that CRA will agree to?

What if you cannot repay because the government stepped up its efforts to verify CERB Canada payments and made demands on you?

As stated above, if you cannot afford to repay the full amount being demanded of you all at once, you can hopefully convince CRA that you deserve a payment plan over time due to “financial hardship”. This assumes that the government is right that you were not originally entitled to the amount that you received for the CERB Canada benefit. But what if you cannot afford to repay it at all, no matter what sort of payment plan you can enter into?

The outcome will depend on if you are insolvent. Being insolvent doesn’t necessarily mean bankruptcy. Insolvency (aka financial failure) is a financial condition that occurs when a person or company doesn’t have enough assets to pay off all debts if they were to be liquidated. It also means that the person or company has stopped paying their bills on time in the normal course.

If the person is NOT insolvent, they are expected to sell assets or use cash on hand to pay their bills.

If you’re insolvent, you can take advantage of Canadian insolvency legislation, the Bankruptcy and Insolvency Act (Canada) (BIA). The debt to repay the CERB Canada benefit is an ordinary unsecured claim that will be eliminated through a successful financial restructuring under either a consumer proposal or a Division I proposal. As a last resort, you could also file for bankruptcy.

I would rather refer you back to some of my earlier Brandon’s Blogs that go over the requirements for each insolvency option, rather than go through all of them individually here. They are:

  1. Consumer proposal –CONSUMER PROPOSAL TORONTO: THE COMPLETE #1 WAY TO ELIMINATE DEBT IN ONTARIO
  2. Division I Proposal –THE EASIEST WAY TO ACTUALLY LIKE WHAT IS A DIVISION i PROPOSAL ONTARIO
  3. Personal bankruptcy – BEYOND BANKRUPTCY SERVICES: OUR BEST PERSONAL INSOLVENCY FAQ 2 JUMPSTART YOUR FINANCIAL LIFE

CERB Canada: Canadian workers now under fire

In summary, CRA now says it’s “time to pay up” for Canadians who were paid the CERB Canada benefit during the pandemic. Although CRA has a right to claw back the amount if it is correct that the person was not eligible, what CRA’s insistence means for many Canadian workers is they now have to choose between paying back their CERB or paying for food, rent or medicine.

This is so ironic because the benefit payments were designed to help those people in making those payments when their incomes dried up. The amounts were taxed so the government earned income that way. Now they are causing unneeded stress and worry to the people they aimed to help.

I hope this Brandon’s Blog was helpful to you in understanding more about this problem now facing many Canadians. If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.cerb canada

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DEFAMATION TO CHARACTER: THE BANKRUPTCY INFORMATION YOU NEED TO AVOID PAYING A JOHNNY DEPP-AMBER HEARD EXPENSIVE JUDGMENT

What is defamation to character?

In Canada, defamation is any intentional or negligent false communication, whether written or spoken, that harms a person’s reputation or exposes them to ridicule, belittling, or contempt. The concept of defamation can have two possible parts; libel and slander. There is a distinction between libel and slander.

Libel is defamation either in writing or some other permanent form, while slander is defamation that is not left in a permanent way. Section 298(1) of the Canadian Criminal Code (R.S.C., 1985, c. C-46) defines a defamatory libel as any published material that is likely to injure someone’s reputation or make them the object of hatred, contempt, or ridicule, without lawful justification or excuse. Slander is more commonly associated with an oral statement. With slander, there generally will always be a fight waged between slander and freedom of speech.

Unless you have been living under a rock for the past few months, you have no doubt “heard” about, and maybe even followed, the sensational legal case of John C. Depp, II v. Amber Laura Heard. Amber Laura Heard was sued for defamation to character by Johnny Depp, who claimed US$50 million in damages, in a trial that began on April 11 and ended on June 1, 2022, in Fairfax County, Virginia.

Johnny Depp married Amber Heard in 2015, but their partnership has actually been shrouded in conflict since the beginning. Heard accused Depp of domestic abuse and they broke up in 2016. Their divorce was all settled in 2017. The jury’s ruling in favour of Johnny Depp ordered Amber Heard to pay the actor $15 million in damages for defamation. The seven-person jury also decided that Depp through his lawyer had defamed Heard on one of three counts in her countersuit, ordering him to pay $2 million.

Defamation in the Real World

Defamation is an act of harming the reputation of another person through a false statement or many of them. In the real world, defamation can lead to severe consequences, including damages to one’s reputation and livelihood. The criminal code and being found guilty of the criminal offence of criminal defamation is one thing. But in the real world, the possibility of imprisonment is not going to provide any real satisfaction to the wronged party. The way to get compensated for the suffered damages because of the defamation to character is to start a civil suit action for a defamation claim.

The jury awarded Johnny Depp $15 million in damages against Amber Heard for defamation to character, but she will only have to pay $10.35 million due to a Virginia law capping punitive damages. One little problem. According to her lawyer, Amber Heard does not have the means to pay $10.35 million in damages to her ex-husband Johnny Depp following their trial verdict in the defamation lawsuit.

After hearing of the verdict, it got me thinking. If this kind of award was handed down here from Canadian defamation actions, could the party who was found guilty of such defamation of character and now had a huge judgment against them, could they use the Canadian insolvency system to get out of paying that kind of judgment coming out of an action for defamation?

The answer is maybe! In this Brandon’s Blog, I take a look at defamation as one of the civil torts that someone would have a civil cause of action for. I then look at what would happen to the person who was found guilty in a civil suit for a defamatory allegation if they looked to the Bankruptcy and Insolvency Act (Canada) (BIA) to try to get out of paying that kind of judgment.

defamation to character
defamation to character

Does defamation to character, libel and slander judgment claim survive in a Canadian bankruptcy?

To see if a claim can be discharged through bankruptcy, we need to look at section 178(1) of the BIA. This section enumerates the debts that are not released by an order of discharge from bankruptcy. As you may recall from earlier Brandon’s Blogs, I have explained that it is not the bankruptcy itself that clears a person’s debts, it is the discharge from bankruptcy.

Notwithstanding that a discharge from bankruptcy is what clears out a person’s debts, the BIA lists several specific debts that cannot be released by an order of discharge. I looked at the list contained in section 178(1) and there is only 1 item that relates to judgment debts. That is section 178(1)(a.1) which reads as follows:

(a.1) any award of damages by a court in civil proceedings in respect of

    • (i) bodily harm intentionally inflicted, or sexual assault, or
    • (ii) wrongful death resulting therefrom;

A person’s bankruptcy discharge releases them from all claims provable in bankruptcy that are not listed in section 178(1). The question is, does Johnny Depp – Amber Heard type judgment awards for damages in defamation cases survive the bankruptcy of the party against who the judgment is?

In order for that claim to survive the person’s bankruptcy, the judgment creditor offended party would have to show that:

  1. the award of damages is for bodily harm; and
  2. was intentionally inflicted.

My research includes 3 court decisions that I believe clearly lay out how defamation to character judgment claims are handled in the Canadian bankruptcy context and whether such a claim survives a person’s bankruptcy. The cases are:

I will explain the main findings and general themes running through each case that seems to answer the question as to is defamation to character judgment claim is eliminated by a person’s discharge from bankruptcy? Put another way, if this was a Canadian case, could Amber Heard get out from under this judgment claim by filing either an assignment in bankruptcy or a restructuring proposal under the BIA?

I will focus on the bankruptcy aspect. The simple answer for a restructuring proposal under the BIA is that a successfully completed restructuring proposal would eliminate such a judgment claim. The real issue is what would happen in a bankruptcy.

defamation to character
defamation to character

Can I file defamation to character lawsuit against someone?

That is exactly what happened in Ross (Re). In the 2014 Saskatchewan Court of Queen’s Bench Ross (Re) decision, the question the Registrar in Bankruptcy needed to answer was “What is the appropriate disposition of the bankruptcy discharge application given the unique circumstances of this bankruptcy?” The Registrar started with the premise that it is more reprehensible to make a bankruptcy assignment with the purpose of avoiding a judgment creditor’s claim than to make a bankruptcy assignment to avoid general commercial debts.

The Registrar said that a bankrupt person’s civil judgment history may be relevant in deciding what conditions to put on that person’s bankruptcy discharge. The court determined that Mr. Ross filed for bankruptcy to avoid paying the creditor’s damage award under defamation laws. There were only two claims admitted in the bankruptcy for dividend purposes: the defamation judgment claim of $92,183 and a claim for $965.83 from a credit card issuer for a total of $93,148.83.

In this case, the Registrar did not look at all as to whether the judgment claim was of a kind that would survive Mr. Ross’ bankruptcy discharge. Rather, it was looked at only from what is an appropriate condition to place on Mr. Ross for his discharge from bankruptcy. The Registrar decided that a condition that Mr. Ross pays the amount of $34,000 or 37% of the proven claims in order to obtain his bankruptcy discharge.

Can you tell me how to file defamation to character lawsuit when the proposed defendant files bankruptcy?

This was not the main issue in this January 2019 British Columbia court decision in Burke v. Red Barn at Mattick’s Ltd. This case does not deal with defamation to character, but rather, is an analysis of section 178(1) of the BIA and particularly subsection (a.1) stating that any award of damages by a court in civil proceedings for bodily harm intentionally inflicted, sexual assault or wrongful death resulting therefrom cannot be discharged through bankruptcy proceedings.

As I previously stated, this is the section that a successful plaintiff who gets a civil judgment in defamation to character lawsuit would rely upon to have their debt survive a defendant’s bankruptcy. So the analysis this British Columbia court Judge goes through is instructive.

This case revolved around a proposed class action which stated that Mr. Schwabe, a former employee invaded the privacy of female employees by recording them without permission while they were changing in and using the restroom. The former employee then filed for bankruptcy, so the plaintiffs requested a declaration from the court to allow the plaintiffs to continue with their proposed class proceeding against him.

The BIA’s section 69.4 automatically halts any legal proceedings related to debts when an insolvency filing is made. No legal action to establish or collect a debt can continue or begin without the court’s permission. If a creditor thinks that a stay of proceedings would unfairly affect them, they can ask the court for a declaration that the stay no longer applies to them. The court can decide to grant this request if it feels that the creditor is likely to be disadvantaged by the stay continuing.

The Judge went through a thoughtful analysis of prior court decisions across Canada. The Judge acknowledged that an applicant under s. 69.4 must demonstrate to the court that at least one of these grounds is present:

  1. Actions for debts that cannot be discharged through bankruptcy.
  2. Actions involving complex, contingent, or unliquidated debts that cannot be valued by the Trustee alone under the BIA.
  3. Actions where the bankrupt party is necessary for complete adjudication of the matter involving others.

The Judge said that going ahead with proceedings after a bankruptcy filing is an unusual situation. He added that simply having a claim listed in the paperwork is not enough to merit an exemption from the stay. To be given an exemption, there must be convincing evidence, a reasonable ground, to show that there is a chance the claim could be successful.

The Court had to take many different factors into account when making its decision in this case. One was if the plaintiff group was successful in obtaining a judgment against the bankrupt individual, would the debt be one that a discharge would not be a defence against? The section we would look to for a judgment for a debt under defamation laws due to defamation to character is the same – “bodily harm intentionally inflicted”.

The damage award to be exempt from discharge under this part of s. 178(1) must be for bodily harm resulting from an act done with the specific intent to injure. The Court’s decision acknowledged that:

  • The non-consensual distribution of intimate images by the bankrupt carries with it the risk of psychological hardship and embarrassment to the victims of such crimes.
  • Some people who have had their private images shared online without their consent have committed suicide as a result.
  • The inferred impact of the distribution of intimate images on victims accordingly is substantial, and the moral responsibility of such offenders generally will be high.
  • Moreover, our courts recognize that via the internet the images can be forever available.

The plaintiffs stated in their affidavit evidence that they have suffered psychological harm as a result of the violation they have experienced. The Judge was content that s. 2 of the Canadian Criminal Code was a full answer that psychological harm is covered under s. 178(1)(a.1)(i) of the BIA. Section 2 of the Criminal Code explains “bodily harm” as “any hurt or injury to a person that interferes with the health or comfort of the person and that is more than merely transient or trifling in nature.” Therefore the Judge determined that it encompasses the emotional trauma and hurt the plaintiffs detailed in their affidavits.

The Judge found that the psychological harm suffered by the plaintiffs constituted “bodily harm” for the purposes of s.178(1)(a.1)(i), and that this harm was “intentionally inflicted” in the sense that the images were distributed with “specific intent to injure.” The Judge ruled that the plaintiffs’ case against Mr. Schwabe is a debt action, not one that he can be discharged from. If the plaintiffs are successful, they will be awarded damages for the intentional bodily harm inflicted.

Similarly, a successful civil lawsuit judgment for a debt arising from action under defamation laws resulting from intentional bodily harm inflicted would also survive the defendant’s bankruptcy.

defamation to character
defamation to character

Can I bring a claim for emotional distress?

This is a decision out of the Milton, Ontario small claims court. Obviously, the amount of money involved fits under the small claims court jurisdiction, but it resulted in a thoughtful 31-page decision from the Court. This is a cyberbullying case between two people who once lived in a common-law relationship.

This case included cyber libel claims. The wrongness lies in making her private, intimate personal life globally public by way of online video. This case too involves bodily injury intentionally inflicted and more specifically, the plaintiff’s mental health as a direct result of the defendant’s actions.

The Court determined that when it comes to the tort of intentional infliction of nervous shock, the law does not recognize any mental states that fall short of a provable injury. The requirements for this tort are:

  • The defendant’s conduct must have been extreme and outrageous.
  • The defendant must have intentionally or recklessly caused the plaintiff emotional distress.
  • The plaintiff must have suffered a visible and provable injury as a result of the defendant’s conduct.

Although small claims court in the Greater Toronto Area is limited to claims not exceeding $35,000, including the award, in this case, it is the care that the small claims court Deputy Judge took that impresses me. This case was only about actual damages and not punitive damages, hence the relatively The Deputy Judge stated that this court emphasizes that it is making an award of damages for bodily harm intentionally inflicted, in the event that any recourse is sought in future to the BIA and, more particularly, s. 178(1)(a.1)(i)).

This case, and the others, show that if the evidence is such that the damages were caused by intentional behaviour to inflict bodily damage, which includes a mental state that can be shown to be a provable injury based on the intentional conduct of the defendant, then that claim will not be discharged when the bankrupt obtains his or her discharge from bankruptcy.

What are the possible punishments for defamation to character?

As you can see, there could be both criminal and civil consequences for defamation to character. In the Johnny Depp – Amber Heard case, if it was Canadian and Amber Head filed for bankruptcy in order to avoid paying the judgment to Johnny Depp, assuming she had the ability to pay, that debt may very well survive her bankruptcy discharge. As outlined above, in order to survive, Johnny Depp would have to show that he has experienced bodily injury, which could include a real mental health disorder, as a result of the intentional acts of Amber Heard.

If so, like in 2 of the 3 above cases, Johnny Depp’s claim against Amber Heard for that defamatory matter would survive under section 178(1)(a.1)(i)) of the BIA.

defamation to character
defamation to character

What happens to a civil award for defamation to character in bankruptcy?

I hope this Brandon’s Blog on what would happen if the Johnny Depp – Amber Heard case and civil lawsuit judgment award was a Canadian case and then Amber Heard filed for bankruptcy to avoid paying the judgment for defamation to character. I hope it was helpful to you in understanding more about this type of debt arising from a defamatory statement which would survive the bankruptcy of a defendant like Amber Heard.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

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DEBT AND UNPOPULAR INTEREST RATE HIKES, HOW IS THE ECONOMY FARING?

What is the definition of debt?

Debt is the money that a person or company owes to others. That is the simplistic definition. It is really one of life’s most stressful parts. Some people grow up in debt. For them, it’s just part of their lives, and they can make it work. Others live from paycheque to paycheque and save little to nothing. For them, it is crippling and can consume their lives, making their existence a daily struggle. For others, it is a parasite, feeding on their mind and their body. It can destroy their life, pulling them down and limiting their options and choices.

Consumer debt and household debt come from a number of places. Some source of debt is from emergency situations, and some of it is from buying expensive things but useful and worth the cost. That is how people have viewed real estate over the last decade, especially during the unprecedented pandemic. However, I also see some situations where high levels are just from bad decisions.

Business loans and corporate debt come in handy for a number of reasons. Perhaps you need some extra cash to get your business up and running. Or, maybe you’re looking to expand your operations by opening a new branch or purchasing new equipment. In any case, a business loan can provide the funds you need to reach your goals. Or, like in the last 2 years, perhaps the bottom has fallen out of the economy due to the COVID-19 pandemic and in order to survive, the business has had to take on government-support loans to increase the business debt load substantially.

All of these are now coming together in a perfect storm, as the Bank of Canada attempts to battle inflation and high Canadian real estate prices by beginning a pattern of interest rate hikes.

In this Brandon’s Blog, I look at how interest rate hikes, higher Canadian household debt and more Canadian business bankruptcies are the most recent signs of the Canadian consumer debt burden, as well as the major indicator of the current state of business in Canada.debt

Policy Interest Rate – Bank of Canada

The Bank of Canada’s primary business is to conduct monetary policy for the Canadian economy. This means that the Bank uses its tools of monetary policy to try to hit its target for inflation, which it does by adjusting the Bank of Canada’s policy interest rate. The Bank of Canada’s policy interest rate is the rate at which it lends money to financial institutions.

At the beginning of March, the Bank of Canada increased its target for the overnight rate to 1%, with the Bank Rate at 1¼% and the deposit rate at 1%. This Fed interest rate hike was the biggest increase in two decades. The reason? To fight inflation.

The world’s biggest central bankers have long argued that ultra-low interest rates encourage spending and investment, helping to boost growth and employment. So at the outset of the pandemic with the world economies in tatters, all major central bankers, including the Bank of Canada, set borrowing costs at record lows. Those actions, amongst other things, contributed to the current state of inflation in the economy.

Macklem won’t rule out an inflation-driven, super-sized rate hike

The central bank predicts that inflation will remain high, averaging almost six percent in the first half of this year and remaining elevated in the second half of 2022. It is expected to ease in the second half of next year before returning to the two-per-cent target in 2024.

What are the factors causing this inflation? The global financial situation has become more difficult and unpredictable. Prices for oil, natural gas, and other commodities have risen sharply, contributing to inflation in many parts of the world. Supply disruptions resulting from Russia’s invasion of Ukraine have caused the prices of energy and other commodities to increase even further.

Looking to the future, Bank of Canada Governor Tiff Macklem stated that the Bank will be taking another 50-basis-point step which has already been baked into the financial markets. He believes that the economy needs higher rates and can handle them. It is evident that Macklem is dedicated to using Canada’s policy interest rate to bring inflation back to target. As inflation continues to surge to new highs, an even bigger interest rate hike may be on the horizon. Bank of Canada Governor Tiff Macklem indicated that further and faster rate hikes could be necessary to keep inflation in check.

The problem is that Canadian inflation is as much from a global impact as it is local. Raising interest rates may slow down home buying and mortgage growth. While it is true that mortgage debt is Canadians’ single largest obligation, increasing interest rates won’t fix the sky-high pricing at the gas pumps and the supermarkets.debt

As interest rates increase, so is household debt!

The latest figures from Statistics Canada, the agency responsible for collecting and disseminating statistics related to the economy of Canada, indicated that the total amount of household debt in the country increased by 0.5% in March 2022, up $14.4 billion to $2.69 trillion.

The increase of $13.2 billion came largely from debt related to the real estate market, such as mortgage borrowing and home equity lines of credit (HELOCs). This amount totalled $2.16 trillion outstanding. However, Statistics Canada also reported that credit card debt has increased for the second consecutive month, growing at a faster rate than mortgage debt!

Now as the Bank of Canada embarks on a hiking cycle that could go faster and further than before, and sky-high inflation squeezes household budgets, economists and capital markets are once again raising the red flag.

In a recent poll, 31% of Canadians polled say they already don’t make enough to cover their bills and required payments. Economists look at the rise in credit card debt and attribute it to a rise in personal spending. This is true. However, with prices rising much faster than wages, the increase could be a troubling sign that Canadians are spending on basics by using credit to replace the money they do not have and will not have to repay the new rising liabilities.

The rising cost of debt payments is already putting a strain on Canadians

If you’re borrowing money, interest is what you pay to your lender for using their money. It is your debt cost. If interest rates go up, the amount you have to pay each month for a mortgage, line of credit, or other loans with variable interest rates will increase. The minimum payment required each month on variable rate loan products will increase as interest rate hikes continue. At some point, you’ll also need to renew a fixed interest rate mortgage or loan. When interest rates are rising, the renewal rate on the fixed debt cost will be higher.

Raising borrowing costs to quell rising consumer prices may pose some risks, especially since Canada has a high level of household debt. In terms of household debt to income, Canada ranks 4th highest in the world.debt

What are the most effective ways to reduce your debt?

Paying down debt as much as possible will help counter the effects of a rise in interest rates and provide you with much-needed debt relief. Here are some of the best ways to reduce your debt burden thereby improving your credit score and credit rating:

  • Cut up your credit cards and only use cash for an extended period of time until things are back in control.
  • Make a budget and stick to it.
  • You should have an emergency fund to pay for unexpected expenses arising from external events out of your control.
  • Create a payoff plan. Look at your various categories of debt and make a plan that is most realistic for each type of debt.
  • Save money on interest by paying down the outstanding amount with the highest interest rate first.
  • Debt consolidation. Consolidate your liabilities with the highest interest rates into a single loan with a lower interest rate. By keeping your payments the same, and paying more than the monthly minimum payment, you’ll be able to pay it off faster and save money in the long run.
  • Avoid getting the biggest mortgage or line of credit that you’re offered.
  • Get a part-time job or begin a side hustle to boost your income.
  • Think first about how borrowing more money could impede your ability to save for future objectives.
  • Speak to a financial advisor or one from a wide variety of other financial professionals to find out how to teach you how to create a plan to be debt-free.

What will happen now with external debt and business bankruptcies?

As businesses continue to experience insolvencies, it’s important to note that the Canadian business bankruptcy rate is on the rise, according to a recent report by Statistics Canada and the Office of the Superintendent of Bankruptcy Canada. This increase underscores the importance of taking measures to protect your business from financial hardship.

Business bankruptcies in Canada increased by almost 34 percent year-over-year in the first quarter of 2022, which some experts warn could be the start of a growing wave of failures. This is closer to pre-pandemic levels. The number of business bankruptcies and proposals increased in the first quarter of 2022, with 807 cases compared to 733 in the previous quarter and 603 in the first quarter of 2021.

Business bankruptcies in Canada are increasing as government support comes to an end and businesses face a difficult post-pandemic recovery with high costs, supply chain problems and a shortage of workers. The financial support provided by the government through the COVID-19 pandemic assisted in delaying the surge in bankruptcies. Funding sources are becoming more expensive also.

Small business owners are feeling increased pressure from inflation in comparison to the average Canadian. With each budget line costing more, filing for bankruptcy is often the only option left. The data doesn’t capture the number of insolvent businesses that are forced to close without any formal filing, but the trend is now becoming evident.

Do you think that debt levels and bankruptcy filings will surpass pre-pandemic levels?

The state of the economy and how inflation and supply chain issues are managed will determine if the number of bankruptcy filings will rise in the coming months or not. As you can see, inflation, supply chain issues, interest rate hikes, household debt problems, business owners searching for more solutions and business bankruptcy filings are all now coming together in a perfect storm.

I hope this Brandon’s Blog on the current state of Canadian interest rates, household debt and business bankruptcies was helpful to you in understanding more about the corporate bankruptcy system in Canada.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.debt

 

 

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CORPORATE BANKRUPTCY FAQ: USE OUR HACK TO SOLVE YOUR CHALLENGING INSOLVENT COMPANY ISSUES

Corporate bankruptcy: An overview

Corporate bankruptcy is a legal process by which businesses can reorganize their financial affairs or liquidate their assets. Although bankruptcy can be complicated and stressful, it can provide businesses with a fresh start.

When it does happen, the corporate bankruptcy process can be complicated. Insolvency can take a toll on your company’s employees, customers, and shareholders. A solid understanding of corporate bankruptcy can help you properly restructure and reorganize your company using an insolvency process without killing your business.

Last week, I gave my best FAQ answers to common questions about personal bankruptcy services. A business partnership or sole proprietorship means that the individual(s) operate the business in their personal name. Answers about business bankruptcies for those forms of business would fall under the personal bankruptcy process that was covered in last week’s personal bankruptcy FAQ blog.

When a corporation conducts business, some of the questions, and answers, are different. In this Brandon’s Blog, I answer the most frequently asked questions about corporate bankruptcy.

Can a business declare corporate bankruptcy?

As stated previously, only a corporation can declare corporate bankruptcy. A corporation is its own legal entity. A “person” is eligible for relief under federal bankruptcy law. A “person” is typically defined in the Canadian bankruptcy legislation to include an individual, part of a partnership, a proprietorship, a company, an unincorporated association, a cooperative society, or a cooperative organization.corporate bankruptcy canada

What are the different types of corporate bankruptcy in Canada?

There are 2 different types of bankruptcy that a company can file for under the Bankruptcy and Insolvency Act Canada (BIA). They are:

  1. Liquidation: This is when the insolvent company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay its secured creditors and unsecured creditors as best as possible since it files for bankruptcy in the priority outlined in the BIA.
  2. Restructuring: This is when the company is insolvent and is incapable to repay its debts due to its financial difficulties, yet all or a sufficient portion of the company’s business is still viable. So, the company negotiates brand-new terms with creditors to lower its financial obligations and also might have the ability to sell some assets to settle its financial debts. Restructuring is the most well-known alternative to bankruptcy. Restructuring under insolvency legislation is also described in the media as bankruptcy protection.

What factors lead to corporate bankruptcy proceedings?

A company always shows signs of trouble before it needs to file for corporate bankruptcy. Some of the early danger signals are:

  • continued history of losses;
  • dwindling cash position;
  • the departure of key management or employees;
  • difficulty meeting loan or lease obligations;
  • the breaking of loan covenants; and
  • difficulty meeting payroll.

Corporate bankruptcy: What does it mean for a company when it liquidates?

As stated above, when a company liquidates it means that the company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay secured creditors and unsecured creditors as best as possible through bankruptcy and then shut down.corporate bankruptcy canada

What happens to debt in corporate bankruptcy?

If the purpose of the corporate bankruptcy is to shut down and have liquidation of business assets, then we first need to see what the net proceeds of sale from those assets are. The BIA describes the order in which funds must be distributed by a licensed insolvency trustee (formerly called a bankruptcy trustee) in bankruptcy. The order in which the debts must be repaid, in whole or in part, is called the priority.

The priority of the rights of creditors to be repaid in a corporate bankruptcy is:

  1. Trust and deemed trust claimants – These are parties whose property is being held or is deemed to be held in trust for them by the bankrupt corporation. The most common type of deemed trust claim in a corporate bankruptcy is Canada Revenue Agency for unremitted employee source deductions.
  2. Secured creditors – Creditors who hold valid security over the assets of the company get paid next. There could be more than just one secured creditor. Within the secured creditor group, the order of priority is based on the ranking of the security registration dates.
  3. Preferred creditors – These are unsecured creditors who have been given certain priority in a corporate bankruptcy under federal bankruptcy laws. The most common examples in a corporate bankruptcy would be Trustee fees, the Trustee’s lawyer’s fee, the levy payable to the Office of the Superintendent of Bankruptcy Canada on any distribution made by the Trustee to a creditor and certain salary, wages or commissions due to employees.
  4. Ordinary unsecured creditors – This group comes after the preferred creditors. They are all creditors who have supplied goods or services and do not hold any security and do not fit into the definition of a preferred creditor.

The balance of any unpaid debt ends up getting written off on the books of the creditors because there are no assets left in the company to claim against.

How does a company get into corporate bankruptcy and what happens to the company?

The way a company gets into bankruptcy is the exact same way an individual can. For a liquidation, either the company can file a voluntary assignment into bankruptcy. If it is one or more creditors owed at least $1,000 trying to push the company into bankruptcy, then they would file a Bankruptcy Application with the court requesting the court to make a Bankruptcy Order.corporate bankruptcy canada

Why might a company choose to file for corporate bankruptcy protection and restructure under a BIA proposal?

Corporate bankruptcy protection and restructuring under a BIA proposal can provide a company with financial difficulties a much-needed relief and a chance to return to profitability. When a company files for protection, the BIA proposal offers an orderly and reliable process for restructuring, which can be appealing to businesses that have a good chance of a turnaround.

A corporation that has a viable business and can return to profitability after restructuring, with support from creditors, has all the right ingredients for a successful restructuring. This is why a company might choose to file for corporate bankruptcy protection and restructure under a BIA proposal. The company will survive and jobs will be saved.

Who is responsible for developing the reorganization plan for the company?

Reorganization is the restructuring of a business to gain efficiency, improve workflow, and drive profits. Reorganization plans vary in length and detail and take a certain period of time to properly develop. They generally describe desired outcomes and final goals. Sometimes a company will undergo a complete reorganization, while other plans focus on aspects that require reorganization, such as a business unit or department.

The reorganization plan of a company is essential to ensure its smooth transition. The reorganization plan involves restructuring various departments of the business, reducing operational costs, and streamlining the workflow. Writing a reorganization plan requires a lot of time, effort, and money.

When a business downsizes, it reduces its workforce to a smaller number. Such a reduction can be a painful process that even threatens to collapse the business. The company needs to have a plan in place to accomplish this reorganization while still running the business. When downsizing occurs, businesses require reorganization plans. Involving and informing employees of the process makes them more likely to follow new plans and less resistant to change.

All of the various individual department organization plans and product sales plans need to be combined into an overall business plan. This overall business plan must also include financial information to show how the company, emerging from restructuring, will operate profitably.

Now that the overall plan is set, senior management must work with its outside financial and legal restructuring professionals to establish the restructuring commercial proposal or plan of arrangement to be presented to the creditors to be voted upon. An excellent communication program must be put into place so that creditors can understand the benefits to them of supporting and voting in favour of the restructuring proposal. Normally negotiations with certain creditors or creditor groups must take place in order to come up with a final and successful restructuring plan that will gain both creditor support and pass through the legal proceedings of court approval.corporate bankruptcy canada

What becomes of a corporation after corporate bankruptcy?

Going through corporate bankruptcy means your company’s assets have been sold to pay off some portion of its debts. Bankruptcy also by operation of law terminates all of the employees. So the corporation is left with no assets and no employees. All it has is debt and a deficit equal to the total debt less the amount that is shown on the balance sheet for the company’s preferred and common stock.

Therefore, the corporation, as a legal entity, is then left to just float away into the stratosphere. There are only 2 ways that a company can survive a corporate bankruptcy:

  • from the sale of the corporate assets, pay off 100% of all of its business debt plus interest; or
  • file a BIA proposal, obtain creditor support and court approval and successfully complete it.

The first way will almost never happen. The second way can happen if there is a good reason to try to make sure that the corporation as a legal entity survives. A reason for doing this might be that there is value to the shares. After becoming bankrupt, a successfully completed proposal annuls the bankruptcy. By definition, the proposal will discharge all of the company’s outstanding debt. The company is now debt-free.

The common stock may have value because it is a public company and the shares can be relisted on the stock exchange. Now the corporate shell is attractive to a private company that wishes to go public and can do so by amalgamating with this public shell. Alternatively in a private company, or in a public company, there may be significant tax loss carryforwards available for use if this corporate shell is merged with the right kind of profitable company. the only way to use the tax losses is first by owning all the shares.

This is all possible, but, the normal outcome for a company that has gone through a corporate bankruptcy is just to fade away, never to be heard from again.

When a company declares corporate bankruptcy, what will happen to your stock or bond?

When you invest money in a company by investing your capital, your money is legally represented by the stock or bonds that you purchased. When you see a company declaring bankruptcy, it means the company can no longer afford to pay its debts.

If a company just liquidates its assets during corporate bankruptcy, the existing shares will likely be worth very little or nothing at all. For a private company, a successful corporate restructuring might increase the value of the shares as the company will emerge from its restructuring with much less debt than before.

The value of a company’s shares is most likely to lower if it effectively restructures its financial affairs. It might have to issue brand-new stock to creditors that will not be paid back in full, watering down the value of the business’s shares.

As far as corporate bonds are they secured or unsecured against the company’s assets? If secured, they could be repaid in whole or in part depending on where they stand in the secured assets pecking order. If unsecured, then it just becomes part of the larger unsecured creditor pool. In a corporate bankruptcy that is a liquidation, those bondholders will receive their share of any distribution made by the Trustee to the ordinary unsecured creditors if there is such a distribution made.

Corporate bankruptcy and insolvency at a glance

In conclusion, bankruptcy and insolvency of course go together, although many people prefer to think of bankruptcy as an economic failure while insolvency is more accurately a sign of a business’s financial failings.

In the same way I hoped last week’s personal bankruptcy blog helped your understanding, I hope this Brandon’s Blog on corporate bankruptcy was helpful to you in understanding more about the corporate bankruptcy system in Canada.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

CLICK HERE TO GET THE FREE HOW TO CLOSE YOUR BUSINESS WITHOUT BANKRUPTCY OFFER
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BEYOND BANKRUPTCY SERVICES: OUR BEST PERSONAL INSOLVENCY FAQ 2 JUMPSTART YOUR FINANCIAL LIFE

Bankruptcy services and FAQ information

Bankruptcy is a last resort for Canadian individuals, entrepreneurs and companies looking for a debt solution. However, bankruptcy services are just one of the available options we canvass with you to provide the opportunity to rebuild your financial affairs and your life.

I help people and senior company management understand bankruptcy and the other options available to rebuild their life. Frankly, bankruptcy is always the last option and hopefully in most cases, can be avoided.

In this Brandon’s Blog, I provide my best FAQ answers to common questions about personal bankruptcy services. The answers below will contain all the information you need to know. So here we go. In the future Brandon’s Blogs, I will talk about corporate bankruptcy services in addition to personal and corporate restructuring as alternatives to bankruptcy services.

Bankruptcy services: Who files for bankruptcy and why?

Many people who are considering looking into the need for the bankruptcy process may feel alone and lost. This is because they may not know anyone who has gone through the same thing, making them feel like they have no one to talk to about it. Bankruptcy can be very scary and intimidating, especially if you feel like you’re the only one experiencing financial difficulties.

Financial problems affect people from all walks of life and all income levels. It doesn’t discriminate, affecting married and single people alike, regardless of age. Seniors and those just starting out in life, consumers and companies are all susceptible to needing bankruptcy services.

The Office of the Superintendent of Bankruptcy Canada (OSB) keeps insolvency statistics. It used to be affiliated with a part of the federal government called Industry Canada. Now it is part of what is called Innovation, Science and Economic Development Canada. The OSB has not yet released the 2021 annual insolvency statistics. In 2020 99,244 insolvencies were filed in Canada. This was a 29.5% decrease in insolvencies filed with the OSB in 2020 compared to 2019. This is the largest annual decrease ever. The decrease can be largely attributed to the outbreak of COVID-19 and the various emergency response measures that followed.

The number of consumers filing for insolvency decreased from 137,178 to 96,458, while the number of businesses filing for insolvency decreased from 3,680 to 2,786. The proportion of proposals among consumer insolvency filings increased from 60.3% to 65.9%.

There are two things to remember from these statistics:

  1. You are not alone. Many people face financial difficulties.
  2. There are options available for avoiding bankruptcy services.

    bankruptcy services
    bankruptcy services

Bankruptcy services: Can bankruptcy clear debt in Canada?

Most outstanding debt owed to unsecured creditors is cleared not by a person filing for bankruptcy, but by that person receiving their absolute bankruptcy discharge.

Even after bankruptcy, some debts still need to be paid. This includes a student loan if it has been less than 7 years since you stopped being a student, alimony and child support, fines and penalties imposed by the court, and any debts due to fraud.

Also, any secured debts, such as a registered car loan or mortgage against real estate are not discharged by a bankruptcy – either personal bankruptcy or corporate bankruptcy.

What debts cannot be discharged through personal bankruptcy services in Canada?

See the section “Bankruptcy services: Can bankruptcy clear debt in Canada?” directly above.

Bankruptcy services: How much debt must you accumulate in order to file for bankruptcy in Canada?

The minimum amount of unsecured debt needed to file for bankruptcy in Canada is $1,000, as stipulated by the Bankruptcy and Insolvency Act (Canada) (BIA). In addition, the person, partnership or company must also be insolvent. Bankruptcy is a legal process. Insolvency is a bad financial situation.

Bankruptcy services: What debts are not erased in bankruptcy?

See the section “Bankruptcy services: Can bankruptcy clear debt in Canada?” directly above.

bankruptcy services
bankruptcy services

Bankruptcy services: What are the three types of bankruptcies?

There are several ways I could answer that question. For example, there are:

  1. Personal bankruptcy is also sometimes referred to as consumer bankruptcy.
  2. Small business bankruptcy. This would mainly be for a proprietorship or partnership.
  3. Corporate bankruptcy – small or large companies.

Another way of answering the same question would be:

  1. Voluntary bankruptcy – an assignment in bankruptcy being filed by the person or company.
  2. Involuntary bankruptcy – a bankruptcy happening because one or more creditors issued a bankruptcy application resulting in a bankruptcy order.
  3. Bankruptcy protection is not bankruptcy at all. It is a financial restructuring performed by a licensed insolvency trustee. The Office of the Superintendent of Bankruptcy Canada maintains a searchable list of individuals licensed to act as a licensed insolvency trustee in Canada.

My final way of answering the same question is:

  1. Consumer proposal – This is a financial restructuring under the BIA to avoid bankruptcy for a person who owes $250,000 or less not including any debts secured against the person’s principal residence.
  2. Proposal – This is a financial restructuring under the BIA to avoid bankruptcy for a person who owes more than $250,000 (not including any debts secured against the person’s principal residence) or for a company with any amount of debt.
  3. Financial restructuring under the Companies’ Creditors Arrangement Act – This is what the media calls bankruptcy protection in order to restructure and avoid bankruptcy. To qualify to file under the Companies’ Creditors Arrangement Act statute, the company must have a debt load of $5 million or more.

All of the above bankruptcy services can only be administered by a licensed insolvency trustee (formerly called a bankruptcy trustee or trustee in bankruptcy), but they are not all bankruptcy.

I guess these are really 9 types!! It all depends on how you wish to look at it.

Bankruptcy services: What are the consequences for your assets when declaring bankruptcy?

A bankruptcy does not mean you have to give up all your assets. There are rules about bankruptcy exemptions in bankruptcy law. Also, every province/territory has laws that say what assets you can keep and how much equity you can have. These types of assets are called exempt assets. There are certain assets that you are allowed to keep that are not accessible to your creditors during a bankruptcy. These assets are exempt under federal law, provincial law or both.

In order to understand what exempt assets are in bankruptcy in Ontario, we must first look at the BIA. Section 67(1) of the BIA addresses the bankruptcy exemption issue specifically. It outlines what property of the bankrupt is available to creditors does and does not include.

Property that is not included is:

  • Property that is held in trust by the bankrupt for any third party.
  • Assets that are not subject to seizure under provincial law.
  • Payments to the bankrupt are made under a program that can be described as social assistance provided by the federal or provincial government.
  • Retirement Savings Plans – The bankrupt’s RRSP (other than for the total of payments made in the 12 months before bankruptcy) or RRIF cannot be touched even in bankruptcy.

As mentioned before, one type of asset that cannot be seized during bankruptcy is any property that is protected under provincial law. In Ontario, the amounts prescribed for exemptions are outlined in the Ontario Execution Act.

These exemptions include:

  • Household furnishings and household appliances – $14,180.
  • Tools and other personal property used to generate income:
  • Exemptions for farmers, being a debtor engaged exclusively in cultivating the soil or farming (and therefore it is that farmer’s principal source of primary income), $31,379 for livestock, fowl, bees, books, tools and implements, and other chattels ordinarily used by the debtor; $14,405 for any other case.
  • $7,117 for a motor vehicle.
  • $10, 783 for a principal residence.

Since these exemptions are provincial, you need to look at provincial/territorial laws for other jurisdictions in Canada.

bankruptcy services
bankruptcy services

Bankruptcy services: What are the implications of personal bankruptcy on retirement plans?

There are 4 main ways Canadians save to live comfortably in retirement. They are:

  1. The principal residence.
  2. RRSP..
  3. Investments.
  4. Private pension plan.

#1 – The principal residence and bankruptcy

For many Canadians, their house is the biggest investment they make and the majority of their savings are tied up in it. Owning a home makes people more confident about their financial future.

If the owner of a home becomes bankrupt, either through an assignment in bankruptcy or bankruptcy order, the debtor’s equity in the home is an asset for the licensed insolvency trustee to sell. The exception is if the home is fully encumbered so that there is only $10,783 or less of equity (in Ontario) in the home.

If the bankrupt is a joint owner, then the Trustee only has access to the bankrupt’s interest, which would be half the equity.

The loss of wealth from the sale of the house or the encumbrance of the house will make it take much longer to build back the equity by paying off the mortgage(s). In the case of joint ownership, the natural purchaser would be the non-bankrupt spouse or partner who owns the other half. The person would likely have to take on more debt to buy the equity from the Trustee.

The loss of wealth as a result of bankruptcy can mean having to work longer than originally planned. This is one way that bankruptcy can affect retirement.

#2 – Your RRSP and bankruptcy

It is the rare debtor that seeks an insolvency option and has a significant amount in their RRSP. This is notwithstanding that a creditor cannot seize your RRSP funds in Ontario.

If you think about it, if you have a 7-figure RRSP and a 6-figure total debt, then you are not insolvent. To be eligible to use the Canadian insolvency process, you must meet certain conditions, one of which is being insolvent.

The only amount of your RRSP that is affected by bankruptcy is any contributions made to the RRSP in the 12 months before the bankruptcy happened. That amount is subject to seizure by your Trustee. Rather than seizing that amount from your RRSP, the Trustee will require you to pay that amount to the Trustee for the benefit of your bankruptcy estate.

Not having a sizeable RRSP to start withdrawing at retirement obviously will affect your retirement plans.

#3 – Bankruptcy and investments

People who are able to save for retirement invest their money to make it grow in addition to an RRSP and principal residence. Investments such as stocks, bonds and mutual funds are very typical. There are two general ways these investments can be held: (i) investment in funds maintained by a life insurance company naming a designated beneficiary (either a spouse or blood relative); and (ii) investments held with your broker.

If you have investments through a contract of insurance and you name your spouse, child, parent, or grandchild as the beneficiary, then those investments are exempt from seizure in Ontario. If you file an assignment in bankruptcy will not have any effect on these investments, and you will be able to keep them. Therefore, this will not affect your retirement plans.

If your investments are through the brokerage arm of your bank, then your investments can be seized in Ontario. These investments will be lost in your bankruptcy and this will affect your retirement plans. If your spouse or partner purchases your interest in these investments from the Trustee, then whatever debt the purchaser had to take on to buy them may affect retirement plans.

#4 – Bankruptcy and a private pension plan

Not everyone in Canada has a private pension plan through their employer. Individuals who are self-employed certainly don’t have it. Having a private pension plan can relieve some of a person’s financial worries as they head toward retirement.

In Ontario, private pensions are protected from seizure and therefore not available for the Trustee. However, if you are already retired and are receiving the private pension income, that income is taken into account when calculating any surplus income payments you may have to make to your Trustee.

bankruptcy services
bankruptcy services

How bankruptcy services work in Ontario: What is the average length of time for a person to be discharged from bankruptcy in Canada?

To be discharged from bankruptcy in Canada can differ based on whether it is a first or second bankruptcy, and whether the bankrupt has any surplus income contributions to make. For a first-time bankrupt it can take 9 months (no surplus income) -21 months (with surplus income contributions). For a second time or more bankruptcy, it takes 24 months (no surplus income) to 36 months (surplus income).

Bankruptcy services: Surplus income

Surplus income is not an ideal term to describe the extra money an individual has. Many people would not feel they have surplus income, especially when they are dealing with debt. However, in the bankruptcy context, surplus income refers to a calculation that determines how much money a bankrupt individual must pay into their bankruptcy estate for the benefit of their creditors.

When you file an assignment in bankruptcy or have a bankruptcy order made against you in Canada, your monthly income is taken into consideration. To have what is supposed to be a practical standard of living during the bankruptcy period, the Office of the Superintendent of Bankruptcy Canada establishes a standard on an annual basis.

The earnings criteria are adjusted for inflation each year and based on information collected by Statistics Canada. Your licensed insolvency trustee decides how much you pay by making monthly payments into your bankruptcy estate each month based on these standards.

It is really the Canadian poverty line that is established by the Office of the Superintendent of Bankruptcy Canada. Regardless of where you reside in Canada, there is no difference between an expensive city as well as a remote area. Just the most fundamental demands of individuals in addition to members of the family are considered.

Bankruptcy services: Debt problems got you down? Feeling overwhelmed?

I hope this Brandon’s Blog on personal bankruptcy services was helpful to you in understanding more about the personal bankruptcy system in Canada.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

bankruptcy services
bankruptcy services

 

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Brandon Blog Post

LEGAL PROCEEDING JUDGMENT LIEN: 2 KINDS OF JUDGMENT LIENS WITH HUGELY DIFFERENT RESULTS IN BANKRUPTCY

In Canada, there are several options in what you can do when someone owes you money and you do not hold any security against any of their property. First, a person or company should obviously make one or more demands on the party that owes them the money before starting any legal proceeding.

If that proves to be unsuccessful, your next steps will probably be governed by how that creditor reacted to your demand. Did they just ignore you or did they put up either a false or somewhat valid dispute to your claim?

One possible next step is that you can retain a lawyer to make a demand to collect the money owed. If those initial efforts to collect payment prove unsuccessful, your lawyer can begin a legal proceeding against the person or company you believe owes you the money. If your legal action is successful in proving your case in court, you will receive a judgment against the party. One option is you can then take this judgment to a debt collector to try to collect on it.

In this Brandon’s Blog, I first explore several issues surrounding being a judgment debtor, having a judgment debt to collect and what happens if the judgment creditor files for bankruptcy? As the title of this Brandon’s Blog suggests, there are 2 kinds of judgment liens and in bankruptcy, the results are very different.

So I first look at what it means to get a judgment and what happens to a judgment creditor and the judgment debt if the debtor files for bankruptcy. To do this, I look at a recent decision from the Court of Queen’s Bench of Alberta which looks at the 2 kinds of judgments in detail.

If you are having financial difficulties collecting a debt from another person or company, you may need legal assistance. If the other person (or their lawyer) refuses to pay, then you can take a legal proceeding to collect the money you are owed.

If you are owed money by someone, your lawyer will want as much information as possible before starting any legal action. The first step is to collect as many details and supporting documents as you can about the debt. Make sure you have a comprehensive overview of the debt, including the amount owed, the name of the debtor, and any relevant deadlines or timelines.

Next, collect the name, address, and phone number of the individual or company who owes the debt – the debtor. Finally, make sure that your proposed legal proceeding is going to be handled for the person or company who is actually owed the debt – the creditor. You need to be precise in who the legal proceeding is against and who it is for.

Finally, make sure that your proposed legal proceeding is going to be handled for the person or company who is actually owed the debt – the debtor. You need to be precise in who the legal proceeding is against and who it is for.

Your lawyer will take the first step of issuing a demand letter to the debtor who owes you money. The letter will most likely threaten that your lawyer will begin a legal proceeding by filing a lawsuit on your behalf if the debt is unpaid after a specific number of days or weeks. If you win, you now have the amount owing as a proven judgment debt.

legal proceeding
legal proceeding

The law in Ontario prevents anyone from beginning a legal proceeding against you for debts that you owe that are over 2 years old. This law is called the Limitations Act, and it applies to any debts that you owe, even if the creditor stops trying to collect the debt.

The Ontario Limitations Act establishes a maximum timeframe within which court proceedings relating to a “claim” may be initiated. In general, someone has 2 years from the time they either knew or ought to have known, that they had suffered a loss or damages as a result of an action or omission on your part.

In general, debt is uncollectible and you cannot be sued on it after 2 years have passed from the time the debt went into default resulting in the party’s claim against you. This result has even been extended to Canadian insolvency proceedings where a creditor files a proof of claim. If there is no judgment, and the claim is over 2 years old, that debt may very well be statute-barred in Ontario and the licensed insolvency trustee would have to disallow that claim.

A judgment is the result of a successful legal proceeding against one or more parties in order to prove the existence of a debt. Getting a judgment made by a provincial court is just the first step. Now the money must be collected. A judgment claim can then be registered against a debtor’s personal property or real property to become a judgment lien. A successful plaintiff in their legal proceeding, now a judgment creditor, would do this to secure payment of the debt. A lien is a method of ensuring payment of money owed by registering against a debtor’s property as security.

The lien arising from a legal proceeding judgment can be properly registered to attach as a security interest in either personal property or real property. Examples against personal property would be:

  • to garnishee wages;
  • obtaining funds from a bank account or non-exempt investments; or
  • amounts to be paid in the future, such as the accounts receivable of a business from various customers.

When it comes to real property, if the judgment debtor is a property owner, a registered judgment lien attaches to the real estate just like a mortgage if properly registered to secure amounts payable.

In Ontario, if you wanted to register a judgment lien against a judgment debtor’s personal property, you would do so under the Ontario Personal Property Security Registration System.

legal proceeding
legal proceeding

What are the judgement proof laws in Ontario?

Being judgment proof means that creditors cannot take your assets if you cannot pay what you owe. The first way this could be is because the only assets you have are the type that is exempt from seizure under provincial law. The Ontario Execution Act stipulates which assets are exempt from seizure.

The second way you may be judgment proof is that your non-exempt assets are fully encumbered by secured loans, such as mortgages and lines of credit, and that there is no value in your property for anyone else, including the judgment debtor. So if you’re judgement proof, your assets are safe from seizure.

If you’re judgment-proof in Ontario, then you don’t have to worry about having your assets seized. However, you will have to learn to live without a bank account, as cash in the bank is not an exempt asset. You also need to be the type of person who doesn’t worry.

You can’t be the type of person who worries about unsatisfied judgments against them or their credit rating taking a hit because of that. You have to plan never to own any non-exempt property in your name because that can be seized.

The non-judgment proof debtor can take action as soon as judgment is given

What if the judgment debtor is not judgment proof but the judgment renders them insolvent? In that case, the assets owned by the judgment debtor are insufficient to pay off the judgment and all of the other debts of the judgment debtor in full. Therefore that judgment debtor may very well need to look at an insolvency proceeding to deal with their debts. Depending on their debt load, they may have to consider either a consumer proposal or a full restructuring proposal or even bankruptcy. Each of these insolvency proceedings is conducted under the Bankruptcy and Insolvency Act (Canada) (BIA).

This is the introduction to the court decision I will now discuss from MNP Ltd v Canada Revenue Agency, 2022 ABQB 320.

At the beginning of Brandon’s Blog, I said that there are two types of judgment liens with very different outcomes in bankruptcy. The Alberta court decision released on May 3, 2020, supports this view. The Reasons for Judgment of the Honourable Mr. Justice M. J. Lema are quite clear and well-reasoned.

The issue that the court had to decide on was “What does a writ of enforcement’s “binding interest”, acquired on registration against a debtor’s land, mean after the debtor’s bankruptcy?”. The fact that the Canada Revenue Agency (CRA) and Royal Bank of Canada (RBC) are respondents, hopefully, gives you a clue as to the 2 kinds of registered judgment liens against a judgment debtor.

The licensed insolvency trustee argued that the pre-bankruptcy priority arising from that interest continues after bankruptcy, that the Trustee acquires that priority position on the debtor’s bankruptcy, and that, on behalf of registered writ-holders (and, in fact, all unsecured creditors). The Trustee further argued that it can assert the binding interest and resulting priority position against a down-title secured creditor (here, CRA) and a secured-against-personal-property-only secured creditor (here, RBC).

Unfortunately, the Trustee’s position as Trustee in the bankruptcy of the judgment debtor was incorrect, according to the Honourable Mr. Justice M.J. Lema. From here on, I will refer to the judgment debtor as the bankrupt.

The key facts are that, before bankruptcy, various registered judgment liens/writs of enforcement were done against various of the bankrupt’s lands. Those writs included writs in favour of the CRA for unpaid taxes and associated amounts. The CRA writs were registered after most or all of the other writs.

The bankrupt was also indebted to the RBC, which held a general security agreement giving it a security interest in all of the debtor’s present and after-acquired personal property. After bankruptcy, via both foreclosures and trustee-initiated sales, various proceeds were harvested from the debtor’s lands.

legal proceeding
legal proceeding

How does CRA get a judgment against a tax debtor? CRA can take its assessment of the taxpayer to Federal Court without notice to the taxpayer or anyone else. Before this happens, CRA has already sent the taxpayer the notice of assessment and if it was not appealed, tried to collect the money. If the taxpayer fails to pay, then CRA’s lawyer through the Department of Justice can go to Federal Court to get the judgment. The judgment that CRA obtains is called a “memorial”.

Read together, s. 223 of the Income Tax Act (ITA) and s. 87 of the BIA clearly provide that:

  • if the Crown registers a memorial against a property in the land titles office
    under ss. 223(5) and (6), it is an ordinary judgment creditor by statute; however,
  • subsection 223(11.1) deems the memorial to be a secured claim in bankruptcy, provided that the requirements of s. 87(1) are met.

There is no ambiguity.

The Trustee acknowledged that, on bankruptcy and per the combined effect of ss. 223(11.1) of the ITA and ss. 86 and 87 BIA, CRA is deemed to be a secured creditor in the bankruptcy. However, the Trustee argued that CRA’s secured position is subordinate to any writs that were registered before the memorial was registered. The court shot down that argument so there is no need to go through the Trustee’s rationale for making it.

By virtue of the ITA, CRA not only has a secured claim but gets to leapfrog everyone else – for sure judgment lien creditors but also prior registered secured creditors registered in the land titles office against the bankrupt property owner. This assumes that the registration is done in the proper land titles office.

The CRA memorial registered against any parcels of land is the first kind of judgment lien. As you can see, Parliament intended that CRA gets a priority secured position ahead of everyone else upon the bankruptcy of the taxpayer landowner. Ahead of not just anyone with a judgment or construction lien, but also any prior registered secured creditors, normally mortgagees.

This takes care of the 1st type of a registered judgment lien in bankruptcy. CRA’s judgment lien moves into a #1 deemed secured lien position if the judgment debtor goes bankrupt.

The court’s analysis proves that the 2nd type of judgment lien, being that of an ordinary judgment creditor does not retain any special status. The judgment creditor is an unsecured creditor and the fact that they registered a judgment lien before the judgment debtor filed for bankruptcy means nothing.

The possibility of a judgment lien-enforcement sale of land or building by the judgment creditor in question or other judgment creditors is effectively eliminated once the debtor is bankrupt. The same is true for a sale of land or building or other disposition of the debtor’s assets by the debtor him-, her-, or itself, regardless of the purchase price. The Trustee is installed to realize the debtor’s non-exempt assets and make sure the creditors are paid, in priority according to the provisions of the BIA.

What is the significance of a judgment lien’s binding interest after the debtor becomes bankrupt? The answer is none.

If there is no bankruptcy, a judgment lien’s binding interest has been interpreted to mean that it:

  1. anchors the judgment creditor’s right to seek a sale of the property;
  2. protects that creditor’s position against sales or other dispositions (e.g. mortgaging or charging) of the property by the judgment debtor; and
  3. provides that the creditor will get actual notice and can share in the proceeds of any legal disposition of the property, such as a writ-based sale by another enforcement creditor, a foreclosure, or a sale by the owner.

A registered judgment lien holder’s binding interest does not make it a “secured creditor” under the BIA. This means that the holder’s interest is not equal to or equivalent to a mortgage or other security against the property for a debt that is due or accruing due. So with the bankruptcy of the judgment debtor, all registered judgment lienholders are merely ordinary unsecured creditors. They have no special rights and can only expect to receive a distribution from the bankruptcy estate once any deemed trust, secured and preferred claims are paid in full, subject to the levy of the Office of the Superintendent of Bankruptcy.

The Trustee tried to argue that the judgment creditors who registered against the real properties of the bankrupt company somehow retained their priority position against each other based on their respective dates of registration. The court decided that this could never be the case. Rather, the BIA prescribes how their ordinary unsecured claims are treated.

The Honourable Mr. Justice M.J. Lema confirmed in his decision that this 2nd kind of judgment lien has no priority of any kind once the judgment debtor is bankrupt. Whether the bankrupt is a man, woman or corporation, the answer is still the same.

legal proceeding
legal proceeding

The judgment debtor’s bankruptcy changed the priorities landscape. The binding interests stemming from judgment lien registration against one or more parcels of land were undercut. Judgment lien creditors other than CRA were relegated to waiting and watching the Trustee gather and sell the assets, regardless of what period of time it takes.

Under that scheme, secured creditors are given priority over unsecured creditors, regardless of their position before bankruptcy. In this case, both CRA (via its deemed security interest against real property) and RBC (via its GSA against personal property) are secured creditors. According to the BIA, they must be paid in full before the unsecured creditors (both preferred and ordinary) are entitled to receive any money.

I hope this Brandon’s Blog on a successful legal proceeding leading to a judgment was helpful to you in understanding more about the 2 kinds of judgments and how they are treated very differently in bankruptcy. It does not matter if it is a personal bankruptcy or corporate bankruptcy.

If you or your company has too much debt, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

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legal proceeding
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DECLARING BANKRUPTCY: REAL ESTATE COMPANY LOSES CHALLENGE ON CORPORATE BANKRUPTCY APPEAL

Declaring bankruptcy: Business insolvency

When the corporate finances are such that the business has an insufficient cash flow to cover its operating expenses and pay its debts when they come due, these financial difficulties create the financial condition of insolvency for the business. Another indicator of insolvency often exists at the same time: if you were to sell all of the company’s assets, you would not be able to raise enough money to pay off its outstanding debt.

Medcap Real Estate Holdings Inc. (Medcap) is an Ontario corporation that owns certain commercial real estate. Medcap’s principal, through other companies which he owns or controls, operates various fitness facilities.

Several creditors made a bankruptcy application to the Court to wind up Medcap’s business through a corporate bankruptcy. In December 2021, the Judge released his decision to issue a bankruptcy order and place the company in the legal position of bankruptcy. Medcap appealed the decision to the Court of Appeal for Ontario.

In this Brandon’s Blog, I discuss the two ways there are for declaring bankruptcy and highlight the reasoning of the Court of Appeal for Ontario in dismissing this company’s appeal for its corporate bankruptcy.

Declaring bankruptcy: An overview of corporate bankruptcy

In Canada, a company is a separate legal entity from its shareholders or Directors and Officers. So a company can go into corporate bankruptcy, as opposed to a person entering personal bankruptcy, also known as consumer bankruptcy. There are two ways a company (or a person) can go bankrupt.

The first way is that a company (or person) files for bankruptcy by filing an assignment in bankruptcy with a licensed insolvency trustee. This is called a voluntary assignment into bankruptcy. The second way, which is what happened to Medcap, is that they are pushed into bankruptcy.

To push a limited company (person) into bankruptcy, one or more creditors, each owed at least $1,000, make a bankruptcy application to the court. The application will include a sworn affidavit from the people with knowledge of the situation providing evidence as to why the company (the person) is insolvent, what acts of bankruptcy the business (person) committed within 6 months preceding the date of the application and requesting that a bankruptcy order be made against the debtor.

Regardless of the types of bankruptcy proceedings that may be involved, these are the only two ways for companies with crippling debt to become bankrupt. It is either voluntary or an involuntary one.

declaring bankruptcy
declaring bankruptcy

Declaring bankruptcy: Types of Corporate Bankruptcy

A company that ends up declaring bankruptcy may be doing so for a variety of reasons, all of which relate to significant financial losses. In Canada, there are two primary types of bankruptcy filings under the Bankruptcy and Insolvency Act (Canada) (BIA).

Once the company is insolvent and no longer viable, declaring bankruptcy in order to have liquidation of assets and end the business in that legal entity is the next step. In this situation, there may be certain business debts that are also a personal liability of the corporate Directors. Unremitted source deductions and HST and unpaid wages and vacation pay fall into this category.

Bankruptcy is a tricky topic. Many people tend to fear it, thinking of it as the end of the road. Given my description above of bankruptcy being for liquidating the company assets, that is understandable.

But what about the company that is insolvent but the business is very viable if the bad parts are cut out? In this kind of situation, filing under the BIA using the restructuring provisions of this federal statute, or for larger companies, the Companies’ Creditors Arrangement Act (CCAA), is a legal way for the company to restructure its debts to get its finances back in order. In a successful restructuring, the good parts of the business are restructured and preserved, the company’s finances are right-sized and most if not all jobs are saved. This form of declaring bankruptcy is what is referred to in the media as bankruptcy protection.

So in Canada, declaring bankruptcy is one type, but declaring bankruptcy protection is also possible. That is why I suggest in Canada, there are 2 types of business-specific options in corporate bankruptcy filings.

Declaring bankruptcy: Does corporate bankruptcy affect personal assets?

The legal separation of personal and corporate assets is clear. However, a company declaring bankruptcy may have an impact on the personal assets of certain people. There are situations where personal assets may be at risk. If you are concerned about your personal assets, you should consult with a legal professional to assess your individual case.

Before making any business or investment decisions, is when you should get that professional advice. Once a corporate bankruptcy filing has been made, it will be too late to properly plan for that situation. Personal assets could be at risk if it is a bankruptcy liquidation and not a successful restructuring.

Examples of when personal assets may be at risk because of business bankruptcies include:

  • the entrepreneur who had to give a personal guarantee of certain corporate debt financial obligations to the company’s primary secured creditor lender and in a liquidation of the company’s assets, the lender suffers a shortfall;
  • there is not enough money left over from the liquidation after any trust claims and secured creditor claims to pay the outstanding wages and vacation pay so the Directors’ personal assets may be at risk;
  • the liquidation value of the assets is essentially zero so the Directors are called upon by Canada Revenue Agency to repay any unremitted employee source deductions or HST amounts;
  • in bankruptcy liquidation, there is generally nothing available to repay investors or shareholders so the money an individual investor or shareholder loses certainly affects their personal assets and personal property. The stock of companies that liquidated their assets after declaring bankruptcy is worthless; and
  • any creditors that are unincorporated, being either a proprietorship or partnership who lose some or all of the amounts owed to them as ordinary unsecured creditors clearly affect the personal assets of those business owners.

Declaring bankruptcy: The Medcap case

With this discussion of corporations declaring bankruptcy, there are some interesting points to be learned from the Medcap appeal case and the bankruptcy process. The application judge dismissed the bankruptcy applications of all but one of the applicants. He issued the bankruptcy order and appointed the licensed insolvency trustee (formerly called a trustee in bankruptcy or bankruptcy trustee) which began Medcap’s administration of bankruptcy.

The Medcap company appealed the bankruptcy order on only one ground; the judge who made the original order failed to exercise his discretion on whether or not to dismiss the application. Medcap did not appeal the application judge’s finding that the prerequisites to the making of a bankruptcy order – a debt owing to an applicant of at least $1,000 and the commission of an act of bankruptcy within six months of the commencement of the application – had been met!

The most interesting part of the Court of Appeal’s decision is the discussion of the two factors that a court could look at where a judge could exercise discretion to justify refusing an otherwise proven bankruptcy application.

declaring bankruptcy
declaring bankruptcy

Declaring bankruptcy: Appealing a bankruptcy order

As mentioned previously, Medcap did not contest the judge’s conclusion that the creditor whose bankruptcy application was allowed had met the requirements under s. 43(1) of the BIA. This is that Medcap owed them a debt exceeding $1,000 and that Medcap committed an act of bankruptcy within 6 months before the filing of that bankruptcy application.

The application judge found that Medcap had failed to pay that creditor’s debt, for which a judgment was issued, despite demands. This is defined as an act of bankruptcy in s. 42(1)(j) of the BIA. In its appeal, the Medcap company argued that, even though the debt and the act of bankruptcy were proven, the application judge made a mistake by not using his discretionary power under s. 43(7) of the BIA to dismiss the application.

Medcap made three arguments to support its appeal: (i) that the trial judge erred in finding that Medcap was unable to pay its debts; (ii) that he erred in finding that the application was brought for an improper motive; and (iii) that he erred in finding that the bankruptcy order would serve no purpose.

Let’s see what the Court of Appeal for Ontario said about this.

Declaring bankruptcy: Unable to pay its debts

This is the first of the three bankruptcy issues that the Court of Appeal looked at. Medcap argued that the application judge dismissed the applications of all applicants but one because there was potential that they were not creditors. Medcap also stated that the application judge had not taken into account that Medcap had reached a settlement with the one creditor whose application was allowed to be heard. Medcap submitted that the application judge erred in not taking this into account as there was no debt owing because of the settlement and the payment of that settlement.

The appellate court found that the lower court judge did not err in rejecting Medcap’s argument. An application for bankruptcy is not solely for the benefit of the applicant creditor, but for the rights of creditors, ALL creditors. Further, the arrangements between the applicant creditor and the debtor will not be able to justify the withdrawal or dismissal of a bankruptcy application, unless the court is satisfied that the debtor is solvent and that other creditors will not be prejudiced by the withdrawal or dismissal.

To be able to pay debts as set out in the BIA, the evidence must be provided for all debts owed, as well as the debtor’s ability to pay them. In other words, the debtor must prove that they are solvent. Medcap did not provide such evidence. Therefore this ground of appeal was dismissed.

Declaring bankruptcy: Bankruptcy application for improper motives

Medcap argued that in cases where a creditor has an ulterior motive for filing a bankruptcy application, this can be sufficient cause for dismissal of the application. The Court of Appeal said that the existence of a motive is a question of fact, and the application judge considered and rejected the suggestion that there was such a motive in this case.

The Court of Appeal found that the application judge was within his rights to reject the argument based on the record. Therefore, the Court of Appeal for Ontario found no justification to interfere and dismissed the appeal on that ground.declaring bankruptcy

Declaring bankruptcy: There is no purpose for this bankruptcy

Medcap argued that the application judge erred in failing to find that no purpose would be served by bankruptcy. He ought to have dismissed the application on the basis that there was nothing to be gained by making a bankruptcy order.

The Court of Appeal emphasized that safeguarding creditors is crucial to insolvency proceedings. A debtor who has (a) committed an act of bankruptcy by not paying debts when they come due, and (b) failed to provide evidence to the court demonstrating the ability to do so, carries the burden of proving that bankruptcy would be pointless. The judge was correct in finding that Medcap had not met that burden.

The three-panel judge went on to say that, in order to demonstrate that there is no purpose for the Medcap bankruptcy, they would need to show that a better result would be achieved for creditors if it were allowed time to restructure under the commercial proposal provisions of the BIA or the provisions of the CCAA.

Medcap did not argue that doing either would have the requisite creditor support but rather suggested that leaving it up to them would be best.

The three appellate court judges hearing this case unanimously rejected Medcap’s appeal, upholding the lower court’s ruling and allowing the bankruptcy process legal proceedings to continue. At this point, the licensed trustee named in the bankruptcy order begins administering the bankruptcy legal process.

Declaring bankruptcy: The final word

What fascinated me most about this case was the nerve of Medcap to argue that the application judge should have declined to make the bankruptcy order, regardless of all the evidence against it.

The Court of Appeal for Ontario soundly rejected the appeal of the bankruptcy order being issued after analyzing the bankruptcy application process in Canada. It concluded that only a real possibility of a successful restructuring under either the BIA or CCAA to avoid bankruptcy liquidation would be a reason to do so.

I hope this Brandon’s Blog on the Medcap case was helpful to you in understanding more about declaring bankruptcy, corporate bankruptcy and how the Ontario court would decide if it was appropriate to issue a bankruptcy order. Hopefully, you have also gained insight into how a corporate bankruptcy decision is made and how a successful corporate bankruptcy protection filing and restructuring can be beneficial.

We understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

declaring bankruptcy
declaring bankruptcy
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