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2021 GLOBAL SUPPLY CHAIN CRISIS: HOW THIS TERRIBLE CRISIS CAUSED A DELICIOUS QUADRUPLING OF OUR LIQUIDATION RECOVERY

supply chain crisis
supply chain crisis

As the COVID-19 pandemic continues, we hope that you, your family, and your friends are safe, healthy, and secure. Ira Smith Trustee & Receiver Inc. is fully operational, and both Ira and Brandon Smith are readily available for phone or video consultations.

The audio version of this Brandon Blog can be found at the bottom of this page. Please click on the play button to listen to it.

What is a supply chain?

The supply chain refers to the facilities that enable a product and all the material it requires to be manufactured to move from one place to another.  Depending on the product and its complexity, the product or its materials can pass through multiple locations.  The supply chain operated smoothly for a long time.  Then the COVID-19 pandemic and its effects on the economy struck.

This Brandon Blog discusses the current global supply chain crisis and its impact on our recent auction liquidation sale.  You might be surprised at the outcome.

 Snarled supply chain:  First was the Suez canal supply chain crisis

This crisis was caused by Ever Given, a 400-meter-long (1,312-foot) container ship that ran aground in the Suez Canal, Egypt, on March 23, 2021.  Throughout the Suez Canal and around the Cape of Good Hope, billions of dollars in cargo were delayed due to the incident. Worldwide container shipping was impacted by five percent.  Those Mediterranean ports that rely on the Suez Canal would again face cargo backlogs if the canal were to be cut off in the future.

Piraeus handled 5.4 million containers last year, making it the biggest freight port in the Mediterranean and the fourth largest in Europe, according to research firm PortEconomics.  The incident has now been resolved, but it shed light on the vulnerability of how raw materials, components, and finished products are transported through chokepoints such as the Suez Canal, which may have severe implications when blocked.

As soon as the ship was freed, traffic resumed and container ships continued on their voyages.

supply chain crisis
supply chain crisis

Supply chain crisis:  Port congestion in Los Angeles and Vancouver

The global supply-chain crisis is evident everywhere, from half-empty shelves in grocery stores to soaring fuel prices at the pump.  Because container ships were anchored off the coast, waiting to dock and unload, San Pedro Bay near Los Angeles and Burrard Inlet just outside the Port of Vancouver were the poster children for the global supply chain crisis.

Global manufacturing and transportation systems are impacted by changes in supply and demand.  Transportation prices have increased as a result of the huge demand for container shipping, and ports have found it difficult to process incoming goods.

Global supply chains have been disrupted by the COVID-19 pandemic, resulting in product shortages, shipping delays, manufacturing disruptions, and soaring prices that have sparked inflation concerns.

In addition, companies face an increase in labour and manufacturing costs, forcing them to decide whether to pass on the increases to customers – and possibly lose market share – or absorb losses themselves.

Raw materials, parts, and consumer goods are at risk because global supply chains are at their breaking point.  It has become more difficult to operate at certain ports and terminals because vessel capacity is very limited and empty containers are hard to find.

The initial lockdown resulted in employees getting laid off. Now there are labour shortages.  These line operators are now hard to hire back because many have now got better-paying jobs at other companies.  There is even a shortage of truck drivers to deliver the goods from the major ports to the warehouses.

The USA’s largest container port, Los Angeles, continues to unload a backlog of container ships around the clock.  However, when this machinery is broken, we can experience being out of goods and experiencing back-ordering, which means we cannot get what we want when we want it.

Due to the crowded docks and port terminals, truckers couldn’t return empty containers and pick up loaded containers scheduled for delivery.

Global supply chain crisis: Shoppers need to start early for the holidays

There are product shortages everywhere. Nutella, a shortage of semiconductors has resulted in a shortage of new cars, steeply higher gas prices, and backorders for holiday gifts such as toys, books, and furniture due to major disruptions in the global supply chain.

Holiday shoppers are warned not to leave their holiday shopping until the last minute because the shelves may be empty.  Presently, there are shortages of the most popular items and stores cannot replenish their inventories for this holiday season.

What is the cause of this?  People bought more goods online during the pandemic lockdown, but fewer services.  Except perhaps take-out food delivered to our house, it is much harder to purchase services online.  The lockdown also affected manufacturing and transportation, resulting in a global supply chain crisis.

Just-in-time music stopped and fragile supply chains stopped moving, causing the supply chain crisis.  Due to startup problems, it is now impossible to get everything working smoothly again.  With the lockdown over, there is also pent-up demand and consumers wanting to make the holidays normal again by getting out shopping in-person to satisfy the elevated demand.

So what does all this have to do with a liquidation?  I will tell you shortly, but first, I will explain what liquidation of a company really means.

supply chain crisis
supply chain crisis

Involuntary vs. voluntary liquidation of a company

Liquidating means selling your property or assets for cash or cash equivalents on the open market.  Liquidation in the world of investing is when an investor closes out their position in a securities position; exiting an investment.  The process of liquidating a business or distributing its assets to claimants is termed liquidation in finance and economics.

Most people on the street would say that a liquidation process is the sale of business assets, either because the business owner is closing or going bankrupt.  It is possible for businesses to do a partial liquidation of slow-moving or unnecessary assets even without facing financial hardship.

When a limited company‘s liabilities exceed its assets, or when its bills cannot be paid when they fall due, the company is insolvent.  It will be forced to liquidate the assets through insolvency proceedings.  Financial institutions are normally secured creditors. This allows them to enforce their security through receivership.  The assets that were pledged as collateral would be taken over by a receiver, whether appointed privately or by the court.

A corporate bankruptcy filing is also an alternative, or perhaps in conjunction with a receivership.  Either way, the entity is forced to convert assets to cash and cease operations through insolvency proceedings, a legal process.

A company that fails to repay creditors due to financial hardship, will end up in receivership and/or the bankruptcy process.  This results in compulsory liquidation, also known as involuntary liquidation.

Alternatively, the shareholders of a non-insolvent company may decide there is now a period of time where winding up operations through voluntary liquidation proceedings makes sense.  Perhaps there was an insurmountable shareholder dispute, or maybe the company’s operating genius shareholder passed away.

Besides providing the capital to start the company, other shareholders were passive.  As a result, the shareholders may decide to wind down the solvent company on their own volition while there is still value for them.

Paying off creditors

In either case, after assets have been liquidated, the cash is distributed to creditors first.  The shareholders are entitled to the remaining net amount after paying liquidation costs and creditor claims.

Regardless of whether the company is insolvent or solvent,  in general, the priority of claims from an asset liquidation tends to fall into the following classes of claims:

  1. Trust claims  – either by contract or statute.
  2. Secured creditors.
  3. Ordinary preferential creditors.
  4. Ordinary unsecured creditors.

After full payment of all outstanding debts from the liquidation of assets in their priority of claims, regardless if it was voluntary or through insolvency proceedings, the remaining funds will be distributed to the shareholders according to their share priority (preferred vs. common) and the proportion of shares they own in the company.

supply chain crisis
supply chain crisis

2021 global supply chain crisis and my liquidation story

I have so far only focused on consumer buying patterns.  A similar process is occurring in the commercial and industrial sectors as well.  As more people have received the Covid-19 vaccine, federal government support has essentially stopped and economic growth is coming back, it is difficult for businesses to find the inputs needed to make their products.  This is the basis for the story I am going to tell you.

Shareholder resolutions appointed my firm as Liquidator of two sister companies under section 193(1) of the Ontario Business Corporations Act.  A furniture manufacturer specializing in custom contract orders for commercial use.  The other company owned the factory property.

As a result of an unresolved shareholder dispute, the shareholders decided that the best thing to do was to liquidate the solvent manufacturing company, while they could still obtain value for themselves.  Having made that decision, it was obvious that selling the Toronto property was also a wise move in today’s market.

The manufacturing company had operated for over 50 years.  The company’s equipment was fully depreciated.  We contacted two auctioneers who each submitted a proposal.  Each explained why they predicted a low gross recovery.  Both proposals were presented to the shareholders, who chose the auctioneer they preferred us to retain.

An online auction was conducted for two weeks.  Initially, neither the number of bidders nor the bids were very high.  After about a week, the magic happened and we saw a surge in demand.  The consequences of the supply chain crisis became apparent. As the number of bidders increased, so did the bids.

We ended up with a gross recovery last week that quadrupled both auctioneers’ estimates.  There was no doubt that the old equipment and delivery truck, which all worked fine, were in great demand.  In fact, the vehicle’s black book value was much lower than its actual sale price.

Nevertheless, if you need that kind of truck and equipment and dealers do not have either new or used available, then historical trading values may be somewhat meaningless when there is only one available source.

Without a doubt, we are thrilled with the results of the liquidation auction.  As soon as the buyers pay for their goods and pick them up, we will have a clean factory so that we can close the sale of the property next month.

Thank you, global supply chain crisis 2021!

Supply chain crisis summary

I hope you found this supply chain crisis Brandon Blog informative. Is your company or are you personally in financial distress and a debt crisis? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement? Do you need to find out what your debt relief options and realistic debt relief solutions for your family debt are? Is your company in financial hot water?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government-approved debt settlement plan to do that. It is an alternative to bankruptcy. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

As the COVID-19 pandemic continues, we hope that you, your family, and your friends are safe, healthy, and secure. Ira Smith Trustee & Receiver Inc. is fully operational, and both Ira and Brandon Smith are readily available for phone or video consultations.

supply chain crisis 

Categories
Brandon Blog Post

TRUSTEE IN BANKRUPTCY ONTARIO: THE BEST MODERN RULES FOR GETTING PAID

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Trustee in bankruptcy Ontario introduction

One of two reasons led you to this page:

  1. you regularly read my Brandon Blog; or
  2. you typed in a search term something like “bankruptcy trustee Ontario“, “licensed insolvency trustee Ontario“, “insolvency trustee Ontario,” “trustee in bankruptcy Ontario” or a variation of these terms.

The bankruptcy process is one of several insolvency options available to the honest but unfortunate debtor in Canada to try to get back to financial stability.

Trustee compensation is charged in one of two distinct ways.  It depends on the type of insolvency proceeding, as I will explain below.  Trustees are sometimes only permitted to charge a relatively fixed fee, known as a “tariff”.  Trustees cannot charge time-based fees in such cases.

On other occasions, the Trustee will charge the individual levels of staff by the hour. To charge time-based remuneration, the remuneration must be approved by the court.  This is called taxation.  All of this is governed by the Bankruptcy and Insolvency Act (Canada) (BIA), which is a federal government statute.

I discuss an unreported case from Ontario in this Brandon Blog, which was the topic of a webinar I attended this week.  The first thing I will do is lay the groundwork, followed by a story of how a trustee in bankruptcy Ontario did not get the entire fee being requested upon the taxation of its accounts.

Trustee in bankruptcy Ontario:  What is a Licensed Insolvency Trustee?

Individuals and businesses with debt problems can seek advice and services from licensed insolvency trustees, a federally regulated profession.  It used to be called a trustee in bankruptcy Ontario to refer to an insolvency trustee licensed in Ontario.

What can a trustee in bankruptcy Ontario do for you?  Depending on your needs, he or she can provide you with an array of options including alternatives to bankruptcy.  Government-regulated insolvency proceedings are the only Canadian government-approved way through which you can be discharged of your debts.

You can trust that, when you hire a trustee in bankruptcy Ontario, you’re dealing with someone who has demonstrated that they possess the knowledge, experience, and skills that are required to be licensed by the Office of the Superintendent of Bankruptcy (OSB).

The insolvency system in Canada is regulated by the federal government.  The OSB oversees an insolvency trustee and mandates that they adhere to federal standards of practice such as the Code of Ethics for Trustees.  If you are unable to resolve a problem with a trustee in bankruptcy Ontario, you can file a complaint with the OSB. All complaints are reviewed and assessed.

trustee in bankruptcy ontario
trustee in bankruptcy ontario

Trustee in bankruptcy Ontario and the OSB:  Who can act as trustee in bankruptcy Canada?

According to Canada’s Bankruptcy and Insolvency Act (BIA), the OSB oversees the administration of bankruptcy and receivership proceedings. It also has some responsibilities regarding the restructuring of large companies covered by the Companies’ Creditors Arrangement Act (CCAA).

Under each of these Canadian statutes, a person, business, or company experiencing financial difficulties may be discharged from most of their debts.  Insolvency cases must be administered by a licensed insolvency trustee.  On the OSB’s website, you can find contact information for all of Canada’s licensed insolvency trustees.

What does a trustee in bankruptcy Ontario cost?

Depending on the services they provide, the cost of an insolvency trustee in Ontario varies.  Providing a no-cost initial consultation is standard practice for professional trustee firms.  In this confidential consultation, our team collects information about your assets, liabilities, income, and expenses to gain a thorough understanding of your situation.

Then, we explain what debt relief options you or your business could benefit from, including any insolvency process.  We will then explain our recommendations and provide you with a cost estimate.  Insolvency costs depend on the type of insolvency proceeding. You will see why shortly.

trustee in bankruptcy ontario
trustee in bankruptcy ontario

Personal bankruptcy – summary administration

Summary administrations are consumer bankruptcy proceedings in which the realizable value of non-exempt assets (the value of non-exempt assets) after the claims of secured creditors are deducted does not exceed $15,000.  For summary administrations, the professional Trustee cannot charge for their time spent.  They are compensated according to a tariff.  The tariff for summary administrations is:

  • 100% of cash receipts up to $975;
  • the portion exceeding $975 but not exceeding $2,000 is taxed at 35%;
  • above $2,000, 50%;
  • each of the two mandatory counselling session’s tariff fee;
  • court fees;
  • an administrative and overhead fee of $100; and
  • HST/GST.

Personal  and corporate bankruptcy – ordinary administration

Personal bankruptcy is classified as an ordinary administration if the net recovery after the claims of secured creditors will be more than $15,000.  Corporate bankruptcy is always an ordinary administration.  Corporate bankruptcy does not currently have a streamlined version as does personal bankruptcy.

An ordinary administration bankruptcy allows the Trustee to charge by time spent, subject to approval by the Inspectors of the bankruptcy estate (if any), the OSB and taxation by the court.

Consumer proposal

As regular readers of my Brandon Blog know, a consumer proposal process is the only federal government-approved debt settlement program in Canada and is always administered by a trustee in bankruptcy Ontario or elsewhere in Canada.  It is also the only consumer insolvency choice in Ontario other than for a summary administration bankruptcy.  A consumer proposal is available to any individual who has $250,000 or less in debt, not including any debt registered against their home.  A consumer proposal is a way of eliminating debts while avoiding bankruptcy.

A professional Trustee, acting as the Administrator in a consumer proposal, cannot charge for time spent on consumer proposals.  Compensation is based on a tariff.  A consumer proposal tariff is as follows:

  •  $750 upon filing the consumer proposal with the OSB;
  • when the consumer proposal is approved or deemed approved, another $750;
  • 20% of the money distributed to creditors, when it is distributed:
  • the fee for each of the two mandatory credit counselling sessions;
  • court costs; and
  • HST/GST

Division I Proposal

A consumer proposal streamlines the process.  Individuals with too much debt to qualify for a consumer proposal may submit a Division I proposal.  Under the BIA, every corporate restructuring plan must be a Division I proposal.

Under a Division I Proposal, the Trustee can charge by the amount of time spent, subject to approval by the Inspectors (if any are allowed for and appointed), the OSB, and taxation by the court.

Receivership – private or court-appointed

Receivership is a remedy for secured creditors legal process.  A trustee in bankruptcy Ontario and elsewhere in Canada can charge for time spent in a receivership.  In a private appointment, there is no taxation.  The secured creditor who appointed the receiver must approve the fee.

In a court-appointed receivership, there is taxation by the court.  The stakeholders can approve or oppose the Receiver’s fee and costs.

The OSB is not involved in either type of appointment.

Restructuring of companies under the Companies’ Creditors Arrangement Act

Canada has a federal statute that governs large corporate restructurings, the Companies’ Creditors Arrangement Act (CCAA).  It is a court-led restructuring process for companies with debts of $5 million or more.  A licensed trustee serves as a Monitor under the CCAA.  The fee for the Monitor is determined by the amount of time spent.  The court must assess its fee and costs.

Having set the background information for you, I can now discuss the unreported court decision discussed in the webinar.

trustee in bankruptcy ontario
trustee in bankruptcy ontario

The unreported court decision:  Background

A trustee in bankruptcy Ontario and two Ontario insolvency lawyers presented this unreported decision in the webinar.  According to the licensed trustee who presented this court ruling, it was his file.  If it had been my file, I would not have been so courageous as to use it as a teaching moment for members of the Ontario insolvency community.

The insolvent person is a real estate broker who has experienced substantial income growth. She incurred significant tax liabilities as a result of poor tax planning advice. She owes $417,060 to the Canada Revenue Agency (CRA), her single largest creditor. Other notable creditors include two chartered banks who are owed $119,196 and $44,025, respectively.

The debtor lodged her Division I proposal with the trustee in bankruptcy Ontario which he filed on October 31, 201.  The debtor offered to pay her creditors $348,000 in 60 monthly installments of $5,800 under her proposal.  A meeting of creditors took place on November 21, 2019. At CRA’s request, the meeting was adjourned to allow for further examination, as is normal when CRA is a major creditor.

The debtor amended her proposal on December 11, 2019, increasing the Proposal Fund to $408,000 payable at $6,800 per month for 60 months.  The Amended Proposal was presented to the reconvened meeting of creditors on December 12, 2019.  Upon submitting the Amended Proposal, the requisite majority of creditors approved it.

The Amended Proposal was approved by the court on January 28, 2020.  The debtor made the 3 monthly payments of $6,800 promised in the Amended Proposal between February and April 2020.  In June 2020, the debtor paid a lump-sum payment of $367,600 instead of continuing with monthly payments for the remainder of the 5-year term.  The Trustee issued the Certificate of Full Performance of Proposal to the debtor and prepared the documentation needed to request a comment letter from the OSB.

It was stated in the original proposal and the Amended Proposal that the Trustee’s fee would be based upon 12.5% of proceeds plus a $5,000.00 deposit paid by the debtor, plus HST.  The total proceeds were $413,007.13.  As a result, the Trustee calculated and claimed a fee of $56,000 (plus HST). $56,000 was calculated as an amount equal to $5,000 for the initial deposit paid by the debtor, plus 12.5% of $408,000 (or $51,000).

The unreported court decision:  The taxation of the trustee in bankruptcy Ontario accounts

Taxations of this nature are done “over the counter”, unless the Associate Justice has questions.  Trustees in bankruptcy prepare the necessary motion material and submit it electronically to the court.  The accounts are taxed and the court order issued without the need for the Trustee to appear in court unless the Associate Justice has questions or concerns.

Taxation of the Trustee’s Final Statement of Receipts and Disbursements was conducted by the Associate Justice on July 13, 2020, in writing at which time she adjourned the taxation so that the Trustee could provide the following:

  1.  The Trustee’s Report to the Court for approval of the debtor’s Amended Proposal.
  2. Time records of the Trustee.
  3. An explanation of where the proposal money came from, and how the proposal could have been completed within 6 months of filing.

    trustee in bankruptcy ontario
    trustee in bankruptcy ontario

The unreported court decision:  The taxation of the trustee in bankruptcy Ontario accounts continues

The matter came back in July in writing. By letter dated July 14, 2020, the Trustee responded to the court’s requests as follows:

  • The Trustee provided the Report to the Court filed upon the approval of the
    Amended Proposal.
  • The Trustee confirmed that no time dockets were kept as the terms of the Amended Proposal provided for the calculation of fees.
  • The source of the funds to pay out the proposal was the re-financing and mortgaging of the debtor’s primary residence.

On July 29, 2020, the Associate Justice adjourned the taxation so that it could proceed by video conference.  The Associate Justice ordered the Trustee to give notice of the taxation to the debtor, the
creditors and the OSB. The Associate Justice also directed the Trustee to be prepared to speak to whether
the fee claimed was fair given the 5-year debt restructuring plan took only 6 months to complete.

Neither the creditors nor the OSB attended the video taxation hearing.  Therefore it was unopposed to the taxation and the fee claimed by the Trustee.

The unreported court decision:  The court’s analysis

As a result, the court considered both positive and negative factors in deciding whether to approve the $56,000 fee for the Trustee.

FOR:

  • by virtue of their approval of the Amended Proposal, the creditors have accepted the Trustee’s fee claim;
  • The Amended Proposal and fee were approved by the court;
  • unsecured creditors will receive a substantial dividend of 54.1% on the ordinary unsecured claims proven;
  • they will receive their dividends much sooner than expected;
  • The Trustee has sent a copy of the Final Statement to all creditors with proven claims and all creditors have been notified of the taxation; no creditors have objected to the fee sought by the Trustee or opposed the approval of the taxation; and
  • the clean OSB comment letter supports taxation and approval of the fee claimed by the Trustee and the OSB did not attend this hearing.

AGAINST:

  • A time docket was not kept by the Trustee to justify the fees claimed in the administration of the estate.  There is no record of the hours spent by each level of staff at their normal hourly rate to prove the Trustee’s efforts.
  • Compensation for work not performed by the Trustee is neither fair nor justifiable because it was not done or was not necessary.
  • About five and a half years before the deadline, the debtor made full payment of the Amended Proposal.  However, the trustee did not investigate the source of the funds. Although the Trustee claimed that the funds were proceeds from the debtor’s re-financing of her principal residence, he could not provide any additional information.
  • According to the sworn statement of affairs, the debtor had a 50% interest in the principal residence with resulting equity of $47,000 and total equity from the debtor’s interests in two other properties totalling $95,000.  Even so, the debtor managed to raise $408,000 through allegedly refinancing only the principal residence.  She raised more money against this one asset than the equity listed in all her assets in her sworn statement of affairs!
  • Would the ordinary unsecured creditors have accepted the Amended Proposal if they were aware of more assets available?

The Associate Justice held that the court still has the right to supervise the administration of the estate, and the BIA obligates the court to tax the fee requested by the Trustee. Further, taxation by the court is not a rubber stamp.

trustee in bankruptcy ontario
trustee in bankruptcy ontario

The unreported court decision:  The court’s decision and the aftermath

The lack of time dockets made it difficult for the court to determine an appropriate level of compensation. The court would have been able to assess whether the $56,000 fee was reasonable and justified if the Trustee had kept time records. According to the Associate Justice, the trustee in bankruptcy Ontario had not discharged his responsibility for proving that the fee is justified.

Taking everything into account, the court reduced the Trustee’s fee by $15,000 from what was claimed.  Accordingly, the court approved a fee of $41,000 plus HST.

As a result, the Trustee sought legal advice.  An appeal was filed by the Trustee to a Justice of the Ontario Superior Court of Justice Commercial List appealing the Associate Justice’s decision.  The appeal was dismissed.  The judge deferred to the experience and discretion of the Associate Justice, who taxes Trustee accounts regularly.

Trustee in bankruptcy Ontario:  The moral of this story

I said at the beginning that, had I been in charge of the case, I would not have been so courageous as this Trustee in turning it into a webinar for my colleagues.  There is a simple lesson here.  The trustee in bankruptcy in Ontario and the rest of Canada must also be a good timekeeper for every insolvency file for which no tariff applies.  The Trustee must also be a good record keeper so that questions from the OSB or the court can be adequately answered.  Lastly, if something doesn’t make sense, like how you can raise $400,000 from assets that are only worth $142,000, find out why.

Trustee in bankruptcy Ontario summary

I hope you found this trustee in bankruptcy Ontario Brandon Blog informative. Are you in financial distress and a debt crisis? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement? Do you need to find out what your debt relief options and realistic debt relief solutions for your family debt are?  Is your company in financial hot water?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government-approved debt settlement plan to do that. It is an alternative to bankruptcy. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

trustee in bankruptcy ontario
trustee in bankruptcy ontario
Categories
Brandon Blog Post

WHAT IS A STALKING HORSE: A COMPLETE PROCESS THE CHEF NEEDED TO USE TO SUCCEED

what is a stalking horse
what is a stalking horse

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

What is a stalking horse bid?

In the 16th century, the term originated.   It originally was a replica of a horse or something that looked like a horse, that was set out by hunters in an area they wished to hunt in. By hiding behind it, the hunters wouldn’t have to worry about scaring away whatever was being hunted.

Today, it means anything that is put forward or proposed, to test the waters or mask the true nature of the proposal. It is much more recent to think about a stalking horse bid. Its name comes from the fact that it is a way to draw other bidders out of the woods and test their level of seriousness in participating in a sale process and making a bid for the assets being sold.

In this Brandon Blog, I describe an Ontario court decision denying the request of a company under bankruptcy protection to sell its assets and if the company only had known what is a stalking horse bid and used it.

The company of celebrity chef Mark McEwan files for creditor protection

On September 28, 2021, McEwan Enterprises Inc. (MEI), a premier hospitality company based in Toronto, Ontario, obtained protection under the Companies’ Creditors Arrangement Act (CCAA) with a list of more than $10 million in liabilities.  The company was founded by chef Mark McEwan.

In his early career, Chef McEwan worked as an executive chef at Toronto’s Sutton Place Hotel.  In addition to mentoring budding chefs in his kitchens, Chef McEwan is also a judge on Food Network’s hit series Top Chef.

MEI at one time ran multiple dining establishments, and gourmet grocery stores, in addition to a catering service. Due to the negative impact on the hospitality industry of the coronavirus, MEI experienced significant losses and business challenges and found itself filing for bankruptcy protection under the CCAA.

what is a stalking horse
what is a stalking horse

The owner of the Bloor-Yonge location opposes CCAA restructuring by celebrity chef Mark McEwan

MEI’s restructuring plan presented for bankruptcy court approval would involve Fairfax Financial Holdings Ltd and McEwan repurchasing the business under a specific asset purchase agreement by a new numbered company.  With fewer grocery and restaurant locations, the business would retain its 268 employees and reduce lease obligations.  The company’s restructuring plan in the CCAA proceedings focuses on effecting a going-concern sale transaction.  That is, selling and transferring substantially all of its assets and many of its liabilities to a new entity formed by MEI’s current shareholders, Fairfax Financial Holdings Limited and Chef McEwan.

One of MEI’s creditors, the landlord of the Bloor-Yonge grocery store, opposed the plan.  Based on its analysis of the situation, the court found that the proposed transaction did not meet the CCAA’s requirements for approval.  Consequently, the sale, the centrepiece of the restructuring plan, failed to get bankruptcy court approval from the bankruptcy judge.

What is a stalking horse?  Why did MEI’s proposed bankruptcy sale process fail?

MEI’s legal and financial advisers are excellent.  They probably told Chef McEwan the MEI restructuring plan as presented to the court had little chance of success.  It would shock me if they didn’t.  Because I am not involved in the MEI CCAA proceeding, I can only guess that Chef McEwan ignored his advisors’ counsel, ignored financial and legal advice, rolled the dice, and lost.

Chef McEwan swore affidavits as part of MEI’s court application.  According to him:

  • MEI’s value and success are dependent upon his continued involvement;
  • the MEI brand has become synonymous with his personal brand and television projects;
  • by inference, he implied that he would not cooperate with any third-party buyer, who would therefore not have his involvement; and
  • in his view, a third-party sales process was not necessary and could negatively affect the company’s operations.

I think it is never wise to go into court with a smug attitude or threaten non-cooperation with a third party, in addition to the legal issues I will explain shortly.  If MEI had used a real bankruptcy auction process and a higher bidder was able to pay the amount of the purchase, the court would not care whether Chef McEwan would work for the new owner if it was not a condition of the potential purchaser’s offer.

Section 36(4) of the CCAA was at issue.  Section 36(3) refers to the factors that a court should consider when considering a specific sale transaction.  They are:

  • a reasonable process led to the proposed sale or disposition in the circumstances;
  • did the monitor approve the process;
  • is the monitor submitting a report to the court indicating that a sale or disposition would be more beneficial to the creditors than a sale or disposition under a pure bankruptcy liquidation;
  • to what extent have the creditors been consulted;
  • how the proposed sale or disposition will affect creditors and other interested parties;
  • considering their market value, determine whether the consideration to be received for the assets is reasonable and fair.

In this case, the purchaser was to a related party as described in section 36(4) of the CCAA.  According to the law, a court may grant authorization only if it is satisfied that:

  • the assets were tried to be sold or otherwise disposed of to non-related parties in good faith;
  • in accordance with the process leading to the proposed sale or disposition, it offers a greater consideration than any other offer.

This was not the case with MEI.  I won’t go into all the reasons for MEI’s CCAA bankruptcy sale failure in this what is a stalking horse Brandon Blog, as you can read all about them here.  The bankruptcy judge determined that the facts of the case do not meet the requirements of section 36(4), thus the proposed transaction cannot be approved.

Accordingly, it was dismissed.

what is a stalking horse
what is a stalking horse

What is a stalking horse?  The competitive bidding process Chef McEwan should have used

The fatal flaw in MEI’s application for approval of the offer was their inability to prove to the court that there was not an even better offer in the marketplace because there was no sales process, possibly being an auction process.  Chef McEwan should have used his offer as a stalking horse bid in a competitive auction process.  He would have sought court approval for a court-supervised auction-type process.  As long as they were fair, he could have set the bidding procedures, the bidding process timelines, and the bidding range through his stalking horse offer, and have the court approve it all at the bidding procedures hearing.

His offer would be exposed to the market, and he might be outbid.  However, he was still in control of setting his offer.  In terms of his approach, he chose to put MEI under the CCAA process, but once there, he had to adhere to the rules of that process.  How could a stalking horse bidding process possibly work?  Let’s find out.

What is a stalking horse? A court-supervised auction for bankruptcy sales

Typically, the debtor executes a binding stalking horse agreement with a purchaser against which higher and better offers can be solicited, and which stipulates that the stalking horse will be considered the highest and best offer if no competing bids are received.  In order to achieve that goal, the debtor will ask the bankruptcy court to approve a competitive auction process and related bidding procedures.

An organization in distress can use the stalking horse bid method to avoid receiving low bids when selling its assets.  Stalking horse bids are initial bids on insolvent company assets.  Setting a low-end bidding bar prevents other bidders from underbidding the purchase price.  Those wishing to participate in the stalking horse bid process and submit an offer after performing due diligence must submit a better offer than the stalking horse bid.

what is a stalking horse
what is a stalking horse

What is a stalking horse and what are the advantages and disadvantages of a stalking horse bid?

There are certain advantages for a stalking horse bidder.  Since the stalking horse bidder is the opening offer that sets the floor price for the assets or company, the insolvent company usually provides several incentives.  To begin with, the stalking horse bidder has the opportunity to negotiate the legal and financial terms of an asset purchase agreement with the debtor that will serve as the floor price.  Thus, the stalking horse bidder does not simply enter into an agreement negotiated by someone else that might not be exactly what it needs.

In addition, the stalking horse bidder may negotiate bidding options that discourage competitors from bidding, although the entire process needs to be fair to all parties.  Thirdly, a stalking horse bidder gets to perform its due diligence first.  The due diligence process involves verifying, investigating, or auditing all relevant facts and financial information of a potential deal or investment opportunity.

However, there is still a chance that someone else may outbid the stalking horse offer and, if they want the assets badly enough, they may even bid more than the liquidation value.  In the MEI case, MEI failed to prove that accepting its offer would be better than liquidation through a receivership or bankruptcy proceeding.  This was another MEI flaw.

Even if that were to happen, stalking horse offers always contain a break fee.  When someone else wins, this money will be awarded to the stalking horse bidder.  It must be possible to pay the break fee and still have a better offer than what the stalking horse bidder offered.  As part of the stalking horse bidding process, the break fee is meant to compensate the stalking horse bidder for the time spent and as an expense reimbursement for the professional fees spent on doing their due diligence and allowing their offer to sit out there for everyone to see.

All the remaining steps follow a typical auction where the highest bidder wins the distressed company‘s assets.

What is a stalking horse recent well-known Canadian example?

Thanks for asking.  The court-supervised auction of insolvent entertainment company Cirque du Soleil was conducted based on an offer made by Cirque du Soleil’s secured creditors.  That creditor proposal replaced a shareholder offer as the stalking horse bid, which set the minimum requirements for potential rival bids.  Also included in the successful bid was Cirque’s commitment to maintaining its headquarters in Montreal for at least five years.

The stalking horse sales process is well known in Canada bankruptcy courts, as you can see.  In this process, the stalking horse bidder gains certain advantages while the distressed company and its assets are exposed to the market.  After a public auction sale, the court is able to determine if there is or is not a better offer out there under a previous bankruptcy court-approved sales process.  So I hope that you can now answer the question, what is a stalking horse?

what is a stalking horse
what is a stalking horse

What next for the chef?

I guess it’s time to start fresh.  Most of the time and money spent so far has been in vain.  If MEI wants to make another shareholder offer, it will have to prove to the court that it met all the CCAA requirements.

What is a stalking horse summary?

I hope you found this what is a stalking horse Brandon Blog informative. Are you in financial distress and a debt crisis? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement? Do you need to find out what your debt relief options and realistic debt relief solutions for your family debt are?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government-approved debt settlement plan to do that. It is an alternative to bankruptcy. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

what is a stalking horse

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RESTRUCTURING OF COMPANY: SOMETIMES AN UNPOPULAR CORPORATE BANKRUPTCY IS NEEDED TO RESTRUCTURE YOUR COMPANY TO IMPROVE PROFITS

restructuring of company 

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Restructuring of company introduction

Following its bankruptcy, Canadian retailer Le Château announced that it would relaunch online under new ownership.  Although extreme, in certain unique circumstances, corporate bankruptcy could be used to restructure a company’s debt and operations.

Often, companies realize they need to restructure too late when fewer options remain and saving the company is more challenging.  A restructuring process started on a voluntary basis can generate greater value than a company restructuring done under the imminent threat of bankruptcy.

A restructuring plan is more likely to succeed when managers understand the fundamental business/strategic challenges their company faces.  In a corporate restructuring, creditors are often required to make significant concessions, which have significant implications for them as well as for the company.

Using the Le Château case as an example, this Brandon Blog discusses certain aspects of the restructuring of company debt, assets, and operations.

restructuring of company
restructuring of company

Restructuring of company: Le Château relaunches online following bankruptcy

Following its filing for bankruptcy protection last year, Le Château, now run by Suzy’s Inc., announced its comeback from bankruptcy by launching an eveningwear collection online before the holidays. YM Inc., which owns many brands including Suzy Shier, acquired the intellectual property assets and certain merchandise and other assets.

Herschel Segal founded Le Château Inc. in 1959 as “Le Chateau Men’s Wear”, a menswear store in downtown Montreal’s Victoria Square.  Le Château began selling imported clothes from Europe when it added women’s clothing in 1962.  As time passed, Le Château sold more fashionable imports to young people instead of its original traditional clothing style.  Since then, Le Château has designed, imported, and retailed apparel, accessories, and footwear for women and men.

Its 240 locations at its peak made the Canadian retailer a staple of nearly every mall and shopping district in the country.  Le Château Inc. (and its US subsidiary Château Stores Inc.) filed for bankruptcy protection in October 2020 under the Companies’ Creditors Arrangement Act (“CCAA”).  It also announced it would close all 123 stores in Canada.  The Court granted the companies permission to run a liquidation process in November 2020.  It used the CCAA to liquidate its assets rather than for the restructuring of company operations and finances.

To adapt to new retail industry trends, the company implemented efforts to right-sized its brick-and-mortar locations.  122 of its 243 stores were closed during the eight years prior to filing for bankruptcy. The Company’s right-sizing efforts and its important investment in its e-commerce platform helped mitigate the decline in brick-and-mortar revenue, but not enough to compensate. During the three fiscal years prior to its insolvency filing, the Company lost about $130 million in net income.  As COVID-19 arrived in March 2020, the end of Le Château was sealed.  Proms, weddings, galas, and parties were cancelled, decimating the retailer’s dress sales.

Le Château began liquidating its 121 stores in November 2020, as well as its transactional website.  In December 2020, the licensed insolvency trustee acting as CCAA Monitor was also appointed Receiver because all assets were secured by loans to various financial institutions.  A court granted the Company’s request to approve a sale transaction with Suzy’s Inc. in June 2021.   Le Château’s intellectual property, merchandise, furniture, fixtures, equipment, and signage were purchased by Suzy’s.  At that point, the inventory liquidation was completed.  Before the Canadian company filed for bankruptcy, the companies changed their names to plain numbered companies as part of the sale of the intellectual property.

A bankruptcy filing was made by the company formerly known as Le Château Inc. on September 2, 2021.  Le Château, now run by Suzy’s Inc., has announced its comeback from bankruptcy with the launch of an eveningwear collection ahead of the holidays.

restructuring of company
restructuring of company

Restructuring of company:  Reasons for corporate restructuring

If the company is both insolvent and not viable in its existing form, the normal insolvency process would be receivership, bankruptcy or both. Instead of using the provisions of the CCAA to liquidate a major retailer, a Court-appointed receiver appointed under Quebec law as well as the Bankruptcy and Insolvency Act (Canada) would have accomplished the same thing as the CCAA process used.

In the example of Le Château, selling assets out of a financially sick corporation to a new owner who will operate the assets in a similar business is actually a form of restructuring of company operations.  Because the old corporation has too much debt and too many operational problems, it cannot continue.  However, as Suzy Shier has shown, there was a good business reason for them to buy certain assets, and they now plan to run a new Le Château business.  A new owner was responsible for the restructuring of company operations and finances.

As a result of a financial crisis, a company may undergo restructuring to change the financial or operational aspects of its business.  Restructuring can occur for several reasons, including:

  • deteriorating financial fundamentals;
  • a lack of profitability;
  • disappointing sales revenue;
  • debt that is too high; and
  • an industry with too much competition or the company is no longer competitive.

Under financial duress, a company engages in restructuring when it makes significant changes to its financial or operational structure.  In reorganizing internally, a company’s operations, processes, departments, or ownership may change, enabling it to be more integrated and profitable.  If shareholders and creditors reach an agreement on a reorganization of assets, issuance of equity to reduce debt, or bankruptcy as long as the business maintains operations, the company may sell its assets.

Restructuring a company usually involves cutting costs, such as payroll, or shrinking the company through asset sales.  After restructuring is completed, the business operations should become smoother and more economically sound.

restructuring of company
restructuring of company

Restructuring of Company:  The company restructuring process

Restructuring a company has many benefits, as well as many reasons for a company to restructure.  The benefits of corporate reorganization can be summarized in two words: survival and success.  The right financial advisory firm can help business owners deal with these challenging issues, whether they are reorganizing for survival or strategic repositioning for the future.

Your company should select restructuring professionals who are experienced in your specific industry as well.  As soon as major problems are discovered, the company should begin restructuring its operations and finances.  Early diagnosis allows a company to fully evaluate its options and avoid being cornered.

Corporate business restructuring can be divided into several stages:

  • assessing the organizational restructuring needed;
  • implementing the organizational restructuring;
  • identification of weaknesses;
  • developing detailed plans to correct these weaknesses through restructuring;
  • calculating and securing funding;
  • raising private equity to help improve operations and balance sheet;
  • evaluating the impact of implemented strategies and amending them as necessary;
  • comparing actual financial results to the budget to ensure the restructuring remains on track; and
  • making necessary corrections.

Companies often do not allow enough time to plan and implement restructurings.  A successful restructuring of a company’s finances and operations depends on how much upfront assessment work was done, how detailed the plan is, and how well the restructuring strategy is implemented.

Reorganizations can take a long time depending on whether they are reactive or proactive.  An example of a reactionary restructuring is when bankruptcy proceedings force a company to make changes within a specified period.  A corporate executive officer who recognizes a change in consumer preferences and positions their company to be a leader in tomorrow’s market is an example of being proactive.

In today’s economy, companies face many challenges, and company restructuring can be a short- and long-term answer to maintaining company viability.  Company restructuring concerns vendors and consumers, stockholders and financial relationships, employees and inventory, quality control and environmental impact, equipment and technology, and management and marketing.

In addition to the reasons for restructuring, every major restructuring has some of these common elements:

  • an improved balance sheet;
  • reduced tax obligations;
  • divesting underproductive assets;
  • Outsourcing some functions that can be more cost-effectively done by outside suppliers rather than by company employees;
  • reducing debt loads;
  • relocating operations;
  • restructuring marketing, sales, and distribution;
  • renegotiating employment contracts;
  • refinancing debts; and
  • changing the company’s public image.

Restructuring company operations and finances are expected to result in long-term survival, profitability, and viability, regardless of the reasons and the specific steps taken.

restructuring of company
restructuring of company

Restructuring of company summary

I hope this restructuring of company Brandon Blog post was helpful for you. Are you worried about your financial situation because you are dealing with substantial debt challenges as a business owner or as an individual? Call me if you have too much debt. It is not your fault. To deal with financial problems, you have actually only been shown the old ways. These old methods no longer work.

The Ira Smith Team employs new modern methods to get you out of debt while avoiding bankruptcy. Let us help you obtain the relief you deserve.

You are under a lot of pressure. We understand your discomfort. A new approach will be designed for you that is as unique as you and your issues, both financial and emotional. Your burden will be lifted and the dark cloud hanging over you will be blown away. We will design a debt settlement strategy for you. We are confident that we can assist you right away.

People and businesses facing financial troubles need a realistic lifeline. There is no one-size-fits-all approach with the Ira Smith Team. Even though we are licensed insolvency trustees, we have found that not everyone has to declare bankruptcy in Canada. Most of our clients never declare bankruptcy. We help people and companies avoid bankruptcy.

This is why we can create a new restructuring process for paying off debt that will be custom-built for you. You’ll have a unique experience, just like the economic difficulties and discomfort you are experiencing. If any of these describe you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation. Let us get you or your business back on track, driving to healthy and balanced trouble-free operations and eliminating the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

restructuring of company
restructuring of company
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THE LUCRATIVE RESP BANKRUPTCY PLAN TO DEBT RELIEF

resp bankruptcy
resp bankruptcy

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

RESP bankruptcy introduction

Parents contribute to their child’s Registered Education Savings Plan (RESP) in order to save for their children’s post-secondary education. In contrast to Registered Retirement Savings Plans (RRSPs), RESP contributions, or the total amount of all contributions made by the parent(s), is a property that is available for seizure in bankruptcy of the owner of the RESP.

In this Brandon Blog, I explain why an RRSP, unlike an RESP, is mostly exempt from seizure in bankruptcy. RRSPs and a Registered Retirement Income Fund (RRIF) are exempt from seizure based on a balancing act between federal and provincial laws. The RESP bankruptcy is not exempt.  Since I practice in Ontario, I will only comment on the situation there.

Will I lose my RRSP in bankruptcy?

An RRSP’s exemption from seizure in bankruptcy was determined solely by provincial law before 2008. The bankruptcy treatment of RRSPs was not outlined in federal insolvency law. The Bankruptcy and Insolvency Act (Canada) (BIA), being the federal bankruptcy law in Canada, other than the exception described in the next section, exempted assets contained in either an RRSP or an RRIF from seizure as of July 2008.

Inequality among RRSPs was the reason for changing the BIA. If your RRSP was held at a financial institution, it would not be exempt from seizure if you filed for bankruptcy. But if you held it:

  • at an insurance company; AND
  • the beneficiary designation of your plan was irrevocable as your spouse, child, parent, or grandchild in the event of your death

under the Ontario Insurance Act, the entire RRSP or RRIF was exempt from seizure.

The reason for amending the BIA was twofold:

  • all RRSPs and RRIFs should be treated the same, regardless of which institution holds them; and
  • retirement income should not be lost as a result of financial problems for Canadians who have gone bankrupt, since their fresh start is made possible by the bankruptcy system.

In other words, before July 2008, people who were going to file for bankruptcy and who had a sizeable RRSP with a chartered bank would transfer the RRSP to an insurance company and designate one or more beneficiaries accordingly. In Canada, bankruptcy courts heard many cases about transactions designed to save an RRSP from seizure in bankruptcy.

An insolvency trustee or bankruptcy trustee could replace the named beneficiary of an insurance policy or retirement investment, including RRSPs or RRIFs, with the Estate and then collapse the plan so as to obtain the funds if the beneficiary designation of the policy was revocable.  Trustees cannot collapse investments if the beneficiary is irrevocable; such plans constitute exempt assets. A Trustee would have to use it as one of the reasons for opposing a bankrupt’s discharge. Since the person, aware of their insolvency, transferred the asset for no value, the creditors are unable to pursue them. This was is known as a settlement.

The leading case on this issue, which was eventually followed by other jurisdictions, including Ontario, is Royal Bank of Canada v. North American Life Assurance Co., 1992 CanLII 4696 (SK CA), also known as the Ramgotra case. Dr. Ramgotra was bankrupt. A lower court decision regarding what should be done with the RRSP funds, turned into an RRIF, prior to his bankruptcy but when he knew he was in financial trouble, was appealed by the Royal Bank of Canada, having received Court approval to appeal the case instead of the Trustee appealing. The Court of Appeal found that the property had an irrevocable interest in Mrs. Ramgotra despite the transfer of the RRSP being a settlement.

So effective July 2008, the Canadian government amended the BIA so that regardless of which of the financial institutions an RRSP was held, only the contributions made within 12 months of the date of bankruptcy were subject to being lost to the licensed insolvency trustee in bankruptcy.

resp bankruptcy
resp bankruptcy

Registered Education Savings Plans (RESP) and bankruptcy:  RESP bankruptcy is not exempt

It is fairly simple to understand why RESP contribution funds are not exempt from seizure in bankruptcy. Since the parent can collapse the plan before maturity, the child does not receive a property interest in the RESP funds. There is therefore no trust or transfer of property to the child. In an RESP bankruptcy, the bankrupt parent’s Trustee can therefore collapse their RESP.

A Trustee must make satisfactory arrangements with the parent, or another relative, to have them pay the Trustee the equivalent amount of funds in the RESP at the date of bankruptcy.  This way the Trustee will have recovered on the asset for the benefit of the bankruptcy estate and the bankrupt’s creditors.  The bankrupt parent will have done what is necessary in order to avoid the RESP collapsing, losing the government contributions money and not having the plan value go forward for the child.

MP Dan Albas introduced his private member’s bill, An Act to amend the Bankruptcy and Insolvency Act (property of bankrupt registered education savings plans), on June 3, 2019. In this bill, the purpose was to amend section 67(1)(b.3) of the BIA, so that RESPs receive the same treatment as RRSPs and RRIFs.  Like many other private member’s bills that die, this bill has not made any progress.

The thrust is obviously to make sure that other than for contributions made in the 12 months before the date of bankruptcy, a parent should not lose the RESP benefits for their child’s post-secondary school education because of their bankruptcy.

No matter how well-intentioned, one societal reason this Bill C-453 initiative will fail is that an elementary or high school student’s college tuition differs from that of a retiree whose earning years are behind him or her.  So to date, there is no federal law that provides creditor protection for a Registered Education Savings Plan.

How to preserve an RESP bankruptcy

Your RESP’s liquidation cash value can be determined by contacting the financial institution holding the funds.  The liquidation value does not include the government grant portion of the funds that are only available if the child attends a qualified educational institution.

You can instruct your Trustee to contact the financial institution holding the RESP funds to have the plan cashed out and remit the proceeds (net of government contributions) to the Trustee.  This way the asset of the bankruptcy estate will go for the benefit of your creditors if you are not interested in keeping your RESP, which is unlikely in almost every case.

Preserving an RESP bankruptcy can be achieved in two ways.  The first is to avoid bankruptcy.  No, I don’t mean to tell you not to deal with your financial problems because like it or not, you are in an insolvency scenario.  Just don’t use bankruptcy.  If your debts not secured by your primary residence are $250,000 or less, you should consider a consumer proposal.  You may use the large debtor proposal provisions of the BIA if the debts exceed this amount.

Second, the nonbankrupt spouse, or another relative, can buy the Trustee’s right, title, and interest in the RESP for an amount equal to its liquidation cash value.  Thus, the purchaser becomes the owner of the RESP, and the child will continue to benefit from it.  In acting in the best interests of unsecured creditors, the Trustee will have recovered the liquidation cash value.

resp bankruptcy
resp bankruptcy

RESP bankruptcy:  A very recent divorce example

Having just dealt with this issue last week in one of our personal bankruptcy filings, I am writing about the RESP bankruptcy treatment today.  I am the insolvency trustee in a bankruptcy filed by a divorced mother who is now on her own.  The failure of her restaurant caused by the COVID-19 pandemic caused her to go bankrupt because of her high debt load.

Her ex-husband and she owned a registered education savings plan for their only child.  As part of the no-cost session I provide to anyone contemplating insolvency, I discussed what might happen to an RESP bankruptcy if a bankruptcy is filed.

It was an upsetting experience for the mother.  It was clear that she was upset at the prospect of losing half the liquidation proceeds if the plan collapsed.   In addition, it was part of the divorce agreement that the jointly owned RESP would be continued for the benefit of the child.  We had to create a plan to keep the RESP afloat in the event of RESP bankruptcy.  I had no trouble coming up with the plan.  What was tricky were the technical details.

This is what we came up with.  First, we told her to contact the financial institution where the funds were held and obtain a written statement of the plan’s liquidation cash value.  After receiving the written statement from the financial institution, we told her to pass it along to us.  She did, and it turned out that the total liquidation value was approximately $26,000.  She, therefore, had a half-interest valued at $13,000.  We then got her permission to contact her ex-husband and explain the situation.

The ex-husband was informed that his ex-wife would be filing for bankruptcy by us.  There would be an RESP bankruptcy.  He knew that he had to maintain the RESP.  When his ex-wife went bankrupt, we told him that if he purchased our right, title, and interest in the RESP, he would become the sole owner, and the fund would be preserved in an RESP bankruptcy and they could continue contributing to it.  It was no problem for him, thankfully.

Because she had actually not yet filed for personal bankruptcy, we had not yet been designated as the licensed insolvency trustee. Our objective was to make sure there wouldn’t be a change of mind despite the divorce condition. Based on Canadian bankruptcy legislation, we scheduled the ex-husband to offer a $13,000 third-party cash guarantee to cover the costs of carrying out the personal bankruptcy.

Furthermore, we agreed that upon the bankruptcy, subject to the approval of the Inspectors, if any were appointed in this summary administration bankruptcy, we would then convert this third-party guarantee into the right, title, and interest as the licensed insolvency trustee of the RESP.

A bill of sale would be issued to him, and we would confirm jointly with the financial institution that he is now the sole owner of the RESP, and they would need to amend their records accordingly.  This RESP bankruptcy would have been fully realized as we had gotten the full value of the mother’s half-interest in the RESP.  It was a win-win situation for everyone involved.

resp bankruptcy
resp bankruptcy

RESP bankruptcy:  What about you?

Hopefully, you see from this Brandon Blog, there are ways to deal with an RRSP both in bankruptcy and non-bankruptcy situations.  I hope you found this RESP bankruptcy Brandon Blog informative.  Are you in financial distress and a debt crisis? Are you worried about any RRSP or RESP contributions? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement?  Do you need to find out what your debt relief options and realistic debt relief solutions for your family debt are?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government-approved debt settlement plan to do that. It is an alternative to bankruptcy.  We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

resp bankruptcy 

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BANKRUPTCY PROTECTION: THE UNDENIABLE BEST THING YOU NEED TO KNOW TO CASH YOUR INSOLVENT CUSTOMER’S CHEQUE SAFELY

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Bankruptcy protection:  What happens if a company gets into financial trouble?

A Canadian company seeking bankruptcy protection has two choices when it is financially troubled and wants to reorganize.  By hiring insolvency legal counsel and a licensed insolvency trustee to get both insolvency and bankruptcy law advice and financial advice, they can protect themselves from their creditors, either by:

  • using the Companies’ Creditors Arrangement Act (CCAA) to file for bankruptcy protection; or
  • working with an insolvency trustee and filing a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act (BIA) you can obtain bankruptcy protection.

In order to reorganize in Canada, an insolvent company files for bankruptcy protection. If you are insolvent in Canada, then you must file for bankruptcy protection, which is equivalent to Chapter 11 in the United States. The process is called financial restructuring or financial reorganization. By doing this, the company will try to restructure while it continues to operate to come up with a restructuring plan that allows the company to survive while satisfying the needs of the creditors to some degree.a

This Brandon Blog discusses a recent court decision that demonstrates that there is a risk to creditors who receive payments from the insolvent company under bankruptcy protection for goods or services supplied if the restructuring fails.

What happens to the company that files for bankruptcy protection?

An organization that files for bankruptcy protection, or as it is sometimes called, creditor protection, differs from an organization that files for bankruptcy.  A pure bankruptcy procedure consists of a liquidation.  The company ceases to operate unless the Trustee sees value in continuing to operate the company for a limited period of time.

The trustee in bankruptcy takes possession of all assets that are either not subject to valid claims by secured creditors (typically financial institutions) or that belong to third parties (for example, equipment under lease or goods undergoing repair that are in the company’s possession).  A licensed insolvency trustee then formulates a plan for selling the unencumbered assets of the company to maximize the proceeds.  Afterwards, the Trustee distributes the funds in accordance with the BIA.

In the case of a company filing for bankruptcy protection, this is one of the alternatives to bankruptcy.  The intention is to continue operating while it tries to restructure.  Most of the time, this entails downsizing.  A plan will be devised to repay some of the remaining debt in exchange for the creditors writing off the balance that is owed.  With success, the company can retain employees and continue to operate.  Creditors will be able to earn money by supplying the reorganized company in the future.

The CCAA allows companies that owe at least $5 million to their creditors to file for bankruptcy protection.  Either the business will be restructured and continue to exist on new financial terms or a wind-down will be supervised to pay back anyone owed money by selling assets.  BIA restructuring provisions can be used by companies that owe less than $5 million.

In other words, a company that goes bankrupt will shut down.  Those who file for bankruptcy protection want to keep operating.  As disruptive as bankruptcy and restructuring are, they can be beneficial for businesses, individuals and the economy since they preserve value and prevent assets from being wasted.

As soon as the company enters bankruptcy protection (or bankruptcy), proceedings against it are stayed.  As a result, all collection rights for creditors are suspended.  A “time-out” gives the company a chance to restructure, or the Trustee can handle its duties in bankruptcy without interference from creditors.  Additionally, it “freezes” all creditors at the time of the filing, so that one cannot gain an advantage over another.

bankruptcy protection
bankruptcy protection

A record number of companies have sought creditor protection under COVID-19 and more are on the way?

The list of large Canadian companies with outstanding debts looking for bankruptcy protection from creditors got to a decade high in May and June 2020. Numerous financial commentators believed there would be a full-blown financial crisis and that a lot more would certainly file as a result of COVID-19 caused the economic downturn. Despite this, the number of corporate insolvency filings appears to have stabilized and also slowed down in 2021. One main reason is the number of government programs supporting Canadian business.  In the same way as the virus itself, COVID-19 has actually taken a hefty financial toll on companies with pre-existing conditions.

Some familiar Canadian corporations in the list of companies that filed in that time due to their financial situation were:

  1. Reitmans
  2. Frank & Oak
  3. Aldo
  4. DavidsTea
  5. Cirque Du Soleil
  6. Mendocino
  7. Bow River Energy
  8. FlightHub
  9. Christian charity, Gospel for Asia
  10. Cequence Energy
  11. Delphi Energy
  12. Sail

Twenty-two major Canadian companies sought creditor protection in May and June 2020, almost four times the usual rate.  The list obviously does not include major U.S. names such as Chesapeake Energy, J Crew, Neiman Marcus, Brooks Brothers, Pier 1 and Boy Scouts of America.

The bankruptcy protection court case facts

I want to tell you about Schendel Mechanical Contracting Ltd (Re), 2021 ABQB 893.  On November 9, 2021, the Honourable Mr. Justice Douglas R. Mah released his decision.

Schendel Mechanical Contracting Ltd. (Schendel) was one of three associated companies that at one time collectively formed a major construction concern in Alberta under the Schendel name.  As a result of financial difficulties, it was an insolvent entity and it filed a Notice of Intention to Make A Proposal under the BIA on March 22, 2019.  Schendel continued operations as part of its restructuring effort. On various Schendel projects, Schendel bought HVAC equipment from the supplier between April 2018 and May 2019.

Ultimately, Schendel’s debt restructuring plan failed.  Schendel was deemed to have filed for bankruptcy when it failed to implement a successful BIA Proposal restructuring.  Schendel went bankrupt immediately.  Its secured creditor applied to the Court for the appointment of a Receiver, which was granted.

As a result of reviewing the company’s books and records, the Receiver found and disputed the legality of a $40,000 payment from Schendel, an insolvent company, to one of its suppliers.  According to the Applicant Receiver, the payment was prohibited for a number of reasons and the funds should be returned.  The recipient supplier asserted that the payment was both innocent and validly received and that it was entitled to retain it.

In this case, a cheque dated July 8, 2019, to make the payment.  Due to an unknown reason, the supplier did not negotiate the cheque until 11:48 AM on July 19, 2019.  Schendel was also deemed to have filed for bankruptcy and the Court made the Receivership Appointment Order all on the same day, July 19, 2019.  The Court had, however, no evidence regarding the exact moment the receivership and bankruptcy decision was made on that same day.

bankruptcy protection
bankruptcy protection

The bankruptcy protection case:  The Receiver’s position

It is noteworthy that the action to recover the $40,000 was brought by the Court-appointed Receiver and not the insolvency trustee of the bankruptcy estate.  According to the Receiver, the funds should be returned on the following grounds:

  • the automatic stay under section 69(1) of the BIA was in effect at the time of filing and throughout the extension of the proposal period, so the supplier was without recourse against Schendel;
  • the Court-ordered stay contained in the Receivership Appointment Order of July 19, 2019, as well as the concurrent stay imposed by a deemed bankruptcy under the BIA, deprived the supplier of all collection remedies as of that date;
  • as an alternative, the payment may be prohibited under the Fraudulent Preferences Act; or
  • it may be in violation of the Statute of Elizabeth (see note below).

NOTE:  The English Parliament passed this statute in 1571 with the purpose of prohibiting transfers that would defraud creditors or hinder their collection efforts. As a result of widespread fraudulent transactions designed to defraud creditors, the 13 Elizabeth Statute was passed.  It is still in effect in Alberta today.

The bankruptcy protection case:  The supplier’s position

The recipient supplier said that it received the payment both innocently and legally and that it is entitled to retain it.  In addition, the recipient supplier said:

  • besides some routine questions about payment, the supplier had not engaged in any activity to try to collect the debt;
  • the relationship with Schendel was arm’s-length;
  • both of the last two extension orders for the NOI define a process by which Schendel may pay, and the Receiver has fallen short to prove that the procedure was not followed when it comes to the subject payment; and
  • for either the Fraudulent Preferences Act or the Statute of Elizabeth, the required intent cannot be shown.

Since the bankruptcy trustee was not involved in this case, nobody was claiming that the payment was a preference or transfer under value under the BIA.

bankruptcy protection
bankruptcy protection

The bankruptcy protection case:  The Judge’s decision

The Court was not presented with evidence on whether the $40,000 payment in question was approved within the proposal extension process or whether it was not approved.  There was evidence to support Schendel’s compliance with approved procedures.  In the post-NOI period, the supplier was found to have provided goods to various Schendel projects worth $34,476.75.

There was evidence that the payment was not just a payment on account of a pre-filing debt without further transactions post-filing.  According to the Judge, the stay would not apply to indebtedness arising from goods or services supplied to Schendel after the filing of the NOI.  This is because such indebtedness would not be a claim that could be a proven claim in the bankruptcy.

The Judge further stated that it is the Receiver’s responsibility to prove that the payment violated the stay. Schendel and the supplier did continue to do business together after the NOI was filed, according to the evidence. During the hearing, the Judge said that he should not simply assume facts in the Receiver’s favour.  Additionally, the evidence indicated that some of the $40,000 payment was applied to the post-NOI supply of goods. A total of $34,476.75 worth of product was supplied to Schendel after the NOI was filed.

As a result, the Judge rejected all of the Receiver’s arguments and dismissed his Application in its entirety.  Consequently, the supplier kept the $40,000.

Bankruptcy protection: How to cash your insolvent customer’s cheque safely

Companies filing for bankruptcy protection, whether under the CCAA or BIA, are reorganizing to stay in business.  Businesses require purchasing goods and services and paying for them.  It’s possible that some pre-filing debts will be paid after the filing date even though the debts are frozen from a collection perspective.

The stay does not necessarily prohibit every post-NOI payment by an insolvent company to a creditor. Such payments are valid when they are necessary to enable the company to move forward with restructuring.  For example, a creditor may require payment of all or a portion of its pre-filing debt in order to supply post-filing.

Parties can agree to repay past debts in order to secure future supplies. First and foremost, the BIA process aims to encourage a debtor to reorganize as a going concern. Both creditors and debtors benefit from the debtor’s continued operation during this critical time. The BIA’s stay provisions and preference provisions give debtors breathing room to reorganize their finances. Setting up legitimate agreements with key suppliers is an integral part of that process.

In the end, it is critical to determine whether the payment of past indebtedness is a valid condition of post-NOI supply, which is required for restructuring to proceed.  In that case, the post-filing payment of the pre-filing amount will be valid.  If not, the insolvency trustee can recover it from the supplier.

Creditors seeking to recover pre-filing debts must make the payment as a condition of a post-filing supply arrangement.  Additionally, because all of this is playing out in real-time in higher-risk settings, a supplier is free to amend the pricing post-filing.  Similarly, if the supplier can secure it, there is no reason for them to not try to go from an unsecured creditor to a secured creditor on the post-filing supply by taking security or requesting a letter of credit.  This would all be done out of an abundance of caution because as stated above, unpaid post-filing debts are not a claim provable in the company’s bankruptcy if the restructuring is unsuccessful.

bankruptcy protection
bankruptcy protection

Bankruptcy protection summary

I hope you found this bankruptcy protection Brandon Blog post informative. Are you worried because you personally or as business owners are dealing with substantial debt challenges and you assume bankruptcy is your only option? If it is too much debt for any reason, 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 while avoiding bankruptcy. We can get you the relief you need and so deserve.

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. Even though we are licensed insolvency trustees, we have found that not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of 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, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation. We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

bankruptcy protection
bankruptcy protection
Categories
Brandon Blog Post

TO CALCULATE HST IS EASY: PAYING IT AND SOLVING OTHER GIGANTIC COVID-19 BUSINESS DEBT PROBLEMS ARE NOT

calculate hst
calculate hst

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

Calculate HST and Canadian small business

I read two business reports this week, one from the Canadian Federation of Independent Businesses (CFIB) and one from the Canada Revenue Agency (CRA).  They both contain troubling information.  The combined effect is bad news.

CRA reports that businesses owe $14.3-billion in unpaid sales tax.  CFIB estimates that small businesses in Canada owe a collective $139 billion in debt due to the COVID-19 pandemic as of August 2021.

Almost three-quarters of small businesses that took on debt expect it to take more than a year to repay. For businesses in the hospitality sector, the number jumps to 87 percent, with most saying it will take longer than two years to pay it off.  Nearly a quarter worried about ever being able to pay off their debts.

These two reports clearly illustrate that one of the debts Canadian business owners have amassed is collected but unremitted Harmonized Sales Tax (HST).  This Brandon Blog will not only describe how to calculate HST but also explain what will happen if you do not pay it over to CRA.

Calculate HST Amounts in Sales and Purchase Documents

You must register for GST/HST if you bill more than $30,000 per year. You do not need to register if you don’t exceed this amount. The HST calculation varies according to the province or territory you operate in. Several provinces have harmonized their provincial sales tax with the Goods and Services Tax (GST) and charge HST on taxable goods and services. GST and provincial sales tax have to be charged in provinces with PST; GST is calculated on the price of each taxable sale of goods or services before PST is added.

HST is calculated on the revenue from each taxable sale that is collectible or collected. The HST on each taxable supply produces an input tax credit that can then be deducted from the HST owing. HST on taxable sales less input tax credits from taxable supplies is the net amount of HST due or refund for the period.  Your HST return may need to be filed annually, quarterly, or monthly, depending on how large your business is as measured by total sales and therefore sales taxes also.

CRA has created an HST calculator to help you calculate HST.

calculate hst
calculate hst

Calculate HST is just one part of small business debt and the COVID-19 impact

In their August 2021 research study, the CFIB uncovered a variety of issues that show the Canadian small business sector is struggling. They found:

  1. It is estimated that 71% of Canadian small business owners have taken on new debt loads to deal with the effects of the COVID-19 pandemic.
  2. CFIB estimates that total Canadian small business debt loads related to the coronavirus is around $139 billion, and 76% of businesses that took on debt said it would take them more than one year to repay it.
  3. Governments should continue business relief measures as government support is winding down since Canadian small businesses are carrying such a burden and are having difficulty regaining their footing.  Rent assistance is one such support program.
  4. Only 39% of small businesses in Canada are currently making sales they consider to be normal for this time of year, despite recent improvements.  Most continue to experience declines in revenue.
  5. About 17% of small businesses in Canada have sales that are half or less of what they should be.
  6. Four in five businesses are using one or more sources of funding to cope with COVID-19.
  7. In the arts, recreation & information, and hospitality sectors, 9 of 10 businesses are using some federal, provincial, or other funding to cope with COVID-19.
  8. In three out of five cases, government relief programs replace less than 30 percent of the COVID-19 shortfall.
  9. Scaling back federal relief programs comes too quickly for most business owners.
  10. According to half of the entrepreneurs, repaying their debt is the biggest challenge their business faces on the road to recovery.

Now for the CRA news release that has to do not only with how to calculate HST, but who is and is not paying their HST.

How to calculate HST is only the first part: Businesses owe $14.3-billion in unpaid sales tax, Canada Revenue Agency says

The number of companies falling behind on federal sales tax remittance indicates financial distress, as companies battle the pandemic and supply chain issues.  In March 2020, when pandemic restrictions began, the nation owed $11.5 billion in GST and HST to the government. By September 2021, it owed $14.3 billion, an increase of 24 percent over that amount.

As of 2020-21, the CRA has received about 500,000 fewer sales tax returns than the year prior. There were approximately 105,000 fewer sales tax filers, the agency reports.  Despite the fact that so many businesses are still operating at some level, they are not even bothering to file their tax returns.

Most businesses file their HST returns on either a once-a-year reporting period or on a quarterly reporting period.  Some larger companies report and remit monthly.  Quarterly remitters with annual taxable income between $1.5 million and $6 million showed the largest drop in returns by reporting period.

Therefore, it is clear that Canadian businesses are using the tax amounts collected as another source of financing since the pandemic hit.  There is no mention of HST in the CFIB study.  HST collected but not remitted was not even considered as a source of financing, which it is.

calculate hst
calculate hst

Calculate HST but if you don’t pay, it is a deemed trust

Regardless of the business legal structure, the GST/HST amounts you collect from your customers are considered a deemed trust in favour of the federal government.  In an operating business, it takes precedence over whatever debts you owe to other creditors, including secured creditors.  The CRA can still get payment from your bank even if the bank does not lend money to you. They can go to the bank where you keep your business funds and get payment there.  All that is explained in my blog post about Canada v. Toronto-Dominion Bank.

However, the CRA has the following options:

  • garnish bank accounts, accounts receivable, and all other sources of income;
  • confiscate and sell assets; and
  • pursue other legal remedies.

In my experience, CRA does not typically seize and sell assets.  Instead, they pursue garnishments.  As in the TD Bank case, they can also just go to whichever of the financial institutions the business banks with and demand the HST funds that have been deposited.  When a company owns real property, they may get a judgment from a federal court without notifying the owner, and register that judgment against the title to the real property.  Upon refinancing or selling the property, the business owner is required to repay the judgment, plus interest.

Calculate HST: Are HST and COVID debt crushing the life out of your business?

In an environment hamstrung by manufacturing and shipping backlogs, businesses may experience supply shortages and higher delivery costs.  Even though paying your bills may be the most emotionally satisfying course of action, it may not be the most practical.

It’s better for your business and your employees if you seek professional advice if you believe that you cannot make next month’s payroll.  The following issues cannot be ignored: lenders demanding loan repayment, landlords threatening to end your lease or seize your assets as payment, suppliers cutting off credit or halting deliveries.

The first thing I do as a licensed insolvency trustee is to determine what stage of the business the company is at.  The stage the business is at is crucial for me to understand.  The choices are:

  1. Solvent and viable.
  2. Solvent but not viable.
  3. Insolvent and viable.
  4. Insolvent and not viable.

The business can probably restructure with some simple changes to its operations if it is solvent and viable.  Insolvent companies that are still viable may be restructured under the provisions of the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act.

The business can be liquidated or sold if it is not viable, but it is solvent.  If it is insolvent and not viable, we are probably looking at bankruptcy or receivership.

A deep dive is required to find out what the correct answer is.  For sure I would need to calculate HST collected but unremitted, as that is a deemed trust claim, apart from one exception I describe below.

calculate hst
calculate hst

Calculate HST:  What happens to the deemed trust claim in a bankruptcy?

The Excise Tax Act (ETA) defines GST/HST as a deemed trust claim.  Under the ETA, a deemed trust claim will include amounts for GST/HST that was collected by the business but not paid to the CRA.  There is only one exception.  A bankruptcy of the business will rearrange the priorities.  In a bankruptcy, the deemed trust GST/HST claim becomes an ordinary unsecured claim.  There is no statutory authority for this same outcome in a BIA restructuring Proposal.  However, sometimes, as an administrative issue, CRA will allow this treatment also.

According to one school of thought, unremitted amounts included in deposits or loan repayments to a financial institution before bankruptcy continue to be deemed trust claims.  Nonetheless, the Supreme Court of Canada clarified GST/HST deemed trusts and secured creditors’ responsibilities for funds received.

The Callidus Capital Corporation v Her Majesty the Queen decision was reversed by the Supreme Court of Canada in 2018. For secured creditors, the decision that the deemed trust provisions of the ETA become inoperative on bankruptcy, and therefore secured creditors are not liable to account for proceeds received from a debtor pre-bankruptcy, is significant.

Calculate HST:  GST/HST liability For directors

ETA section 323 increases the CRA‘s power to collect unremitted GST/HST when efforts to collect against corporations prove futile.  As a result of the failure of the corporation to remit GST/HST, its directors will be liable for any tax the corporation should have remitted. The directors are jointly and severally liable for the corporation’s unremitted GST/HST.

CRA has the right to look to the directors whether the corporation is in bankruptcy or not.  When we calculate HST and discover a company owes net HST, there is another downside to bankruptcy.  CRA may now want to claim on the directors sooner because of the HST liability becoming unsecured.

calculate hst
calculate hst

Calculate HST summary

I hope you now see why I feel the combination of the CFIB survey results and the announcement from CRA spells upcoming trouble for Canadian businesses.  I also hope you found this calculate HST Brandon Blog post informative. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? If it is too much debt for any reason, 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 while avoiding bankruptcy. We can get you the relief you need and so deserve.

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. Even though we are licensed insolvency trustees, we have found that not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of 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, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation. We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Categories
Brandon Blog Post

3 TOP WAYS TO SUCCEED IN CREDIT REPAIR USING A CREDIT CARD FOR REBUILDING CREDIT

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Credit card for rebuilding credit:  Introduction

Money mistakes in the past can negatively impact your credit score and your ability to qualify for a loan or obtain a good interest rate. Fortunately, there is hope.  Bad credit scores can be improved in Canada by the use of perseverance and some time.  You might even qualify for a credit card for rebuilding credit in Canada.

This Brandon Blog shows you how to take control of your finances, including learning how to use a credit card for rebuilding credit to improve your credit rating.

credit card for rebuilding credit
credit card for rebuilding credit

A credit card for rebuilding credit for people with bad credit is not  your first step

Getting a copy of your credit report is the best way to determine which areas need improvement when it comes to repairing your credit.  How many late or missed payments have you had in the past? The credit bureaus can report past due utility payments, outstanding cell phone bills, and old parking tickets.  Have you exceeded your debt utilization ratio? Did you experience bankruptcy in your past?

Could your credit report be inaccurate?  This is something that needs to be brought to the creditor’s attention so that they can fix the problem and revise their reporting.  As an alternative, you can provide proof to the two credit reporting agencies in Canada, so that each can correct the error.

credit card for rebuilding credit
credit card for rebuilding credit

A credit card for rebuilding credit Canada is not your next step either

Now that you know your debts need to be addressed, you need to figure out how to get your payments in order.  You need to develop smart spending and saving habits to rebuild your credit score.  One of the best ways to do this is to create a budget that reflects your income and expenditures.  In my Brandon Blog, I have written extensively about the importance of household budgets.   Budgets are essentially a plan for how you will spend your money. Following a budget will help you with having normal and current payment activity.

Getting comfortable with not overspending and living within your means should become a habit. You don’t have to give up every nice dinner or outing just because you have a budget, but you do have to be aware of how much income you have available to spend and save after taxes.  This will allow you to be able to make all necessary payments on time.

Next, you must establish better credit history through consistent payments.  Your payment history is the most important factor in determining your credit score, so if you’ve fallen behind on your payments – or haven’t been paying on time – your credit situation is unlikely to improve until you catch up on your accounts.  Without improving on this, you cannot fix a poor credit score.  Spoiler alert – making only the minimum payment each month against your regular credit card is not keeping current on that debt.

If you cannot pay your overdue accounts right now, call up your creditors.  Maybe you can negotiate a special repayment plan that fits your budget.  Cut your debt as much as possible.  Credit utilization ratios are very important.  If your various types of credit, such as credit card balance, line of credit, or overdraft are used more than three-quarters of your available credit, that will bring down your credit score.

With time, patience, and financial discipline, building a better credit history and credit score – even rebuilding credit after bankruptcy – can be done. In the beginning, you may need to only use cash, and preferably not your debit card, for all of your necessary everyday purchases.  Put your credit cards away to avoid temptation.  Knowing that if you do not follow your budget you will run out of money is a strong motivation to stay on track when you only take out the amount of cash your budget says you can afford to spend.

One of the first steps to rebuilding credit with a credit card might be to lock each traditional credit card away and not use them!

credit card for rebuilding credit
credit card for rebuilding credit

Prepaid Credit Cards vs. Secured Credit Cards: What’s the Difference?

Prepaid cards are sold at many retail locations, such as grocery stores and pharmacies.  A service fee is charged when you load money onto the card and when you use it.  So not all the money you load onto the card is applied to your purchases.  Whenever you do buy something with this kind of credit card, the dollar amount of your purchase is deducted from your cash balance.

You can still get a prepaid credit card without having a good credit score.  That is because by getting this type of card, you are not applying for or getting credit from anyone.  To load it, you use your own money.  To put money onto a prepaid card you can: (i) transfer money from your bank account onto the card; or (ii) give cash to the clerk who will add it to the card at the store that sold it to you.

Prepaid cards are not credit cards in the traditional sense, so they won’t help you build credit or repair credit.  In the same vein, it is not a credit card for rebuilding credit.

One of the requirements of a secured credit card is that you need to pay a cash deposit. Once the deposit is made, the credit limit is equal to the amount of the deposit.  The security deposit that you pay is collateral held onto by the credit card issuer in return for the credit they are extending to you.  If you don’t repay your balance on time, the credit card company can use this security deposit to pay off your debt.  Once you have paid the security deposit, you can use the secured credit card.

The normal size of payment of security deposit typically varies from $500 to $10,000. You can get a secured charge card if you do not get approved for a standard unsecured credit card. Those with a poor credit history looking for a credit card for rebuilding credit will certainly find a charge card of this kind beneficial. Secured cards do not require a credit check because the financial institution is protected by the down payment. Consequently, you are practically certain to be authorized.

You will boost your credit rating as you make purchases and repay your full balance outstanding every month with this type of card. It is because the issuer of the secured credit card is really giving you credit. Your balances as well as payment history are reported frequently to the two credit bureaus in Canada. You can enhance your credit score over time by making your full regular monthly payments when due. Any individual aiming to use a credit card for rebuilding credit should seriously look into getting a secured credit card.

credit card for rebuilding credit
credit card for rebuilding credit

Credit card for rebuilding credit:  Secured credit cards vs. unsecured credit cards

There are differences between secured cards and unsecured credit cards. An unsecured credit card is a routine charge card that can be made use of day-to-day as much as the credit limit allows. The issuer of these types of traditional charge cards makes a hard credit check inquiry right into your credit report when you apply for one. An unsecured card does not need a down payment. An unsecured charge card normally has a higher credit limit, and some credit card companies offer with their unsecured cards benefits like cashback, price protection, a better interest rate on purchases or travel points.

You can ask if your secured card can be turned into an unsecured one after an amount of time (and your security deposit returned).  I would say that a reasonable time period would be six months to a year of making consistent payments on time as well as staying within your credit line. You have to demonstrate that you can handle credit properly.

Credit cards, both secured and unsecured, report your activity to the credit bureaus. If you use the card responsibly, you can build or rebuild your credit.  Look around carefully to find the right credit card for your financial and credit score situation that will help you rebuild your credit.  Secured, unsecured, low-interest rate, travel benefits and even guaranteed approval credit cards are available from many financial institutions in Canada.

Picking the ideal credit card for rebuilding credit is really crucial.  While some bank cards have an annual cost, others do not.  You must constantly check out the fine print in the contract when picking a credit card.  I wish you great success in your financial journey.

credit card for rebuilding credit
credit card for rebuilding credit

Credit card for rebuilding credit:  Summary

I hope you found this credit card for rebuilding credit Brandon Blog post informative. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? Your situation may be so dire that a redone budget and a secured credit card may not be enough of an answer.  If it is too much debt for any reason, 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 while avoiding bankruptcy. We can get you the relief you need and so deserve.

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. Even though we are licensed insolvency trustees, we have found that not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of 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, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.  We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

credit card for rebuilding credit
credit card for rebuilding credit

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Categories
Brandon Blog Post

BAD CREDIT LOANS TORONTO: DO YOU NEED TO BORROW WITH ALARMING HIGH-INTEREST INSTALMENT LOANS?

bad credit loans toronto
bad credit loans toronto

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

Bad credit loans Toronto: How Canadians are dealing with higher rates

Low- and moderate-income people make up the membership of the Association of Community Organizations for Reform Now (ACORN) Canada.  A report about high-interest loans was published by the organization in February 2021.  The study found that instalment loans and high-interest online loans are becoming more popular.  This loan type differs from payday loans in the category of bad credit loans Toronto.

According to the study:

  • Loans with high-interest rates are growing in popularity.
  • We need to protect consumers from unfair and deceptive practices.
  • To stop unfair lending practices, the Federal Government needs to act.

Since the publication of the study, nothing has changed.  The COVID-19 pandemic, the vaccination program, and the continuing stimulus to the Canadian economy have certainly taken the spotlight.  I discuss these new high-interest loans in this Brandon Blog, which are akin to long-term payday loans for bad credit loans Toronto.

bad credit loans toronto
bad credit loans toronto

Bad credit loans Toronto:  Forget payday loans, this is Canada’s new generation of high-interest loans

Provincial laws regulate payday loans, which usually have to be repaid within two weeks. These loans have very high-interest rates and are for relatively small amounts – enough to tide the person over until the next regular payday.  In the event that a borrower cannot repay the loan on time, the payday lender rolls the amount owed, with more fees, into a new loan.

Typically, this results in annualized rates of interest between 400 percent and 500 percent.  Canadians are struggling at a time when this form of legalized loan-sharking continues.  Anti-poverty groups like ACORN have long targeted the industry, but it is being increasingly targeted by legislation.

In the midst of government efforts to rein in the payday loan industry, payday lenders as well as new online lenders offering an alternative to payday lenders are extending lines of credit and instalment loans to cash-strapped borrowers. At 47% annual interest, these lines of credit and instalment loans create debt traps.

Lack of regulation of high-interest personal loans has contributed to the growth of lenders offering bad credit Toronto instalment loans. According to ACORN’s report, nine out of 13 provinces have specific rules to regulate payday loans, but far fewer have rules to address other forms of high-cost lending, such as instalment loans.

bad credit loans toronto
bad credit loans toronto

Bad credit loans Toronto: Why Canadian borrowers are still taking on the high-interest loans steep commitment

Due to a lack of regulation, these high-interest instalment loan lenders have grown at a rapid rate.  Why do Canadian borrowers continue to take on debt when interest rates are so high?   It is because they cannot avoid it.  People who borrow this way often have no other option.

It was brought to light by the pandemic that there are essentially two classes in Canada: those with solid credit scores, savings, an emergency fund and collateral, and those without.  The major banks and credit unions can lend to the former at a competitive interest rate but won’t to the latter.  So many Canadians need this type of alternative lender.

Payday lenders are not the only players in the high-interest instalment loan industry in Canada. Equitable Bank and easyfinancial are also major players. The most common uses of the funds borrowed on these high-interest installment loans since the pandemic began are:

  1. Financing furniture and appliances purchases.
  2. Paying rent and other expenses both before and while receiving federal government COVID-19 support payments.
  3. Supporting other family members while unemployed.
  4. Buying Christmas presents.

Let’s learn how installment loans work.  Suppose you want to purchase a $1,500 piece of furniture for your apartment and the store offers you the option of an instalment loan financing.   It costs almost $2,000 to borrow to pay for the furniture and the additional charges and administration fees. A 29.99 percent annual interest rate applies. In this example, the cost of borrowing is just over 39 percent annual percentage rate (APR), which includes interest and other charges.

The loan term will ultimately come to an end.  The loan does not amortize so that there is nothing owed at the end of the term.  They may refinance the loan for you if you are unable to repay the outstanding balance of the loan on time at the end of the term.  If they do, it is at a higher interest rate than the original loan (with more fees and charges of course.)  It becomes a never-ending circle debt trap.  This is how high-interest instalment loans work.

bad credit loans toronto
bad credit loans toronto

Bad credit loans Toronto:  Budget 2021 sets up a fight over high-interest loans

In order not to be guilty of charging a criminal rate of interest on those long-term loans, they need to adhere to the maximum annual interest limit of 60 percent.  This rate, however, has been in effect for almost four decades already.  Despite the fact that annual interest rates on these high-interest rate instalment loans are less than 60 percent, critics contend that they charge a criminal rate practically, if not legally.  There are faint rumblings of some political will to try to rein in what many call predatory lending.

bad credit loans toronto
bad credit loans toronto

Bad credit loans Toronto summary

I hope you found this bad credit loans Toronto Brandon Blog post both informative and eye-opening. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? If it is too much debt for any reason, 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 while avoiding bankruptcy. We can get you the relief you need and so deserve.

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. Even though we are a licensed insolvency trustee, we have found that not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of 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, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Categories
Brandon Blog Post

WHAT DOES BANKRUPTCY DISCHARGED MEAN FOR 1 BANKRUPTCY TRUSTEE AND SOMEONE WHO IS SERIOUSLY BANKRUPT?

 

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

What does bankruptcy discharged mean:  Restrictions placed on undischarged bankrupts

By enabling debtors to file an assignment in bankruptcy or consumer proposal, the Bankruptcy and Insolvency Act (BIA) provides relief to an honest but unfortunate debtor.  Garnishment of wages (other than marital support) ceases, legal actions and collection calls cease, and the debtor receives some breathing space.  If a bankrupt fails to fulfill his or her obligations, what happens?  Can they receive a discharge from bankruptcy?

This Brandon Blog examines a recent case from Nova Scotia dealing with what does bankruptcy discharged mean for both a bankrupt person and for the licensed insolvency trustee.  I also describe what does it mean for an undischarged bankrupt if the bankruptcy trustee gets its discharge when the bankrupt person does not have their bankruptcy discharge.

I will eventually get to the Court case, but there is first some background information that I will provide which sets the stage for a better understanding of the Court decision.

What does it mean to be an undischarged bankrupt?

In the event, you were unable to fulfill your obligations under your personal bankruptcy proceedings, your Trustee, and maybe a creditor or two would have opposed your discharge from bankruptcy.  A bankrupt who has not been discharged poses many potential problems.  Therefore, if you are an undischarged bankrupt, it is because you have failed to fulfill one or more of your obligations as a bankrupt.

what does bankruptcy discharged mean
what does bankruptcy discharged mean

What does bankruptcy discharged mean:  Debts eliminated by bankruptcy discharge

A bankruptcy discharge means that you have completed your personal bankruptcy process and are no longer legally liable for any outstanding debt you included in the bankruptcy filing (with the exception of a few which I will describe soon).  Upon receiving an absolute discharge from bankruptcy (we’ll get to that shortly), you are no longer responsible for any discharged debts.

The discharge in bankruptcy eliminates most of your debts, including unsecured debts such as credit card bills, medical bills, and payday loans.  When you are discharged from bankruptcy, not the fact that you filed for bankruptcy, is what eliminates your debts.  You need your discharge to get rid of your debts, which explains why it’s so important.  That is what does bankruptcy discharged mean, really means.

What does bankruptcy discharged mean:  Bankruptcy law can resolve tax debts

As well as the usual unsecured debts mentioned above, if you owe Canada Revenue Agency (CRA) money because you were not able to pay your whole personal income tax obligation when you filed your taxes, then a payment arrangement makes sense.

Collections officers from the CRA contact taxpayers regarding outstanding income tax debt arising from their tax filings and notices of assessment.  They attempt to collect from delinquent taxpayers.  When you say that you cannot pay the full amount at that time, they will offer you the option of a payment arrangement.  The interviewer will ask you about your financial situation and may ask you to submit documents to support your income and expense claims.

They recommend a settlement plan after evaluating the information. Only if all attempts at collection have failed will legal action be taken.  You must send the CRA postdated cheques to cover the agreed-upon monthly payment to participate in such a plan.  Additional payments can be made if you have money to spare.  The interest clock does not stop with a CRA payment plan.  Be certain that all your cheques clear the bank as well.  The entire payment plan can be cancelled if only one is returned NSF.

Should you enter into a payment plan? Yes.  You should demonstrate to CRA that you want to work with them, and avoid tax debt collection activities that will disrupt your life.    The most common enforcement activity involves freezing and taking money from your bank accounts, as well as garnishing your salary or wages if you’re employed.  If you are a proprietor, they can notify your customers and claim your receivables. Furthermore, a federal judgment can be obtained without your knowledge to place a lien on your home.

You do not need to experience CRA’s more drastic collection methods. Be sure to pay your obligations on time. A tax garnishment, third-party assessment, or an asset lien is never pleasant.  The consequences are severe and disruptive. In most cases, CRA only takes this step if you fail to comply with their efforts to enter into and maintain a CRA payment arrangement.

CRA tax debts can be discharged under bankruptcy law if no payment plan can be arranged.  If bankruptcy is successfully discharged or a consumer proposal is fully completed, the income tax debt can be eliminated.  We assume that CRA hasn’t already obtained a judgment against your interest in your home and registered it against it.  Upon doing so, the CRA has successfully turned an unsecured debt into secured debt, and bankruptcy law no longer applies.

Several other things to keep in mind are:

  • A bankrupt who owes more than $200,000 in personal income taxes and whose personal income tax debt represents at least 75% of their total unsecured proven claims is considered a high-tax debtor.  In this situation, you cannot be automatically discharged.  It is unavoidable that the Trustee will object to your discharge and there will be a discharge hearing before the Bankruptcy Registrar in the Bankruptcy Courts.  Additionally, the CRA will oppose your discharge and will make submissions at your hearing.  I am certain you will receive a conditional discharge, at least with the condition that you pay a portion of your income tax debt to the Trustee for distribution among your creditors.
  • Unremitted employee source deductions owed by a proprietor or partner of an unincorporated business will not be helped by bankruptcy law.  Generally, bankruptcy will eliminate HST obligations.  For now, CRA ranks the debt as unsecured in a consumer proposal, but as CRA provides the accommodation, it is not a part of bankruptcy law.  If the outstanding HST is extremely large, the CRA may argue that since you held the HST in trust for them, it still remains a claim even if you declare bankruptcy.  Under Canadian bankruptcy law, they can do this, but I have not seen them do it yet.
  • Director liability for unremitted employee source deductions or HST is an unsecured claim against you for your personal liability as a Director.  Bankruptcy and a properly worded Proposal will both eliminate that debt.

    what does bankruptcy discharged mean
    what does bankruptcy discharged mean

What does bankruptcy discharged mean:  Debts never discharged in bankruptcy

In personal bankruptcy, there are certain types of debts that are not discharged. Section 178(1) of the BIA outlines the following debts that are nondischargeable debt:

  • Any type of fine, penalty, restitution order, or other order similar to a fine, penalty or restitution order, imposed by a court for an offence, or any kind of debt arising from a recognizance or bond;
  • Damages awarded by a court in a civil case for:
    • bodily injury intentionally caused, or sexual assault, or
    • wrongful death as a result of these acts;
  • the payment of spousal support or an alimentary pension;
  • any financial obligation or liability arising under a judgment establishing an association or regarding support, maintenance, or an agreement for maintenance and support of a spouse, former spouse, previous common-law partner, or child who is not living with the bankrupt;
  • a financial obligation or liability that results from fraud, embezzlement, misappropriation or defalcation in a fiduciary capacity or, in the Province of Quebec, while acting as a trustee or administrator;
  • apart from debts and responsibilities arising from equity claims, any debt or liability resulting from getting property or services by false pretenses or fraudulent misrepresentation;
  • unless a creditor had notification or understanding of the bankruptcy and didn’t take reasonable action to prove a claim, the liability for the dividend that a creditor would have received on any provable claim not disclosed to the trustee; or
  • student loans if the bankruptcy occurred before the bankrupt stopped being a full- or part-time student or within seven years of the date the bankrupt stopped being a full- or part-time student.

What does bankruptcy discharged mean:  Absolute discharge vs. conditional discharge and so on and so forth

In order to obtain a discharge, a bankrupt person must have fulfilled all of their bankruptcy duties.  These personal bankruptcy duties include:

  • providing all books, records or documents to the Trustee that identify the assets and liabilities of the debtor;
  • prepare and submit to the Trustee within 5 days after filing for personal bankruptcy, unless the Office of the Superintendent of Bankruptcy Canada extends the time, a sworn statement of affairs detailing the person’s assets and liabilities, and for each of the bankrupt’s creditors, their respective names, addresses and the amount owing;
  • disclose to the Trustee complete details of all dispositions of property within 1 year before the date of the bankruptcy;
  • make a disclosure to the Trustee of all the details of property disposed of by gift or settlement without adequate valuable consideration within a 5 year time period before the date of bankruptcy;
  • if a creditors’ meeting is called, attending it;
  • making any required surplus income payments to the Trustee;
  • participating in two mandatory financial counselling sessions; and
  • offering whatever assistance is requested by the Trustee.

If the bankrupt fulfill all of their duties, then the Trustee will not have a reason to oppose the discharge.  If no creditor opposes, then the bankrupt is entitled to an absolute discharge.  As already stated, the discharge is what eliminates unsecured debts.

In addition to an absolute discharge, there are other types of discharge under bankruptcy law available to a bankrupt person upon having a discharge hearing:

  • conditional discharge;
  • suspended discharge; and
  • refused discharge.

To read more on the different kinds of discharges available to be applied to a bankrupt person, and for what does bankruptcy discharged mean, take a look at my August 2021 Brandon Blog “A BANKRUPTCY DISCHARGED IS THE KEY TO HEARTWARMING DEBT ELIMINAT1ON“.

what does bankruptcy discharged mean
what does bankruptcy discharged mean

What does bankruptcy discharged mean:  At long last, the Nova Scotia case

The Nova Scotia bankruptcy case deals with the discharge of the Trustee in a personal bankruptcy matter.  Once the Trustee brings on the bankrupt’s application for discharge and a discharge Order is made by the Court, and the Trustee completes the rest of the administration of the bankruptcy estate, the Trustee is entitled to a discharge.  If the bankrupt did not receive an absolute discharge and has not completed his or her duties, including complying with a conditional discharge order, eventually, the Trustee can still apply for its discharge.  Upon the Trustee’s discharge two things occur:

The bankrupt goes into bankruptcy purgatory.  No discharge occurs.  The Trustee has fulfilled its obligation to present the bankrupt’s discharge request to the court and the court has issued an Order. Whenever the bankrupt wants to prove they have fulfilled all their obligations, obeyed the discharge order, and now deserve an absolute discharge, he or she will need to retain a bankruptcy lawyer and apply to the Bankruptcy Courts.

On the day the Trustee is discharged, the stay of proceedings that had protected the bankrupt from any enforcement action by creditors whose debts were owed at the date of bankruptcy no longer applies.  As a result, creditors can now pursue the bankrupt person since the debts have not been eliminated and the stay of proceedings is no longer in place.

It is interesting to examine how far the Registrar in Bankruptcy directed the Trustee in this Nova Scotia bankruptcy case to ensure that all creditors understood that they still had the right to pursue the bankrupt.

The decision in Frost (Re), 2021 NSSC 296 can be boiled down to the following facts:

  • Mr. Frost went bankrupt.
  • He failed to fulfill his duties and moved to the UK permanently.
  • He didn’t inform the Trustee of his new address and telephone number.
  • His actions left his Trustee and other stakeholders to fend for themselves, explicitly telling the Trustee he wasn’t going to fulfill those duties and didn’t intend to do so.
  • A hearing was held for the bankrupt’s discharge and Mr. Frost was refused discharge.
  • The Court previously directed the Trustee to appear before it to be heard on the Trustee’s application for discharge.

The Court concluded that the Trustee completed the administration of the bankruptcy estate and gave the Trustee its discharge.  However, the reason why the Registrar in Bankruptcy wanted the Trustee to attend such a hearing was so the Registrar could take things one step further.  In the normal course, the Trustee sends out a notice to all those whose proof of claim was admitted of the results of the bankruptcy administration and of the Trustee’s discharge.  However, the Registrar wanted to make sure that it was crystal clear to all creditors.

The Registrar wrote a cover letter for the Trustee and directed the Trustee to send it along with the normal statutory notice to creditors (or their debt collectors of record).  Here is a copy of that letter:

what does bankruptcy discharged mean
what does bankruptcy discharged mean 

What does bankruptcy discharged mean summary

I hope you found this what does bankruptcy discharged mean Brandon Blog post informative. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? If it is too much debt for any reason, 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 while avoiding bankruptcy. We can get you the relief you need and so deserve.

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. We help many people and companies stay clear of 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, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

what does bankruptcy discharged mean
what does bankruptcy discharged mean
Call a Trustee Now!