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COMPANY BANKRUPTCIES: A USEFUL TOOL TO SHOWER EXECS WITH BONUSES?

company bankruptcies
company bankruptcies

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would rather listen to the audio version of this company bankruptcies Brandon’s Blog, please scroll to the bottom and click on the podcast.

Company bankruptcies introduction

Company bankruptcies have been in the news during 2020. The ones that got the most attention were large US retailers filing for Chapter 11 bankruptcy protection, their Canadian subsidiaries filing for restructuring or pure Canadian retailers who needed to file.

In the United States, almost one-third of 40 big firms seeking U.S. bankruptcy protection during the coronavirus pandemic awarded bonuses to execs within a month prior to filing their cases, according to a Reuters evaluation. Eight companies, consisting of J.C. Penney and Hertz, approved the bonuses as few as five days before seeking bankruptcy protection.

In this Brandon’s Blog, I discuss why this happened and look at could it happen in Canadian bankruptcies cases.

The role of a Key Employee Retention Plan (KERP) in company bankruptcies

A KERP is not a new concept in company bankruptcies. KERP refers to an advantage strategy utilized by a debtor company in a bankruptcy situation as incentives to upper management to stay working for the business throughout the bankruptcy. The purpose of this KERP is to help in the retention of particular essential qualified and competent executives of the company and its subsidiaries, by providing a retention bonus offer for such employees in return for their continued employment during the restructuring of the business in bankruptcy protection.

The KERP intends to maintain qualified officers, employees, and directors of the company and its subsidiaries upon whose judgment and effort the company depends upon for the successful conduct of its business. It is expected that providing such persons with a direct stake in the firm’s successful restructuring will assure a more direct alignment of their interests with those of the business and have them working on the company’s behalf throughout the entire financial restructuring. In this way, senior management and key personnel are incentivized to keep their employment with the company throughout its restructuring and not leave for a new opportunity.

So if KERP is normal, why pay out big bonuses ahead of time?

This phenomenon is unique to company bankruptcies restructurings in the United States. So far, it has not been applied directly to Canadian insolvency filings. The main reasons are the legislation and because of the supervisory role and practices of the courts.

KERPs have long caused objections that companies are enriching execs while cutting jobs, stiffing creditors and wiping out shareholders. In March, creditors filed a claim against previous Toys R’ US executives and directors, accusing them of misdeeds that consisted of paying out such rewards days before its 2017 bankruptcy filing. The company liquidated in 2018, terminating 31,000+ workers.

An attorney for the execs and directors stated the benefits were warranted, given the added work and stress on senior executives, as Toys R’ US had wanted to remain in business after its restructuring. As we all know, the restructuring failed and the company was liquidated.

United States legislation in 2005 needed execs and other company insiders to have a competing job offer in hand before getting retention bonus offers through a bankruptcy protection administration. That forced companies to design new means to pay the bonuses.

After the 2008 financial crisis, firms frequently proposed bonuses in bankruptcy court, casting them as incentive plans with goals execs have to satisfy. Courts mostly accepted the plans, ruling that the performance benchmarks placed the payment past the purview of the limitations on retention incentives. The plans, nonetheless, sparked objections from creditors calling them KERPs in disguise.

At some point, companies discovered they could avoid analysis entirely by approving benefits before insolvency filings. US Bankruptcy Trustees have no power to stop bonuses paid even days prior to company bankruptcies.

Why big bonuses are not paid out on the eve of company bankruptcies in Canada

As I mentioned earlier, the treatment of KERPs is really directed by the supervision of the court. A large Canadian bankruptcy protection filing that might involve a KERP is done under the Companies’ Creditors Arrangement Act (Canada) (CCAA). The Canadian legislation and therefore the decisions of the courts in Canada are different than in the United States.

A financial restructuring under the CCAA is a collaborative effort in Canada. It is not as adversarial as in the USA. In a Canadian CCAA restructuring, a Monitor is appointed by the court. The Monitor to a large extent is the “eyes and ears” of the court. The process is that the Monitor acts as a supervisor over the company’s affairs in restructuring and also acts as a mediator between the various stakeholders. The court places a high degree of reliance on the Monitor’s recommendations. The court also expects its Monitor to be in the middle of all important matters and make thoughtful and pragmatic recommendations.

In Canada, the legislation does not directly address the issue of a KERP. Rather, the court will review the terms of a KERP put before it for approval. The court expects that:

  • Hard evidence will be put before it to show why the KERP is required and will aid in the company restructuring.
  • Why the employees for whom it is being recommended qualify.
  • The court will want to see that the KERP was negotiated, that key stakeholders had input, and there is not a “one size fits all” plan for all the employees.
  • Rather, individual employee characteristics have been taken into account.
  • The Monitor has been involved in the discussions and is recommending it to the court with reasons.

The proper use of an appropriately-calibrated reward plan is evident:

  • Company bankruptcies cause staff members now in an insecure position to be prey to competitors able to provide the possibility of a stable and solvent workplace to people whose natural very first top priority is caring for their households.
  • There is a danger that the top and mobile employees will certainly be cherry-picked while the company in a restructuring might discover itself significantly handicapped in attempting to attract competent senior staff.
  • Sometimes a restructuring can result in a court-supervised sales process. Employees might commonly find themselves being asked to bring all of their skills and devotion to the task of making themselves unemployed.
  • Considering that many employers use a mix of base pay and profit-based motivations, company bankruptcies causing a restructuring may put greater demands on key staff including covering for associates who have been laid off or who have actually left for greener fields.

The main factors considered by the court being asked in company bankruptcies to approve a KERP

The main factors a court considers during company bankruptcies are:

  • Whether the Monitor recommends the KERP agreement and the cost.
  • For the senior staff to which the KERP is being recommended, how realistic is it that they would seriously consider various other work choices if the KERP was not approved?
  • Is the continued employment of the senior staff members for which the KERP is being recommended is essential for the security of the business and to boost the performance of the overall restructuring?
  • Each employee’s background with and expertise in connection with the debtor.
  • Any problems in replacing each of the senior staff for the employees to which the KERP would apply.
  • Were the KERP agreement and its cost authorized by the board of directors, including the independent Monitor, as the business judgment of the board needs to not be disregarded?
  • Is the KERP agreement and charge approved or consented to by secured creditors of the borrower (who might very likely end up paying for it)?
  • Are payments under the KERP payable upon the conclusion of the restructuring process or are milestones built in that may or may not be realistic.

These are the major issues that the court needs to consider when determining whether or not to approve a KERP. As you can see, in company bankruptcies in Canada resulting in a CCAA restructuring, the issues the court must consider are many. So far, business sense has prevailed in Canada not requiring the shenanigans now taking place in US bankruptcy restructuring cases.

Company bankruptcies summary

I hope you have found this company bankruptcies Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

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Brandon Blog Post

UNDUE INFLUENCE: ENTREPRENEUR’S SPOUSE’S ONTARIO COLLATERAL SECURITY

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Undue influence introduction

Undue influence refers to a situation in which somebody is pushed into taking an action, usually with respect to their property, rather than under their own uninfluenced decision. The action does not a result of their true wishes or objectives, rather it is those of the influencer.

It is an equitable principle made use of to set aside particular transactions. While initially used on wills, it has also been found in various other transactions such as:

  • powers of attorney; and
  • a spouse providing a collateral mortgage on property owned by the spouse to support that spouse’s guarantee of a business loan taken out by the other spouse or a company owned by one or both spouses.

It is especially important to think about the concept of undue influence and its impact if suspected. This is especially true when the person being influenced is a senior when dealing with estates and wills.

In this Brandon’s Blog, I look at a recent decision of the Court of Appeal for Ontario in reviewing a lower court’s decision involving the presumption of undue influence.

Presumed undue influence

The decision of the Court of Appeal for Ontario in JGB Collateral v. Rochon, 2020 ONCA 464 (CanLII) was released on July 17, 2020. Mr. Rochon was Chairman and CEO of a publicly-traded Florida corporation (the “Company” or the “Corporation”). He was also a significant shareholder. The Company borrowed from a New York-based lender. As a condition of the loan, Ms. Rochon was required to give her personal guarantee to the lender for this debt, supported by a collateral mortgage over a farm property she owned in Lanark, Ontario. She did so.

The Corporation defaulted on the loan and filed for bankruptcy protection in the United States Bankruptcy Court. Mrs. Rochon’s guarantee was governed by New York State law, and the New York court decided that her guarantee was valid and enforceable. The lender used that finding to begin an action in Ontario seeking the possession and sale of the Ontario property.

The Ontario lower court decided that the collateral mortgage on the Ontario property was not enforceable due to the fact that:

  1. It was the result of presumed undue influence on Mrs. Rochon by Mr. Rochon.
  2. The lender had notice thereof.
  3. It did not sufficiently ensure that Mrs. Rochon got independent legal advice prior to providing the guarantee and collateral mortgage security.

The lower court’s decision of the presumed undue influence and undue influence

Whenever there is the presumption of undue influence, the evidence is needed to either prove or disprove the allegation of undue influence. As I mentioned earlier, these legal concepts arise many times in the Estates area. It is not unusual for an Estate Trustee to see the will be challenged on the basis that one or more of the beneficiaries used undue influence on the deceased when the most recent will was drafted and signed.

It also arises in commercial transactions, especially between spouses, when one spouse provides a guarantee like Mrs. Rochon did with collateral security.

The Court of Appeal started out by stating that the presumption of undue influence is a rebuttable presumption based on evidence. It emerges if the nature of the connection between the borrower and the guarantor, coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the excessive impact of one party over the other. Evidence is then needed to prove or disprove the presumption of undue influence.

The motion judge decided that the crucial points supporting a presumption of undue influence were satisfied:

“[t]his is a classic case of a spouse who unquestioningly complied with any and all requests by her husband to sign documents related to his business”.

He found two attorneys acted for the stakeholders. One of them was the company’s general counsel and also Mr. and Mrs. Rochon’s daughter. He also noted the evidence of an officer of the lender, that he asked for and received confirmation from both lawyers that everything in the guarantee, including the declaration in it that its terms had been clarified to both Mr. and Mrs. Rochon by an independent lawyer.

The lower court judge decided that this was insufficient. The lender did not get a certificate that Mrs. Rochon was provided with independent legal advice. Additionally, there was no indication that Mrs. Rochon got legal advice independently from (as well as by an independent lawyer) to any kind of legal recommendations given to Mr. Rochon.

He commented that Mrs. Rochon’s difficulty to the enforceability of the mortgage would certainly have been counteracted by the easy tool of calling for ample proof, via a Certification of Independent Legal Advice (or comparable), that Mrs. Rochon was fully knowledgeable about the import of the security that she was offering.

Based on these findings, the lower court judge found that Mrs. Rochon’s guarantee and collateral mortgage security was the product of undue influence. Therefore her guarantee was unenforceable and the collateral mortgage was void and unenforceable.

The Court of Appeal for Ontario undue influence decision

The appellate court’s three-judge panel reviewed the lower court’s decision and found several errors. Based on the evidence, the Court of Appeal found that:

  1. Mrs. Rochon never argued undue influence in the New York State court case so that issue was never examined there.
  2. The motion court considered just the nature of the connection between Mr. and Mrs. Rochon. He fell short to think about the nature of the transaction between them.
  3. While Mr. and Mrs. Rochon swore in their affidavits before the motion court that Mrs. Rochon had no financial interest in the Company, they acknowledge in their factums before the appeal court that Mrs. Rochon had an interest in the Corporation. However, they suggest that it was not significant, and for that reason, the judge’s failure to clearly consider it is of no importance.
  4. The materials before the motion court included a Schedule 13D filing with the US Securities and Exchange Commission, signed by Mr. Rochon. It was also submitted with the Securities and Exchange Commission. It shows that Mrs. Rochon was a limited partner holding a 20% interest in a limited partnership holding around 35% of the common shares of the Corporation. The filing also said that she had the indirect right, through the limited partnership, to obtain dividends from, or profits from the sale of, any common shares of the Company owned by the limited partnership.
  5. Therefore, Mrs. Rochon had a significant interest in the Company.
  6. The Company was in numerous aspects that of a family business. The Rochon’s son and daughter were employed by the Corporation. Therefore, aside from her significant economic interest in the Corporation, Mrs. Rochon had a desire to do what she could to sustain it. As she confessed on cross-examination, signing documents when asked by her other half, such as those with this financing, was in both her and her other half’s best interests. From a business perspective, there was an advantage to Mrs. Rochon.
  7. Even if a presumption of undue influence did occur such that the lender was put on notice to make certain Mrs. Rochon was participating in the transaction of her own free will, the lender did so. The lower court judge improperly elevated the test of what a lending institution must do to secure itself from an assertion of presumed undue influence.

Particularly, take practical steps to attempt to ensure that the guarantor understands the deal and is becoming part of it freely, and understands the ramifications of becoming a guarantor, by recommending that the guarantor look for and get independent legal advice.

The lower court improperly boosted the onus on the lender to a demand that a loan provider obtains a written Certification from a lawyer that the attorney has provided independent legal advice to the guarantor. The Court of Appeal For Ontario found that the inquiries made by the lender of the attorneys sufficed to shield it from Mrs. Rochon’s assertion of presumed undue influence.

Therefore, the Court of Appeal for Ontario reversed the lower court decision and gave the lender judgment to seize and sell the Ontario property.

Undue influence summary

This is a very important case for entrepreneurs in Ontario. Entrepreneurs are by definition risk-takers. It is not unusual for them to not have any family assets in their name, either jointly or on their own. Rather, family assets can be shielded by having ownership by a spouse, other family members or a family trust. That way, if the company established by the entrepreneur runs into business problems, the family home or other assets are not at risk.

For this reason, it is common for a bank to ask not only for the entrepreneur’s guarantee for a bank loan to the company, but also the guarantee of his or her spouse. The bank also can and many times does ask for collateral security to stand in support of the spouse’s guarantee. So, it is important to understand when there may be a presumption of undue influence in getting the guarantee and collateral security and what tests the court will use if it is raised as a defence on the guarantee.

I hope you have found this undue influence Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

undue influence
undue influence
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THE BEST CEWS EXTENSION NEWS REVIEWED

cews extension
cews extension

The Ira Smith Trustee Team 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’s Blog, please scroll to the bottom of the page and click on the podcast.

CEWS extension introduction

On Friday, July 17, 2020, the federal government made an announcement regarding the Canada Emergency Wage Subsidy (CEWS). The CEWS extension deals with both extending the date the program continues to and also amends some of its provisions.

This Brandon’s Blog discusses the proposed changes announced by Finance Minister Bill Morneau. I caution that this is merely an announcement about the Liberal government’s intention to make a legislation change. Right now there is no new legislation on the books so the final CEWS extension may look different than what was announced.

CEWS status prior to the July 17 announcement

The CEWS was put in place for an initial 12-week duration from March 15 to June 6, 2020, giving a 75-per-cent wage aid to eligible companies. In my May 20, 2020 blog, CANADA EMERGENCY WAGE SUBSIDY: HELPING YOUR COVID-19 BUSINESS RECOVERY, I wrote about Prime Minister Justin Trudeau introducing on May 15, 2020, amendments to the program to aid businesses to prepare for reopening. These companies needed to be able to rehire workers laid off when the state of an emergency closure was proclaimed.

Justin Trudeau’s May announcement was of a CEWS extension for 3 extra months to August 29. The CEWS covers 75% of a staff member’s wage or salary – as much as $847 per week – for qualified employers. For those able to in addition gain from the Temporary 10% Wage Subsidy for a period, any kind of credit taken under that program will decrease the total to be declared under the CEWS for that precise same period.

Another CEWS extension was inevitable

CEWS is just one of many support programs under the federal government’s COVID-19 Economic Response Plan. In my July 8, 2020 blog, CANADIAN BUSINESS: WHAT WILL BE THE ULTIMATE BUSINESS IN ONTARIO RECOVERY PROGRAM?, I talked about not only the inevitability of a CEWS extension but of extensions for the other government support programs. It is not that I am some insightful visionary, it is just as simple as the coronavirus is not going away. Similarly, the financial pain being experienced by entrepreneurs and their companies and by ordinary people is also not going away.

Everyone will certainly need to stand on their own 2 feet just like they needed to prior to the COVID-19 pandemic. Until the CEWS extension news last Friday, the Canadian company assistance programs were all set up to end August 31. I asked the question “What will take place then?”.

My personal idea was that the government will certainly not be able to finish the financial assistance programs that soon. Instead, I wrote they will certainly have to prolong all the programs once more. They may modify them to start the process of weaning Canadians off of COVID-19 Economic Response Plan assistance. However, they would certainly need to be extended.

I wrote that the government would not intend to extend for more than 90 days, however, Xmas would come shortly after the expiry of a 90-day extension, pandemic or no pandemic. The only part that I got wrong was that the government would not want to shut down the faucet prior to Christmas. So, I wrote that it suggested an extension until January 1, 2021. I also don’t see one thing in the CEWS extension that I predicted. That the government will accompany the new extension with an alert to every Canadian to get their affairs in order since there will certainly be no more assistance programs after December 31.

As I will explain below, I did not see such a warning in last Friday’s announcement.

The CEWS extension

The CEWS safeguards jobs by helping organizations maintain workers on the payroll and also motivating companies to re-hire employees formerly laid off. The Canadian government says that since the CEWS was launched, 3 million Canadian workers have actually had their work sustained, and that number continues to expand.

Finance Minister Bill Morneau revealed last Friday that the CEWS extension would include program changes that would widen the reach of the program. It would also offer much better-targeted assistance to ensure that more workers can return to their jobs promptly as the economy reboots.

The proposed modifications included in the Federal government’s draft proposed legislation for the CEWS extension would:

  • The CEWS extension will prolong the program until November 21, 2020, with the intent to supply additional support until December 19, 2020.
  • Make the subsidy obtainable to a more comprehensive range of companies by consisting of employers with a revenue decrease of less than 30 percent and also offering a slowly lowering base aid to all eligible employers. This would help numerous employers with less than a 30% revenue loss obtain assistance to keep employees.
  • Introduce a top-up subsidy of approximately an extra 25 percent for employers that have actually been most adversely affected by the pandemic. This would be especially practical to companies in industries that are recovering much more slowly.
  • Offer certainty to companies that have actually already made company decisions for July and August by ensuring they would not have their subsidy lower than they would have had under the previous policies.
  • Address specific concerns recognized by stakeholders.

These recommended adjustments come from consultations with labour and business representatives on making certain that the CEWS extension remains to save jobs and help with economic growth.

By helping employees shift back to their jobs and sustaining companies as they boost revenue, these adjustments go to give support to companies to have some certainty that they need to bring back workers.

There are other government subsidy programs too

The federal government continues to evaluate as well as react to the impact of COVID-19 and stands ready to take extra actions as required to maintain the economy. So, perhaps we will see announcements soon, just like the CEWS extension announcement, to extend:

Only time will tell. I will certainly keep you updated as more announcements are made.

“We are ensuring that Canadians are able to get back to work as quickly as possible. The adjustments we are proposing would ensure that the CEWS continues to address Canadians’ needs while also positioning them for growth as economies continue to gradually and safely reopen.” – Bill Morneau, Minister of Finance

CEWS extension summary

I hope you have found this CEWS extension Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Categories
Brandon Blog Post

BANKRUPTCY MEANS: SERIOUSLY, CAN IT EVER MEAN BEGGING FOR A BANKRUPTCY ANNULMENT?

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Bankruptcy means introduction

From my perspective, bankruptcy means that a person or company has either filed an assignment in bankruptcy or the court has issued a bankruptcy order against the debtor. The debtor has taken the voluntary action to seek relief and the benefits obtained by doing so under the Bankruptcy and Insolvency Act (Canada) (BIA). Or a court, based on the application of one or more creditors, has ordered that the BIA applies and the debtor is adjudged bankrupt.

As I have written in the past, this is different from insolvency. Insolvency is the financial state where a company or person cannot meet their liabilities as they come due or whose assets, if sold at fair value, would not be enough to pay off all of the liabilities. Bankruptcy is a legal state.

I recently read an article about Mr. Stanley Frank Ostrowski aka Frank Ostrowski, who lives in Winnipeg, Manitoba. Mr. Ostrowski filed an assignment in bankruptcy on February 12, 2019. He listed his assets having a value of $250. He stated that his liabilities were $259,621. This is his second bankruptcy. His first was in 1983 and he received an absolute discharge in 1985.

The article states that Mr. Ostrowski has now made an application to the court to annul his bankruptcy. This Brandon’s Blog looks at: Is it possible to annul a bankruptcy and under what circumstances? Put another way, is it really the case that bankruptcy means you can file for bankruptcy and then say oops, I didn’t really want to file? I am not really sure that is how bankruptcies work.

The reasons why Mr. Ostrowski thinks bankruptcy means it can be annulled

In May 1987, a jury decided that Mr. Ostrowski was guilty of first-degree murder. In March 1992, he was found guilty of possession of cocaine for the purposes of trafficking. He was sentenced to 15 years in prison, concurrent with his life sentence for murder.

He served 23 years, 2 months and 24 days in prison. He got out of jail on December 18, 2009. In 2014, then federal justice minister Peter MacKay asked Manitoba’s Court of Appeal to review the case. Then justice minister MacKay believed that there was a miscarriage of justice with respect to the murder conviction.

In a November 2018 decision, the Court of Appeal set aside the conviction after it discovered a miscarriage of justice took place when two vital details were not revealed to the defence or the court. While the court set aside his conviction, it did not acquit him. In their decision, the three-judge panel said they thought there was enough proof against the accused, which the court could have found him guilty even if full disclosure had been made.

The court also held that it would be unfair to have another trial given that it had been 32 years since the shooting. The court also entered a judicial finding that the charge is stayed from further prosecution.

In June 2020, Mr. Ostrowski retained legal counsel to commence an action for damages because of his wrongful conviction. His lawyers have not yet launched the claim but they plan to. The article said that he will be seeking $16 million in compensation.

Now he wants to have his 2019 bankruptcy annulled. He believes he has a realistic chance of receiving sufficient compensation to be able to settle all his debts. So with all this background information, do I think his bankruptcy means that he can get his bankruptcy annulled?

Bankruptcy means: what happens if I declare bankruptcy?

I have written before about what happens when a person or company declares bankruptcy. There is a responsibility to make full disclosure to the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) all of your assets, liabilities, income and expenses. The debtor also must give to the Trustee all provincially non-exempt assets so that the Trustee can sell them for the benefit of the creditors.

In his bankruptcy filing documents, Mr. Ostrowski did not make mention of this potential lawsuit that had not yet been launched. He also did not indicate that he had the right to such an asset. If he had, there would be two realistic options.

He could have taken the position that the amount of recovery in a lawsuit not yet launched is unknown and speculative. So, the action should only be valued at $1 as a placeholder. By doing so, he would have made full disclosure to his creditors and to his Trustee as to the existence of this potential asset.

If Mr. Ostrowski had disclosed this asset and valued it at more than $259,371, then he would not have met the asset test for being insolvent and potentially would not have been able to file for bankruptcy. I say potentially because, in his affidavit, Mr. Ostrowski makes no mention of what his income and expenses were at the time of filing for bankruptcy or now. Mr. Ostrowski does not disclose in his affidavit whether or not he has to pay any surplus income to his Trustee for the benefit of his creditors.

Can bankruptcy be annulled?

Annulling a bankruptcy is more than just cancelling a bankruptcy. It is erasing it to the point as if it never happened. It is a complete elimination of the bankruptcy. If it was the person’s first bankruptcy, and it was annulled, they could honestly say they never were bankrupt.

To figure out what are the odds that Mr. Ostrowski will be successful in his application to annul his bankruptcy, we need to look at several factors. First, what reasons does Mr. Ostrowski say are the basis as to why his bankruptcy should be annulled?

In his affidavit sworn June 8, 2020, the reasons he gives are:

  1. “I have a realistic chance of receiving sufficient compensation to be able to settle my debts with my creditors in a manner that would be more advantageous to the creditors than if I pursue bankruptcy.”
  2. “I am advised by…” my lawyer “…that when he advised…” my Trustee, “… of my intention to seek an order annulling my assignment in bankruptcy…” my Trustee “…did not object to it.”.

That is it. No other reasons. To Mr. Ostrowski, his bankruptcy means that maybe perhaps he can do better for his creditors than they would get in his bankruptcy and his Trustee doesn’t object to his trying to annul his bankruptcy.

With all due respect to his legal counsel on this bankruptcy annulment application who only has what he has to work with, I rate those reasons somewhere between weak and lame! The bankruptcy annulment process was not designed for the convenience of the bankrupt.

Bankruptcy means when will a court annul a bankruptcy?

First, Section 181(1) of the BIA gives the court the authority to annul a bankruptcy. It says:

“181 (1) If, in the opinion of the court, a bankruptcy order ought not to have been made or an assignment ought not to have been filed, the court may by order annul the bankruptcy.”

This authority is discretionary. Generally, the court will only annul an assignment if it is shown that:

  • The debtor was not insolvent at the time of filing.
  • It was an abuse of process of the court
  • The debtor was trying to commit a fraud on his or her creditors.

If Mr. Ostrowski’s affidavit is the only evidence submitted in his application to annul his bankruptcy, he has not shown that the bankruptcy assignment “ought not to have been filed”.

Second, there have been cases where an assignment in bankruptcy has been annulled. The list of general reasons why the court found that a bankruptcy order ought not to have been made or an assignment ought not to have been filed are:

  1. An assignment in bankruptcy was completed and was to be held in escrow while the debtor negotiated with his creditors. The assignment was only to be filed if a resolution could not be worked out. A deal was reached but the assignment was filed in error. In other words, a verifiable mistake.
  2. The bankruptcy was of no benefit to the creditors. The creditors would receive a distribution but would bear all the costs of the bankruptcy administration.
  3. The debtor was restrained by court order from dealing with all of his assets without giving his estranged wife seven clear days’ notice and he filed an assignment in bankruptcy with no notice given.
  4. Joint assignment by a husband and wife where it was evident that a large amount of debt was from the husband’s unincorporated business and the wife was not in partnership with him.
  5. A bankruptcy assignment purportedly filed by an infant!
  6. The second assignment filed before the bankrupt received a discharge from the 1st bankruptcy.
  7. The husband filing an assignment in bankruptcy in an attempt to disgorge himself of his assets while embroiled in bitter family law proceedings.
  8. Directors of a company whose assets were already being administered under a court-appointed receiver having filed an assignment in bankruptcy for the company.

In all the above situations, the court DID annul the bankruptcy. The court did not agree that bankruptcy means it was the right choice in those situations.

Bankruptcy means when will a court NOT annul a bankruptcy?

Third, there have been cases where an assignment in bankruptcy was NOT annulled. The list of general reasons why the court found refusing the annulment request was appropriate are:

  1. The sole purpose of the bankruptcy was to rearrange the priorities of certain creditors.
  2. A bankruptcy to defeat the enforcement attempts of a judgment creditor.
  3. The sworn statement of affairs failed to show the name and amount of a creditor.
  4. The debtor had no assets.
  5. Debtor was insolvent and did not bring an application to annul the bankruptcy until 4 months after filing an assignment in bankruptcy. The court decided that an application to annul a bankruptcy only because the debtor did not wish to continue with the bankruptcy process should be brought immediately after the filing of the assignment in bankruptcy.

The last reason why the court did not annul a bankruptcy, is pretty much the reason Mr. Ostrowski says he wants his bankruptcy annulled. Only in his case, he is bringing the application some 18 months after becoming a bankrupt.

Interestingly enough, that last reason was a Manitoba case, Baker (Bankrupt), Re, 1997 CanLII 23100 (MB QB). In that case, the bankrupt contended that the Trustee filed the bankruptcy documents with the Office of the Superintendent of Bankruptcy in error. However, she waited for 4 months and the court was not persuaded that the filing was an error!

In Mr. Ostrowski’s case, his reasons boil down to it will be more convenient for him! As you can probably tell by now, I don’t place a high probability of his chances of success in persuading the court to annul his bankruptcy. But then I am not the judge.

Bankruptcy means what should Mr. Ostrowski do?

The answer as to what his bankruptcy means and what Frank Ostrowski should do lies within the BIA. Mr. Ostrowski has two choices and I believe it will be what the court decides.

First, the BIA allows for a bankrupt, with the permission of the inspectors in his bankruptcy, if any, to file a restructuring proposal. He could get that started right now without any court application.

If his debts are truly over $250,000, based on the claims filed to date, then he can file a proposal under part III division I proposal under the BIA. If the claims filed are a total under $250,000, then he could file a consumer proposal. Either way, the administration would continue under the BIA.

His proposal would be a very simple one. It would essentially say that he has a claim against several parties for what his lawyer believes is $16 million. He knows he will get at least enough to pay all of his creditors in full. So, if you vote in favour of my proposal, if I win, enough money will be paid to the Trustee to pay all the creditors in full. If I don’t win, or there isn’t enough money to pay everyone in full, all creditors will share in whatever is available.

Once the restructuring proposal is accepted by his creditors and approved by the court, his bankruptcy is annulled. He will get exactly what he is asking for. His creditors will get paid presumably in full. They will not just get the chance to have their debts settled as Mr. Ostrowski states in his affidavit.

Second, section 144 of the BIA says that the bankrupt is entitled to any surplus remaining after payment of all creditor claims in full, with interest, and the cost of the bankruptcy administration. So, if Mr. Ostrowski is successful and gets $16 million, that money would go to his Trustee, after the legal costs of winning that award. The Trustee would keep what is necessary to pay all the claims in full, with interest, and the costs of the bankruptcy administration. Mr. Ostrowski would keep the rest.

I recommend the first way, the restructuring proposal route because that could get Mr. Ostrowski’s bankruptcy annulled fairly quickly, which is what he is asking for.

It will be interesting to see what the court decides. I will let you know when I find out.

Bankruptcy means summary

I hope you found this bankruptcy means Brandon’s Blog informative and interesting.

The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days. Some people think that bankruptcy means the end of their life. Bankruptcy should be a last resort for anyone. We strive to help people and companies avoid bankruptcy. But if bankruptcy is necessary, do not think of it as the end of life. It really is a fresh new beginning. That is what bankruptcy means.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

bankruptcy means
bankruptcy means
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Brandon Blog Post

ZOOMING RULES OF CIVIL PROCEDURE FOR SUPERIOR COURT OF JUSTICE TORONTO BANKRUPTCY COURT

rules of civil procedure superior court of justice toronto bankruptcy courtThe Ira Smith Trustee Team 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 an audio version of this Brandon’s Blog, please scroll to the bottom and click on the podcast.

Rules of civil procedure introduction

Today’s blog is taking a lighter look at new rules of civil procedure for a Zooming video conference world. These are my somewhat tongue in cheek suggestions for the Superior Court of Justice Toronto bankruptcy court.

I did not make these up. I am taking it from an actual Standing Order For The Conduct of Evidentiary Video Conference Hearings. It was issued by the Honourable D. H. Lester, Circuit Judge in the Circuit Court of the Fourth Judicial Circuit, Clay County Florida. It was sent to me by a Florida bankruptcy attorney friend of mine. I have just amended them for the Ontario Superior Court of Justice Toronto bankruptcy court context.

I have not seen any such pronouncements from the Ontario Superior Court of Justice Toronto Bankruptcy Court (and doubt that I will!). Below would be my proposed amendments to the R.R.O. 1990, Reg. 194: RULES OF CIVIL PROCEDURE (Rules of Civil Procedure) under the Courts of Justice Act, R.S.O. 1990, c. C.43. Everything I am suggesting below was actually in the Florida Standing Order.

New rules of civil procedure 46.02

Rules of civil procedure 46 through 51, sets out the rules of civil procedure for pre-trial procedures. I propose a new rule, number 46.02, to read:

46.02 Prior to any video conference hearing, all counsel, parties and witnesses shall familiarize themselves with the operation of Zoom and its capabilities. Instructions on Zoom operation may be found at https://zoom.us/resources. The following procedure will be followed:

(a) Enter your name on your Zoom profile so that you can be identified by the Judge.

(b) Devices must be fully charged prior to the hearing with a charger accessible in the event it becomes necessary.

(c) Devices must remain muted unless the participant is speaking. All participants must be in a location that is free of extraneous noise or visual distraction.

(d) A virtual background is not permitted.

(e) Hearings are court proceedings. Appropriate courtroom attire for counsel, parties and witnesses is expected.

It is too bad that virtual backgrounds would not be allowed in the Toronto bankruptcy court. I personally would want to attend a bankruptcy court hearing with this background:

rules of civil procedure superior court of justice toronto bankruptcy court
Photo courtesy of Zoom.us rules of civil procedure

As far as appropriate courtroom attire, I asked my friend if a judge has made him stand up yet to see what he was wearing below the waist. He said he has not yet been asked to do so, but it could happen.

New Superior Court of Justice rules of civil procedure for witness testimony

Rule 53 of the Rules of Civil Procedure deals with evidence at trial. I propose a new rule 53.01.1 which would go something like:

53.01.1 (a) At least three business days prior to hearing, the parties shall e-mail to the court a list of all witnesses expected to be called, with full names, e-mail addresses and cell phone numbers. Real names must be used. Court reporters are meeting participants. If a court reporter will be present, the reporter’s name and e-mail address shall be provided along with the witness list.

(b) After any opening statements, when a witness is called, the judge will admit the witness from the waiting room. After testifying, the witness will be removed electronically from the hearing.

(c) Witnesses must be alone. Prior to testifying and after testifying, witnesses shall scan the room to confirm they are the only person in the room. However, if an interpreter is necessary, interpreters may be either in the room with a witness or a meeting participant. The parties list of witnesses should indicate whether a witness will be testifying through an interpreter. The interpreter’s name and e-mail address must be provided to the judge in the list of witnesses.

(d) Passing of electronic notes during testimony and recording of the proceedings is forbidden.

(e) All other electronic devices must be turned off.

(f) A lawyer and a party may be in the same room. However, the camera must capture both. No one else may be present in the room.

New rules of civil procedure for documents in writing in Superior Court of Justice proceedings

I propose new rules of civil procedure number 4.01.1:

4.01.1 (a) At least five days prior to hearing, the lawyers shall confer

to disclose exhibits and other documents in writing expected to be used and to stipulate to as many as possible.

(b) All documents in writing must be delivered, e-mailed to the judge or e-filed at least three business days prior to the hearing. They should be pre-marked, identifying the party and exhibit number. Exhibits over ten pages in the number of pages shall be either delivered to the judge or e-filed in searchable PDF format with computer-generated page numbers. The parties must also provide an index that includes the number of pages.

(c) All lawyers, the judge and the court reporter must have a copy of all documents in writing. Witnesses must have a copy of all documents in writing to which they will testify or for which they will lay the predicate for admission.

(d) Documents in writing can be shared during the video hearing using a shared screen on Zoom.

Rules of civil procedure for the Superior Court of Justice

So this is what was in the Florida Standing Order for a Zooming video environment. I hope you enjoyed this somewhat light-hearted Brandon’s Blog.

The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

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Brandon Blog Post

CANADIAN BUSINESS: WHAT WILL BE THE ULTIMATE BUSINESS IN ONTARIO RECOVERY PROGRAM?

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Canadian business introduction

In April 2020, a survey of entrepreneurs who own what could be called a small Canadian business across the GTA was conducted. It found that almost two-thirds of them might have to shut down for good as they struggle to stay on top of rent and other bills throughout the COVID-19 pandemic.

In this Brandon’s Blog, I look at entrepreneurs in Canadian business, both small and large, and talk about the one essential ingredient that will determine Canadian business success or failure. This one necessary item may turn out to be the only Canadian business recovery program that will ultimately work.

Canadian business opening-up again

Many are progressively opening up under local, provincial and federal government guidance. They need to navigate a host of constraints, including restrictions on the number of customers at any one time. I have read that many say the restrictions with their added layer of costs may stop them from being profitable. Even though COVID-19 cases appear to be under control in Ontario, companies have actually reopened to dramatically smaller sized groups, imperilling their survival.

To save local Canadian businesses, and the millions they employ, the federal government developed Canada’s COVID-19 Economic Response Plan. The federal assistance programs for Canadian business include:

I have already written about most of these support programs. I have attached relevant links above so that you can read up on the various support programs for Canadian business.

Provincial governments have also stepped up. For example, in Ontario, the Doug Ford Conservative government has implemented:

  1. Interest/penalty relief – Canadian business in Ontario will get five months of interest and fine relief to make payments for taxes administered by the Province. From April 1, 2020 – August 31, 2020, Ontario will not apply any penalty interest on any late-filed returns or incomplete or late tax obligation payments under the Employer Health Tax, Tobacco Tax and Gas Tax obligations. This enhances relief from the federal government on interest and other charges from not remitting the amount owing for corporate income tax.
  2. WSIB payment deferments – Employers can delay WSIB payments for 6 months.
  3. Rent support for local Canadian business – Ontario has partnered with the Government of Canada on the Ontario-Canada emergency commercial rent assistance for small businesses and landlords experiencing financial problems throughout the COVID-19 pandemic.

But there are still Canadian business problems

Despite all these support programs, the Canadian business world still has to figure out how to pay the balance of their rent, utility, insurance as well as a host of various other recurring expenses. While some have had the ability to delay these expenses, they can’t do so for life. Companies will become required to take care of their unmet commitments. They will also have to figure out how they are going to go back to paying all their expenses in full once the support programs end and business has not yet come back to the pre-coronavirus pandemic level.

Some companies may have enough cash savings to ride out the pandemic or can access fresh cash resources from owners. That is both good and bad. Entrepreneurs will take from their retirement savings, and in some cases deplete them, in the hopes of keeping their business alive long enough to survive and once again be profitable. It is highly doubtful that Canadian business will be able to borrow from the Banks as a source of fresh capital under these circumstances.

For a lot of others, the crush of past-due costs will certainly limit and maybe even end their business.

What happens when the government support programs end?

That is a big question that I get asked always. The answer is somewhat obvious: Everyone will have to stand on their own two feet just like they had to before the COVID-19 pandemic. Right now all the Canadian business support programs are all scheduled to end August 31. What will happen then?

My personal belief is that the federal and provincial governments will not be able to end the economic response support programs that soon. Rather, I think they will have to extend all the programs again. They may tweak them to begin the process of weaning Canadian business off of government support. Nevertheless, I feel they will have to be extended.

I think the extension will come with stark warnings. I believe the government would not want to extend for more than 90 days, but Christmas will still come in December. Pandemic or no pandemic. Nobody will want to shut off the tap before Christmas. So, that means an extension until the end of the calendar year 2020. With it, the governments will have to warn everyone to get their houses in order now because for certain there will be no more support programs after December 31.

I don’t have any inside information. I am just guessing. But to me, that seems the most realistic to still help Canadian business because entrepreneurs and workers are still all scared. At the same time, the governments’ exit strategy time clock begins ticking. Everyone will have a fair warning.

There is one precious commodity Canadian business will need when the support programs stop

Please humour me. Let us just say you find my prediction to be a reasonable one. On January 1, 2021, Canadian business is not all of a sudden flush with cash. They have survived. Entrepreneurs will still be scared. They certainly will not hire everyone back with an uncertain economic climate. All of the creditors of the businesses will start demanding payment in full. They have been patient and understanding. But now, all business debts will be demanded.

What is the one commodity Canadian business will desperately need? Cash is an obvious one but, no more is coming. Not from the government, the Banks or investors. Entrepreneurs are already tapped out having used personal savings to keep their businesses afloat. The most precious commodity Canadian business will need is TIME. Time to gear up again. Time to get back on their feet and bring in some cash. The Courts will have reopened. Creditors will begin to sue. There will be no more “time-outs” built into our Canadian economic system.

How will businesses get the time they need?

Bankruptcy protection will very likely be the answer

Breathing time that briefly ices up the need to pay off old debt while letting Canadian business function and have the time to find a strategy to keep going. In most cases, that will only be able to happen with a bankruptcy protection insolvency filing.

While bankruptcy is only thought of with going out of business, there are two Canadian federal statutes that allow viable businesses to develop a restructuring plan to lead them back to success. The trouble is that bankruptcy laws don’t give sufficient time to do this while there is still a pandemic. Ongoing COVID-19 health problems will likely suppress the Canadian economy in 2021.

Some out-of-the-box thinking and creativity are going to have to go into bankruptcy restructuring. It will be incumbent on licensed insolvency trustees (formerly called bankruptcy trustees), insolvency lawyers and the courts to recognize viable businesses that deserve to survive. This will be the case even if the processes being recommended are a bit unorthodox. These times are unorthodox and the solutions will have to fit the realities of our time.

I have previously written many blogs on how the two Canadian insolvency statutes can be used to allow Canadian business to restructure. The two statutes are:

For the purpose of this blog, I won’t repeat what I have previously written about corporate restructuring under either the BIA or CCAA. For this blog, what you need to know is that CCAA proceedings are for companies with $5 million or more of debt. BIA proceedings are for those companies with $4,999,999 of debt or less. Both statutes allow for bankruptcy protection filing. They are the Canadian equivalent to Chapter 11 bankruptcy protection in the United States.

How will bankruptcy protections help Canadian business?

For numerous companies battling the consequences of COVID-19, the main issue will not be a massive backlog of debt. It will be the inability to pay off the debt fast due to an absence of immediate profits. Cash will be needed to carry on business and make commitments on a go-forward basis. Given enough time, Canadian business will be able to repay its debts which accrued during the coronavirus shutdown. Unfortunately, the time Canadian business will need will be much longer than how much longer creditors will be willing to wait.

This is where bankruptcy protection filing, under either the BIA or CCAA comes in. First, under a bankruptcy protection filing, there is an automatic stay of proceedings. Creditors will not be able to start or continue collection efforts. This includes repossession by secured creditors or beginning or continuing legal proceedings.

Other benefits of a bankruptcy protection filing for Canadian business will be:

  1. Buying some time to come up with a restructuring plan to keep viable businesses in operation.
  2. Saving jobs through restructuring rather than liquidating the assets of many companies.
  3. Allowing for the sale of entire business units to be integrated into other healthier companies in order for businesses to survive, albeit in a different legal format.
  4. To allow for the sale of redundant assets to raise much-needed cash.
  5. Get out of onerous equipment, IP or premises leases/contracts that need to be jettisoned or else a restructuring is not possible.
  6. Stopping secured lenders from calling a default on loan facilities due to either cash or non-cash impairment charges leading to going concern worries.
  7. Obtain operating capital by way of a new debtor-in-possession loan credit facility for restructuring. Most companies outside of a formal restructuring will be unable to borrow any more money as I have already mentioned. However, in a BIA or CCAA Canadian business restructuring, the court can approve emergency funding and raise that operating loan to the top of the pile by giving it a priority secured loan position.
  8. Stopping Canada Revenue Agency (CRA) from starting or continuing garnishee tactics, general collection efforts and especially placing liens on business property for unpaid taxes.
  9. To allow companies to restructure their debt and clean up their balance sheets in a post lockdown economy.

The biggest resource Canadian business will need is also going to be its largest enemy

So as you can see, I believe that the most important resource that Canadian business will need to survive will not be cash. It will be time. Creditors will no longer want to give businesses more time to repay. Companies will need more time to get back on their feet when the COVID-19 Economic Response Plan support programs end.

The only way I can see that truly happening while allowing for proper restructuring of viable businesses will be under bankruptcy protection filings. Those businesses that are not viable, by definition, will fall by the wayside causing more harm to many good people.

So this why I say formal bankruptcy protection proceedings to allow viable businesses to restructure will be the ultimate business recovery program in a post-lockdown Canada.

Canadian business summary

I hope you have found this Canadian business Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

canadian business
canadian business
Categories
Brandon Blog Post

CANADA IN RECESSION: WILL THE ECONOMY FALL INTO A GREAT DEPRESSION?

canada in recession
canada in recession

The Ira Smith Trustee Team 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 Canada in recession Brandon’s Blog, please scroll down to the bottom and click on the podcast.

Canada in recession introduction

It’s official. C.D. Howe Institute has declared that Canada in recession because COVID-19 is now a reality. Canada’s economy is in a recession. Nouriel Roubini is a world-known economist and a professor of economics at New York University’s Stern School of Business. He accurately forecasted the credit crisis of 2007-2008. He has some stark current thoughts on just how bad the Canadian economy can go. He has written and talked at length lately about the components that could take Canada in recession to a depression.

Canada in recession – When will there be a recovery?

Dr. Roubini sees three possible scenarios for how things are going to develop in the global economy. He says:

  1. His baseline assumption for North America this year is one of a U-shape recovery.
  2. The equity markets in the US are pricing in a V-shaped recovery with very strong growth in the second half of the year into next year.
  3. There is a risk of a greater depression for the rest of the decade but not for this year.

He believes there are forces that are going to lead Canada into a depression. His view is that there is going to be a U-shape recovery because this is a global shock. Both households and corporations will have to spend less and save more. Precautionary savings are going to go higher. Income is going to be lower. This will translate into less business capital spending. He says there will be a global investment slump because of a global savings glut.

That is a recipe for a very anemic recovery.

Could external forces push the US and Canada in recession into a depression?

The question is how long and how deeply related to this crisis the recession will be? Although in the short term there is Canada in recession, later in the decade is when there will be a price to be paid. That potential for depression and deep slump happens later in the decade as a result of fear and panic leading people and companies to save more and spend less.

So, what can governments do to stave off a worse depression? Dr. Roubini is very pessimistic and believes a greater depression will happen sometime later in the decade. He believes it is only a matter of when and not whether it will happen.

He describes the North American economy as a train wreck in slow-motion. It won’t happen this year but there are fundamental forces like debt and deficits leading people and businesses to insolvency. There will be an inability to fund liabilities coming from demographics that become worse. There will be deflation that is going to make more people insolvent. The need for quantitative easing will debase currencies. The need will be because of the large fiscal deficits that eventually are going to lead to inflation by the middle of the decade.

There is also digital disruption because manufacturers will have to substitute labour with the capital in equipment and technology because businesses will have to cut costs to save more and spend less. That implies more automation and more robotics; especially if we are going to try to lessen our dependence on China for goods.

We are in the process of a democracy backlash. People who are scared are becoming more populist and will try to elect authoritarian populist governments to come to power all over the world. Relations with China will probably become colder because of the coronavirus related anger towards China. It is going to get very ugly.

There will be digital rivalries including cyber warfare. It will get worse over the next few years. This is the way warfare is going to be. It will not be the conventional words the enemies of the Western Hemisphere be it China, Russia, Iran or North Korea. They cannot fight the USA using conventional weapons.

Events in the 2016 US election and the COVID-19 pandemic in 2020 shows our enemies that they can use cyber and biological war to successfully weaken the North American economy and create societal problems. They will continue to interfere with the US democratic process and use man-made disasters. Pandemics and global climate change are two things they can weaponize to try to destabilize our way of life.

This has the potential to make us wind up into a great depression. Government fiscal policy cannot do much about it. That is not the tool we need to fight these new threats.

What about internal forces pushing the US and Canada in recession into a depression?

One huge issue is the debt level; both personal debt and sovereign. We are in way over our heads. We were before this crisis. In terms of how we get out of it is there a natural path that would resolve it? It doesn’t seem clear right now because governments are having to spend trillions of dollars to keep their economies afloat during the coronavirus pandemic. What has kept things in check prior to the pandemic is that interest rates were close to zero, if not negative, like in Europe and Japan. The current economic environment is going to make it impossible for governments to change the historically low-interest rates for the foreseeable future.

I have written many times before discussing different issues relating to record high Canadian household debt levels. The debt levels are the single most internal reason why Canada in recession could become Canada in depression.

Canada in recession summary

I don’t mean to be pessimistic when talking about Canada in recession. However, today, I just don’t see any silver lining. I am sure there is one, I just can’t see it right now.

I hope you have found Canada in recession Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

 

Categories
Brandon Blog Post

CMHC INSURANCE: ENGAGING NEW RULES FOR COVID-19 MORTGAGE APPROVAL

chmc insurance
chmc insurance

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

The Ira Smith Trustee Team wishes all of our Canadian readers a healthy, happy and safe Canada Day.

cmhc insurance
cmhc insurance

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

CMHC Insurance introduction

CMHC insurance is helping to stabilize Canada’s economic system as well as sustain the financial health of families during the COVID-19 pandemic. Effective July 1, 2020, CMHC insurance rules are changing. It will affect the cost of real estate in Canada. It is also designed to minimize risks to CMHC and therefore the Canadian economy.

I describe what those changes are and why they are being made in this Brandon’s Blog.

What is CMHC Insurance?

In simple terms, CMHC insurance is insurance provided to mortgage lenders to protect them in case of mortgage defaults. If the lender needs to sell the home and suffers a loss, CMHC insurance pays off the lender to cover that loss.

CMHC insurance allows lenders to continue making mortgage loans at reasonable interest rates to those people who would not otherwise qualify. At the present time, the down payment required to get CMHC insurance is only 5 percent of the purchase price. One of the changes that I describe below, is that it will rise to 10 percent.

How Much Is CMHC Insurance

Like any other insurance product, there are CMHC insurance premiums. The mortgage lender pays the insurance costs. It is determined by taking into account the size of your mortgage and the amount of your down payment. The lending institution passes this cost on to the borrower. It can be paid as a lump sum or included in the mortgage which obviously affects the mortgage payments.

Here is a link to the CMHC insurance page where you can use the CMHC insurance premium calculator. This will allow you to calculate your potential mortgage insurance premium rates.

CMHC And The COVID-19 Pandemic Response

Early on, in coordinated action with the Bank of Canada and with Finance, CMHC relaunched a program to make certain that financial institutions have access to term financing. The reason is so mortgage lenders can have the necessary liquidity to continue to offer mortgage financing. This ensures that the mortgage market and therefore the real estate markets remain functional.

Under the program, the Canadian government can buy up to $150 billion of insured home mortgages. They are also prepared to increase the issuance of traditional securitization programs, as needed.

On top of that, CMHC acted quickly to assist Canadians who are having difficulty paying their home mortgage as a result of the coronavirus pandemic. Acting with Genworth Financial Canada and Canada Guaranty, CMHC is using short-term deferral of mortgage payments for up to 6 months to help Canadian homeowners. CMHC believes that about 12 percent of homeowners have elected to postpone repayments until now. This number may in fact grow depending on what happens with job recalls and government support programs this Fall.

The same mortgage deferral is offered to multi-unit real estate owners in order to accommodate the loss of rental income. As well CMHC has taken actions to guarantee that charitable, as well as co-operative housing service providers, remain able to get government rent subsidies. CMHC is urging recipients of federal assistance to refrain from evictions during the COVID-19 pandemic.

Almost everything CMHC insurance has done in response to the COVID-19 situation talks about allowing Canadians to borrow. The federal government is taking on more financial debt to fund COVID-19 support programs. Mortgage deferments are adding to already historically high household debt.

CMHC Insurance guidelines

Canadians are amongst the global leaders in household financial debt. Pre-COVID-19, the proportion of gross financial debt to GDP for Canada went to 99 percent. This is due to not only more borrowing, but also declining GDP. CMHC estimates that it could go to over 115 percent in Q2 2020 and get to 130 percent in Q3, before decreasing. At those levels, GDP growth is choked off.

CMHC is now forecasting a decline in average real estate prices between 9 to 18 percent in the coming 12 months. The resulting mix of greater mortgage debt, declining home prices as well as increased unemployment is the reason CMHC takes issue for Canada’s longer-term financial security.

CMHC is trying to figure out how to handle expanding mortgage debt “deferral high cliff” that looms in the autumn when some jobless people will need to start paying their home mortgages once more. As long as one-fifth of all home mortgages could be delinquent if Canada’s economic situation has not adequately recuperated.

CMHC insurance feels a responsibility to prevent enhanced losses that arise from dropping real estate prices. CMHC believes that if it does not act, a first-time buyer looking to buy a $600,000 house with a 5 percent down payment stands to lose over $90,000 of value on their $30,000 financial investment if rates fall by 10 percent. In contrast, a 10 percent down payment provides more of a cushion.

CMHC insurance will be expected to cover losses if properties need to be sold. For these reasons, CMHC is evaluating whether it needs to alter its underwriting because of its assessment of future market conditions.

CMHC Insurance rules are changing

CMHC says that its support for homeownership cannot be endless. Canadians believe that owning a home is crucial for retirement savings. Over the past 20 years, the typical Canadian homeowner has had a tax-free gain of $340,000 from their house. CMHC believes that house prices and the resulting mortgage debt levels are significantly unreachable for first-time buyers.

Effective July 1, 2020, CMHC insurance is changing its insurance underwriting for all new applications. The changes are:

  • limiting the Gross/Total Debt Servicing (GDS/TDS) proportions. The test will allow for 35% of gross income to be spent on housing. It will also only allow total borrowing costs to be 42% of gross income.
  • requiring a credit rating a minimum of 680 for at least one borrower; and
  • non-traditional sources for a down payment that is from borrowed funds will no longer be counted as equity for insurance purposes.

CMHC has also taken another action to further handle the risk to the CMHC insurance business, as well as inevitably Canadian taxpayers. During this uncertain time, CMHC has put on hold mortgage insurance coverage for refinancing, unless the funds are used for repair work or reinvestment in the real estate. While making this decision on multi-unit properties requiring CMCH insurance, they have not yet figured out what is going to happen when these mortgages cannot be renewed without CMHC insurance.

CMHC insurance says that COVID-19 has subjected enduring vulnerabilities in Canadian financial markets. It believes that its actions will safeguard home purchasers, minimize government and taxpayer risk as well as sustain the stability of real estate markets.

These new requirements will certainly curtail demand amongst the general Canadian population. The new CMHC insurance rules will also lower the number of people qualifying. One thing CMHC barely mentions, other than for language about saving Canadian taxpayers from losses, is that it will slow down the growth in the portfolio of CMHC insurance provided mortgages. This is what it really is all about.

CMHC Insurance rules summary

I hope you have found the CMHC insurance Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

The Ira Smith Trustee Team wishes all of our Canadian readers a healthy, happy and safe Canada Day.

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cmhc insurance
Categories
Brandon Blog Post

INSOLVENCIES IN CANADA: THE CALM BEFORE THE SCARY STORM?

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Insolvencies in Canada introduction

Insolvencies in Canada are at a record low. Is it the calm before the scary storm?

Consumer insolvencies in Canada have been driven to unusually reduced degrees in recent years because of sustained low-interest rates and strong property values.

In this Brandon’s Blog, I discuss what could very well happen in the 4th quarter of 2020 and into 2021.

Insolvencies in Canada – recent history

The lower number of insolvency filings is not a new phenomenon. Insolvencies in Canada have been at historically low levels for many years. It was not until last year that personal insolvency filings increased year over year.

In 2019, consumer insolvencies for the 12-month period finishing December 31, 2019, increased by 9.5% compared to the 12-months ending December 31, 2018. Personal bankruptcy decreased by 1.2%, while consumer proposals were 17.9% higher.

After many successive years of steady decline, business bankruptcies in Canada had reached a plateau level in 2019. Typically speaking, business bankruptcies in Canada have been stable.

During the 1st quarter of 2020, the Office of the Superintendent of Bankruptcy Canada (OSB) reports that between the 4th quarter of 2019 and the end of the 1st quarter of 2020, for insolvencies in Canada:

  • Total insolvency filings decreased by 5.4%.
  • Consumer filings were down by 5.5%.
  • Business insolvency filings were 2.6% lower.
  • In all cases, bankruptcy filings were drastically lower and restructuring proposals were essentially flat.
  • For personal filings, Alberta was basically flat while the other provinces and territory showed decreases.
  • In business filings, Ontario showed a slight increase (8.3%) and British Columbia showed a huge increase (43.5%). Again, it was restructuring proposals, not bankruptcy, making up the majority of business filings. All other provinces and territories showed a decrease.

Then the effects of the economic shutdown of the country started taking hold in April 2020.

April 2020 insolvencies in Canada and the United States

The total variety of insolvencies in Canada (both bankruptcy and proposal filings) decreased by 38.7% in April 2020 contrasted to March 2020. Personal bankruptcy decreased by 41.5% and proposals decreased by 37.2%.

The number of insolvencies filed in April 2020 was 43.5% less than the total in April 2019. Consumer bankruptcies decreased by 43.1%, while consumer proposals decreased by 54.8%.

The story in the United States is very similar. American Banker reports that presently in the US, personal bankruptcy filings are actually reduced year over year. It reports that according to information from the federal courts, there were 186,000 consumer bankruptcy cases in the first quarter of 2019. By comparison, there were 175,000 for the initial quarter of 2020.

A lot more noticeably, the rate of consumer insolvency cases for April of 2020 was 46% lower than in April of 2019.

There are a variety of reasons in both countries. From my discussions with a couple of US bankruptcy lawyers, I am friendly with, it seems the reasons in both countries are generally the same.

In no particular order, the main reasons are:

  • Mortgage payment deferral programs masking what might otherwise be increased delinquencies.
  • Lower overall credit card spending while people are at home in self-quarantine.
  • Various government programs supplying much-needed cash to unemployed people and businesses.
  • Government programs deferring the timing for filing income tax returns and the payment of income tax.
  • Moral suasion so far stopping banks, credit card companies and collection agencies from aggressively making collection attempts during this time.
  • The closure of the courts making it impossible to sue anyone.

    insolvencies in canada
    insolvencies in canada

The economy is starting to reopen

In conjunction with the federal government, the provinces and territories are starting to reopen cities and businesses. No doubt there will be a lot of growing pains as the economy reopens. What should we expect? What will it mean for insolvencies in Canada?

In his first speech as Governor of the Bank of Canada, on June 22, 2020, Tiff Macklem stated that he expects there will be an initial boost to the Canadian economy as it reopens and activity resumes. He does not expect that good news to last very long. Rather, he expects there will be the 2nd stage of economic recovery that will certainly be long and slow, due to the remaining unpredictability around the coronavirus.

The federal government will need to wean Canadians off of the various support programs. When that happens, all the financial pain currently hiding under the radar will rise to the forefront. COVID-19 support programs, payment deferrals and other “time outs” will end and the courts will reopen. Creditors will get back to business as usual in chasing delinquent accounts. The federal, provincial and territorial governments will feel they have done enough to the tune of trillions of dollars. Their attitude will be, in so many words, it is now time for you to stand on your own two feet again.

In fact, some government attitudes are already changing.

Will temporary layoffs be a harbinger for business insolvencies in Canada?

Throughout the coronavirus pandemic, BC seemed to handle their lockdown and other COVID-19 things a bit differently than the other provinces and territories. As they now consider reopening, BC businesses are worried.

British Columbia businesses are discouraged by Labour Minister Harry Bains’s failure to recognize the seriousness of problems facing the mainly small and medium-sized businesses. Their issue is the possibility for thousands of companies to have to make an insolvency filing. Their main worry is that they will be compelled to make severance payments as a result of the unexpected scenarios brought by the COVID-19 pandemic.

The Minister has it within his power to supply a Ministerial Order to expand the temporary layoff time frame under the Employment Standards Act to provide companies with the breathing room” required to survive, recoup, and facilitate return-to-work for laid-off staff.

All provinces and territories face extraordinary difficulties as a result of the economic results from COVID-19. Few business owners can plan for or have the cash-on-hand to terminate all or a considerable part of their labour force at the same time throughout the very best of times.

BC companies will be faced with fears as the clock ticks to target dates beginning in very early July requiring several companies to either recall or permanently terminate laid-off staff members. They don’t have enough business or money to rehire everyone. They also don’t have the cash to make the severance payments. Without legislative support, this problem will face all Canadian businesses.

In the nick of time, the federal government has come to the rescue. On June 23, 2020, Prime Minister Justin Trudeau announced that the federal government has expanded the period for temporary layoffs by as much as 6 months. Employers now have more time to recall staff members who were laid off due to COVID-19.

Now, for employees who were laid off before March 31, the government has proposed that their employers have the earlier of 6 months or up until December 30 to recall their staff. For employees laid off between March 31 and September 30, their company will have up until December 30, unless a later recall day was given on their layoff notification.

I caution that this is a proposal floated by our PM right now and not actual legislation. Labour legislation is largely left up to the provinces and territories. It is interesting to note that the Feds seem to be stepping into this. As we all know, ultimately, businesses will either be able to survive or will have to restructure under our laws for insolvencies in Canada.

Will extending employee recalls be a harbinger for personal insolvencies in Canada?

So now that employees can expect to remain unemployed for longer, what is that going to mean? For several years now polls have shown that Canadians are on the brink of insolvency. As I already mentioned, rock-bottom interest rates and rising real estate values, leading to lots of home equity lines of credit room to borrow on. This has kept Canadians in debt and out of becoming one of the statistics for insolvencies in Canada.

So the question is, once the Canada Employment Response Benefit (CERB) runs out, what will the unemployed do? Seems to me there are a few options, none of them good:

  1. Cut back on spending as much as possible. In places like the Greater Toronto Area (GTA), you have to be a magician to be able to live on $2,000 per month (after putting away the amount you will have to pay eventually in CERB income tax).
  2. Burn through the rest of your savings until you have no cash.
  3. As a result of 1 or 2, go deeper into debt on your lines of credit and credit cards until you have no more borrowing room.

Once all of this has happened, the only thing left to do will be to consult with a licensed insolvency trustee (formerly called a bankruptcy trustee) to discuss your realistic options for eliminating debt.

Insolvencies in Canada summary

I hope you have found the insolvencies in Canada Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

insolvencies in canada
insolvencies in canada
Categories
Brandon Blog Post

COMMERCIAL TENANCIES ACT ONTARIO: NEW FIX FOR YOUR UNRULY LANDLORD’S COVID-19 COMMERCIAL LEASE TERMINATION

commercial tenancies act
B commercial tenancies act

The Ira Smith Team 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’s Blog, please scroll to the bottom and click on the podcast

Commercial Tenancies Act introduction

On June 18, 2020, Royal Assent was given to the Ontario Bill 192, Protecting Small Business Act, 2020, An Act to amend the Commercial Tenancies Act Ontario. The aim of this provincial law is to prevent commercial landlords from either terminating a commercial tenancy or distraining on a commercial tenant’s property. If that has already taken place, then this amendment to provincial law tries to compensate the commercial tenant for damages.

This is an updated to my April 27, 2020 blog titled, SMALL BUSINESS RELIEF PROGRAM: CANADA EMERGENCY COMMERCIAL RENT ASSISTANCE. In this Brandon’s Blog, I will describe how this Bill 192 amending the Commercial Tenancies Act works. As with everything, the devil is in the details.

Which commercial landlords qualify?

This Ontario law applies to all commercial landlords who:

  1. Are eligible to obtain help under the Canada Emergency Commercial Rent Assistance (CECRA) for small businesses program. This is designed as an unsecured, interest-free, forgivable loan program administered by Canada Mortgage and Housing Corporation (CMHC).
  2. Can receive help under the CECRA if the landlord participated in a rent reduction contract with the commercial tenant having a moratorium on the eviction.

To get CECRA for small businesses, the landlord must:

  • own commercial real estate which is leased to one or more affected small business tenants;
  • go into (or have actually already entered) into a lawfully binding rent reduction agreement for the period of April, May and also June 2020 (presumably subject to extension of the program by the federal government), decreasing an affected small business renter’s lease cost by at least 75%;
  • ensure the rent decrease agreement with each affected renter includes:
    • a postponement on eviction for the period throughout which the property owner consents to apply the loan funds; as well as
    • a statement of rental revenue included in the attestation.

In order to be considered an affected small business tenant, the tenant has to have been in operation before March 1, 2020, as well as should not generate greater than $20 million in gross annual income when calculated on a combined basis, based upon 2019 earnings.

The landlord also cannot:

  1. Have an owner holding a federal or provincial political office.
  2. Controlled by a person holding such a political position.

CECRA will not include any federal, provincial, or municipal-owned properties, where a government is the landlord of the small business tenant. Initially, the landlord had to have a mortgage financing the property. CMHC later qualified that this was not the case.

Which small business tenants qualify?

Impacted small business lessees are businesses, including charitable and non-profit organizations that:

  • pay no greater than $50,000 in monthly gross lease cost per location (as specified by a valid and enforceable written lease).
  • creates no more than $20 million in gross yearly income, calculated on a parent company consolidated basis.
  • have experienced a minimum of a 70% decrease in pre-COVID-19 income.

Eligible small business tenants include those who have entered into written valid sub-tenancy arrangements that meet the CECRA requirements.

To determine the 70% reduction in earnings, the following two circumstances apply:

  1. Your small business was operating throughout April through June 2019. Compare your gross income from April, May and June of 2020 to your revenues of April, May and June of 2019.
  2. The small business was not running throughout April through June 2019. In this case, compare your average gross revenue from April, May and June of 2020 to your typical gross income for January and February 2020.

How is the Commercial Tenancies Act amended?

Bill 192, Protecting Small Business Act, 2020, modifies the Commercial Tenancies Act to forbid particular activities by property owners if the landlord is or would qualify to receive assistance from the CECRA. If the landlord is accepted and receives the CECRA help, then these provincial amendments cease to apply. The reason for that is because, under the federal program, the landlord has agreed not to evict the tenant.

This provincial legislation also forbids Judges from making a writ of possession that is effective throughout the non-enforcement time out if the basis for making the writ is arrears of rent under the lease. These Commercial Tenancies Act amendments also ban landlords from enforcing a right of re-entry and from seizing any property of the tenant by way of distress for arrears of rent throughout the non-enforcement time period.

The non-enforcement period begins on May 1, 2020, and ends midnight September 1, 2020. This will obviously be subject to either extension or even termination on an earlier day to be called by proclamation of the Lieutenant Governor.

If a landlord exercises a right of re-entry between May 1, 2020, and August 31, 2020, inclusive, the commercial tenant has to recover possession of the commercial space. The tenancy is regarded to be reinstated on the same terms and conditions unless the property owner and the occupant agree on other terms and conditions If it is incapable to return the leased premises to the commercial tenant, the landlord must compensate the tenant for damages.

Similarly, if a commercial landlord distrains against a tenant’s goods in the non-enforcement period on account of rent arrears under a commercial lease, the landlord needs to return any unsold items to the tenant.

Some obvious comments

I have some comments on this Bill 192, Protecting Small Business Act, 2020, An Act to amend the Commercial Tenancies Act Ontario. Most of my comments I think will be obvious. To date, whatever I have read on how landlords feel about these amendments, has not been positive. It will be interesting to see if the Courts reopen prior to August 31, if any landlords go to Court to overturn it and what the Court decision will be.

I think the real strength of the amendments to the Commercial Tenancies Act comes from the fact that the Ontario Courts are closed. No one can challenge the law on a constitutional basis at this time!

So my comments are:

  1. The wording of the Bill to see if a landlord qualifies is:

80 (1) Subject to subsection (2), this Part applies to a tenancy in respect of which the landlord satisfies either of the following criteria:

  1. The landlord is eligible to receive assistance under the Canada Emergency Commercial Rent Assistance for small businesses program.
  2. The landlord would be eligible to receive assistance under the Canada Emergency Commercial Rent Assistance for small businesses program if the landlord entered into a rent reduction agreement with the tenant containing a moratorium on eviction.

A landlord is only “eligible to receive assistance” based on a two-part test; one is a landlord test and the other is a commercial tenant test. A landlord should have the right to receive sufficient financial information from its tenant to see if the tenant can meet its test of reduced gross revenue. The only way a landlord is eligible is if the tenant meets the required tests.

What if the tenant refuses to divulge that information? Can the landlord merely take the position that it is not “eligible”? If so, then the landlord could either terminate the lease or effect distraint. Again, with the Courts closed, it will be all over before the tenant can have their day in Court.

  1. These amendments are effective beginning on May 1, 2020. The emergency COVID-19 shutdown in Ontario began on March 17, 2020. As a result, many small businesses were not in a position to make their April rent payment. Does this mean that landlords who either terminated a commercial lease or distrained on the tenant’s assets before May 1 are exempt?
  2. The landlord is not entitled to either terminate the lease or distrain during the non-enforcement period on the assets for non-payment of rent. What if the tenant, prior to the Ontario emergency shutdown was in breach of the lease for other reasons. If the landlord has not yet taken action as a result of those breaches and wishes to get rid of the tenant for reasons other than rent arrears, can the landlord take action during the non-enforcement period as long as rent arrears is not one of the reasons?
  1. A commercial tenant whose landlord terminated the lease is entitled to compensation for damages if the premises cannot be handed back to the tenant. How the damages are calculated are not spelled out. It will most certainly be the subject matter of future litigation.

A commercial tenant whose landlord distrained on the tenant’s property is only entitled to a return of the property that has not yet been sold. This is presumably because the lease has not been terminated. However, I presume the tenant will not be operated again if all or most of its property has been sold. Now what? More litigation no doubt.

The amendments contained in the Bill 192, Protecting Small Business Act, 2020, An Act to amend the Commercial Tenancies Act Ontario is obviously done to persuade landlords to enter into the CECRA program with their tenants. That is a good thing. As you can see from my comments, it is more persuasion and relying on the fact that the Courts are closed than brilliant wordsmithing language.

Commercial Tenancies Act summary

I hope you have found this Commercial Tenancies Act Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Call a Trustee Now!