Tag: Bankruptcy and Insolvency Act

INSOLVENCY ADVISORY SERVICES: STANDOUT HELP DOES NOT NEED HORRIFYING HIGH COSTS

Post author By Brandon Smith
Post date December 23, 2024

This is our last blog post for 2024. We will be back with more in January. Happy Holidays and a Happy and Healthy New Year to all of our readers.

Insolvency Advisory Services: Introduction

Insolvency is a complex financial situation with significant legal and practical implications. This Brandon’s Blog post explores the key aspects of insolvency law in Canada, drawing on authoritative sources to provide a clear and informative overview.

As the pandemic-induced economic rollercoaster continues, I recently read an article in The Globe & Mail Report on Business about the world of insolvency advisory services. On the one hand, professionals like me help to fix corporate car crashes during crises, seemingly thriving off others’ misfortunes. On the other hand, our services can lead struggling businesses to a new beginning, saving jobs and families. Not just the workers or the owners, but all the businesses that rely upon that one business. Let’s dive into this fascinating landscape where financial insolvency wizardry collides with corporate despair.

What is Insolvency?

Insolvency refers to a situation in which an individual or a company is unable to fulfill their financial obligations as they become due. In Canada, the legal framework offers several mechanisms to manage insolvency, with the goal of balancing the interests of both debtors and creditors.

The Insolvency Legal Framework

Key Legislation in Canadian Insolvency Law

The Bankruptcy and Insolvency Act (BIA) serves as the fundamental legislation governing insolvency in Canada. This federal law establishes the protocols for addressing bankruptcies and proposals, ensuring a fair and systematic approach for all parties involved.

In conjunction with the BIA, the Companies’ Creditors Arrangement Act (CCAA) offers a framework specifically designed for the restructuring of insolvent corporations, particularly those with debts exceeding $5 million. Both the BIA and CCAA are administered by the Office of the Superintendent of Bankruptcy (OSB), which operates under the Department of Innovation, Science and Economic Development Canada. The OSB is essential in overseeing the insolvency process, licensing insolvency professionals, and maintaining public records related to insolvency matters.

Provincial Laws and Their Impact on Insolvency

Federal legislation primarily regulates the fundamental aspects of insolvency in Canada; however, provincial laws significantly influence this area, particularly concerning property and civil rights. Specific issues addressed by provincial legislation include:

The establishment of security interests The handling of absconding debtors Regulations surrounding bulk sales Provisions related to fraudulent conveyances

This interaction between federal and provincial laws results in a comprehensive legal framework for managing insolvency in Canada.

Roles and Responsibilities

Licensed Insolvency Trustees are licensed professionals authorized by the OSB to administer bankruptcies, handle proposals, and act as monitors or receivers. Insolvency Trustees play a pivotal role in guiding debtors and creditors through the insolvency process, ensuring compliance with legal requirements.

Access to Insolvency Information

The OSB provides a searchable database of bankruptcy and insolvency records that is available to the public for a fee. This database includes detailed information on various insolvency proceedings, such as bankruptcies, proposals, receiverships, and proceedings under the CCAA. Furthermore, the publication “Insolvency Insider Canada” offers current news and legal updates on trends related to insolvency in Canada.

Insolvency Advisory Services: The Profit Motive

Have you ever thought about how much insolvency advisers bill out per hour? The article stated that downtown Bay Street bankruptcy legal counsel and licensed insolvency trustees charge up to $1,300 per hour for their services. Are these fees justified? Or are they merely a symptom of a broken system?

Understanding Senior Claims

In insolvency cases, fees charged by advisers are classified as senior claims. This means they get paid before other creditors. When a company admits insolvency and makes a filing under either the BIA or the CCAA, these advisers work hard to navigate the complex legal landscape.

But who benefits the most? According to The Globe & Mail article:

Adviser fees have been climbing steadily over the years. While companies going through insolvency struggle with debt, they may very well be paying unnecessarily high fees.

The Financial Implications

What does this mean for businesses? When firms find themselves in the dire straits of insolvency, they owe a mountain of money. The debt piles up, and the cost of hiring pricey advisers only adds to their woes. In many cases, legal and financial advisers are feasting on the carcass of struggling companies.

The Cold Reality

This narrative reveals the harsh truth: while companies drown in debt, they may very well be paying too much for their advisers. Insolvency advisers are essential for navigating bankruptcies and restructurings, but many companies may be paying too much for the help they need. No doubt there are certain regulated industries or overly complex businesses that need the minds and skills of the downtown Bay Street advisers. But that is not the majority of Canadian businesses.

Insolvency Case Study: Do Our Fees Hold Up In Court?

We are involved in the liquidation case of two companies. Certain stakeholders, including the Estate Trustees of the Estate of a deceased shareholder, disagreed with the fees we and our legal counsel charged. A court hearing concerning our fees as a court-appointed liquidator and those of our legal counsel was held in the winding-up case.

As liquidator we sought approval for substantial fees which were challenged by the respondents, shareholders of the companies, as disproportionate to the assets involved. The judge considered various factors including the complexity of the case, the time spent, and the results achieved, ultimately approving the fees, citing prior court approvals of the liquidator’s actions and rejecting the respondents’ arguments as a collateral attack. The decision highlights the principles of fairness and reasonableness in determining court officer fees.

What factors influenced the assessment of the fairness of our liquidation fees?

The court evaluated several factors to assess the fairness of the liquidation fees charged by the Liquidator and their counsel. Ultimately, the judge ruled in our favour based on the following considerations:

Nature, Extent, and Value of Assets: The Liquidator was responsible for liquidating two companies that presented moderately complex tax and accounting challenges.
Complications and Challenges Encountered: The Liquidator faced numerous obstacles, including concurrent family and estate proceedings, conflicts between the Estate Trustees and another shareholder, and multiple adjournments. Additionally, delays in court proceedings instigated by the Estate Trustees contributed to increased costs.

These delays included:

The conversion of the liquidation proceedings from voluntary to court-supervised, happened almost a year after the liquidation proceedings began.
The proposed sale of was delayed because the Estate Trustees continued accepting new orders despite the initial agreement to not accept new orders during the voluntary liquidation. They requested time to procure an offer to sell the company.
Further delays were caused when the Estate Trustees proposed to remove one of the companies from the liquidation but failed to do so. The Liquidator was then required to notify customers that business operations would cease once current orders were completed.
The Estate Trustees switched counsel, which caused adjournments and increased time spent on the case.

The degree of assistance provided by the company. The Estate Trustees were confrontational and slow to provide information, which made the Liquidator’s job more difficult.
The time spent. The liquidation proceedings were protracted due to issues between the stakeholders.
The Liquidator’s knowledge, experience, and skill. Both the Liquidator and its counsel were found to have significant knowledge and experience in corporate and insolvency matters.
Diligence and thoroughness. The Liquidator produced three comprehensive reports and affidavits for the motion. Their invoices provided a clear understanding of the thoroughness of their work.
The responsibilities assumed. The Liquidator was responsible for extensive activities, which were outlined in its reports and approved by the court. These activities included monitoring business operations, selling one of the companies’ primary assets, engaging various professionals, establishing and monitoring a claims process, and taking steps to wind down an active business.
The results of the efforts. The Liquidator successfully converted the voluntary liquidation into a court-supervised process. They managed the companies’ finances, initiated a claims process, and made interim distributions.
The cost of comparable services when performed prudently and economically. The rates charged by the Liquidator and its counsel were comparable to those charged by other providers in the Toronto market. Although the respondents argued that the fees were disproportionate to the value of the businesses, the court ultimately ruled that the fees were fair and reasonable given the factors outlined above.

The Mechanics of Corporate Insolvency

Understanding corporate insolvency and bankruptcy law can feel like navigating a maze. Why is there a need for specialized expertise in this field? Let’s dive into this complex world.

1. The Ins and Outs of Bankruptcy Law

Bankruptcy law is not just a set of rules; it’s a detailed framework designed to address financial distress. At the core is the legal process that aims to protect debtors while ensuring creditors get as much back as possible. This is where specialized knowledge comes in. It is critical to understand the nuances, strategies and strategizing, litigation processes, and the potential financial ramifications of each decision.

Think about it: would you trust someone who has only dabbled in the subject to handle a significant financial crisis? I wouldn’t. Expertise in this area enhances efficiency. A knowledgeable insolvency adviser can streamline the process and avoid costly missteps.

Also, this specialized knowledge often leads to reduced competition. But there are alternatives; there are experienced insolvency professionals who operate in lower-cost boutique firms like mine. Their offices may not be as fancy as the Bay Street crowd, but, what do you want to pay for. Their knowledge and expertise or their office furnishings and high rent?

2. A Day in the Life of a Licensed Insolvency Trustee Adviser

What does a licensed insolvency trustee adviser actually do day-to-day? Most of our time on corporate restructuring files involves analyzing company financials and negotiating with creditors. Navigating through heaps of paperwork is part of the gig, too. Advisors must also attend court hearings and meetings with various stakeholders, always looking to find the best possible outcome.

Typical Tasks Include:

Drafting essential documents and filings.
Conducting asset evaluations.
Coordinating with legal teams and financial analysts.

On any given day, a licensed insolvency trustee adviser may switch gears between solving legal puzzles and crunching numbers. It’s a mixture of law, finance, and a bit of psychology when negotiating to save distressed businesses.

3. Key Players in Corporate Insolvency

Corporate insolvency involves several key roles, each contributing to the process in distinct ways:

Legal Counsel: Legal professionals represent the interests of their clients and assist in navigating the complex legal landscape associated with insolvency proceedings. Court-
Court-Appointed Receivers/Insolvency Trustees: These individuals are tasked with managing the assets of the company during the insolvency process, ensuring proper handling and distribution according to legal guidelines.
Monitors: Monitors oversee the restructuring process to prevent the company from entering receivership or bankruptcy. They ensure that the company adheres to all legal requirements throughout the process.

Each of these roles is essential in facilitating a fair and orderly insolvency process. Together, they work towards achieving the best possible financial recovery while upholding the integrity of the legal framework.

4. Why Experience Really Matters

Experience can make or break an insolvency case. A seasoned insolvency professional will have seen various crises unfold, equipping them with the knowledge of what strategies work. They can anticipate challenges and react swiftly to changes in circumstances.

Also noteworthy is that judges usually have a high regard for seasoned practitioners. The more experienced the insolvency adviser, the more likely they will get favourable outcomes – and that’s crucial. After all, when dealing with millions on the line, would you want a novice watching your back?

Ultimately, the world of corporate insolvency is a ripe field for those with the right set of skills and experience. But remember, it’s about guiding businesses through some of the most turbulent waters they face.

The Ripple Effect of Rising Insolvency Advisories

In today’s economic climate, the rise in insolvency advisory fees is an issue that’s hard to ignore. It touches everyone – from entreprenurial businesses trying to stay afloat to investors scratching their heads over diminished returns.

Entrepreneurial Businesses and Higher Fees

As advisory fees rise, entrepreneurs are generally shut out of being able to restructure. That is one of the reasons why Ira Smith Trustee & Receiver Inc. was established. We offer the highest quality of service that rivals any Bay Street licensed insolvency trustee firm. However, due to our unique boutique formula, our hourly rates are slightly less than half of those charged by downtown Toronto Bay Street insolvency professionals.

We know that many entrepreneurs find themselves squeezed by Bay Street hourly rates, unable to afford the very advice meant to save their companies. That is why we can earn a fair return for our services in running our insolvency advisory business, without killing off the company we are trying to save because of higher fees. Downtown firms don’t think we can, but with the combined experience of Ira and Brandon Smith totalling over 60 years, we know how to and have done complex corporate restructuring. We are also one of those experienced seasoned firms that judges recognize as such. Our clients also give us 5-star reviews!

The Role of Insolvency Advisers

Despite the high costs, insolvency advisers play a crucial role in reviving struggling companies. When firms like Groupe Dynamite sought protection during tough times, savvy advisers helped them navigate those murky waters. Their expertise can mean the difference between a successful turnaround and a grim closure.

Lending and Creditworthiness

But there’s a catch. Rising advisory fees may also undermine a company’s creditworthiness. Imagine a lender reviewing a firm burdened by steep fees. They might hesitate, fearing that funds directed to advisers are funds that won’t go toward debt repayment. Essentially, high fees could close the door on future lending.

Myths Surrounding Formal Insolvency Proceedings

It is essential to clarify some misconceptions regarding the beneficiaries of formal insolvency proceedings. A common belief is that companies undergoing restructuring are guaranteed to be saved; however, this is not always the reality. Once advisers get to work, there are situations where we realize that most of the company isn’t salvageable. This emphasizes the importance of critically assessing the situation as quickly as possible so that unnecessary steps are not taken using up scarce resources.

In certain cases, such as that of Groupe Dynamite case, advisers have successfully revitalized struggling brands. Conversely, there are situations where advisers do earn fees from a business that ultimately cannot be sustained. Therefore, an effective insolvency assessment must identify these challenges from the outset in every case. It is crucial to ensure that a successful restructuring does not come at the expense of overwhelming financial burdens.

A candid and transparent dialogue between the insolvency advisor and company management is necessary before initiating any restructuring efforts. This collaboration is vital for determining the viability of the company and the best course of action moving forward.

The Ethical Dilemma In Insolvency Advisory

Navigating the complexities of insolvency involves not only strategic calculations but also significant ethical considerations. A critical question arises: at what point does one profit from another’s misfortune? The high fees charged by downtown Toronto Bay Street insolvency advisers, which can exceed $1,300 per hour, certainly prompts the question. This raises an important discussion about whether these professionals are genuinely aiding in recovery or merely capitalizing on the difficulties faced by their clients.

Insolvency advisory fees are typically structured to be front-loaded, meaning that the initial phases of an insolvency case require significantly more effort from advisers. This is necessary as they work to thoroughly understand the various issues at hand. Consequently, the execution of the devised strategy tends to be less intensive than its formulation.

This structure can exacerbate the financial strain on already struggling businesses, leading to concerns about the fairness of such practices. Therefore, transparency regarding fees is not merely a preferable quality but an essential component of ethical practice in insolvency advisory. Business owners deserve clarity to make informed decisions during challenging times.

Finding Balance

Achieving a balance between risk and reward is essential for long-term success in business. While it can be tempting to chase higher gains, it’s important to carefully consider the potential consequences. Understanding the balance between your business’s viability and the associated advisory fees is key to making informed decisions.

As we navigate the challenges ahead, let’s stay vigilant and compassionate, ensuring we take care of our businesses and those who support us in maintaining them.

I encourage you to take a moment to reflect on these points and prepare not just for success, but for stability in the ever-changing marketplace. Together, we can build a resilient foundation for the future.

Insolvency in Canada: FAQs

1. What is insolvency and how does it impact businesses in Canada?

Insolvency happens when an individual or a company is unable to fulfill their financial obligations when they are due. This situation can have important legal and practical implications, and it is guided by a detailed set of federal and provincial laws in Canada. For businesses facing insolvency, there are several potential outcomes, such as increasing debt, legal actions from creditors, and the possibility of closure. However, it’s important to remember that there are options available to help navigate this challenging situation, and seeking advice from financial professionals can be a valuable step forward.

2. What key legislation governs insolvency in Canada?

The BIA serves as the primary federal legislation governing bankruptcies and proposals in Canada. It establishes a structured process to protect the interests of all parties involved in insolvency proceedings. In contrast, the CCAA is specifically designed for the restructuring of insolvent corporations, with debts that exceed $5 million. Additionally, provincial laws contribute to the framework surrounding bankruptcy, particularly in matters related to property rights and fraudulent conveyances.

3. What role do Licensed Insolvency Trustees play in insolvency proceedings?

Licensed Insolvency Trustees are professionals authorized by the OSB to oversee bankruptcy proceedings, manage proposals, and act as receivers or monitors. Their responsibilities include offering guidance to both debtors and creditors throughout the legal processes, ensuring compliance with applicable regulations, and working to balance the interests of all parties involved.

4. Why are insolvency advisory fees considered a concern, especially for entrepreneurial smaller businesses?

Insolvency advisory services, though crucial in navigating complex legal and financial landscapes, often come with high hourly rates. This can be a significant burden for struggling businesses, particularly smaller enterprises, as these fees are prioritized as senior claims, meaning they are paid before other creditors. Some argue that these fees add to the financial strain and may not always guarantee a successful recovery.

5. What are some alternatives to high-priced Bay Street insolvency firms?

While large Bay Street firms dominate the insolvency landscape, boutique firms like ours offer comparable expertise and experience at lower hourly rates. Smaller Firms like ours prioritize practical solutions and cost-effectiveness, all delivered with a large dose of empathy. This makes us a viable alternative for businesses seeking quality advice without exorbitant fees.

6. How can businesses prepare for potential insolvency and mitigate risks?

Organizations can effectively mitigate the risks associated with insolvency by prioritizing strong financial management practices. This entails diligent monitoring of cash flow, diversifying revenue sources, maintaining adequate reserves, and establishing a contingency plan to address potential financial challenges. Timely identification of warning signs, along with seeking guidance from qualified professionals, can greatly enhance the likelihood of recovery.

7. What ethical considerations arise in the field of insolvency advisory services?

The power dynamics and the potential for substantial fees in insolvency advisory raise significant ethical considerations regarding the profit derived from a company’s financial difficulties. It is crucial to ensure transparency in fee structures and demonstrate a sincere commitment to prioritizing the client’s best interests over the pursuit of maximum profit. Such practices are essential for upholding ethical standards within the industry.

Insolvency Conclusion: Navigating the Stormy Waters Ahead

As I reflect on the unpredictability of the business world, it strikes me how everything can change in an instant. What appears stable today can be rocky tomorrow. We’ve seen thriving companies face insolvency as consumer habits shift overnight. There are many such examples. They soared high, only to crash due to rising interest rates impacting consumer spending. It’s a stark reminder that no one is immune to the tides of economic downturn.

For business owners, the key is preparation. Have you considered what your plans are if faced with potential insolvency? It’s essential to develop mitigation strategies. Keeping an eye on cash flow, diversifying income streams, and maintaining a strong financial buffer can save a business from downfall. By creating a robust financial foundation, we can cushion ourselves against unforeseen storms.

I hope you enjoyed this insolvency Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding the bankruptcy process. We can get you debt relief freedom using processes that are a bankruptcy alternative.

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

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

Tags advisory services, Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy proceeding, BIA, business insolvency, CCAA, Companies’ Creditors Arrangement Act, court appointed receiver, financial restructuring, formal insolvency proceedings, insolvency process, Ira Smith Trustee, legal advice, legal counsel, legal fees, Office of the Superintendent of Bankruptcy, OSB, public record

Brandon Blog Post

FRAUD AND MISREPRESENTATION AND BANKRUPTCY: SUPREME COURT OF CANADA’S REVOLUTIONARY RULING ON ADMINISTRATIVE FINES AND BANKRUPTCY

Post author By Brandon Smith
Post date August 5, 2024

fraud and misrepresentation

Fraud and Misrepresentation: Introduction

On July 31, 2024, the Supreme Court of Canada released its decision in the case of Poonian v. British Columbia (Securities Commission), 2024 SCC 28. This appeal to the Supreme Court was heard on December 6, 2023. The Canadian insolvency community has been anxiously awaiting this decision to drop.

Thalbinder Singh Poonian and Shailu Poonian engaged in market manipulation that caused vulnerable investors to lose millions of dollars. The British Columbia Securities Commission (BCSC) found that they had contravened the province’s Securities Act. It ordered them to pay $13.5 million in administrative penalties; it also ordered them to disgorge approximately $5.6 million, which represented the amounts they obtained as a result of the market manipulation fraud and misrepresentation scheme.

These sanctions were registered with the Supreme Court of British Columbia under the Securities Act, which provides that, on being filed in a registry of that court, a decision of the BCSC has the same force and effect, and all proceedings may be taken on it as if it were a judgment of that court.

On April 20, 2018, the Poonians initiated a voluntary assignment in bankruptcy. Subsequently, on February 13, 2020, they sought a discharge from bankruptcy; however, this request was opposed by both the BCSC and the Canada Revenue Agency. On April 8, 2020, the Supreme Court of British Columbia denied the Poonians’ application, and as a result, they continue to remain undischarged bankrupts to this day.

In this Brandon’s Blog, I discuss the decision of the Supreme Court of Canada in this case. The Poonian case stems from stock market manipulation, fraud and misrepresentation. It highlights the intersection of fraud, bankruptcy law, and investor protection. Its impact stresses the need for reform to ensure accountability for dishonest practices while fostering trust in financial markets. The ruling may serve as a crucial step towards a more ethical financial landscape.

Fraud and Misrepresentation: The Core Issues of the Case

Delving into the intricacies of the case provides a rich tapestry of legal nuances that underscore the importance of regulatory frameworks in financial markets. The case was centred around the role of the BCSC, a critical entity in safeguarding investor interests and maintaining the integrity of the marketplace.

An important question arose: could the

administrative penalties and disgorgement orders imposed by the BCSC withstand the complexities introduced by bankruptcy discharges as delineated in the Bankruptcy and Insolvency Act (Canada) (BIA)? This question reflects legal intricacies and highlights ethical implications in financial governance.

First, let’s examine the significant penalties. The case’s details reveal staggering financial penalties: Thalbinder Poonian was hit with a hefty $13.5 million administrative penalty, while his partner, Shailu Poonian, faced $3.5 million. Additionally, a $5.6 million disgorgement order was made by the BCSC representing the Poonians’ illicit gains from their fraud and misrepresentation activities between 2007 and 2009.

The BCSC applied to the Supreme Court of British Columbia for a declaration that the debts represented by the administrative penalties and disgorgement orders not be released by any order of discharge, under s.178(1)(a), (d) and (e) of the BIA. The chambers judge allowed the BCSC’s application, finding that the debts were exempt and would survive any discharge. While only one exception had to apply for the debts not to be released, the chambers judge found the exceptions in s. 178(1)(a) and (e) both applied.

The Poonians filed an appeal with the British Columbia Court of Appeal, contesting, among other points, the chambers judge’s interpretation of the Bankruptcy and Insolvency Act (BIA). Justice Willcock, representing the British Columbia Court of Appeal, determined that the chambers judge had made an error in concluding that the debts were exempt from discharge under section 178(1)(a) of the BIA. However, the court upheld the chambers judge’s finding that the debts were exempt under section 178(1)(e). As the debts were deemed exempt, albeit only under section 178(1)(e), the appeal was ultimately dismissed.

Not satisfied with this result, the Poonians appealed to the Supreme Court of Canada. Before delving into the findings of the Supreme Court of Canada, we should review some basics about the BIA.

fraud and misrepresentation

The Legal Background of Bankruptcy and Fraud and Misrepresentation

The Bankruptcy and Insolvency Act

The Supreme Court’s analysis of the BIA centred on interpreting and applying the exceptions listed under section 178(1) in the context of the Poonian v. British Columbia Securities Commission case. Here are the key aspects of the court’s analysis:

Financial Rehabilitation and Fresh Start Principle:

The court acknowledged the primary objective of the BIA, which is to facilitate the financial rehabilitation of debtors by enabling them to achieve a fresh start and relief from burdensome debt.
Subsection 178(2) of the BIA delineates the fresh start principle, permitting an honest yet unfortunate debtor to be discharged from outstanding debts upon completing the bankruptcy process.

Limits of Financial Rehabilitation:

The court acknowledged that while financial rehabilitation is a key goal of the BIA, it is not unlimited. There must be a proper balance of interests. Sections 172 and 178(1) of the BIA set out specific debts and considerations that balance financial rehabilitation with other policy objectives.

Section 178(1) Exceptions:

The court highlighted that Section 178(1) enumerates particular debts that are not extinguished by discharge and consequently persist beyond bankruptcy. This provision reflects Parliament’s intention to reconcile financial rehabilitation with other policy objectives, including the maintenance of confidence in the credit system.

Specific Debt Exemptions:

The court addressed exemptions under sections 178(1)(a) and 178(1)(e) of the BIA, which were central to the case.
Section 178(1)(a) relates to fines, penalties, restitution orders, recognizances, bail, and orders imposed by a court (emphasis added). The court interpreted this subsection to clarify its scope and application to the BCSC’s orders.
Section 178(1)(e) pertains to debts or liabilities resulting from obtaining property or services by false pretenses or fraudulent misrepresentation. The court provided a detailed analysis of the elements and requirements of this subsection concerning the case at hand.

Interpretation of Court Orders:

There was an analysis of the effect of administrative tribunal decisions being registered as judgments of a court and whether they fall under the exemptions listed in section 178(1)(a) of the BIA.

Decision on Exemptions:

Ultimately, the court determined whether the administrative penalties and disgorgement orders in the Poonian case were exempt from discharge under section 178(1)(a) and (e).

Overall, the court’s analysis primarily focused on the relevant exceptions under section 178(1) of the BIA, their interpretation, and their application to the specific circumstances of the case.

Section 178(1) Explained

The legal background of bankruptcy concerning fraud and misrepresentation involves specific elements that need to be established for a debt or liability to survive bankruptcy under section 178(1)(e) of the BIA. Here are the key points in the Supreme Court analysis related to this legislative history:

False Pretences or Fraudulent Misrepresentation:

- The first requirement is for the creditor to prove that the debts or liabilities were obtained as a result of the debtor’s false pretences or fraudulent misrepresentation.
- A court cannot infer fraud easily and must independently review the evidence presented.
- Judicial notice of fraud is not admissible, and fraud cannot be inferred in a cursory manner.
- The creditor must establish that a deceitful statement was made, which was false, made knowingly without belief in its truth, and that the creditor relied on it and suffered a loss as a result.

Passing of Property or Provision of Services:

- The second requirement involves a loss in the form of a transfer of property or delivery of services, resulting in a corresponding debt or liability.
- The bankrupt need not be the direct recipient of the property. It can pass indirectly from the person to a third party at the bankrupt’s direction.
- The property need not be obtained or retained by the bankrupt, but the fraudulent misrepresentation must induce a person to give the property to the bankrupt or someone associated with the bankrupt.

Link between Debt or Liability and Fraud:

The debt or liability must have been created as a direct result of false pretences or fraudulent misrepresentation.
The court must ensure a clear and cogent link between the deceitful conduct and the resulting debt or liability.
Even if findings of fraud have been made by an administrative decision-maker, the court must make its determination based on a review of the evidence.

In summary, the legal background of bankruptcy and fraud/misrepresentation involves stringent requirements to establish that debts or liabilities were obtained through deceitful actions, resulting in a loss of property or services, and directly linked to the fraudulent conduct. These elements are essential for determining whether a debt or liability can survive bankruptcy under the BIA.

Fraud and Misrepresentation: The Appeal To The Supreme Court

The Supreme Court’s Decision

The Supreme Court’s majority opinion dismissing this appeal by the Poonians written by Justice Côté now provides clarity on the matter. The SCC affirmed that the disgorgement orders are monetary sanctions imposed because of, and thus resulting from, deceitful conduct or dishonest conduct that Parliament specifically sought to address. They are debts that originate from the Poonians having obtained property by false pretences or fraudulent misrepresentations. Accordingly, the disgorgement order falls within the narrow scope of s. 178(1)(e) and should not be released by any order of discharge from bankruptcy. The Supreme Court majority decision decided that the administrative penalties do not fall under any of the section 178(1) exemptions, be it section 178(1)(a) or (e).

This decision illuminates the understanding that the BCSC’s disgorgement order was closely tied to the fraudulent actions of the Poonians, which had directly inflicted financial harm on investors, but the administrative penalties were not. In essence, the court recognized that allowing the disgorgement order to be discharged would go against the spirit of the law designed to root out fraudulent behaviour.

The dissenting opinion from Justices Karakatsanis and Martin also adds an intriguing layer to this narrative. They concurred with the majority opinion for the survival of the disgorgement order under BIA sections 178(1)(e), but they would have given the administrative penalties the same treatment. The dissenting Justices advocated for the idea that all the underlying actions constituted fraud. However, their dissenting opinion did not alienate them from the majority opinion on the disgorgement order.

The Poonian case highlights the critical tension between providing pathways for honest debtors and preventing those engaged in deceit from reaping financial rewards for their actions. It is a reminder that while bankruptcy law aims to provide relief, it should not create loopholes that enable fraudsters to escape accountability. The dissonance between the aims of the BIA and the realities of financial misconduct presents a significant challenge but also an opportunity to fortify legal structures that prioritize the trustworthiness of our financial systems.

The Supreme Court’s Detailed Analysis of Section 178(1) of the BIA

To fully grasp the nuances of bankruptcy discharges, understanding Section 178(1) is crucial. This section explicitly lists categories of debts that a bankruptcy discharge does not cover. Specifically, it sets out parameters that determine if a debt may survive the bankruptcy process.

Subsection (a) targets amounts that are deemed penalties specifically imposed by a court for offences.
Subsection (e), on the other hand, relates to non-dischargeable debts that arise from unlawful acquisition of property through fraudulent misrepresentation.

Through the context of Poonian’s case, we begin to see the implications of these distinctions. The Supreme Court directly confronted whether the administrative penalties levied against the Poonians did not fall under the non-dischargeable categories, notwithstanding these penalties had been registered with the BC court.

Differences Between Court-Imposed Penalties and Administrative Fines

One of the critical distinctions I’ve noticed is how court-imposed penalties differ fundamentally from administrative fines. Administrative penalties are typically issued by regulatory agencies for violations of regulation rather than for conduct termed by law. In the case at hand, the penalties were administered by the BCSC, which is an administrative body. It was not a decision of the Court.

The Supreme Court highlighted that for the context of subsection (a), penalties need to originate from a court ruling to classify as “court-imposed.” The Justices affirmed neither the administrative penalties nor the disgorgement orders stemming from the BCSC fell under subsection 178(1)(a). Conversely, it recognized that only the disgorgement order debt could indeed be assessed under subsection 178(1)(e) because they arose from the fraudulent actions committed by the Poonians, aligning such misconduct directly with fraudulent misrepresentation.

fraud and misrepresentation

Fraud and Misrepresentation: Real-Life Implications for Those Facing Bankruptcy

While exploring this judicial decision, let’s not overlook the real-world implications for individuals grappling with the aftermath of bankruptcy. Bankruptcy proceedings are not simply academic exercises; they represent often hard-fought battles for individuals and families seeking finality and relief from oppressive debt. However, as this case illustrates, an individual’s past actions in the realm of fraud can significantly affect their future financial recovery.

The situation faced by Thalbinder and Shailu Poonian serves as a cautionary tale. After executing a fraudulent market manipulation scheme that inflicted massive financial losses on investors, they found themselves facing not only civil penalties but also the complexities of bankruptcy law that would determine if certain of their debts could not be discharged through the bankruptcy process. Their case spotlighted how, even while seeking refuge under the BIA, the weight of their actions continued to haunt them—shaping their financial reality moving forward.

In the context of fraud and misrepresentation, the legal system takes a firm stance. The Supreme Court underscored that despite bankruptcy serving as a fresh start for many, there remains a clear societal interest in holding those who engage in fraudulent conduct accountable. As one legal expert succinctly articulated,

“It’s essential to maintain the balance between allowing recovery and punishing fraudulent behaviour.”

Upon reviewing the rulings, it becomes evident that the relationship between administrative penalties and bankruptcy discharges presents significant complexities. The evolving nature of jurisprudence underscores the importance of seeking experienced legal counsel for individuals navigating these circumstances. Cases such as that of the Poonians highlight the enduring repercussions of dishonesty in business transactions and the stringent scrutiny that follows in the legal arena.

Moreover, Section 178(1) serves as an essential protective measure against unscrupulous debtors, holding accountable those who exploit the bankruptcy system for personal gain. It is imperative to emphasize that not all debts are treated equitably in bankruptcy proceedings, particularly for individuals who have acquired property through fraud and misrepresentation.

Fraud and Misrepresentation: The Broader Legal Implications of the Ruling

In reflecting on the Supreme Court ruling in this case, I am struck by the potential ramifications for future cases involving a fraudulent scheme and bankruptcy. The ruling not only clarifies certain provisions under the BIA but also highlights that the majority opinion shapes the legal discourse for years to come.

The core issue at stake was whether administrative penalties and disgorgement orders could withstand bankruptcy discharges. The Poonians, who engaged in a significant market manipulation scheme causing notable losses to investors, faced substantial sanctions totalling over $17 million. What caught my attention was the legal reasoning applied by the judges concerning subsections of the BIA — particularly around the distinction of what constitutes a “penalty imposed by a court.” The majority decision concluded that the disgorgement orders could indeed be non-dischargeable, while they dismissed the administrative penalties under section 178(1).

fraud and misrepresentation

Fraud and Misrepresentation: Impact on Future Cases

The implications of this ruling extend far beyond the immediate case. The way future fraud cases are adjudicated may fundamentally change as a consequence of this decision. From my perspective, the judicial reasoning employed could pave the way for stricter enforcement of certain penalties against those engaging in fraudulent activity. At the same time, the reasoning, in this case, can be extended to all administrative tribunals charged with maintaining the trust the public can place in the industry they regulate.

I can envision that future court rulings will be influenced by the emphasis placed on the fraudulent behaviour of the individuals involved. If future courts lean towards the rationale demonstrated here, it might deter would-be fraudsters from riskier financial behaviour due to the heightened likelihood of facing non-dischargeable debts post-bankruptcy.

Furthermore, this case might serve as a benchmark for evaluating the legitimacy and scope of financial penalties imposed not only by commissions like the BCSC but also by regulatory bodies across Canada. When I think about the potential for greater clarity in judicial interpretation, I am both hopeful and curious about its influence on how we perceive financial accountability in society at large.

Fraud and Misrepresentation: Conclusion

As I sift through the implications of this Supreme Court decision, I can’t help but reflect on how the outcomes resonate far beyond the courtroom. The repercussions of this case reach every corner of the investment community, sending ripples into regulatory frameworks that must adapt to this reality.

The Poonians were found guilty of orchestrating fraud and misrepresentation through their stock manipulation activities that significantly harmed countless investors. The Supreme Court’s ruling, emphasizes a crucial principle: while bankruptcy laws may offer a fresh start, they should not protect those who engage in unethical conduct.

I hope you enjoyed this fraud and misrepresentation Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

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

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

Brandon Blog Post

ESSENTIAL DUTIES OF BANKRUPTS AND TRUSTEES IN LIQUIDATING ASSETS: THE ULTIMATE COMPREHENSIVE GUIDE

Post author By Brandon Smith
Post date July 29, 2024

Liquidating Assets: Introduction

Today I am writing about an exciting recent court decision from the Court of King’s Bench of Alberta released on July 23, 2024. This case is an appeal to the Court decided by The Honourable Justice Douglas R. Mah from the decision of the Registrar in Bankruptcy in the bankruptcy discharge hearing of Dr. Omar Ahmad Nsair. The case citation is Nsair (Re), 2024 ABKB 450.

Regular readers of my Brandon’s Blog will recall that last week I wrote about the bankruptcy discharge hearing of Ontario’s self-proclaimed Crypto King in LESSONS FROM THE AIDEN PLETERSKI BANKRUPTCY: OUR COMPREHENSIVE GUIDE ON A “CRYPTO KING” BANKRUPTCY DISCHARGE.

That blog dealt with Aiden Pleterski’s failed application for discharge from bankruptcy. One of the various reasons his discharge application failed was, amongst other things, his total lack of cooperation with their licensed insolvency trustee for the identification and liquidation of his non-exempt assets.

Dr. Omar Ahmad Nsair’s case answers the following question: How much assistance does the bankrupt need to give the licensed insolvency trustee? Dr. Nsair filed a voluntary assignment in bankruptcy. His case underscores the challenges of balancing statutory duties with practical limitations in asset realization, offering valuable insights into the intricacies of bankruptcy proceedings.

First I will provide an overview of the role and responsibilities of a receiver or bankruptcy trustee in liquidating assets. Then I will delve into the details of Dr. Nsair’s personal bankruptcy, where a compelling narrative unfolds, shedding light on the complexities of asset realization and statutory duties in the face of economic uncertainties. Join me on this legal journey as we dissect the nuances of bankruptcy proceedings and the implications for all parties involved.

Liquidating Assets: The Bankruptcy and Insolvency Act of Canada

Overview of the Bankruptcy and Insolvency Act Relating To Liquidating Assets

The Canadian Bankruptcy and Insolvency Act (BIA) is a federal statute that plays a crucial role in liquidating assets in both receivership and bankruptcy scenarios. Here are some key aspects of the BIA’s importance in this context:

Priorities: The BIA sets out the order of priority for the distribution of assets in receivership or bankruptcy. This ensures that certain creditors, such as secured creditors, are paid first, followed by unsecured creditors.
Stay of Proceedings: The BIA provides for a stay of proceedings, which prevents creditors from taking legal action against the debtor or its assets during the receivership or bankruptcy process. This stay allows for a more orderly way of liquidating assets.
Powers of the Receiver or Trustee: The BIA grants the receiver or trustee extensive powers to manage and liquidate the insolvent debtor’s assets. This includes the power to sell assets, collect debts, and manage the debtor’s business.
Asset Protection: The BIA provides for the protection of certain assets, such as exempt property, which are not available to creditors. This ensures that debtors have some protection for essential assets, such as their primary residence.
Notice and Disclosure: The BIA requires the receiver or trustee to provide notice to creditors and other interested parties of the liquidation process. This ensures that all parties are aware of the process and have an opportunity to participate.
Liquidating Assets Process: The BIA sets out the procedures for liquidating assets, including the requirement for a public auction or sale of assets. This ensures that assets are sold fairly and transparently.
Distribution of Proceeds: The BIA sets out the rules for distributing the proceeds of liquidating assets, including the priority of payments to creditors. This ensures that creditors are paid in the correct order.
Avoidance Powers: The BIA grants the licensed insolvency trustee acting as receiver or bankruptcy trustee avoidance powers, which allow them to recover assets that were transferred or sold by the insolvent debtor for less than their fair value. This ensures that creditors receive a fair return on their investment.
Reporting Requirements: The BIA requires the receiver or trustee to provide regular reports to the court and creditors, which ensures transparency and accountability in liquidating assets.
Court Supervision: The BIA provides for court supervision of the liquidation process, which ensures that the receiver or trustee is following the law and that the process is fair and orderly.

In summary, the Canadian Bankruptcy and Insolvency Act plays a critical role in liquidating assets in both receivership and bankruptcy scenarios by providing a framework for the process, protecting creditors’ interests, and ensuring transparency and accountability.

Purpose of liquidating assets in bankruptcy

The primary purpose of liquidating assets in bankruptcy is to:

Distribute the proceeds to creditors: The goal is to collect as much money as possible from the sale of assets and distribute it among creditors, including secured and unsecured creditors, under the priority of claims.
Pay off debts: Liquidating assets helps to pay off the debts of the bankrupt individual or business, allowing them to discharge their obligations and start fresh.
Provide a fresh start: By liquidating assets and paying off debts, the bankrupt individual or business can obtain a fresh start, free from the burden of debt and the stigma of bankruptcy.
Prevent asset stripping: Liquidating assets helps to prevent asset stripping, where creditors or other parties attempt to remove or sell assets for personal gain, leaving the bankrupt individual or business with little or no assets.
Ensure Equity: Liquidating assets guarantees that all creditors receive fair and equitable treatment, as the proceeds are allocated following the established priority of claims.
Provide a mechanism for debt forgiveness: In some cases, liquidating assets can provide a mechanism for debt forgiveness, where debts are written off or reduced due to the lack of assets or the inability to recover them.
Facilitate business restructuring: In the case of a business bankruptcy, liquidating assets can facilitate restructuring and reorganization, allowing the business to continue operating and creating jobs.
Protect the public interest: Liquidating assets helps to protect the public interest by ensuring that the assets of the bankrupt individual or business are not used to perpetuate fraud or other illegal activities.
Provide a mechanism for asset recovery: Liquidating assets provides a mechanism for asset recovery, where assets that were transferred or hidden by the bankrupt individual or business can be recovered and distributed among creditors.
Ensure compliance with bankruptcy laws: Liquidating assets ensures compliance with bankruptcy laws and regulations, which helps to maintain public confidence in the bankruptcy system.

Overall, the purpose of liquidating assets in bankruptcy is to achieve a fair and orderly distribution of assets among creditors, while providing a fresh start for the bankrupt individual or business.

Liquidating Assets: Role of a Trustee in Liquidation

Duties and Responsibilities of a Trustee

As a licensed insolvency trustee, my duties and responsibilities include:

To act as a fiduciary: The licensed trustee must act in the best interests of the bankrupt individual or business, and not in their interests.
To take possession of assets: The trustee must take possession of the assets of the bankrupt individual or business, including real estate, inventory, equipment, and other assets.
To inventory and value assets: The trustee must conduct an inventory of the assets and determine their value.
To determine the priority of claims: The trustee must determine the priority of claims against the assets, including secured and unsecured creditors.
To sell or dispose of assets: The trustee must sell or dispose of assets in a fair and orderly manner, often through public auction or private sale.
To distribute proceeds: The trustee must distribute the proceeds from the sale of assets among creditors, following the priority of claims.
To manage the liquidation process: The trustee must manage the liquidation process, including hiring professionals, such as appraisers and auctioneers, and negotiating with creditors.
Regular reporting: The licensed trustee is required to furnish regular reports and updates to the court, creditors, and other stakeholders regarding the progress of the liquidation process.
To ensure compliance with laws and regulations: The trustee must ensure compliance with bankruptcy laws and regulations, as well as any applicable provincial or territorial laws.
To represent the bankrupt: The trustee represents the bankrupt individual or business when liquidating assets, including negotiating with creditors and making decisions about the sale of assets. The Trustee must do so as a prudent person, but at the same time, is representing and looking out for the rights of the unsecured creditors.
To provide a fresh start: The trustee’s role is to help the bankrupt individual or business obtain a fresh start, by liquidating assets and distributing the proceeds fairly and equitably among creditors.
To maintain confidentiality: The trustee must maintain confidentiality regarding the affairs of the bankrupt individual or business.
To act impartially: The licensed trustee must act impartially and without bias in the process of liquidating assets.
To provide a fair and orderly liquidation: The trustee must provide a fair and orderly process when liquidating assets, taking into account the interests of all stakeholders.
To ensure transparency: The trustee must ensure transparency in the liquidation process, providing regular updates and reports to stakeholders.

These duties and responsibilities are outlined in the BIA and the Bankruptcy Rules and are subject to the supervision of the court.

Trustee’s role in asset valuation and sale

The LIT plays a crucial role in the valuation and sale of assets in receivership or bankruptcy. Here are some key responsibilities:

Asset Identification: The licensed trustee is responsible for identifying all assets of the bankrupt or receiver, including real estate, inventory, equipment, vehicles, and other tangible and intangible assets.
Asset Valuation: The LIT must determine the fair market value of each asset, which may involve hiring appraisers, conducting auctions, or negotiating sales with potential buyers. The goal is to ensure that the assets are valued accurately and fairly.
Asset Classification: The licensed trustee must categorize assets into different classes, such as:
- Preserved assets: Those that are essential to the business or have significant value and should be preserved for the benefit of creditors.
- Realizable assets: Those that can be sold or liquidated to generate cash for creditors.
- Non-realizable assets: Those that have little or no value and may be abandoned or written off.
Asset Sale and Liquidation of assets: The Trustee is tasked with the responsibility of conducting asset sales for liquidating assets in a timely and efficient manner, to maximize returns for creditors. This process may include:
- Auctions: The LIT may conduct public or private auctions to sell assets to the highest bidder.
- Negotiated sales: The LIT may negotiate sales with potential buyers, taking into account the asset’s value, market conditions, and the needs of creditors.
- Private sales: The LIT may sell assets privately, often to a specific buyer or group of buyers.
Asset Disposition: The LIT must ensure that assets are disposed of under the BIA and for large debtor companies, the Companies’ Creditors Arrangement Act (CCAA), as well as any applicable provincial or territorial laws.
Reporting and Disclosure: The LIT must provide regular reports to the court, creditors, and other stakeholders on the valuation, sale, and disposition of assets, as well as any issues or challenges that arise during the process.
Compliance with Court Orders: The LIT must comply with any court orders or directions regarding the valuation and sale of assets, including any restrictions or limitations imposed by the court.

Throughout the process, the licensed trusteeNsair’s must maintain transparency, accountability, and fairness, ensuring that the valuation and sale of assets are conducted in a manner that is in the best interests of all stakeholders, including creditors, the bankrupt or receiver, and other parties involved.

Now that we have gone over the basics of the liquidation of assets in a receivership or bankruptcy context, it is time to focus on the specifics of Dr. Nsair’s personal bankruptcy case.

Significance of ATB Financial as a Major Secured Creditor *Turned Un**secured Creditor*

ATB Financial’s role as a major creditor in Dr. Nsair’s bankruptcy proceedings cannot be understated. With substantial sums at stake and implications for the overall outcome of the proceedings, the actions and decisions of ATB Financial carry significant weight in determining the resolution of the case.

In reading the Judge’s Decision, it is obvious that ATB was fuming at their loss and that the Registrar decided that Dr. Nsair fully cooperated with the Trustee and deserved an absolute discharge. It is ATB Financial that appealed the Registrar’s ruling.

Liquidating Assets: Key Details and Contention Points

The valuation disagreements surrounding these condominium units added a layer of complexity to the situation, with various parties presenting differing estimates of their worth. Marketability challenges further compounded the issue, as the aftermath of the 2020 Beirut explosion cast a shadow of uncertainty over the realizable value of these properties.

Exploring the stalemate in asset realization, it became evident that the conflicting perspectives on the condos’ marketability hindered progress in the bankruptcy process. Despite efforts to assess their sale feasibility, the uncertainty surrounding their actual value created a deadlock, impeding any meaningful progress toward creditor benefit.

As a result, the Trustee decided that it could not take the risk of attempting to sell the condominium units. The Trustee wrote to all the creditors advising them of the situation and that it was not going to take any action concerning the condominium assets. The Trustee further advised the creditors that if they wished to, they could seek the Court’s permission under section 38(1) of the BIA to take on the action of selling the condos in their name. No creditors, including ATB Financial, moved on this option.

Liquidating Assets: Introduction to Dr. Nsair’s Bankruptcy Case

As I delve into the intricate details of Dr. Nsair’s bankruptcy case, it’s essential to provide a comprehensive overview of the background and the key players involved. The case of Dr. Nsair, a dentist facing challenging financial circumstances, unfolds with significant legal implications and complexities.

Dr. Nsair’s bankruptcy situation is a focal point of this case, highlighting the struggles and obligations under the BIA of an insolvent person. The involvement of ATB Financial as a major secured creditor suffering a shortfall, adds a layer of significance to the proceedings. Approximately $1.9 million was still owed after a receivership related to dental clinics operated by Dr. Nsair and his brother. Dr. Nsair’s financial difficulties continued as he guaranteed the ATB Financial debt.

However, the argument that ATB Financial put forward for their opposition to Dr. Nsair’s bankruptcy discharge leading to the appeal of the Registrar’s ruling was they felt the bankrupt did not cooperate with the Trustee enough. ATB Financial could not articulate what else the bankrupt should have done. Just that he should have done not only more, but more than what the Trustee or ATB Financial had done.

The result of all this would be that if Dr. Nsair’s discharge from bankruptcy was upheld, then the Trustee would finish the file and obtain its discharge. The BIA states that if there is unrealized property when the Trustee gets its discharge, then subject to any further directive from the Court, the unrealized property goes back to the discharged bankrupt. That got ATB Financial’s juices flowing!

Liquidating Assets: The Registrar’s Decision and Legal Interpretations

Upon assessing Dr. Nsair’s obligations and actions in the context of his bankruptcy case, it became evident that he faced many challenges. From the looming shadow of ATB Financial, a significant now unsecured creditor seeking approximately $1.9 million, to the uncertainties surrounding the commercial condominium units in Beirut, Lebanon, owned by Dr. Nsair, the stakes were undeniably high.

The Court of King’s Bench of Alberta, in its scrutiny of Dr. Nsair’s case, highlighted the delicate balance between statutory duties and the financial condition of the parties involved. It underscored the need for a nuanced approach that considers the economic uncertainties and practical limitations inherent in such proceedings.

Section 158(k) of the BIA reads as follows:

(k) aid to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors;

Despite the challenges faced by the Trustee and creditors, the Registrar’s decision shed light on the complexities of the situation. By delving into the legal interpretations surrounding section 158(k) of the BIA and Dr. Nsair’s obligations, the decision provided clarity on the expectations placed on individuals in bankruptcy scenarios. It emphasized the importance of aligning actions with the objectives of the Bankruptcy and Insolvency Act while acknowledging the constraints faced by all parties.

Through this lens, the Registrar’s decision not only addressed the immediate concerns raised by ATB Financial but also set a precedent for future cases involving asset realization and creditors’ benefits. It highlighted the need for a pragmatic approach that considers the practicalities of the situation while upholding the principles of fairness and justice.

Liquidating Assets: Court Ruling and Implications

One of the pivotal aspects under scrutiny was Dr. Nsair’s obligation, as outlined in section 158(k) of the BIA, to facilitate the realization of his assets for the benefit of creditors. The focal point emerged around three commercial condominium units in Beirut, Lebanon, owned by Dr. Nsair. These properties, impacted by the 2020 Beirut explosion, sparked valuation disputes, with estimates varying widely. Dr. Nsair declared the asset on his sworn Statement of Affairs and provided the Trustee with complete information about them and their legal status.

The Registrar’s ruling centred on interpreting section 158(k) and assessing Dr. Nsair’s compliance with aiding in asset realization. While ATB Financial advocated for stringent measures due to perceived inaction on Dr. Nsair’s part, they could not state what else Dr. Nsair should have done. The Registrar’s decision favoured a nuanced approach. It emphasized the practical limitations and reasonable expectations aligned with the BIA’s objectives, highlighting the complexities of balancing statutory duties with economic uncertainties.

Ultimately, the Court upheld the Registrar’s decision, emphasizing that Dr. Nsair did not breach section 158(k) by refraining from actions beyond his or the Trustee’s capacity. The directive the Court can give when the Trustee seeks its discharge, if any before condos were to revert to Dr. Nsair underscores the importance of a fair evaluation of asset realization potential for the benefit of creditors.

This case underscores the intricate dynamics of bankruptcy proceedings, showcasing the delicate balance between legal obligations, practical constraints, and economic realities. It serves as a testament to the challenges inherent in navigating asset realization in bankruptcy cases, emphasizing the need for a judicious approach that considers all stakeholders’ interests.

Liquidating Assets: Lessons Learned

As I reflect on the intricate details of the bankruptcy legal process, one key aspect that stands out is the delicate balance between statutory duties and practical limitations. The case of Dr. Nsair’s bankruptcy journey shed light on the complexities involved in asset realization and the legal interpretations surrounding it.

Throughout Dr. Nsair’s legal battle, it became evident that navigating the intricacies of the BIA requires a deep understanding of one’s statutory duties while also acknowledging the practical constraints that may hinder swift resolutions. The case exemplified the challenges faced by individuals like Dr. Nsair in fulfilling their obligations to aid in asset realization for creditors’ benefits.

One of the key takeaways from Dr. Nsair’s legal ordeal is the importance of maintaining a clear line of communication and collaboration between all parties involved, including creditors, trustees, and the Court. By aligning expectations and working towards a common goal, the process of asset realization can be streamlined, ensuring a fair and equitable outcome for all stakeholders.

Liquidating Assets: FAQ

What is the role of a receiver in a receivership case?

A receiver is appointed either privately or by the court to take possession of and liquidate the assets under receivership to satisfy the obligations owed to secured creditors.

How does financial restructuring differ from bankruptcy in Canada?

Financial restructuring involves negotiating more sustainable debt terms with creditors and taking steps towards financial sustainability under court supervision, to preserve the business as a going concern. Bankruptcy, on the other hand, involves liquidating assets of the insolvent business and distributing the proceeds to unsecured creditors.

What are the key functions of insolvency laws like the BIA in Canada?

Insolvency laws like the BIA provide frameworks and processes to help minimize the impact of business insolvency on stakeholders, make the best of a bad situation, and ensure that assets of failed businesses are returned to the economy for productive purposes.

What options does an insolvent firm have under the BIA in Canada?

An insolvent firm in Canada can opt for bankruptcy to liquidate its assets and distribute proceeds to creditors, or work with creditors to restructure their debt and continue as a going concern through commercial proposal proceedings. If the firm requires an immediate stay of proceedings, it can first file a Notice of Intention To Make a Proposal. The firm may also require interim financing otherwise called DIP financing to work through the proposal process.

How does bankruptcy liquidation contribute to marketplace dynamics in Canada?

Bankruptcy liquidation helps ensure that assets of failed businesses are returned to the economy for productive purposes, contributing to marketplace dynamics and minimizing the impact of business insolvency on stakeholders.

Liquidating Assets: Conclusion

Dr. Nsair’s bankruptcy case underscores the challenges of balancing statutory duties with practical limitations in asset realization, offering valuable insights into the intricacies of bankruptcy proceedings.

I hope you enjoyed this liquidating assets Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or someone with too much personal debt.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

Brandon Blog Post

BIA: 2 PEOPLE’S CHALLENGE SUING A CANADIAN LICENSED INSOLVENCY TRUSTEE

Post author By Brandon Smith
Post date April 24, 2023

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Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA): Introduction

On April 13, 2023, the Supreme Court of Canada (SCC) dismissed the application by the legal counsel of a former bankrupt and his wife for leave to appeal the costs awarded against them in a decision of the Court of Appeal for Ontario. As is the usual case, the SCC did not give any reasons for the dismissal. The Court of Appeal for Ontario’s decision dealt with what is required under section 215 of the Bankruptcy and Insolvency Act (Canada) (BIA) to sue a licensed insolvency trustee.

In this Brandon’s Blog, I provide a comprehensive guide to the Court of Appeal for Ontario decision and everything you need to know about section 215 of the BIA. Using this real court decision as an example, we’ll explore the ins and outs of Section 215 of the BIA to give you a clear understanding of its purpose, how it applies, and the potential consequences of non-compliance.

Overview of BIA Section 215

Section 215 of the BIA requires that permission of the court be obtained to bring an action against the Office of the Superintendent of Bankruptcy Canada, an official receiver, an interim receiver or a licensed insolvency trustee with respect to any report made under, or any action taken, under the BIA.

The purpose of this section is to ensure that the court must first decide if a proposed action has on its surface a legitimate purpose relating to the administration of insolvency matters in Canada and to avoid frivolous actions that have no chance of success.

Regular readers of Brandon’s Blog know that I have been following and writing about the case of the former bankrupt, Mr. Wayne Flight and his wife, Amber Nicole Flight. In my November 2021 blog titled: TRUSTEE IN BANKRUPTCY: CERTAIN ACTIONS AGAINST TRUSTEE CAN BE UNLEASHED WITHOUT FIRST REQUIRING COURT PERMISSION, I detailed a decision of the Ontario court where the motion judge decided that notwithstanding section 215 of the BIA, the Flights did not need to first obtain authorization from the Court in order to initiate their legal proceeding.

Then in July 2022, I wrote that the licensed insolvency trustee (formerly called a bankruptcy trustee) had appealed this lower court decision and gave an overview of the appeal and other related issues in my blog titled: INSOLVENCY TRUSTEE: TURNS OUT CERTAIN ACTIONS AGAINST THE TRUSTEE CANNOT BE UNLEASHED WITHOUT COURT PERMISSION.

As stated above, this Brandon’s Blog will provide a comprehensive guide to the Court of Appeal for Ontario decision and everything you need to know about section 215 of the BIA.

BIA: The Motion Judge’s Decision

The motion judge decided that the Flights did not require the permission of the court, under s. 215 of the BIA, to bring an action against the Trustee, relating to the administration of four bankruptcies of Brian Wayne Flight! The same corporate trustee was the Trustee in each of his bankruptcy proceedings. The lower court judge rendered a decision that negates the applicability of the clause in dispute, deeming the action to be levied against the individual Trustee in a personal capacity, and further alleging omissions as a mitigating factor. She did not assess whether section 215 of the BIA did apply and if it did, should permission to proceed with the action be granted.

Upon due consideration of the arguments presented, the Court of Appeal for Ontario has granted the Trustee in Bankruptcy leave to appeal and has subsequently set aside the order of the motion judge. In rendering its decision, the appellate court has determined that pursuant to section 215 of the BIA, permission to bring the civil action must be obtained and has thus directed the matter back to the bankruptcy court to assess whether such permission should be granted.

It is noteworthy that, despite the Flights’ appeal of this ruling to the SCC, said appeal has been dismissed. Consequently, the matter will now be remanded to the bankruptcy court for further deliberations.

The BIA case background

Mr. Flight filed for bankruptcy on four separate occasions – specifically in the years 2004, 2006, 2011, and 2016. The same corporate trustee was the Trustee in respect of each of these bankruptcies. The same individual licensed insolvency trustee was the individual at the corporate trustee with carriage of Mr. Flight’s bankruptcies.

The total of the proven claims in the first three bankruptcies was $324,800. The total amount distributed to creditors of those bankruptcies was about $3,200. Proven claims in the fourth bankruptcy were $127,870.

In the year 2018, amidst his fourth bankruptcy, Mr. Flight uncovered the fact that substantial amounts had been unlawfully appropriated from his business operations between 2003 and 2018. The perpetrator of this offence was none other than Julie LeBlanc, his former spouse, his bookkeeper, and authorized agent. Ultimately, Mr. Flight determined that the amount of the misappropriations was approximately $206,000.

Mr. Flight successfully retrieved a sum of approximately $30,300 from Ms. LeBlanc, however, it was not submitted to the Trustee. Subsequently, in April 2018, Mr. Flight lodged a complaint with the Office of the Superintendent of Bankruptcy regarding the Trustee’s inability to identify Ms. LeBlanc’s actions. Following the formal complaint, the Trustee was made aware of Ms. LeBlanc’s illicit activities and the funds secured by Mr. Flight.

Disputes then arose between the Trustee and Mr.Flight concerning whether and on what terms he would be discharged from bankruptcy and how the payments from Ms. LeBlanc should be treated. In August 2019, Mr. Flight was granted a conditional discharge on terms that, if complied with, allowed him to receive an absolute discharge after twelve months. The Trustee and Mr. Flight did not agree as to whether those conditions were met.

In September 2019, Mr. Flight and his current spouse, Amber Nicole Flight, commenced an action against the individual licensed trustee, seeking relief (the “Action”). The Action does not name, or refer to, the corporate trustee, but it treats the individual trustee as though he were the Trustee. The central allegation in the Action is that the individual trustee, as the“Licensed Insolvency Trustee” for each of the bankruptcies, ought to have detected Ms. LeBlanc’s misappropriations and, once told about them, ought to have taken steps including suing Ms. LeBlanc.

As Mr. Flight states in his affidavit:

“At the heart of this action is the Trustee’s failure to detect, prevent, and once he became aware of it, to litigate, the theft and fraud committed by my former Accountant, Bookkeeper, and Power of Attorney, JulieLeBlanc”.

Did the undischarged bankrupt have the right to launch the Action under the BIA?

Both the individual trustee and the corporate trustee objected to the Action on the basis that at the time of its commencement, (i) Mr. Flight was an undischarged bankrupt person, and (ii) no permission was obtained under s. 215 of the BIA to bring the Action.

Mr. Flight brought a motion, in his bankruptcy proceeding, seeking directions with respect to whether he had the right to commence the Action as an undischarged bankrupt and, if required, seeking leave to do so under section 215 of the BIA.

In September 2020, and before the motion for directions was heard, Mr. Flight launched but did not proceed with, a motion for an absolute discharge. In October 2020, working with a different insolvency professional, he filed a consumer proposal under the BIA. It was accepted by Mr. Flight’s sole significant creditor in February 2021. The acceptance of the consumer proposal resulted in his bankruptcy being deemed annulled.

Following acceptance of the consumer proposal the motion judge heard the motion for directions with respect to the Action.

The Court of Appeal for Ontario’s analysis

The motion judge, sitting in the bankruptcy court, determined that permission was not required under section 215 of the BIA to commence the Action. She expressly did not determine whether, if permission were required, should it be granted. She did not address whether Mr. Flight’s status as an undischarged bankrupt at the time the Action was started prevented him from bringing it.

The motion judge described the Action as one seeking “a declaration that the defendant engaged in misfeasance, negligence, fraud and breach of fiduciary duty in his personal capacity and that the defendant was unjustly enriched.” She described the claims in the Action as alleging a theft (by Ms. LeBlanc) that caused Mr. Flight’s repeated bankruptcies, and as alleging that the individual trustee was liable since the“defendant trustee ought to have detected this fraud in the administration of the four bankruptcies”.

The motion judge described the Action as claiming damages flowing from the individual trustee’s alleged failure to: “take any meaningful action to address the alleged fraud and its impact on the fourth bankruptcy after its discovery”; “diligently commence an action against the former bookkeeper”; “investigate the fraud”; “adjust the plaintiff’s surplus income”; “recommend a consumer proposal in alternative to bankruptcy”; and “have the plaintiff promptly discharged from his fourth bankruptcy”.

The motion judge gave two reasons for finding that the Action did not require permission under section 215 of the BIA. According to her perspective, seeking recourse against trustees in their individual capacity does not necessitate prior authorization. Furthermore, it is noteworthy that the pursuit of legal recourse pertaining to omissions does not necessitate getting prior authorization.

The Court of Appeal for Ontario’s decision

The Court of Appeal for Ontario found that the motion judge erred in concluding that the capacity in which the Trustee was sued made section 215 of the BIA inapplicable. An action does not fall outside of section 215 of the BIA because it names an individual rather than the corporate trustee as the defendant, where the action alleges that the individual owed the duties of a Trustee and is liable as if he were the Trustee. Nor does an action fall outside of section 215 of the BIA because the claim asserts that it is brought against the Trustee in a personal capacity, where the gist of the claim is wrongdoing in the performance of the Trustee’s role.

The appellate court stated that the motion judge also erred in holding that an action that makes any allegation of an omission falls outside of section 215 of the BIA. Although section 215 does not apply to an action premised on the failure of a Trustee to do an act specifically and expressly mandated by the BIA, that is not the core allegation in the Flight’s claim. Section 215 applies to the Action, which alleges common law wrongdoing in the performance of the Trustee’s role, even if an aspect of that wrongdoing is described as an omission to act.

The Court of Appeal for Ontario granted the Trustee’s leave to appeal, allowed the appeal, and returned the matter to the bankruptcy court to determine whether the Flights should be granted permission to sue the individual trustee. The individual and corporate trustees were entitled to the costs of the appeal, fixed in the amount of $13,000, inclusive of disbursements and applicable taxes. Now that the SCC appeal is dismissed, the lower court will have to decide the real issues as determined by the Court of Appeal for Ontario

BIA: Conclusion

I hope you enjoyed this section 215 BIA Brandon’s Blog.

Revenue and cash flow shortages are critical issues facing people, entrepreneurs and their companies and businesses. Are you now worried about just how you or your business are going to survive? Are you worried about what your fiduciary obligations are and not sure if the decisions you are about to make are the correct ones to avoid personal liability? Those concerns are obviously on your mind. Coming out of the pandemic, we are also now worried about the economic effects of inflation and a potential recession.

The Ira Smith Team understands these concerns. More significantly, we know the requirements of the business owner or the individual that has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious.

It is not your fault you can’t fix this problem on your own. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy proceedings. We can get you debt relief now.

We have helped many entrepreneurs and their insolvent companies who thought that consulting with a trustee and receiver meant their company would go bankrupt. On the contrary. We helped turn their companies around through financial restructuring.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

The Ira Smith Trustee & Receiver Inc. team understands that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, Starting Over, Starting Now.

Tags bankrupt person, Bankruptcy and Insolvency Act, bankruptcy proceedings, BIA, bia section 215, civil action, Consumer Proposal, corporate trustee, current spouse, interim receiver, Ira Smith Trustee, legal counsel, licensed trustee, official receiver, trustee in bankruptcy, trustee in respect, trustee with respect, undischarged bankrupt

Brandon Blog Post

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

Post author By Brandon Smith
Post date August 15, 2022

fraudulent misrepresentation

An overview of fraudulent misrepresentation

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

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

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

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

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

What are the three types of misrepresentation?

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

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

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

What are the legal consequences of making false statements?

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

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

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

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

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

The aggrieved party, BMO, filed its motion seeking:

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

The evidence of fraudulent misrepresentation

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

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

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

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

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

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

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

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

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

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

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

fraudulent misrepresentation

What are the 5 elements of a fraudulent misrepresentation claim?

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

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

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

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

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

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

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

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

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

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

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

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

Call us now for a no-cost initial consultation.

Brandon Blog Post

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

Post author By Brandon Smith
Post date May 2, 2022

Declaring bankruptcy: Business insolvency

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

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

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

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

Declaring bankruptcy: An overview of corporate bankruptcy

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

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

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

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

declaring bankruptcy

Declaring bankruptcy: Types of Corporate Bankruptcy

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

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

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

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

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

Declaring bankruptcy: Does corporate bankruptcy affect personal assets?

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

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

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

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

Declaring bankruptcy: The Medcap case

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

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

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

declaring bankruptcy

Declaring bankruptcy: Appealing a bankruptcy order

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

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

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

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

Declaring bankruptcy: Unable to pay its debts

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

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

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

Declaring bankruptcy: Bankruptcy application for improper motives

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

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

Declaring bankruptcy: There is no purpose for this bankruptcy

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

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

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

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

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

Declaring bankruptcy: The final word

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

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

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

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

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

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

Brandon Blog Post

INHERITANCE DURING BANKRUPTCY: OUR BEST ANSWER TO HOW IS AN INHERITANCE TREATED IN A BANKRUPTCY?

Post author By Brandon Smith
Post date April 4, 2022

Inheritance during bankruptcy: Family situations

Your assets are considered yours in Canada. In other words, if during your bankruptcy you inherit money from a family member, the property belongs to the bankruptcy estate. Your property, including cash, will be distributed by your licensed insolvency trustee (“Trustee”) to your unsecured creditors.

Whenever an insolvent person comes to us for a free consultation, we always inquire whether or not the insolvent person is in line to inherit anything in the near future. Our recommendations will depend on the answer.

Many Canadians wonder whether the bankruptcy process will affect their inheritance. The Court of Appeal for Ontario recently reviewed a bankruptcy judge’s decision that bankruptcy would impact an estate in Richards (Re), 2022 ONCA 216 (CanLII).

This Brandon’s Blog examines this Court of Appeal decision about inheritance during bankruptcy. The case looks at would you lose your inheritance if you filed for bankruptcy, or can you use family situations to protect it from your creditors and eventually be able to get it back?

Inheritance during bankruptcy: Bankruptcy, winnings, gifts, inheritance property and the Bankruptcy and Insolvency Act

Section 67 (1)(c) of the Bankruptcy and Insolvency Act (Canada) (“BIA” ) sets out the bankruptcy law and the bankruptcy procedure regarding the property of the bankrupt as:

“all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year — or the fiscal year of the bankrupt if it is different from the calendar year — in which the bankrupt became a bankrupt…”

This includes any assets that you own as of the date you filed for bankruptcy, as well as any assets that you have acquired after filing for bankruptcy and before you get your bankruptcy discharge. Additionally, it includes assets that you were entitled to but hid or contracted out of.

There are two parts to that sentence that are simple, but the second part is more complicated. Gifts, lottery winnings, inheritance during bankruptcy, and any other unexpected financial gain are included in this category.

Inheritance during bankruptcy

Inheritance during bankruptcy: What happens if I receive property, assets or an inheritance while I am bankrupt?

Receiving an inheritance or gift of a property while in bankruptcy can be a mixed blessing. A gift or inheritance can relieve financial stress by allowing you to pay off debts that would otherwise require you to file for bankruptcy. Receiving assets, property, or inheritances during bankruptcy will be for the benefit of creditors and will also affect how your bankruptcy file is handled including your discharge, as well as whether you were really qualified for bankruptcy at all. Of course, timing is everything.

The reason is the section of the BIA I quoted above. Your windfall could have paid off all your creditors without making an assignment in bankruptcy if it was large enough. In the event that it happens during your period of bankruptcy and before you apply for discharge, but the windfall is not large enough to pay off all your debts, it will affect the type of discharge from bankruptcy you may be able to get, whether it is an automatic discharge or a conditional discharge.

If it occurs after you have made your bankruptcy filing and is large enough to pay off all your debts, then perhaps you can apply to annul the bankruptcy. So all of these factors have to be taken into consideration when you experience an inheritance during bankruptcy or if you otherwise have a windfall.

Inheritance during bankruptcy: Will I lose my Inheritance in a bankruptcy?

By now, you should know that you will lose whatever part of your inheritance during bankruptcy. It will be whatever portion is required to pay off your creditors in full (plus interest). But what happens to an inheritance during bankruptcy if you try to contract out of receiving your inheritance if you are an undischarged bankrupt? Can the Will or trust set up that provides you with the inheritance be used to stop you from losing it during your bankruptcy?

That is what the Court of Appeal for Ontario decision in Richards (Re), 2022 ONCA 216 (CanLII) is all about which I will now describe.

Michael Richards filed an appeal with the Court of Appeal for Ontario on March 11, 2022, challenging the bankruptcy judge’s order from June 3, 2021. The issue at stake concerned the interpretation of a trust of which Mr. Richards was a beneficiary (the “Trust”).

A judgment against him was owed to The Royal Bank of Canada (“RBC”) for $987,613 plus costs and interest. Mr. Richards was struggling financially. RBC filed a Bankruptcy Application against him on September 16, 2019. The Bankruptcy Order was issued the same day.

A trust set up by his father in 2001 gives Mr. Richards the right to either the property at 61 St. Clair Avenue West or the proceeds of its sale (the “Property”). His parents were able to live in the house during their lives, with a life interest in the Property. In 2010, his father died. His mother remained in the Property and she died in July 2020. The date of death of the second parent is called the “Time of Division” in the Trust.

Before his mother died, the trustees of the Trust sold the property with the net proceeds from the sale, totalling $1,172,120.90, held in trust. Trust funds had to be distributed to Mr. Richards if he was alive at the time of division. Obviously, he was.

Inheritance during bankruptcy

Inheritance during bankruptcy: RBC and section 38 of the BIA

In October 2020, RBC obtained an order under s. 38 of the BIA (the “s. 38 order”). Section 38 allows one or more creditors to take an assignment of a claim or action that the Trustee may have if the Trustee is unable or unwilling to enforce that claim or action.

The s. 38 order gave RBC (in this case alone) an assignment of rights of the Trustee of the bankrupt estate to make a claim against the sale proceeds of the Property. The Trustee had not wanted to pursue the claim due to a lack of funding. RBC now stood in the shoes of the Trustee with respect to the sale proceeds of the Property.

RBC filed a motion to recoup the sale proceeds up to the amount owed to them (including the costs of the s. 38 action). They sought a declaration that Mr. Richards was the beneficiary of the Trust and had an interest in the Property under the terms of the Trust. RBC argued that the sale proceeds should go towards satisfying their outstanding debt because it was the property of the bankrupt.

Inheritance during bankruptcy: The undischarged bankrupt’s position

Mr. Richards responded that his interest in the Property was suspended while he is bankrupt, under the provisions of a different section of the document establishing the Trust. That very unusual provision reads as follows:

“Any right of a Beneficiary to receive any income or capital of the Trust Fund…. shall be enforceable only until such Beneficiary shall become bankrupt … whereupon… the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist … and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time.”

Mr. Richards submitted that his interest in the Property could not vest in his Trustee as he had no rights to the Property until such time as he was discharged from bankruptcy. He contended that, during his bankruptcy, any rights he had were suspended. It is only on his discharge from bankruptcy that the Property will vest in him and only then will he own it outright.

Inheritance during bankruptcy

Inheritance during bankruptcy: The trial judge’s decision

The bankruptcy judge overseeing the bankruptcy case trial held that the Property vested in Mr. Richards at the Time of Division. This meant that the Property was his and vested in his Trustee upon becoming bankrupt. Since the Trustee had transferred its rights in the action against the Property to RBC, the bank was legally entitled to receive the proceeds of sale up to the amount owed.

Inheritance during bankruptcy: The Court of Appeal for Ontario decision

The Court of Appeal for Ontario made a very clear and concise decision. It said that Mr. Richards had not shown any mistakes in the bankruptcy judge’s decision. The appellate court ruled that her interpretation of the Trust document was entitled to deference on review, stating that it agreed with her interpretation. The court found that her interpretation was consistent with the plain wording of the relevant section and also consistent with the stated purpose of the Trust.

This case demonstrates that actions that violate the public policy underpinning the BIA by individuals trying to shield their assets from creditors are not tolerated.

Inheritance during bankruptcy

Inheritance during bankruptcy: Could the inheritance have been shielded from the creditors?

In the beginning, I want to make it clear that I am not a lawyer and I do not give advice to insolvent people on how to protect their assets from their secured creditors, preferred creditors or unsecured ordinary creditors. Instead, given these specific facts, can I think of a way the Trust could have been structured differently?

When the Trust was prepared, obviously his parents were concerned about their son’s financial situation and legal proceedings against him. Rather than having the Property transferred to him at the Time of Division, the Trust should have kept the cash from the sale of the real property invested and paid Mr. Richards a monthly allowance for life.

That monthly allowance could not have been treated directly as his property. Rather, it would be considered part of his income, subject to the surplus income rule. Mr. Richards may have very well may have had to make surplus income payments to his Trustee as part of getting his bankruptcy discharge, but the bulk of the inheritance could have been shielded from his creditors.

Inheritance during bankruptcy: With the right Trust personal bankruptcies can be avoided

If the Trust was worded as I suggest, only providing Mr. Richards with a lifetime allowance but never able to have the asset itself transferred to his ownership, Mr. Richards could have avoided bankruptcy altogether. He could have filed a Proposal.

If his financial situation was such that he owed $250,000 or less, he could have filed a consumer proposal. If he owed more than $250,000, it would be a Division I BIA restructuring proposal. Either way, he would have avoided filing for bankruptcy or having a Bankruptcy Order made against him.

Although the RBC judgement against him was an ordinary unsecured claim, without their vote in favour of his proposal, it could not have succeeded. However, with the differing approach for the Trust that I suggested, it would not give RBC access to the entire amount of cash. They would have been facing the reality that they would not have been able to collect in full on their judgement for a very long time. There wouldn’t be a pot of money to attack.

This is how Mr. Richards’s parents could have made sure that the inheritance was protected for him and shielded from his creditors.

Inheritance during bankruptcy

Inheritance during bankruptcy: Summary

In conclusion, the BIA allows a bankrupt’s assets to distribute property to creditors based on a “just and equitable” standard.

I hope you found this inheritance during bankruptcy Brandon’s Blog. Are you on the edge of insolvency? Are bill collectors hounding you? Are you ducking all your phone calls to the point where your voicemail box is always full?

If so, you need to call me today. As a licensed insolvency trustee (formerly called a trustee in bankruptcy) we are the only professionals licensed, recognized as well as supervised by the federal government to give insolvency assistance. We are also the only authorized party in Canada to apply remedies under the Bankruptcy and Insolvency Act (Canada). I can definitely help you to choose what is best for you to free you from your financial debt issues.

Call the Ira Smith Team today so we can get free you from the stress, anxiety, and discomfort that your cash issues have created. With the distinct roadmap, we establish simply for you, we will without delay return you right to a healthy and balanced problem-free life, Starting Over Starting Now.

Brandon Blog Post

THE LUCRATIVE RESP BANKRUPTCY PLAN TO DEBT RELIEF

Post author By Brandon Smith
Post date November 15, 2021

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

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

RESP bankruptcy introduction

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

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

Will I lose my RRSP in bankruptcy?

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

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

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

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

The reason for amending the BIA was twofold:

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

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

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

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

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

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

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

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

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

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

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

How to preserve an RESP bankruptcy

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

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

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

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

RESP bankruptcy: A very recent divorce example

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

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

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

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

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

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

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

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

RESP bankruptcy: What about you?

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

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

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

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

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

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

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Brandon Blog Post

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

Post author By Brandon Smith
Post date November 12, 2021

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

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

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

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

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

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

What happens to the company that files for bankruptcy protection?

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

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

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

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

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

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

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

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

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

Reitmans
Frank & Oak
Aldo
DavidsTea
Cirque Du Soleil
Mendocino
Bow River Energy
FlightHub
Christian charity, Gospel for Asia
Cequence Energy
Delphi Energy
Sail

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

**The bankruptcy protection court case facts**

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

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

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

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

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

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**The bankruptcy protection case: The Receiver’s position**

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

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

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

**The bankruptcy protection case: The supplier’s position**

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

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

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

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**The bankruptcy protection case: The Judge’s decision**

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

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

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

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

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

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

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

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

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

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

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Bankruptcy protection summary

I hope you found this bankruptcy protection Brandon Blog post informative. Are you worried because you personally or as business owners are dealing with substantial debt challenges and you assume bankruptcy is your only option? If it is too much debt for any reason, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Even though we are licensed insolvency trustees, we have found that not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

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

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

Brandon Blog Post

BANKRUPTCY AND INSOLVENCY ACT OF CANADA TR1ES TO GIVE EVERYONE UNDENIABLE EQUITABLE TREATMENT

Post author By Brandon Smith
Post date October 18, 2021

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

bankruptcy and insolvency act of canada

What is the purpose of the Bankruptcy & Insolvency Act of Canada?

With all the talk of the economy, supply chain problems and the uncertainty of the future these days, it’s no wonder that many people aren’t sure how they will end up when things become “normal” again.

For Canadian people and businesses with too much debt, an insolvency proceeding under the Bankruptcy and Insolvency Act of Canada might just be the answer to getting back to a healthy stress-free life. Notwithstanding that using this federal statute can be a very effective strategy for managing financial difficulties, it is a very scary one that people do not like to talk about.

The Bankruptcy and Insolvency Act of Canada is based on the principle of balancing fairness, equity and a fresh start. A recent court decision in Saskatchewan exemplifies these principles. In this Brandon Blog, I describe a little bit about the Bankruptcy and Insolvency Act of Canada, explain the court decision and how the court used these principles in reaching its decision.

What is in the Bankruptcy and Insolvency Act of Canada?

Canadian citizens, businesses, and companies who run into financial difficulties can turn to the Bankruptcy and Insolvency Act of Canada for assistance. This federal legislation contains the laws, rules, and guidelines that all involved parties must abide by. It details how different financial options work legally, and defines the roles of the various stakeholders – the Office of the Superintendent of Bankruptcy, the Licensed Insolvency Trustees, the debtor, and the secured creditors and unsecured creditors (both preferred and ordinary).

Despite the fact that provincial legislation in Canada may overlap or affect stakeholder rights, federal bankruptcy legislation has priority over provincial legislation in insolvency matters. Therefore, provincial governments cannot do indirectly what is prohibited directly. However, there are cases where provincial laws will still apply. The laws surrounding property exemptions and enforcement of court orders differ from province to province and territory to territory. These provincial and territorial regulations continue to apply even under bankruptcy laws.

It is the Bankruptcy and Insolvency Act of Canada that governs all bankruptcies and proposals (either Division I or consumer proposals) in Canada. Receiverships are also governed by the Bankruptcy and Insolvency Act of Canada. The Laws of Canada – Bankruptcy and Insolvency, are meant to give the honest but unfortunate debtor, be it a person, business or company, a fresh start in life.

bankruptcy and insolvency act of canada

Growth in consumer proposals and business proposals

A person who files for the personal bankruptcy process submits an assignment in bankruptcy and related documents to a Licensed Insolvency Trustee. These documents outline the person’s assets, liabilities, income, and expenses. An insolvent person’s reason for insolvency must also be included in the documents. Individuals typically give the reason for not being able to pay their bills in a timely manner. Consumer proposals require very similar documentation as bankruptcy, except for the assignment in bankruptcy document.

In order to file a Division I Proposal under the Bankruptcy and Insolvency Act of Canada, insolvent companies must describe their assets and liabilities and provide a realistic cash flow statement documenting how they intend to operate under the proposed insolvency process. They must also explain how they became insolvent. Personal insolvency is less complex than corporate insolvency.

Despite a long-term decline in individual bankruptcy filings, consumer proposals have gained in popularity among individuals. The decrease in bankruptcy filings and the increase in proposals can be attributed to several different reasons. Under a proposal, a financial reorganization or restructuring is what is done. Bankruptcy is simply a liquidation.

Regardless of whether it is a consumer proposal, a Division I proposal, or bankruptcy, the Bankruptcy and Insolvency Act of Canada governs these proceedings. The Companies’ Creditors Arrangement Act, another federal government statute, governs reorganizations of very large corporations. This is especially true if there are separate insolvent corporations under the corporate umbrella in different countries, requiring foreign proceedings.

Why does one choose a consumer proposal instead of filing for bankruptcy?

A consumer proposal has many advantages over bankruptcy proceedings. By filing a consumer proposal, you’re able to retain the property you own such as your home, car, boat, etc. and extinguish all of your debts while only paying back a portion. A consumer proposal doesn’t require any of those items to be sold, as long as you can afford them with the monthly payment made under the proposal and your other living expenses.

Changing your lifestyle can help you get out of debt more quickly with a consumer proposal. Bankruptcy means losing everything, except for some assets that are exempt under provincial laws. You have equity if you do not fully encumber your assets by way of secured loans from financial institutions, your house, car, boat, furniture, clothing, jewelry, or anything else of value. You can keep this equity in a consumer proposal, but you will lose it in bankruptcy.

The main reason why people should attempt to perform a successful consumer proposal instead of going straight into bankruptcy under the Bankruptcy and Insolvency Act of Canada is because of this. As you will see in the recent court case I am about to describe, if you don’t pay close attention to how you conduct your affairs once you declare bankruptcy, you might be exposed to another minefield even after receiving your discharge.

bankruptcy and insolvency act of canada

**The Bankruptcy and Insolvency Act of Canada case**

This judgment of the Registrar in Bankruptcy of the Queen’s Bench for Saskatchewan was released on October 6, 2021. It is a relatively simple case, but it described so well the equitable nature of the Bankruptcy and Insolvency Act of Canada.

In this legal process case, there are two unsecured creditors who are the Applicants. They jointly loaned money to an individual debtor, who is now an insolvent debtor and a bankrupt individual on an unsecured basis. They also filed their proof of claim for this debt with the insolvency trustee. They then applied for an order pursuant to s. 69.4 of the Bankruptcy and Insolvency Act of Canada lifting the bankruptcy stay that is in effect with regard to the bankrupt.

The purpose of section 69.3 is to prevent bankruptcy creditors from initiating or continuing enforcement proceedings against a bankrupt debtor. In bankruptcy, a creditor has no recourse against the debtor or the debtor’s property, and may not commence, continue, or seek any action for the recovery of money for a claim that is provable in the bankruptcy.

Nevertheless, Section 69.4 allows a court to lift the stay if it decides that the applicant has established that the continued operation of the stay is likely to cause material harm to him or her, or if there are other equitable grounds for lifting the stay.

**The case: How the Bankruptcy and Insolvency Act of Canada works for fairness and equity**

The bankruptcy process generally compromises the debt obligation of the bankrupt, resulting in creditor claims run through the bankruptcy claims process. Generally, unsecured creditors lose their right to enforce their types of debts and, as a result, realize less than 100% of their debt. Some creditors do not receive anything from an estate in bankruptcy.

There are two major objectives of bankruptcy (and consumer proposal or commercial proposal) proceedings under the Bankruptcy and Insolvency Act of Canada. For one thing, it provides an equitable system for distributing the proceeds from the estate in bankruptcy among the bankrupt’s unsecured creditors. According to the laws Of Canada – bankruptcy and insolvency, unsecured creditors are expected to be treated predictably and fairly. However, it does not guarantee that creditors will receive a dividend in all cases.

Secondly, it is intended to give an honest but unfortunate bankrupt an opportunity to be freed from the crushing burden of debt and receive financial rehabilitation to become a contributing member of society. That is one reason why every person who does an insolvency filing must attend two financial counselling sessions.

In bankruptcy, an automatic stay allows the bankrupt to re-establish himself or herself financially and restart his or her financial affairs so that he or she can meet his or her credit obligations moving forward without being hampered by debt enforcement proceedings.

bankruptcy and insolvency act of canada

**The case: Role of unsecured creditors trying to lift the stay of proceedings**

The Registrar, in this case, followed the reasoning of a 2001 decision from the Court of Appeal for Ontario. It is far from routine to lift the stay, and therefore the court has to make sure that the reasons for lifting the stay are sound and consistent with the objectives of the Bankruptcy and Insolvency Act of Canada.

In the case of Mcculloch (Re), 2021 SKQB 259 (CanLII), the two creditors were alleging that Ms. Mcculloch induced them to loan her the money on a fraudulent basis. It was their argument that they should be allowed to continue legal action against the bankrupt so that they could prove in a separate court action that the debt was a result of fraud and that, therefore, their claim would survive the bankruptcy and her discharge. In addition, they stated that they would be more severely affected than the commercial creditors if the bankruptcy stay bars them from taking action against McCulloch.

According to the Registrar:

Bankruptcy often disproportionately affects individual creditors over commercial creditors. Generally, creditor relationships are based more on trust than on cost-benefit analysis. When advancing a loan, the commercial creditor such as a credit card company, unpaid suppliers, or a sophisticated secured creditor, generally assesses the risk and determines whether it can absorb the loss in the event of default. Individual lenders do not usually do this.
If this form of prejudice is sufficient to support lifting the stay, other individual creditors may be able to apply to lift the stay merely on the basis of relative disadvantage to individual creditors. Lifting the stay on this basis is inappropriate.
The Trustee objects to this application on the grounds that it will significantly increase the costs of bankruptcy administration at the expense of other creditors. In this case, the Registrar sided with the Trustee.
According to the lawyer representing the bankrupt, the creditors have not established any material prejudice or other equitable grounds for lifting the stay. The Registrar agreed.
Due to the potential cost increases to other creditors, the equities are opposed to lifting the stay.
However, these 2 creditors still have rights in the bankruptcy. The court still has the right to hear their submissions at the discharge hearing. Additionally, they continue to have the right to pursue Ms. McCulloch once the bankruptcy proceedings are over.
At this time, lifting the stay would not benefit the applicants or their creditor claims since during the bankruptcy, Ms. McCulloch’s either the bankruptcy vests her assets in the Trustee for the benefit of the creditors or remain exempt from execution under Saskatchewan law. This disposition of property makes it simply impossible for these creditors to realize much from this stage, prior to the bankrupt’s discharge.
In this case, the equity does not support the court’s exercise of its authority to declare that the bankruptcy stay, established under section 69.3 of the Bankruptcy and Insolvency Act of Canada, does not apply to this litigation.

As a result, the Registrar denied the applicant’s request for what they thought was their legal rights in lifting the stay. Clearly, the Registrar was guided by the Bankruptcy and Insolvency Act of Canada‘s aims of fairness and equity to all stakeholders.

Bankruptcy and Insolvency Act of Canada summary

I hope you enjoyed this Bankruptcy and Insolvency Act of Canada Brandon Blog post. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? Call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

Call us now for a no-cost consultation.

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

Insolvency Advisory Services: Introduction

What is Insolvency?

The Insolvency Legal Framework

Key Legislation in Canadian Insolvency Law

Provincial Laws and Their Impact on Insolvency

Roles and Responsibilities

Access to Insolvency Information

Insolvency Advisory Services: The Profit Motive

Understanding Senior Claims

The Financial Implications

The Cold Reality

Insolvency Case Study: Do Our Fees Hold Up In Court?

What factors influenced the assessment of the fairness of our liquidation fees?

The Mechanics of Corporate Insolvency

1. The Ins and Outs of Bankruptcy Law

2. A Day in the Life of a Licensed Insolvency Trustee Adviser

Typical Tasks Include:

3. Key Players in Corporate Insolvency

4. Why Experience Really Matters

The Ripple Effect of Rising Insolvency Advisories

Entrepreneurial Businesses and Higher Fees

The Role of Insolvency Advisers

Lending and Creditworthiness

Myths Surrounding Formal Insolvency Proceedings

The Ethical Dilemma In Insolvency Advisory

Finding Balance

Insolvency in Canada: FAQs

Insolvency Conclusion: Navigating the Stormy Waters Ahead

Fraud and Misrepresentation: Introduction

Fraud and Misrepresentation: The Core Issues of the Case

The Legal Background of Bankruptcy and Fraud and Misrepresentation

The Bankruptcy and Insolvency Act

Financial Rehabilitation and Fresh Start Principle:

Limits of Financial Rehabilitation:

Section 178(1) Exceptions:

Specific Debt Exemptions:

Interpretation of Court Orders:

Decision on Exemptions:

Section 178(1) Explained

False Pretences or Fraudulent Misrepresentation:

Passing of Property or Provision of Services:

Link between Debt or Liability and Fraud:

Fraud and Misrepresentation: The Appeal To The Supreme Court

The Supreme Court’s Decision

The Supreme Court’s Detailed Analysis of Section 178(1) of the BIA

Differences Between Court-Imposed Penalties and Administrative Fines

Fraud and Misrepresentation: Real-Life Implications for Those Facing Bankruptcy

Fraud and Misrepresentation: The Broader Legal Implications of the Ruling

Fraud and Misrepresentation: Impact on Future Cases

Fraud and Misrepresentation: Conclusion

Liquidating Assets: Introduction

Liquidating Assets: The Bankruptcy and Insolvency Act of Canada

Overview of the Bankruptcy and Insolvency Act Relating To Liquidating Assets

Purpose of liquidating assets in bankruptcy

Liquidating Assets: Role of a Trustee in Liquidation

Duties and Responsibilities of a Trustee

Trustee’s role in asset valuation and sale

Significance of ATB Financial as a Major Secured Creditor Turned Unsecured Creditor

Liquidating Assets: Key Details and Contention Points

Liquidating Assets: Introduction to Dr. Nsair’s Bankruptcy Case

Liquidating Assets: The Registrar’s Decision and Legal Interpretations

Liquidating Assets: Court Ruling and Implications

Liquidating Assets: Lessons Learned

Liquidating Assets: FAQ

Liquidating Assets: Conclusion

Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA): Introduction

Overview of BIA Section 215

BIA: The Motion Judge’s Decision

The BIA case background

Did the undischarged bankrupt have the right to launch the Action under the BIA?

The Court of Appeal for Ontario’s analysis

The Court of Appeal for Ontario’s decision

BIA: Conclusion

An overview of fraudulent misrepresentation

What are the three types of misrepresentation?

What are the legal consequences of making false statements?

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

The evidence of fraudulent misrepresentation

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

What are the 5 elements of a fraudulent misrepresentation claim?

Significance of ATB Financial as a Major Secured Creditor *Turned Un**secured Creditor*

**The bankruptcy protection court case facts**

**The bankruptcy protection case: The Receiver’s position**

**The bankruptcy protection case: The supplier’s position**

**The bankruptcy protection case: The Judge’s decision**

**The Bankruptcy and Insolvency Act of Canada case**

**The case: How the Bankruptcy and Insolvency Act of Canada works for fairness and equity**

**The case: Role of unsecured creditors trying to lift the stay of proceedings**