Tag: Bankruptcy and Insolvency Act

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: this is when someone makes a false claim or untrue statement but honestly believes that the false 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 are or are not true.
Fraudulent misrepresentation: this is when someone makes a false claim deliberately in order 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:

in order 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
in order 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 as against the Defendants is issued in accordance with 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 in the amount 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 material 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 in order 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.

resp bankruptcy

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.

bankruptcy protection

Bankruptcy protection summary

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

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

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

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

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

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

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.

Brandon Blog Post

PENSIONS IN BANKRUPTCY: FEDERAL CONSERVATIVE PARTY PROMISE MASSIVE CANADIAN WORKER PENSION PROTECT1ON

Post author By Brandon Smith
Post date September 2, 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.

Pension & Bankruptcy in Canada

Underfunding is a major concern for traditional, defined-benefit pension plans. In other words, do they have enough pension assets and therefore enough money to meet their projected future pension obligations? Inadequate actuarial assumptions, poor investment returns, and mismanagement can lead to pension plan underfunding. In the case of corporate insolvency of a large employer with a defined-benefit pension plan, this issue always arises. Underfunded pensions in bankruptcy wind up hurting retirees.

The Sears Canada court-supervised liquidation forced us to again focus on the treatment of pensioners in corporate bankruptcies under the Bankruptcy and Insolvency Act (Canada) (BIA) or restructurings and liquidations under the Companies’ Creditors Arrangement Act (CCAA). It was widely reported that representative for 17,000 Sears Canada retirees says insolvency laws are unjust when it comes to underfunded pensions.

PM Justin Trudeau is the only person who wants this election right now. Erin O’Toole, leader of the Conservative Party, promised to prioritize pensioners ahead of companies and creditors during bankruptcy and restructuring proceedings if he were elected.

This Brandon Blog discusses the issue of pensions in bankruptcy and how the Liberals had several opportunities to fix it but did not.

Pensions in bankruptcy: Pension and benefits issues in bankruptcy and restructuring

Pensioners suffer pension losses and ultimately pension income losses when a company is insolvent and its defined benefit pension fund plan is underfunded. In practice, the pensioners’ rights are weak and highly inadequate, especially when pension plans are underfunded. Although provincial and federal government pension legislation purports to offer some protection for amounts owing to an underfunded pension plan, insolvency legislation does not preserve that protection for the majority of those amounts. The insolvency protection of pensioners and pensions in bankruptcy is thus largely illusory.

Founder and Director of the National Centre for Business Law, Dr. Janis Sarra teaches law at Peter A. Allard School of Law. Canadian pensioners and employees, she believes, are among the worst protected pensions in bankruptcy and/or in insolvency among 60 countries.

In every Canadian province and territory, pensioners are protected by law in connection with pension deficits and pension payments. Specifically, every jurisdiction grants a deemed trust to protect employee pensions earned on employer assets owed to pension plans. The Pension Benefits Standards Act, which governs federally regulated pension plans, specifies the amounts that must be held separately from the employer’s funds, for example. Funds held in trust for active and retired pension plan members are not considered a part of the employer’s estate in liquidation or bankruptcy.

Under the Pension Benefits Act in Ontario, employers are required to hold all amounts owing to the pension plan in trust on behalf of their employees. According to the Supreme Court of Canada, the Ontario Pension Benefits Act creates a deemed trust over the entire wind-up deficit, subject only to the doctrine of paramountcy. Therefore, Ontario’s pension legislation expressly recognizes that the deemed trust is covered by all amounts of the employer owing to the pension plan.

The pension legislation in Quebec confers a deemed trust on special payments due in the year of insolvency. The special payments already due are deemed to be in trust, and the amount owing to the pension plan for unpaid special payments is deemed to be in trust based on Quebec’s pension law.

Due to other judicial decisions not giving effect to these deemed trusts in BIA and CCAA proceedings, the federal and provincial pension legislation has been hindered. In the meantime, to the extent that the BIA and CCAA protect pensions, the protection is negligible in practice. In Ontario (and every other province), provincial law protections are subject to the doctrine of paramountcy.

Paramountcy says that in the conflict between federal and provincial laws, federal law takes precedence. Both the BIA and CCAA are federal laws. The Supreme Court of Canada has held that provincial deemed trusts are not applicable to bankruptcy cases unless the BIA expressly permits them. There have even been successful attacks on federal pension law.

In accordance with existing regulations, the secured creditors may receive funds that would otherwise go to employees’ pension plans. Therefore, there really isn’t much protection for pensions in bankruptcy.

Pensions in bankruptcy: PM Justin Trudeau had his chance to fix this problem

Erin O’Toole doesn’t seem to be bringing up a new subject. The Liberal federal government had at least three chances to fix this pension issue for Canadian workers whose employers become financially troubled and have to liquidate or file for bankruptcy. A brief look at the recent history follows.

Let’s look at some history of attempts to protect pensions in bankruptcy. The Canadian Association for Retired Persons, a nationwide not-for-profit group, lobbied politicians on Parliament Hill about legislation changes. According to Wanda Morris, vice-president of CARP, the unfunded pension liability should be given priority so that it is handled first.

There is no priority for retirees when it comes to dividing up assets in bankruptcy, and Morris wants to protect underfunded defined benefit pensions when the company goes through restructuring or bankruptcy.

CARP estimates that roughly 1.3 million Canadians, aside from the retired Sears employees, may be at risk due to defined benefit pension plans. The closure of Sears Canada stores made the plight of retirees a top priority for CARP.

Marilène Gill, Bloc Québécois MP, introduced a member’s BILL C-372, on Oct. 17, 2017. It was intended to change the BIA and the CCAA. The change seeks to correct the injustice faced by retired workers whose pension and insurance policy benefits are not secured when their company declares bankruptcy or undergoes restructuring. As a result of Sears Canada closing locations, the changes were related to the employees’ and retirees’ treatment.

On October 17, 2017, Bill C-372 passed First Reading. The House rarely passes private member’s bills like this one. The Liberal Party did not support taking it further and allowed it to die.

Hamilton Mountain NDP MP Scott Duvall asked for leave to introduce Bill C-384 in the House of Commons on November 6, 2017. He proposed amending Canada’s insolvency laws so that companies must bring any pension fund to 100% before paying any other secured creditors. Additionally, it requires companies to pay termination or severance pay owing before paying secured creditors. Similarly, this bill passed first reading and then died.

Lastly, Senator Art Eggleton, P.C., proposed BILL S-253 shortly before his retirement to amend the insolvency legislation in Canada. After First Reading passed on September 18, 2018, Second Reading followed on September 25. By introducing this bill, the BIA and CCAA would be amended. The plan proposed to give priority to claims for unfunded obligations or solvency deficiencies of pensions. This is applicable to both solvent companies as well as companies that might become insolvent if certain shareholder payments were made.

The proposed legislation would also amend the Pension Benefits Standards Act as well as the Pension Benefits Standards Regulations in order to enable the Superintendent of Financial Institutions to identify when a pension plan’s funding is impaired and to recommend to the employer the necessary steps to fix it. It is not surprising that the Liberal federal government did not carry forward this bill.

Pensions in bankruptcy: Erin O’Toole vows to force bankrupt firms to pay pensions over executive bonuses

The Hon. Erin O’Toole announced on August 24, 2021, that if he wins the election he plans to protect workers’ pensions. In bankruptcy and restructuring proceedings, he pledges to give priority to pensioners over the corporations and most other creditors.

According to him, as part of Canada’s Recovery Plan, a Conservative government will change the law to ensure that workers come first in cases of bankruptcy and reorganization.

The Conservative Party of Canada will also improve pension security by:

Preventing executives from receiving bonuses during a time of restructuring unless the pension plan is fully funded.
Unlike in the past, underfunded pension plans will no longer be forced to convert to annuities, a practice that involves financial assets being disposed of and replaced with an insurance contract to reduce risks, as well as offer pensioners, fixed payments. The practice of companies failing during a recession when markets are depressed usually locks in losses and means workers receive less money.
By mandating that companies report the funding status of their pension plans to their employees, they can provide their employees with greater transparency.

No further details were given. At least the Conservative Party is focused on this issue of when an employer is insolvent and there are pensions in bankruptcy.

Pensions in bankruptcy: Summary

We will have to wait to see the results of this election to know if anything might change when it comes to pensions in bankruptcy of the employer.

I hope that you found this pensions in bankruptcy Brandon Blog informative. An unexpected situation, such as your employer having financial trouble and entering liquidation or bankruptcy proceedings, by their very nature, are not pleasant and could have the effect of making your debt load now impossible to service. There are several insolvency processes available to a person or company with too much debt. You may not need to file for bankruptcy.

If you are concerned because you or your business are dealing with substantial debt challenges, you need debt help and you assume bankruptcy is your only option, call me.

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

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

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

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

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

Call us now for a no-cost consultation.

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.

pensions in bankruptcy

Brandon Blog Post

TENANTS IN COMMON VS JOINT TENANCY IN ONTARIO: THE MODERN RULES OF A 1 CO-OWNER UNHAPPY BANKRUPTCY

Post author By Brandon Smith
Post date August 4, 2021

tenants in common vs joint tenancy

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.

Tenants in common vs joint tenancy in Ontario: Shared ownership of property

There are two different types of property joint ownership: tenants in common vs joint tenancy. Whether you’re married or not, you still face the same problems. Having a co-owned home raises the issue of how the title should be held; tenants in common vs joint tenancy. Both are equally good. The answer really depends on the relationship between the co-owners and their estate planning needs.

A bankruptcy filing by one of the co-owners complicates matters further. A recent bankruptcy case decision in Ontario where only one of the joint owners filed for bankruptcy, highlights the problem, especially for non-bankrupt co-owner. This Brandon Blog discusses the recent bankruptcy case and what it means for both the bankrupt co-owner and the non-bankrupt co-owner regardless of the ownership choices between tenants in common vs joint tenancy.

Home ownership in Ontario: tenants in common vs joint tenants as co-owners

The word “tenants” is normally thought of with property rental. But both joint tenancy and tenants in common reference to a type of shared property ownership. As tenants in common, the ownership rights and all areas of an entire property are owned equally by all members of the group.

When one of the joint tenants dies, the deceased owner‘s share of the property passes to the surviving owner without going through the probate process. With tenants in common, in the event of death, this is not the case.. For asset protection and estate planning purposes, many married couples who want to hold title to the real property in a co-ownership structure, do so as joint tenants to avoid the probate process. Each joint tenant owns a 50% share ownership stake in the property.

Tenants in common may freely decide what ownership percentage of the property each owns. Each tenant in common does not need to own an equal percentage of the property; unequal ownership is fine as long as all co-owners agree on the ownership arrangements of unequal shares. The tenants in common can also transfer their share of the property through a Will, a real estate transfer, or even an arm’s length sale. Tenants in common are well advised to have a signed co-ownership agreement that spells everything out.

This is the primary difference between tenants in common vs joint tenancy in Ontario for the joint ownership of real property.

Property ownership part 2: tenants in common vs joint tenants in Ontario and the bankruptcy of 1 co-owner

When a co-owner becomes bankrupt, what happens? The Brandon Blog faithful knows that I have previously explained that upon bankruptcy of a person, the non-exempt assets of the bankrupt should be vested in the licensed insolvency trustee, subject to secured creditors‘ rights. For real estate ownership, the answer does not change whether title is held in tenants in common vs joint tenancy.

There is an exemption in Ontario for equity in one’s home of not more than $10,783. It is not an exemption for the first $10K, but rather if the total equity is below that amount. Therefore, we can consider the equity in a bankrupt person’s ownership interest in their home to belong to the Trustee for all practical purposes.

If the bankrupt has a 50% ownership stake due to a joint tenancy agreement, then it is the bankrupt’s equity in half the home. If the bankrupt’s ownership stake is under a tenants in common co-ownership agreement, then it is the equity in only the bankrupt’s co-ownership share. In either scenario, the ownership interest of the non-bankrupt owners are not directly affected. However, the other co-owners’ are affected one way or the other by the bankruptcy of a co-owner. The legal case I am about to tell you about is no exception.

Land Owner Transparency Registry: A Public Database

Upon the person’s bankruptcy, the bankrupt must disclose all assets to the Trustee. With computerization and the internet, it is easy for a Trustee to determine if the bankrupt has an ownership interest in the real estate where they reside. This is whether or not the bankrupt has disclosed such ownership interest.

The decision of the Honourable Justice Pattillo of the Ontario Superior Court of Justice in Bankruptcy and Insolvency dated July 28, 2021, in Re Johansen Bankruptcy, 2021 ONSC 5241 (CanLII) highlights the issues in the bankruptcy of a co-owner of real estate. In December 2016, Mr. Johansen filed a voluntary bankruptcy assignment. In his sworn statement of affairs, he listed no realizable assets and liabilities of $73,968 (unsecured) and $14,950 (secured). No mention is made of any ownership in real estate.

The Trustee learned of the bankrupt’s interest in the home he lived in with his mother in March 2017. In the period from April 2017 to October 2020, the Trustee wrote to the bankrupt and Mrs. Johansen as well as spoke to the bankrupt several times about his interest in the home and why it hadn’t been disclosed. The bankrupt did not provide any information other than denying interest in the property, and his mother did not respond.

A FedEx courier envelope containing a one-page statutory declaration purportedly signed by Mrs. Johansen on October 18, 2018, arrived at the Trustee on October 16, 2020. Her declaration stated, in part, that putting the 20% in the bankrupt’s name was intended to provide her son with an interest in her Estate over and above any other entitlements under her Will. According to her, the 20% was a gift to be realized only after her death.

In the Trustee’s view, the bankrupt and his mother are playing games with each other. The Trustee applied to the court for a declaration that the bankrupt held a 20% interest in the home at the time of bankruptcy, and that he could partition and sell it. Despite the Trustee having a lawyer, the bankrupt represented himself. It would have been better if he had gotten legal advice and been represented in court.

Tenants In Common vs Joint Tenancy: Can your 90-year-old mother be thrown out of her house?

The Judge determined that the bankrupt owned a 20% interest in the property based on the legal title, and hence, that 20% interest vested in the Trustee pursuant to s. 71 of the Bankruptcy and Insolvency Act (Canada) (BIA).

Mrs. Johansen’s statutory declaration to the effect that the bankrupt did not own the real estate and that the 20% was a gift that only passes to him on her death was not accepted by the Judge. The declaration was signed some two years after the bankruptcy when the Trustee’s ownership interest was well known. Despite repeated requests from the Trustee for information, it was not produced for another two years. In addition to what was noted by the Judge, his main concern was the way she characterized the bankrupt’s interest, given the evidence concerning the property they owned before this home, which Mrs. Johansen failed to mention.

Mrs. Johansen and the former marriage of the bankrupt’s wife, as well as the bankrupt, were the three parties on title to the home they purchased on January 30, 2007. They obtained a mortgage from TD Bank on January 30, 2007, which was discharged on February 21, 2007. Due to a marital split, the bankrupt’s wife was removed from the legal title on October 17, 2008, leaving just his mother Mrs. Johansen and himself as parties on the legal title. The bankrupt admitted that his ex-wife was paid for her interest in that home. On June 28, 2012, the bankrupt and his mother sold that home for $567,000, and the same day purchased the current home for $450,000.

The home was purchased in 2012. The title documents recorded at the time, its ownership is divided between 20% owned by the bankrupt and 80% owned by Mrs. Johansen. Mrs. Johansen and the bankrupt both signed the Land Transfer Tax affidavit showing as between tenants in common vs joint tenancy they chose to own the home as tenants in common. There are no mortgages recorded on the title.

All title searches, including a current title search, did not reveal the nature of the interests of each of Mrs. Johansen, the bankrupt or his ex-wife held in that previous home. However, it did show that each of them had an interest in it. The Judge determined that when Mrs. Johansen and the bankrupt bought the current home, it is a reasonable conclusion that the bankrupt had a 20% ownership interest in it. It was not intended to only pass on Mrs. Johansen’s death.

Justice Pattillo did not accept the bankrupt’s evidence that he has no interest in the property and had no knowledge that he was one of the parties on title. Given the history and the fact that he signed the affidavit of Land Transfer Tax at the time of purchase, Justice Pattillo held that the bankrupt was aware he had an interest in the legal title in the property.

Justice Pattillo found that the Trustee had the standing to bring the application for partition or sale of the property since he is a person with an interest in it. The Judge noted that Mrs. Johansen is 90 years old and does not wish to sell her home. Based on the evidence, however, he did not consider that to be of sufficient hardship to warrant refusing the requested remedy.

Tenants in common vs joint tenancy: The bankruptcy of 1 co-owner will affect the others

The Judge stayed his order for three months. He encouraged the bankrupt and through him his mother to seek professional advice so that this issue can be resolved with the Trustee before the sale process begins. The order will take effect if a resolution is not reached within that timeframe.

Now that the prospect of the sale of the entire home, not just the bankrupt’s co-ownership interest, was a reality, the bankrupt and his mother needed professional guidance. Their professional advice would be that the Trustee is only entitled to 20% of the bankrupt’s equity interest. So, if the mother from her own funds, or by getting a mortgage, can come up with the value of the 20% interest and pay it to the Trustee, then the house will not get sold. She will have bought the bankrupt son’s 20% interest, and the Trustee will have all the money he is entitled to.

If one co-owner goes bankrupt, the other co-owners are affected as well. It is the Trustee’s responsibility to convert the bankrupt’s equity into cash. One or more of the remaining co-owners are the natural buyers of the bankrupt co-owner’s interest. Sometimes non-bankrupt co-owners must sell, as is the case for Johansen if the mother cannot purchase the son’s equity from the Trustee, but most often someone will purchase the Trustee’s equity to maintain the status quo.

Had the choice of ownership interest as between tenants in common vs joint tenancy, this would not have changed the outcome of this case.

A lawyer can help you understand tenants in common vs joint tenancy in Ontario

I hope that you found the tenants in common vs joint tenancy Brandon Blog interesting. Problems will arise when you or your company are in financial distress, cash-starved and cannot repay debts. There are several insolvency processes available to a company or a person with too much debt.

If you are concerned because you or your business are dealing with substantial debt challenges, you need debt help and you assume bankruptcy is your only option, call me.

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

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

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

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

Call us now for a no-cost consultation.

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.

tenants in common vs joint tenancy

Brandon Blog Post

REVERSE VESTING ORDER: 1 REMARKABLE CREATIVE WAY TO DO FINANCIAL RESTRUCTURING

Post author By Brandon Smith
Post date August 2, 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.

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.

Vesting order and reverse vesting order

In a corporate insolvency case, a court may grant a vesting order, which authorizes the sale of a company’s assets to the buyer once the purchase price is paid. A vesting order vests ownership in the purchaser as a result of this court order. This is proof that the purchaser is entitled to transfer the assets into its name. No matter what insolvency process is used, this is the use of a vesting order.

In the past year or so, a new trend has emerged regarding the sale of the assets of insolvent companies as part of a restructuring under the Companies’ Creditors Arrangement Act (CCAA). That new trend is the use of a reverse vesting order.

In this Brandon Blog, I explain what a reverse vesting order is and why I believe its use will be a significant feature of Canadian firm restructurings in 2021 and beyond.

Reverse vesting order – A powerful tool for maximizing recovery in complex insolvencies

A reverse vesting order can be very useful in complex insolvencies. A timely recovery can benefit creditors, and the process can maximize recoveries for all parties. Reverse vesting orders are a good solution for an insolvent debtor corporation when:

there are a large number of secured creditors, unsecured creditors and assets;
all of the assets do not have an immediate buyer;
the company is insolvent; and
the company must deal with unwanted assets and a group of creditors in a particular way.

It is best used in a large-scale CCAA corporate restructuring but is not limited to that.

reverse vesting order

Reverse vesting order as a third restructuring tool

There have traditionally been two insolvency processes available to licensed insolvency trustees, insolvency lawyers, and company stakeholders. The two are (i) liquidating assets; and (ii) reorganizing companies. In general, assets are liquidated through either receivership or bankruptcy. Incorporated companies can restructure either under the provisions of the Bankruptcy and Insolvency Act (Canada) (BIA) or, for larger and more complex restructurings, under the CCAA. It is obvious that assets must be sold in order to liquidate them.

Sometimes, as part of a corporate restructuring, there are redundant and unwanted assets that can be sold to raise cash. The question is, what if the real value, especially a going-concern value of a company in a commercial insolvency case is not in its tangible assets. Rather, its real value lies in:

the ability to operate in a specific industry and such licenses cannot be sold by their very nature and wording – think of the cannabis and nursing home industries as two examples;
tax losses and tax attributes that can be monetized if the licensed insolvency trustee is also able to take over the shares; or
being listed on the stock exchange and thus as a public company having a greater market value than a private corporation.

As a result, it is extremely difficult to realize any value from such assets.

What is the importance of the reverse vesting order? How a reverse vesting order works will tell you all you need to know about why it is important as a third restructuring tool. Under a reverse vesting order, a newly incorporated residual corporation is added as a party to the CCAA proceedings.

As part of the CCAA restructuring, the operating debtor company transfers undesirable assets and liabilities to the newly incorporated non-operating company. With its assets and liabilities selected by the purchaser, the debtor company holds only the desirable assets and liabilities, which means its common shares can be sold rather than the company’s assets. As a result, valuable permits, contracts, tax losses, and statutory authority are preserved, which can otherwise be lost in a disposition of assets.

Why is reverse vesting order important?

A reverse vesting order is an alternative to the traditional CCAA plans of arrangement, particularly for companies operating in highly regulated environments or when there is no value remaining after the realization of secured debt and the parties intend to continue the running of the debtor company.

A reverse vesting order is an alternative to the traditional CCAA plans of arrangement, particularly for companies operating in highly regulated environments or when there is no value remaining after the realization of secured debt and the parties plan to continue operating the debtor company.

By using a reverse vesting order, existing corporations, which have been streamlined to become solvent through an innovative solution, are transferred to new investors instead of desirable assets being sold through a court-approved sale. The debtor corporation that initially filed for bankruptcy protection under the CCAA can now be removed from the restructuring proceedings. There are certain unwanted assets and unwanted liabilities that are transferred to the newly incorporated residual corporation. There can then be asset sales allowing for some sort of distribution to creditors (either in a plan of arrangement or in bankruptcy) in order to allow some creditor recovery.

A reverse vesting order may prove to be the most efficient approach to facilitate a going concern operation transfer through restructuring proceedings, letting businesses emerge from CCAA proceedings quickly without having filed a plan of arrangement, while preserving key attributes of the corporate entity and its existing corporate structure.

Legal challenges to the use of reverse vesting orders have been unsuccessful. I would like to discuss the case of Nemaska Lithium Inc.

Reverse vesting order issued by Québec Superior Court after first contested hearing

In December 2019, Nemaska Lithium Inc. and related companies (Nemaska Lithium or the Nemaska entities) commenced CCAA proceedings. A lithium mining project was developed in Quebec by them. A CCAA judge approved an uncontested sale or investment solicitation process (SISP) in January 2020 that led to the acceptance of a bid that was subject to the condition that a reverse vesting order is issued.

A proposed reverse vesting order provides that Nemaska entities will be acquired by the bidder free of the claims of the unsecured creditors, which will be transferred as part of a pre-closing reorganization to a newly incorporated non-operating company.

The reverse vesting order will allow the purchaser to continue to operate the Nemaska entities in a highly regulated environment by maintaining their existing permits, licences, authorizations, essential contracts, and fiscal attributes. In essence, it is a credit bid in which the shares of the Nemaska entities are acquired in exchange for the assumption of the secured debt.

A shareholder (who was also an alleged creditor) filed motions opposing the reverse vesting order issuance on multiple grounds, including:

a vesting order cannot be granted for anything other than a sale or disposition of assets through a vesting order for sales of assets;
the reverse vesting order is not permissible under the CCAA because it allows the Nemaska entities to exit CCAA protection outside of a plan of arrangement or plan of compromise;
this reverse vesting order contemplated a corporate reorganization that is not permitted by securities laws; and
in light of the proposed transaction, the directors and officers of Nemaska Lithium Inc. should not be released.

The Honourable Justice Gouin, J.S.C., reviewed and assessed:

the SISP process which led to the offer;
the lack of alternatives to the offer;
the potential harm to Nemaska Lithium‘s stakeholders, including its employees, creditors, suppliers, and the Cree community;
stopping the restructuring process to relaunch a SISP in the future following what was already a thorough examination of the market or, alternatively,
bankrupting the Nemaska entities.

In light of all these factors, the judge approved the reverse vesting order on October 15, 2020. Limiting the remedies available under the CCAA would unnecessarily hinder the development of innovative solutions for more complex commercial and social issues in Canadian insolvency matters.

The decision and formal recognition of reverse vesting order by the Court of Appeal

Leave to appeal the CCAA judge‘s decision was sought by the parties who objected to the reverse vesting order being made. The Appellate Court carefully considered the judge’s decision-making process and particularly that the Québec Superior Court judge relied extensively on the principles set out by the Supreme Court of Canada in the matter of 9354-9186 Quebec inc. c. Callidus Capital Corp., namely the:

development of CCAA proceedings and the role of the CCAA supervising judge;
remedial objectives of Canadian insolvency laws to provide timely, efficient, and impartial resolution of a debtor’s insolvency, secure fair and equitable treatment of creditors’ claims against a debtor, protect the public interest, and balance the costs and benefits of restructuring or liquidating the debtor company’s assets;
CCAA‘s goal of preventing social and economic losses from liquidating insolvent companies by facilitating their reorganization and survival as a going concern; and
CCAA judge‘s broad discretion under s. 11 of the CCAA in an effort to advance the CCAA’s remedial objectives while taking into account three fundamental factors that the debtor company application must prove: (1) the requested order is appropriate in the circumstances, and (2) good faith on the part of the applicant, and (3) the applicant has been acting with due diligence.

It was determined by the Court of Appeal judge that the risk of potential harm to stakeholders outweighed any legal merits of any arguments raised by the opposing parties. Therefore, the Quebec Court of Appeal denied the leave to appeal the decision of the CCAA judge.

Canada’s Supreme Court has denied leave to appeal. Having now established reverse vesting as an option for CCAA restructurings, the law is now set in stone.

The Nemaska case is the first reverse vesting order transaction to withstand judicial scrutiny in Canada and reaffirms the flexibility of CCAA proceedings for distressed M&A transactions of distressed businesses.

Reverse vesting order and distressed M&A opportunities

I hope that you found this reverse vesting order Brandon Blog interesting. Problems will arise when you or your company are in business distress, cash-starved and cannot repay debts. There are several insolvency processes available to a company or a person with too much debt.

If you are concerned because you or your business are dealing with substantial debt challenges, you need debt help and you assume bankruptcy is your only option, call me.

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

The 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.

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

Call us now for a no-cost consultation.

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.

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