Tag: Bankruptcy and Insolvency Act

FILING FOR BANKRUPTCY IN ONTARIO: 3RD TIME SHOULD NOT BE A CHARM

Post author By Brandon Smith
Post date December 11, 2019

Filing for bankruptcy in Ontario introduction

We have all heard the expression “third time’s a charm” or “third time lucky”. You say this when someone is successful the third time they try something after they failed the first two times. This expression is not meant to apply to the world of Canadian insolvency or a desperate financial situation. Certainly not for filing for bankruptcy in Ontario.

On December 9, 2019, the Toronto Star published an article by investigative reporters Jesse McLean and David Bruser titled “Rack up debt. Declare bankruptcy. Repeat. And repeat again. How thousands of Canadians are doing it and costing the rest of us”. The article talks about four specific people who file for bankruptcy multiple times.

In this Brandon’s Blog, I want to describe how filing for bankruptcy in Ontario works. Thankfully, the article does state that in the Toronto Bankruptcy CourtFreme, it is much tougher to get away with multiple bankruptcies, as it should be.

Filing for bankruptcy in Ontario: How do I declare bankruptcy in Canada?

Filing for bankruptcy in Ontario begins with a no-cost consultation with a licensed insolvency trustee (formerly called a bankruptcy trustee ) (Trustee). In that consultation, the Trustee will want to get a good understanding of your assets, liabilities, income and expenses. That way, the Trustee will be able to discuss with you all the available options and help you narrow them down to the most viable options to solve your debt problems.

At the end of the meeting, the Trustee will give you the standard intake form. By completing the form fully, you will provide the Trustee with the proper information needed for your filing for bankruptcy in Ontario. My Firm calls our standard intake form the Debt Relief Worksheet The information is then used in order for the Trustee to finalize his or her recommendations to you for dealing with your debt. The options available in general for dealing with personal debt are:

A consumer proposal is an insolvency process which is one of the best of all the alternatives to bankruptcy. It is much preferable than filing for bankruptcy in Ontario. In a consumer proposal, you are able to compromise your debt. You make an offer to pay less than the total you owe. You then make the monthly payment to the Trustee until you have paid the total you agreed to.

If you end up deciding on either a consumer proposal or bankruptcy, the Trustee will prepare the required documentation. This is the case for consumer proposal documents or those necessary for filing for bankruptcy in Ontario.

The Licensed Insolvency Trustee then takes the fully completed worksheet and all additional documents in support of your information. The information is then used in order to prepare the documentation necessary for filing for bankruptcy in Ontario. The documents include your Statement of Affairs and your Statement of Income and Expenses.

The Statement of Affairs used for filing is attested to by the debtor as to its accuracy. This statement includes a listing of all of the person’s assets and indicates which are exempt from seizure and which are not. The asset exemptions are guided by provincial law. As there are some variations between provinces, in this blog I will only be referring to bankruptcy process Ontario exemptions.

The assets not exempt from a seizure will be surrendered to the Trustee to be sold. The statement also lists all the names of the creditors, their respective addresses and the amount owed to each.

The Statement of Income and Expenses, as the name suggests, shows the monthly income and expenses of the household. It also shows whether or not the person will be subject to surplus income payments to the Trustee or not.

When all the documents are ready, the Trustee electronically files them with the Office of the Superintendent of Bankruptcy (OSB). The local OSB representative reviews the filing. If everything is in order, the OSB issues a Bankruptcy Certificate. The issuance of that certificate is the moment the person is now bankrupt.

Filing for bankruptcy in Ontario: How long does bankruptcy last in Ontario?

The Canadian bankruptcy system is administered under the Bankruptcy and Insolvency Act (Canada). This is a federal statute and bankruptcy is a complex legal process. Bankruptcy allows you to compromise the debts to your unsecured creditors. It does not deal with the debt owing to a secured creditor if you are able and wish to keep the asset.

So the question is not how long does bankruptcy last in Ontario? Rather, it really is how long does bankruptcy last in Canada?

The Toronto Star investigative article talks about the length of a bankruptcy. It correctly states that a first-time bankrupt, that does not need to pay surplus income, is entitled to an automatic discharge after 9 months. This assumes that they have lived up to all of their commitments as an undischarged bankrupt as well as completely cooperated with the Trustee.

If a first-time bankrupt surplus income, they must pay it for 21 months prior to qualifying for a discharge. This again assumes that they have fully cooperated with the Trustee. In both cases, if neither the Trustee nor a creditor opposes the discharge of the bankrupt, the Trustee can issue the discharge certificate.

In a second time bankruptcy, with no surplus income, the bankrupt has to wait for 24 months before being eligible for a discharge. Again, if the bankrupt has completed all duties and has cooperated fully, and no creditor opposes the discharge, the Trustee can issue the discharge certificate. If there is a surplus income requirement, then the minimum period before being eligible for a discharge is 36 months. Under the same conditions, the Trustee can issue the discharge certificate if there is no opposition.

The article highlights, correctly, that if it is the person’s third or more bankruptcy, the Trustee cannot issue a discharge certificate. The discharge hearing must be held in Court, even if the Trustee is not opposing. The reason for this is because the Canadian bankruptcy system is supposed to financially rehabilitate the honest but unfortunate debtor.

So in a third or more bankruptcy, the Court wants to review the circumstances of the person’s bankruptcy and why rehabilitation has not been accomplished yet. If there is a Trustee or creditor opposition to discharge, the hearing becomes more complicated.

I have written several blogs previously on the bankruptcy discharge process. You can search for them up above in the search function. If you wish to find out more about the bankruptcy process, you can CLICK HERE and read our filing for bankruptcy in Ontario faq.

**What about my credit cards when filing for bankruptcy in Ontario?**

When filing for bankruptcy in Ontario, you have to do the following:

disclose to the Trustee information regarding every one of your assets and financial debts;
disclose to the Trustee any transactions where you sold or transferred any of your property in the last 5 years;
surrender your credit cards to the Licensed Insolvency Trustee;
attend the initial meeting of creditors (if required);
attend 1 credit counselling session near the beginning of the insolvency process and another 1 credit counselling session later on in the administration;
keep the bankruptcy Trustee informed of any address change; and
assist the Trustee whenever asked for information, documents or property

**What about my credit report when filing for bankruptcy in Ontario?**

The information in your credit report that affects your credit score is usually eliminated after a specific period of time. Generally, it will be removed after six or 7 years for initial bankruptcy. The time frame is a bit less in a consumer proposal.

Sometimes you may hear people say that you remain in bankruptcy for seven years. That is not true. What that time frame really is all about when filing for bankruptcy in Ontario is the amount of time it takes for the notation of your bankruptcy to affect your credit rating and to be eliminated from your credit record. However, even before you are discharged from bankruptcy, or finish your consumer proposal, there are steps you can take to begin rebuilding your credit score and credit report.

filing for bankruptcy in ontario

**How bankruptcies work in Canada – Filing for bankruptcy in Ontario multiple times**

The investigative reporting in the Toronto Star details the multiple bankruptcies of four different people. These people range from being in their third to fifth bankruptcy. The article states that the Province of Quebec has the most people who have gone bankrupt multiple times. The article, of course, and rightly so, takes a very dim view of people who “game the system” with multiple bankruptcies.

As I mentioned earlier, the article clearly states that from their research in Ontario and Quebec, the writers found that the Toronto bankruptcy court takes the dimmest view of people with multiple bankruptcies when they come up for their discharge hearing.

Being a serial bankrupt is not a good thing. The reporting is fair and balanced. It does admit that some people just get a curveball thrown at them in life and have no choice but for filing for bankruptcy in Ontario. However, there are two themes stressed in the article which I don’t think are accurate. They are:

“Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency (CRA) has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.” While this is true, it assumes that the taxes would have been paid if the people did not file for bankruptcy multiple times.

My belief is that people who go bankrupt multiple times have their affairs arranged in such a way that they do not have much to lose in bankruptcy. If they don’t have much to lose in a bankruptcy, then there isn’t much for CRA to seize if the person is not bankrupt. So the reality is that there is a class of Canadians that will not pay their fair share no matter what. This is clearly unfair to society as a whole, but it isn’t bankruptcy that causes it.

“Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high-interest rates to their customers who do pay their debts.”

The fact that credit card companies charge high-interest rates is true. However, in my experience, customers who do pay their credit card debt are not incurring interest charges. They pay their credit card balance off monthly.

Those who only make the minimum payment are the ones who are incurring high-interest charges. Ultimately, those people cannot afford to make all their debt payments and they ultimately invoke an insolvency process, being either a consumer proposal or bankruptcy.

So even a one-time-only bankrupt pushes a loss onto a credit card company. Hence the high-interest rates charged. By the way, who is it that makes the credit decision to extend new credit to a multiple time bankrupt? It isn’t the bankruptcy system, it is the credit card issuer. Perhaps they should not give a credit card to someone who has demonstrated many times that they cannot handle the credit responsibly.

Filing for bankruptcy in Ontario – Rack up debt

The statistics quoted in the article shows that although there has been an increase over the years in multiple time bankrupts, this is somewhat of a self-fulfilling prophecy. By definition, if a certain segment of the Canadian population goes bankrupt multiple times, then the statistics have to show an increase.

The statistics used in the article shows the following regarding the percentage between 1st and 2nd + out of total personal bankruptcies between 2011 through 2018:

Year	Total # bankruptcies	1st time %	2nd + time %
2011	77,993	84.41	15.59
2012	71,495	83.83	16.17
2013	69,224	82.74	17.26
2014	64,839	81.31	18.69
2015	63,406	80.52	19.48
2016	63,372	80.10	19.90
2017	57,969	79.23	20.77
2018	55,091	78.99	21.01

My takeaways from these statistics are:

Personal bankruptcies in Canada dropped by 29.4% between 2011 and 2018. I believe there are two main reasons. First, fewer Canadians are opting for an insolvency process in an era of unprecedented low-interest rates. Second, those requiring an insolvency process, have sufficient income to perform a successful consumer proposal thereby being able to avoid bankruptcy.
The increase in second and more time bankrupts is just under 5%. I believe most of the increase is as mentioned above, somewhat self-fulfilling. Every time the same person goes bankrupt, the statistic has to increase! So, what percentage increase is because of the actual mathematical formula, and what percentage increase is because there are actually more people in raw numbers are filing for bankruptcy more than one time?

Filing for bankruptcy in Ontario – The bankruptcy discharge

A discharge from bankruptcy releases you from the legal commitment to pay off your debts you had as of the day you applied for bankruptcy, with certain exceptions. Examples of certain exceptions are alimony, child support, certain student loans (if you stopped being a student less than seven years before filing), court-ordered penalties or fines and financial debts as a result of a fraud finding against you.

Of course, the ultimate objective for those filing for bankruptcy in Ontario is to receive the most sought after discharge from bankruptcy after you have performed all of your duties. The bankruptcy discharge releases a person from the majority of his or her debts as indicated above.

While many people thinking about bankruptcy currently have a poor credit score, it’s usually not irreparable. Declaring personal bankruptcy, nevertheless, will drop it to an R9 rating. This is the worst possible score there is. Unfortunately, this rating will last for about 6 years post-discharge. As I have already mentioned, there are steps you can take to start rebuilding your credit score.

Filing for bankruptcy in Ontario summary

I hope you found this Brandon’s Blog on filing for bankruptcy in Ontario useful. Sometimes things are too far gone and more drastic and immediate triage action is required.

Do you have too much debt? Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. We can help with your personal debt situation. We can also help with insolvency for business.

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. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team . That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

Tags Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy in ontario, bankruptcy ontario exemptions, Consumer Proposal, debt relief worksheet, filing bankruptcy, filing bankruptcy in ontario, filing bankruptcy in ontario faq, filing for bankruptcy, filing for bankruptcy in ontario, how do I declare bankruptcy in canada, how long does bankruptcy last in ontario, office of the superintendent of bankrkuptcy, rack up debt, statement of affairs, statement of income and expenses

Brandon Blog Post

UNDISCHARGED BANKRUPT: WHAT YOU NEED TO KNOW ABOUT BANKRUPTCY DISCHARGE

Post author By Brandon Smith
Post date December 2, 2019

If you would prefer to hear an audio version of this undischarged bankrupt Brandon’s Blog, please scroll down to the bottom and click on the podcast

Undischarged bankrupt introduction

I recently read a Manitoba court decision issued in late October about the position taken by a judgment creditor in an undischarged bankrupt’s hearing. The creditor holding the judgment realized that the bankrupt’s discharge would discharge that debt. So, they tried to convince the court that their debt fit into one of the limited classes of debt that is not discharged by the bankrupt discharge.

That court case reminded me that is not so unusual. Many times a creditor who holds a judgment against the undischarged bankrupt tries to bootstrap their position. One of the leading cases cited by the Manitoba court is a 2018 decision from the Court of Appeal for Ontario.

The purpose of this Brandon’s Blog is to describe the bankruptcy discharge process, the position taken by the judgment creditor and what the Court has to say about that.

How bankruptcies work in Canada

The Canadian bankruptcy legislation is open for an insolvent and not viable company, or the insolvent, honest but unfortunate person can obtain relief. Subject to trust claimants’ rights and secured creditors, the company or person is assigning all of their unencumbered assets to the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee). In return, the bankrupt person can have all of their debts discharged, subject to certain exceptions.

The bankruptcy discharge is amongst the primary advantages of relief under the Bankruptcy and Insolvency Act (Canada) (BIA). The discharge is vital to the bankruptcy procedure. Debtors, after bankruptcy, can wipe the slate tidy as well as begin over. This is a central concept under the BIA law. That is the essence of the bankruptcy discharge meaning.

A bankruptcy discharge is when the bankrupt is released under Canadian bankruptcy law from his or her financial debts as part of the bankruptcy discharge procedure. Some people think that it is the declaring for bankruptcy that releases the insolvent from obligation. This is not the case, it is the discharge that releases a bankrupt from debt.

A bankruptcy discharge provides the discharge of all unsecured debts, except for:

support payments to a previous partner or children;
penalties or fines enforced by the Court;
financial debts arising from fraud or fraudulent breach of trust;
student loans if less than seven years have actually passed since the bankrupt stopped being a part-time or full-time student.

Can an undischarged bankrupt leave the country?

If you are an undischarged bankrupt, you can travel. There are no restrictions on you leaving or returning to Canada if you are travelling for work or on vacation. Just make sure that your travel plans do not interfere with your legal obligation and your duties in your personal bankruptcy case, including:

attending a meeting of creditors (if one is required);
showing up for your mandatory counselling sessions;
submitting your monthly income reports to the Trustee;
remitting any surplus income payments you are required to make;
providing your financial information to the Trustee so that your pre and post-bankruptcy income tax returns can be filed;
being able to respond to any inquiries from your Trustee; and
attending in Court for your bankruptcy discharge hearing in an opposed discharge application.
undischarged bankrupt

Undischarged bankrupt: What is an undischarged debt?

When a bankrupt is discharged from bankruptcy, the individual is released from the legal obligation to repay their different types of debt that is unsecured and existed on the day that the bankruptcy was filed, except for the following types of original debt:

Alimony or support payments to a previous spouse or for the children;
Fines or monetary penalties imposed by the Court;
Financial obligations arising from fraud, misappropriation or defalcation; or
Student loans if less than seven years have actually passed since the person stopped being a full or part-time student.

So other than for the small category of debts that are not discharged, once the bankrupt is discharged from their bankruptcy, they do not have to make payments on debts that existed at the date of bankruptcy.

Undischarged bankrupt: Trustee opposed the discharge

A first-time bankrupt, who does not need to pay surplus income, is entitled to an automatic discharge after 9 months. This assumes that they have lived up to all of their obligations as an undischarged bankrupt and fully cooperated with the LIT. If this first-time bankrupt is subject to surplus income, then they must pay it for 21 months before they are entitled to a discharge. Longer timelines apply for a second or more time bankrupt.

If the Trustee has evidence that the bankrupt has not been forthright and fully cooperative, or has actually committed one or more bankruptcy offences, then the Trustee has a duty to oppose the bankrupt’s discharge.

Notice of opposition to discharge

Similarly, any unsecured creditor can oppose the bankrupt’s discharge. The grounds of opposition would likewise be evidence of lack of honesty or that one or more offences have been committed. The process for a creditor opposing the discharge of the bankrupt is by filing a notice of opposition to discharge.

In either a Trustee or creditor opposed discharge, the bankrupt’s application for discharge must be heard in Bankruptcy Court. For more on the discharge process, you can read about it in one of my previous Brandon’s Blogs.

The judgement creditor

Often, a judgment creditor thinks they have a higher position in the pecking order than other unsecured creditors because they have a judgment. They may have even registered the judgement against the title to real estate owned wholly or partially by the defendant. Unfortunately, upon the bankruptcy of a person, all enforcement proceedings on a judgment must stop.

The judgment for a debt, in bankruptcy, is merely a piece of paper that proves you have unsecured debt. Nothing else. Anyone who understands the litigation process knows that there is a big difference between getting a judgment and collecting on it.

Judgement creditors may take a keener interest in the bankruptcy proceedings, including opposing the discharge from bankruptcy. The reasons for this are twofold:

The judgment creditor has already spent time in court, money on legal fees and still has not collected their debt, so they are more invested in this person’s bankruptcy than someone who did not go the court route.
They are hoping that they can somehow fit their money judgment only into a position where they can claim that the debt is one not released by an order of discharge.

It is this second reason that this Manitoba court case, and the Court of Appeal for Ontario decision relied upon by the Manitoba court, revolves around.

Undischarged bankrupt: Can more evidence be introduced by a judgment creditor at the discharge hearing?

Most judgements that I see in a debt settlement program under the BIA or bankruptcy tend to fall into the same category. A service or good was supplied and not paid for. A contract was entered into and was breached. That is just normal business. There is no fraud, embezzlement, misappropriation, defalcation, fraudulent misrepresentation or fraudulent breach of trust.

It is simply someone owes money and didn’t pay. The plaintiff entered all of the evidence they thought was important, the defendant either defended or allowed for default judgment to be obtained because they did not defend. Regardless, the court ordered the defendant to pay the money.

The judgement creditor was unpaid and then one day received the Trustee’s notice of bankruptcy in the mail. The judgment creditor was incensed. The creditor took an active interest in the bankruptcy proceedings and maybe even served as a bankruptcy inspector. The bankrupt person is now entitled to apply for his or her discharge from bankruptcy.

The judgment creditor is unhappy because they now know that they are receiving either nothing or a small dividend from the Trustee compared to the debt to be written off. So they now oppose the bankrupt’s discharge and try to get new evidence submitted to the Bankruptcy Court to somehow prove that their judgment is a claim that is not extinguished by the person’s bankruptcy discharge.

This is what the Court of Appeal decision was all about. Can you introduce new evidence at a bankruptcy discharge hearing?

The case I am referring to, Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171 (CanLII). The appeals court said that the answer is no. You can read the entire decision here if you like. The Court of Appeal essentially said that the Court is allowed to look at:

the judgment
the proof that would certainly have been entered as evidence at the time in the pleadings
as well as that evidence which has been led in the bankruptcy discharge hearing

to analyze whether the judgment debt falls within an exclusion to the general discharge rules. The Court also said that in a bankruptcy discharge hearing, the application judge was limited to looking at the judgment, the pleadings, the statement of claim and any statement of defence, to determine whether the judgment fell into the class of those debts not released by a discharge from bankruptcy. New evidence is not allowed.

This finding has been followed and further clarified. It is now apparent that the only purpose of a bankrupt’s application for discharge is to consider the bankrupt’s application. It is not a forum to attempt to advance new or amended claims.

Undischarged bankrupt summary

I hope you enjoyed this Brandon’s Blog on the undischarged bankrupt. Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

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 know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

undischarged bankrupt

Brandon Blog Post

HOW DOES DEBT RELIEF WORK: APPARENTLY NOT GREAT 4 EVERYONE

Post author By Brandon Smith
Post date November 25, 2019

NOTE: On January 13, 2022, three settlement agreements were approved by the Honourable Justice Mayer of the British Columbia Supreme Court on January 29, 2021, and November 15, 2021. As a compromise of disputed claims, these settlements are not an admission or finding of liability by the settling Defendants. You can read all about the Settlement Administration Plan and how to file a claim by CLICKING HERE to read our latest 4 Pillars blog.

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

How does debt relief work Introduction

On October 29, 2019, The Supreme Court of British Columbia, certified a class-action lawsuit in Pearce v. 4 Pillars Consulting Group Inc., 2019 BCSC 1851. At the crux of the litigation, the question of how does debt relief work legally will be answered. In Brandon’s Blog, I describe the issues raised in this class-action lawsuit.

What is a class action?

In a class action, one or more individuals called Representative Plaintiffs sue on behalf of all other individuals with similar claims. With each other, the people included in the class action are called Class Members. One court settles the concerns for all Class Members, with the exception of those that exclude themselves from the Class.

The 4 Pillars lawsuit class-action

A class-action legal action has been begun in the B.C. Supreme Court against the 4 Pillars Consulting Group Inc. (4 Pillars). The claim is that the 4 Pillars debt consulting business has breached the B.C. Business Practices and Consumer Protection Act as well as the federal Bankruptcy and Insolvency Act (Canada) (BIA).

Plaintiff seeks to certify his action as class proceedings. The litigation looks to recoup damages for the costs billed by 4 Pillars as debt consultants to its clients. In the 4 Pillars litigation, Mr. Pearce is looking to recoup damages for the costs billed by 4 Pillars to all persons that paid fees to it in British Columbia in connection with: (i) a consumer proposal under the BIA; or (ii) an informal debt settlement proposal with the person’s creditors, all after April 1, 2016.

How does debt relief work: The allegations

In his litigation, Plaintiff claims that Defendant provided debt restructuring services in breach of both provincial legislation and the BIA.

Mr. Pearce alleges that:

The major, if not single, debt restructuring solution given by 4 Pillars is to prepare the consumer proposal documents to hand over to licensed insolvency trustees (formerly called licensed bankruptcy trustees or a bankruptcy trustee) (Trustee) and schedules a meeting with the Trustee so that the consumer proposal can be submitted;
4 Pillars debt consultants represent that it might hold financial liability negotiations directly with a customer’s creditors, trying to get you an informal debt settlement, although that service is hardly ever really supplied;
Their standard form agreement, which clients need to enter into with them, allows 4 Pillars to speak to the client’s creditors on their behalf;
Under their standard procedures, 4 Pillars gets in touch with the debtor’s creditors to advise them that they are acting for the debtor and they will need time to make plans for the debtor; and
They meet the debtor numerous times, collect information from the borrower, prepare a consumer proposal to provide to a Trustee and afterward meets the Trustee to administer the consumer proposal process.

Mr. Pearce goes on to state the 4 Pillars:

acts only for its clients, the borrowers;
prepares a consumer proposal for its clients and afterward represents to the Trustee why the proposal terms are reasonable;

urges the Trustee to recommend that the creditors accept the proposal on the suggested terms;
meets the Trustee and helps in answering the Trustee’s concerns; and

will, ideally, create an alternate proposal and, once more, advocate the Trustee, if their first consumer proposal is rejected by the borrower’s creditors.

The alleged cause of action under the BIA: Are the activities of a debt consulting business in breach of the BIA?

Mr. Pearce claims that contrary to the provisions of the BIA:

none of the entities or individuals offering financial debt restructuring services are Trustees;
performed various regulated activities that only Trustees are authorized to carry out;

collected financial information from their customers and prepared consumer proposals for them; required borrowers to pay fees and costs which are not allowed; and
4 Pillars has actively solicited people to file consumer proposals which is prohibited.

There are many more claims being made by Mr. Pearce, including that there is not any real debt settlement negotiation with creditors or any real debt relief management, other than the preparation of the consumer proposal. Defendant, of course, denies it all. After hearing all the evidence, the Court found that there were sufficient grounds for this litigation to go forward as a class-action lawsuit.

Are Debt Relief Programs a good idea?

Is debt settlement a good idea?

Debt relief programs are a good idea. However, as Mr. Pearce’s litigation shows, there are companies that charge high fees and really provide no value. Worse, they may actually do more harm than good.

I have previously blogged about the risks of debt settlement businesses. In 2017, I covered the study by the Office of the Superintendent of Bankruptcy (OSB) on debt negotiation companies.

The major findings of the OSB study were that in 2016:

In 17% of all consumer proposal filings, the client reported having spent initially for debt counselling from a debt settlement company before being guided to a Trustee.
57% of the consumer proposal filings for which earlier financial debt settlement advice was obtained, the Trustees had strong ties with 2 large-volume financial debt settlement companies. These 2 companies represented 64% of the total for those Trustee fees reported in 2016 for financial advice before submitting to a proceeding with a Trustee.
Thirteen Trustee firms, that included one national-level firm, were uncovered to have countless Trustees running in routine partnership with large-volume financial debt settlement firms.
For about 50 Trustees within these 13 firms, much better than 40% of their consumer filings were sourced from these debt settlement companies. For about 20 of those Trustees, more than 90% of their consumer proposal work stems from these 2 organizations.
Financial debt negotiation companies have actually long utilized scare tactics with consumers to draw in business. They tell consumers that all a Trustee intends to do is put them into bankruptcy.

The OSB concluded that customers were paying financial debt settlement companies fees with cash they could not afford to pay. Only when they could no longer pay, then the debt settlement company referred the people to their favourite Trustees! The OSB was additionally concerned about the business arrangements being made between financial debt settlement outfits and those same Trustees. The OSB is very concerned with how does debt relief work in Canada since it supervises the insolvency process in Canada.

Ever since the OSB has actually introduced modifications to methods that Trustees have to comply with for the regulation of debt counsellors and business arrangements with a view to curb these practices. For the record, I as well as my Firm have no relationship with any type of debt negotiation company

Do Debt relief companies really work?

How does debt relief work with a legitimate credit counsellor? What this says is that a legitimate credit counselling service can offer a good debt settlement program. There are community-based credit counselling agencies that do not charge fees and they really do know how does debt relief work. These organizations provide a valuable service in the areas of budgeting and debt management. They are not the kind of debt consulting services that rips off unsuspecting people and prey on their fears of going to see a Trustee.

How does a debt relief program affect your credit?

With a debt relief program run by a reputable credit counselling agency, you make one regular monthly repayment to the credit counsellor, which after that disburses repayments to your creditors. This kind of plan can have a negative influence on your credit rating. Naturally, any type of late payments or high unpaid amounts on accounts will certainly worsen your credit rating The unscrupulous debt relief companies have an additional trick up their sleeve that makes your credit score worse.

The debt restructuring businesses that actually do try to negotiate with your creditors first do not make payments to them from the funds you supply for some time. Their theory is that your account must first go into arrears. Some people speculate that the money you are paying them, while they are not passing it on to your creditors, goes to the company only. When your account is now months in default, your credit score worsens.

So, the debt settlement credit score impact is real.

Is Debt Settlement Really Worth It?

How does debt relief work with a true debt settlement program? Is it really is worth it? With real consumer debt relief you can:

get real credit counselling;
help with setting and following a family budget where you do not spend more than you earn;
receive true debt settlement where you will pay off all your debts for less than what the full amount is;
enjoy the time you need to pay this lesser amount to get rid of all your debts;
avoid interest and other high fees and charges; and
end the stress in your life and move forward without the pain, worry, and guilt that your unmanageable debts have caused you.

There is only one government-approved debt settlement program in Canada. It achieves all of the above. The only professional authorized to administer it is a Trustee. As Pearce, now class-action litigation shows, it is a consumer proposal. A consumer proposal and a Division 1 proposal are alternatives to filing for bankruptcy. As the Pearce litigation confirms, only a Trustee can administer these kinds of debt restructuring proposal.

Although they are the same in a number of ways, there are some substantial distinctions between a consumer proposal and a Division I Proposal. Consumer proposals are used for people whose financial debts aren’t greater than $250,000, not including any type of debts registered against your house. Division 1 proposals are readily available to both companies and also people whose financial obligations go beyond $250,000 (omitting mortgages signed up on their home).

A consumer proposal is an official process under the BIA. With a Trustee, you make a proposal to:

Pay your creditors a percentage of what you owe them over a particular amount of time, not greater than 5 years.
Prolong the time you need to pay back the reduced amount taking care of all of your unsecured debts.
A mix of both.

Settlements are made by the Trustee, using the monthly cash payments you make to the Trustee to make regular distributions to all your unsecured creditors.

4 Pillars lawsuit update May 24, 2021

4 Pillars appealed the decision that Mr. Pearce’s lawsuit should be converted into a class action proceeding to the Court of Appeal for British Columbia. See our updated blog describing the appeal:

4 PILLARS LAWSUIT GETS GIGANTIC APPROVAL TO PROCEED FROM COURT OF APPEAL FOR BRITISH COLUMBIA

How does debt relief work Summary

I hope you enjoyed this Brandon’s Blog on how does debt relief work and the 4 Pillars lawsuit. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate 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, so many dollars in debt. 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 develop a financial plan to get you debt relief freedom and you can stop feeling the shame of debt.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

Tags 4 pillars lawsuit, are debt relief programs a good idea, Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy trustee, BIA, consumer debt relief, Consumer Proposal, debt settlement credit score impact, debt settlement negotiation, do debt relief programs really work, how does a debt relief program affect your credit, how does debt relief work, Ira Smith Trustee, is debt settlement a good idea, is debt settlement really worth it, licensed insolvency trustee, Pearce v. 4 Pillars Consulting Group Inc.

Brandon Blog Post

CREDIT COUNSELLING CANADA: VERY BUSY WITH BANKRUPTCY ONLINE CHATTER

Post author By Brandon Smith
Post date November 18, 2019

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

Introduction

Like many people, I have set up various Google News alerts. Mine are mostly on the topic of insolvency. I have done this so that whenever a news article is posted on the topic, I will be alerted. One of the alerts I have set up is for the term “credit counselling Canada”. Last week I have noticed that a fair bit of bankruptcy online chatter.

The posts being promoted include:

I have taken a look at the posts. Generally, they are very accurate.

Unscrupulous debt consultants

I was very happy to see some of the posts warning against going to the unscrupulous debt consultants that I have written about before. The Office of the Superintendent of Bankruptcy (OSB) has also warned against them.

The purpose of this Brandon’s Blog is to comment and shed light on several comments in their recent busy online articles that I think are slightly misleading.

Consumer Proposal Ontario

In the Ontario consumer proposal blog, it is stated that a consumer proposal can only be arranged and administered by a bankruptcy trustee (now called a licensed insolvency trustee) (Trustee) which is true. They then go on to state what the cost of a consumer proposal is, that you need to pay an initial setup fee. They also state that the Trustee will also keep 20% of all of your consumer proposal payments.

This is misleading. The way I read it, is they claim you will have to pay a Trustee a setup fee, their fee and an additional 20%. This is not correct. In reality, the Trustee’s fee is a fixed tariff set by the Bankruptcy and Insolvency Act (Canada) (BIA). The fee and disbursements of the Trustee are set in the statute. It is illegal, for the Trustee to collect anything above and beyond the statutory tariff.

The reality is that the Trustee’s fee and disbursements, set by a tariff, come out of the person’s consumer proposal payments. The consumer proposal payments are calculated off of what your creditors can expect in that person’s bankruptcy. Whatever that amount is, the bankruptcy law says that the amount offered in the consumer proposal must be higher. Therefore, the amount a person must offer to get creditor buy-in to accept the consumer proposal has zero relationships to the Trustee’s fee and disbursements.

As the Trustee is entitled to take its capped fee and disbursements from the consumer proposal fund, rather than costing the person, the Trustee’s fee and disbursements are actually free to the insolvent debtor!

Bankruptcy Trustee, Creditor & Debtor

The blog I read on this topic discussed is pretty accurate. The only issue I take is that when describing the role of the Trustee, they pull out the old scare tactic that although the Trustee makes sure that the rights of the debtor are not abused, the Trustee acts for your creditors. This is technically true but overlooks the role of the Trustee as a credit counsellor before the debtor decides whether or not to file either a consumer proposal or for bankruptcy.

In my professional practice, before I allow anyone to file for bankruptcy, I provide an exhaustive and detailed analysis of the person’s financial situation. I first ask the person to explain the issues and financial crisis they are facing which is upending their life. We then together look at their assets, liabilities and income so that I can come up with realistic options. We then discuss the options available and I explain the advantages and disadvantages of each. Then I provide my recommendation. All of this is done in an initial consultation and is no charge to the person.

If they wish to explore the options we discussed more seriously, I then have them complete our standard intake form called the Debt Relief Worksheet. That document when fully completed and provided to me with appropriate backup, allows me to confirm my initial diagnosis and recommendations. Then it is up to the debtor to make their choice as to how they wish to proceed.

After going through this process, with everything fully explained by me, there are no surprises. If the debtor follows my advice, they will have either a successful debt settlement consumer proposal or will discharge their debts through the bankruptcy process. During and after this entire process, the debtor does not feel that I am biased against them in favour of their creditors. Although I have acted formally on behalf of their creditors, the debtor thanks me for saving them and allowing them to restart their lives.

Personal bankruptcy Toronto

The blog I read on personal bankruptcy, part of a credit counselling Canada series, said that people will tell you that bankruptcy eliminated all of their debts. They then ask the question: Did they tell you that it is not possible for everyone? The obvious answer is no because someone who eliminated all of their debts isn’t worried about someone else’s situation and distinctions.

The three types of debts given as examples that cannot be eliminated by a discharge from bankruptcy are:

Secured debts, like mortgages and car loans
Student loans where you have ceased being a full-time or part-time student less than 7 years ago
Child and alimony support payments

This is all true. When I counsel debtors during the free consultation, we review issues like this. We discuss all of the person’s debts, which can be discharged and which cannot be. Just because a certain debt on its face cannot be discharged through bankruptcy, does not mean that the person cannot properly avail themselves of an insolvency process and improve their financial position in life.

Specifically, with secured debt, I attack it from the perspective of can you afford to keep paying that debt, or should you keep paying it. If the home is fully encumbered and there is no or little equity, perhaps renting is a cheaper alternative. We go through the same analysis for a car loan.

In some cases, it might make sense for the person to give up the asset to the mortgagee/lender and allow them to make a demand on the debtor for the shortfall. A shortfall happens when the lender sells the asset but the market will only pay less than the secured debt owing. The lender’s loss is the shortfall. They can pursue the debtor for the loss.

That lender loss, or shortfall, is now an unsecured debt. The person has hopefully found a car they can afford and home, condo or apartment to rent they can afford in their budget. They have now turned the secured debt into an unsecured shortfall claim. That unsecured debt can be discharged through either a consumer proposal or bankruptcy process.

So just because a secured debt cannot be discharged in bankruptcy, it doesn’t mean the person can afford or should keep that debt and continue making payments. They may have a better way to live while then being able to discharge their debts through an insolvency process.

Bankruptcy Discharge in Canada

The blog I read on bankruptcy discharge does not say too much about the bankruptcy discharge process. Rather, they do focus on the dangers of not getting a discharge and remaining undischarged bankrupt.

Everything they say on the topic is true. However, I believe it does leave out a lot of information. In my experience, if someone follows my advice and lives up to all of their obligations during the lifetime of their bankruptcy, then they are not going to have a problem with discharge. It really is only those who try to “game” the system, do not fully cooperate and refuse to make full and transparent disclosure who have problems.

That is how the BIA is designed to work. You are asking your creditors to forgo a lot of the debt you owe them. In return, you have to be fully cooperative and make full disclosure, so that every stakeholder in the bankruptcy process knows that it has been a fair process.

In all of the personal bankruptcies I have administered, it is a very small minority who have a problem with discharge. In all cases, it is their past behaviour or their lack of full disclosure in bankruptcy that has caused the problems, not the bankruptcy process itself.

Summary

I hope you enjoyed this Brandon’s Blog on credit counselling Canada. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

Tags Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy discharge, bankruptcy discharge in canada, bankruptcy toronto, bankruptcy trustee, BIA, Consumer Proposal, consumer proposal ontario, credit counselling, credit counselling canada, licensed insolvency trustee, Office of the Superintendent of Bankruptcy, ontario consumer proposal, personal bankruptcy toronto, what is a consumer proposal

Brandon Blog Post

HOW BANKRUPTCIES WORK IN CANADA: 5 NEW CANADIAN INSOLVENCY LAW AMENDMENTS

Post author By Brandon Smith
Post date November 11, 2019

If you would prefer to listen to the audio version of this how bankruptcies work in Canada Brandon’s Blog, please scroll down to the bottom of the page and click on the podcast

Canadian bankruptcies laws

Last week I wrote about amendments to Canadian insolvency law for intellectual property rights in my Brandon’s Blog INSOLVENCY LAW CANADA AMENDMENTS FOR INTELLECTUAL PROPERTY RIGHTS In addition to the intellectual property rights amendments, other amendments affecting how bankruptcies work in Canada. They were enacted as of November 1, 2019. They too were part of the changes announced in the Canadian 2019 Budget.

Corporate bankruptcies Canada

Most of the amendments affect not just corporate bankruptcies. Receiverships and corporate financial restructuring are likewise affected. Even the operation of solvent companies is also affected. The amendments were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA), Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) and the Canada Business Corporations Act (R.S.C., 1985, c. C-44). I will focus on the changes to the BIA and CCAA.

The BIA and the CCAA modifications in the Budget Implementation Act, 2019, No. 1, are planned to boost retired life protection by making the insolvency treatment fairer and much more clear. In the legislation, the amendments fall under the heading “Enhancing Retirement Security”.

This issue remained in the news over the past two years. High profile insolvency situations such as Sears Canada and U.S. Steel Canada brought this matter to the forefront. I wrote a few blogs on the topic of proposals to change the BIA and CCAA. The proposals were meant to supply protection to senior citizens. This consisted of private members’ bills introduced by Hamilton Mountain NDP MP Scott Duvall, Bloc Québécois MP Marilène Gill and Senator Art Eggleton, P. C.

None of their Bills ever came close to being enacted. Rather, the Liberal government made some changes. Only time will tell if the changes I describe below will accomplish the stated goal of enhancing retirement security.

Insolvency and bankruptcy code amendments – BIA

The BIA amendments will apply to bankruptcy, receivership and BIA financial restructurings done under the Proposal section of the BIA. The amendments are aimed at several areas. All the insolvency amendments are for insolvency proceedings beginning on or after November 1, 2019.

1. Good faith

Section 4.2 of the BIA is amended by adding a good faith provision section(4.2)(1). The new language states that any interested person in any type of process under the BIA must act in good faith relative to those proceedings. New subsection 4.‍2(2) codifies a power for the Court. It now states that if the court is satisfied that an interested individual fails to act in good faith, on application by any other interested party, the Court might make any kind of order that it thinks is proper in the circumstances.

I would have hoped that acting in good faith was always a given. Previously, the Court had wide discretion in insolvency proceedings to make an order that it believed to be just and appropriate. I am not sure this new language adds much to “enhancing retirement security”, but at least now it is codified.

2. Registered disability savings plan

Before Budget Canada 2019, there was a gap when it came to a registered disability savings plan (RDSP). The gap was that unlike an RRSP or RRIF, there was no exemption for an RDSP in how bankruptcies work in Canada.

Now Paragraph 67(1)‍(b.‍3) of the BIA is amended to include the same exemption for an RDSP that an RRSP and RRIF enjoy. That is, the amounts in any of these funds are now exempt from seizure in a bankruptcy apart from property added to any such plan or fund in the twelve-month period before the date of bankruptcy.

3. Director liability – Inquiry into dividends, redemption of shares or compensation

Section 101(1) of the BIA has been amended. It now deals with certain transactions that 1 year before the corporation went bankrupt. The time period is within the day that is one year prior to the date of the initial bankruptcy event and ending on the date of the bankruptcy both such dates included. If the corporation had:

paid a dividend, aside from a stock dividend;
redeemed or acquired for cancellation any one of its shares of the company’s capital stock; or
has paid termination pay, severance pay or incentive or other benefits to a director, officer or any person that manages or controls the business

the Court may, on the application of the licensed insolvency trustee (Trustee), inquire into the transaction to find out whether it took place at a time when the firm was insolvent or whether it made the firm bankrupt.

If a transaction referred to above has actually occurred, the Court can give judgment to the Trustee against the directors of the firm, jointly as well as severally, or individually as appropriate in the circumstances.

The amount of the pay or benefits, with interest on the amount, that has not been paid back to the company if the Court discovers that the payment of the pay or benefit:

occurred at a time when the company was insolvent or it made the corporation bankrupt;
was notably over the reasonable market price of the consideration gotten by the company;
was made outside the common course of business

and the directors did not have reasonable grounds to think that the payment:

took place when the firm was not insolvent or would not render the firm insolvent;
was not conspicuously over the fair market value of the consider obtained by the corporation; and
was made in the ordinary course of business.

Interestingly, the new statute also states that a judgment will not be made against or be binding on a director who had protested against the payment of the pay or benefits and had, therefore, vindicated himself or herself under the relevant corporate legislation from any kind of resulting obligation.

No doubt we will only learn how effective this additional liability of directors provision will be after several court cases. Presumably, this amendment to the statute will provide extra food for thought for the insurance companies providing director and officer liability coverage.

Insolvency proceedings under the CCAA

The CCAA covers larger company financial restructuring. In addition to amendments to the CCAA to mirror the BIA amendments discussed above, there were also a couple of other changes made.

4. Initial application

Prior to November 1 CCAA filings, the company was given an initial stay of proceedings for 30 days. Now, for filings November 1, 2019, and after, this initial stay period has been reduced to 10 days.

5. Relief reasonably necessary

An initial order made or during the 10-day initial application stay period will be limited to alleviation that is fairly required for the continued operations of the borrower business in the regular course, but no extra relief will be granted. This narrowing of relief during the initial order period means that the Company cannot ask for all sorts of extra relief outside of the normal course of business.

In order to attempt to get extra relief, the Company will have to make a motion to the Court on notice to any affected parties. The Company will not be able to pack it into an initial order and force affected parties who did not receive notice to have to come to Court under the comeback clause. This was the case before November 1, 2019.

Most times in a CCAA restructuring, it is necessary for the Company’s survival to get debtor-in-possession financing. When such financing is available, it usually comes with very onerous terms. To avoid essentially keeping all of the Company’s assets out of reach by using such financing, the CCAA has been amended. It says that when applying for the initial order or during the initial stay period, no order shall be made unless the court is pleased that the terms of the loan are restricted to what is reasonably necessary for the continued operations of the debtor firm in the ordinary course of business during that initial stay period duration.

In this way, Parliament has tried to put the brakes on wide-sweeping initial orders that have everything including the kitchen sink in them. Parliament wants to have the initial orders contain only what is reasonably necessary to keep the Company’s operations going until everyone is back in Court all lawyered up.

It will be very interesting to see what Court decisions come from all of these new amendments to the Canadian insolvency laws.

Summary

I hope you enjoyed this how bankruptcies work in Canada Brandon’s Blog on the other BIA and CCAA insolvency amendments effective November 1, 2019. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

Tags Bankruptcy and Insolvency Act, BIA, canadian bankruptcies laws, canadian insolvency law amendments, CCAA, Companies’ Creditors Arrangement Act, corporate restructuring, director liability, good faith, how bankruptcies work in canada, initial appliction, initial order, Insolvency and bankruptcy code amendments, Ira Smith Trustee, rdsp, registered disability savings plan, stay of proceedings

Brandon Blog Post

INSOLVENCY LAW CANADA AMENDMENTS FOR INTELLECTUAL PROPERTY RIGHTS

Post author By Brandon Smith
Post date November 6, 2019

Insolvency Canada news

The Federal government published in the Canada Gazette, Part II, Volume 153, Number 18, its intention to amend Canadian insolvency law for intellectual property rights (IP). On November 1, 2019, those changes came into effect. This change was part of the Canadian 2019 Budget. In Brandon’s Blog, I will discuss what the changes are and why they were made.

Insolvency law amendments for IP in Canada

Amendments relating to how IP is treated under Canadian insolvency law were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) and the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) was made. The BIA controls liquidations and restructurings for people and companies, and the CCAA covers large company restructurings.

The changes are meant to shield IP user rights in cases where the IP licensor becomes insolvent.

The BIA, as well as CCAA changes in the Budget Implementation Act, 2019, No. 1, are intended to improve retired life protection by making the insolvency procedure fairer and much more clear.

Previous Canadian IP insolvency law

Previously, Canadian insolvency law only explicitly dealt with IP in restructuring proceedings. Both the BIA and the CCAA allows for a debtor to disclaim or resiliate agreements. There are certain conditions that the debtor business must meet. This essentially boils down to being able to prove that the agreement in question is either so onerous and/or costly to the debtor business, that a successful restructuring is impossible if the debtor must continue honouring that agreement.

Specifically, as it relates to IP, the BIA, and CCAA if a debtor who is a licensor under an IP agreement disclaims the agreement, the licensee has rights. The licensee can continue to use the IP and gain all benefits it had bargained for, as long as the licensee continues to perform its responsibilities under the IP agreement concerning the use of that IP.

There was no such equivalent section for the receivership or bankruptcy of the debtor. So, if there was a liquidation, the licensee was not protected the same way they would be if the licensor debtor business disclaimed the agreement in financial restructuring.

Insolvency law reform

The amendments in Budget Implementation Act, 2018, No. 2 were done to protect copyright (IP) individual rights in situations where the IP licensor comes to be insolvent.

Effective for all filings beginning on November 1, 2019, or later, there are changes to the BIA and the CCAA, Canada’s main insolvency statutes. The November 1 amendments are done so that the rights of a licensee under an IP agreement where the licensor has disclaimed the agreement will be the same in a financial restructuring or a liquidation through either receivership or bankruptcy.

The following modifications accomplish the goal of safeguarding IP customer’s rights in instances where the IP licensor ends up being insolvent:

Many times as part of a corporate restructuring, the Court authorizes the company that filed a Notice of Intention To Make a Proposal, or a Proposal, to sell assets. The new amendments now make it so that if the corporation being restructured is the licensor under an IP agreement and sells it, the licensee retains its rights to use the IP, as long as they are and stay current under the agreement.
If a bankruptcy trustee (now called a licensed insolvency trustee) (Trustee) administering the bankruptcy (or receivership) of a licensor under an IP agreement sells the agreement, the licensee retains its rights under that agreement. Again, the licensee must be current in its obligations to continue enjoying the benefit of the IP agreement.
The Trustee disclaims the debtor licensor’s interest in an IP agreement as part of a bankruptcy (or receivership) administration. The licensee will continue to enjoy the rights and benefits of the IP agreement as long as it is current in all of its responsibilities under that same agreement.
If that IP is sold in a CCAA restructuring, the CCAA legislation has now been amended, for administrations that began after October 31, 2019, offers that an IP licensee in excellent standing can continue to utilize the IP.

Proposed BIA wording for IP insolvency proceedings

These are new amendments. There have not been any court decisions on these new amendments yet. The new legislation is not available yet as far as I know. However, my understanding is that the BIA will be amended, in part, to implement the changes concerning IP agreements as I have discussed, along the following lines:

“Intellectual property — sale or disposition

246.1 (1) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property that is included in a sale or disposition by the receiver, that sale or disposition does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

Intellectual property — disclaimer or resiliation

(2) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property, the disclaimer or resiliation of that agreement by the receiver does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.”

Summary

I hope you enjoyed this Brandon’s Blog on the insolvency amendments effective November 1, 2019. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

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

Tags Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy trustee, BIA, CCAA, Companies’ Creditors Arrangement Act, corporate restructuring, financial restructuring, insolvency, insolvency law, insolvency law canada amendments, insolvency law reform, intellectual property rights, Ira Smith Trustee, licensed insolvency trustee, notice of intention to make a proposal, proposal, receivership, trustee

Brandon Blog Post

STUDENT LOAN BANKRUPTCY DISCHARGE CANADA: REGISTRAR STRONG DECISION REVERSED

Post author By Brandon Smith
Post date October 30, 2019

Introduction

Last month, I wrote about the decision in the decision of the Registrar in Bankruptcy sitting in the Court of Queen’s Bench of Alberta in Edmonton. The case, Morrison (Re), 2019 ABQB 521, dealt with the issue of student loan bankruptcy discharge Canada.

What happens to student loans if you declare bankruptcy?

This was an application according to s. 178( 1.1) of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). As a whole, student loans cannot be released by a bankruptcy discharge where the date of bankruptcy took place within seven years after the day on which the bankrupt ceased to be a full time or part-time student.

However, Section 178( 1.1) of the BIA, permits after 5 years after the day on which the bankrupt, with student loan debt ceases to be a part-time or full-time student, the Court may, on an application, order that such financial debt will be released. For such Canada student loan forgiveness, the Court needs to be assured that:

the bankrupt person has really acted in good faith about their commitments under their student debt loan agreement
the bankrupt will remain to experience financial difficulty to such an extent that the bankrupt will be unable to pay that financial debt

The appeal of the Registrar’s decision

I won’t go into all of the details leading up to Ms. Morrison’s bankruptcy. If you want to read about it, check out my September 4, 2019, Brandon’s Blog, CANADA STUDENT LOAN FORGIVENESS: BANKRUPTCY TREATS STUDENT LOANS FAIRLY.

The Registrar discovered that the timing of when Ms. Morrison filed for bankruptcy compared to the seven-year cut-off was very close. The bankrupt’s key interest and her intent at the time of meeting with the Trustee were to get a discharge from all of her creditors on equal ground. The Registrar decided that Ms. Morrison did not seek bankruptcy to avoid only her student loan debt but rather to deal with every one of her debt problems.

There was obviously miscommunication between Ms. Morrison and her Trustee. The problem was that the miscommunication aggravated her specified objective.

The federal government did not oppose the discharge. The Registrar decided that her student loan debt should be discharged. He made a conditional order of discharge taking everything, including her surplus income, into consideration.

Both Canada Student Loans (CSL), as well as Ontario Student Loans (OSL), appealed the Registrar’s decision to a Judge of the Court of Queen’s Bench of Alberta. The reason OSL was involved was that her education was in Ontario. She later moved to Alberta to pursue work opportunities.

The Commercial Court’s review of a Registrar’s decision

The Judge first considered what is the proper criteria he needs to use. He determined that when it comes to the Commercial Court’s review of a Registrar’s decision, the Judge stated that the criteria that need to be followed are:

findings of fact are deserving of deference unless there is an overriding and palpable error;
questions of the law and matters of principle are reviewed on the standard of accuracy and correctness;
concerns of mixed fact and law exist along within a range in between the above 2 requirements;
a mistake in characterizing or thinking about the correct legal examination to be used attracts accuracy; and
in order to disrupt a discretionary determination, the reviewing Court needs to discover that the Registrar erred in principle or in law or failed to think about an appropriate aspect or took into consideration an inappropriate factor, resulting in a wrong conclusion, thus allowing the assessing Court to use its discretion to replace the Registrar’s findings.

The Judge’s review of the Registrar’s decision

The provision of the BIA that Ms. Morrison applied under is Section 178(1.1) of the BIA. That section states:

“Court may order non-application of subsection (1):

(1.1) At any time after five years after the day on which a bankrupt who has a debt referred to in paragraph (1)(g) or (g.1) ceases to be a full- or part-time student or an eligible apprentice, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that

(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and

(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.”

The Judge stated that as the legislation indicates, the determination of whether either of the called for parts of “good faith” and “financial difficulty” is established is contextual and fact-specific. It is based upon considering all aspects of the particular situation. Also if pleased that the requisite elements are present, the Court still maintains a discretion to decline the granting of such relief.

Can you put student loan on bankruptcy – Good faith

The Registrar’s finding was that Ms. Morrison’s actions evidenced an underlying behaviour of good faith but that objective was overborne by life getting in her way. The Judge accepted the part that life got in her way might be real in regard to the very early post-student years of 2008-2014. However, he decided that starting in 2014 she began to make a relatively decent living, yet made no effort to start to repay her student loan debt.

The Judge analyzed Ms. Morrison’s behaviour once she started earning a better income in 2014 and her statements concerning why she filed for bankruptcy. He also remarked that it was plain from her rancour and annoyance directed at her Trustee because her strategy to have bankruptcy free her from her student loan debt failed. She felt the Trustee did not advise her properly on the timing of the bankruptcy as related to when she ceased to be a full-time or part-time student. She was upset that she had this student loan bankruptcy discharge Canada issue.

The Judge then reviewed what are the things he must consider in trying to determine good faith. He stated that the relevant cases suggest, good faith that has to be shown in order for the application to succeed connects to the loan, not the bankrupt’s general behaviour throughout the bankruptcy. He said the things he must consider are as follows:

whether the student loan financing was used for the desired purpose;
did the person complete the financed education;
has the education obtained provide financial gain to the bankrupt;
were reasonable attempts made to clear up the student financial debts;
has the person actually used available alternatives, such as interest relief or loan remission;
the timing of the bankruptcy;
do the student loan debt comprise a considerable component of the total debt;
did the applicant get enough work and earnings to be reasonably expected to make payments on the loan;
the way of life of the applicant;
whether the applicant had adequate income for there to be surplus income under the Superintendent of Bankruptcy’s directive;
what offers the bankrupt might have made to the lending administrators and their reactions; as well as
whether the bankrupt was hampered at any time with health problems which would have either reduced the amount the person could work or entirely eliminate the possibility of working.

In weighing all these factors, the Judge was of the view that what counted against Ms. Morrison was her absence of initiative in attempting to repay the debt on some basis. The Judge also found that, notwithstanding that Ms. Morrison has struggled both personally and financially, and had a run of rotten luck, this could not excuse her from failing to make any attempt to repay the student loans.

Therefore, the Judge disagreed with the Registrar. He found that she did not meet the test of acting in good faith.

How can I get my student loans forgiven in Canada – financial difficulty

Both CSL and also OSL contended that financial difficulty, unlike the Registrar’s conclusion, has not been proven as Ms. Morrison’s own evidence shows she has the ability to make some repayment towards the debt. CSL likewise suggested that the Registrar decreased the statutory limit for financial difficulty by finding that the evidence need only show that settlement will provide a hardship to her rather than revealing the bankrupt will be unable to pay the debt.

Section 178(1.1)(b) of the BIA states regarding financial difficulty:

“the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.”

The Judge took this section to indicate that, for the present as well as in the foreseeable future, the bankrupt’s financial position will not allow them to genuinely both pay their debts and subsist in an affordable method.

Therefore, in His Honour’s view, the idea of a settlement of student debt may well entail some challenges or hardship. It is just when the difficulty would deny an individual a level of practical subsistence that the “financial difficulty” aspect of this section comes into play.

Student loan debt Canada forgiveness – The decision on appeal

The Judge agreed with CSL that the Registrar had lowered the bar on the determination of financial difficulty from what is intended in the BIA. He also found that Ms. Morrison has some capacity to make some contribution towards retiring the student loan debts concerned. The evidence also showed that CSL and OSL were open to some sort of repayment offer.

Accordingly, the Judge determined that the demands of s 178( 1.1) have actually not been met by Ms. Morrison and her original application is unsuccessful. Therefore, he reversed the Registrar’s decision and allowed the appeal of CSL and OSL.

The Judge further ordered that she is, nevertheless, at liberty to make a re-application (in this bankruptcy) no earlier than one year from the date of his decision. He further stated that any re-application will need to be supported by proof of good faith in relation to any kind of settlement to either CSL or OSL as well as her full disclosure of her financial position at that time.

The Judge said he did not wish to “pile on”, so he did not order any costs to be paid.

Student loan bankruptcy discharge Canada summary

I hope that you have found this student loan bankruptcy discharge Canada information useful. Do you have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.

We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.

Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.

Tags Bankruptcy and Insolvency Act, BIA, can you put student loan on bankruptcy, canada student loans, commercial court, debt problems, financial difficulty, good faith, how can I get my student loans forgiven in Canada, Ira Smith Trustee, ontario student loans, registrar, student loan, student loan bankruptcy, student loan bankruptcy discharge canada, trustee, what happens to student loans if you declare bankruptcy

Brandon Blog Post

THE EASIEST WAY TO ACTUALLY LIKE WHAT IS A DIVISION i PROPOSAL ONTARIO

Post author By Brandon Smith
Post date October 28, 2019

If you would prefer to listen to an audio version of this what is a division i proposal Brandon’s Blog, please scroll to the bottom and click on the podcast

Introduction

Over recent times, I have been receiving increased inquiries as to what is a division i proposal. The purpose of this Brandon’s Blog is to explain what it is. No person or company actually likes to enter a restructuring process to avoid bankruptcy, so hopefully, this discussion will be helpful to those that really need it to appreciate why if necessary, it is actually easy to like it; especially a successful one!

What is a division i proposal?

Division I is one of the two divisions of Part III of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3). Division I is a restructuring provision. It is available to people who owe more than $250,000 and companies with any level of debt, in need of financial restructuring.

At the beginning of any consultation with an insolvent person or for an insolvent company, is to determine if a successful restructuring can be accomplished. If not, the only other realistic alternative is bankruptcy. A successful restructuring of a person will allow that person to keep the assets they wish to keep and can afford to hold onto.

A company that successfully restructures will continue to provide employment. The jobs that will be preserved are not only those of the company that restructures. Its continuing to do business with suppliers who continue to do business with the restructured company will also avoid layoffs or terminations of their own staff. The reason for this is that their own volumes will not decrease, or decrease as much as if its customers went bankrupt and could no longer buy from them.

How do I start a restructuring plan for a person?

The first thing the insolvent person or company needs to do is hire a licensed insolvency trustee (LIT) (formerly called a trustee in bankruptcy). The reason why is because a LIT is the only one in Canada authorized to administer a restructuring proposal.

The LIT will discuss with the insolvent person about the nature of his or her assets and liabilities. Which assets are financed and which are owned free and clear. There will also be a frank analysis and discussion of the person’s income and expenses. The reason for this is to do preliminary credit counselling to help the person recognize how their historical household budget (whether they actually knew it or not) needs to change. Is there room in a new solvent budget to pay for an expensive asset, or does it need to be replaced by a less expensive one? A leased or financed auto is a prime example.

I want to make that determination upfront because a financed asset given up before the debt is fully repaid will create an acceleration of the full amount of that liability claim. I will want to make sure that it is done the right way, so the new accelerated liability will be caught as a debt being compromised, not a post-filing debt not caught in the financial restructuring.

Once the issues have been identified and the realistic options identified, I will then want to work with the person to put together a realistic post-filing cash flow budget. There are three main reasons for this, being:

I want to make sure that there is a budget that shows the person’s monthly expenses will be no more than, and hopefully less than, their monthly after-tax income.
We must be sure that the monthly cash flow shows the person can afford the monthly payments to the LIT required to have a successful restructuring.
One step needed to have a successful restructuring is to have such a monthly cash flow budget signed off by both the insolvent person and the LIT showing the person can survive through and afford a successful restructuring. Any creditor can request to see a copy of that signed off cash flow budget.

How do I start a corporate restructuring plan for a company?

The initial step in any corporate restructuring is for the board of directors to recognize and also resolve that the company is insolvent, that it needs to reorganize under this part of the BIA and to approve the hiring of a LIT.

I described the consultation process I first go through with a person to determine if they can successfully complete a restructuring proposal and then to start developing it. Similarly, I go through a consultation process with the senior management of the company.

I first want to determine if we have the basic requirement for a successful corporate restructuring. That basic requirement is, the company’s business, or one or more portions of the business, must be viable, notwithstanding that it is insolvent. There must be a true demand for the business and that it will be able to operate successfully once its financial position is right-sized. It may be the whole business, or it may be the case that we need to use the restructuring process to cut away the dead business units, in order to allow the viable one to survive and ultimately flourish.

By its nature, corporate restructuring is more complex than a personal one. There are many more moving parts to a company. However, the basic analysis is similar. What are the assets and liabilities of the company? Which business units are capable of being operated profitably? Which assets that are financed are essential to the future of the restructured company. Which are redundant and must be jettisoned. How will all the answers to these questions affect the company’s labour force? How many jobs will be lost and how many will be saved?

Ultimately, all these answers must be compiled into a cash flow statement. We must know does the company have sufficient financing or funds available to it so that it can properly operate during the restructuring process. There is no point in starting a restructuring if the company cannot survive the restructuring period. What will the company’s post-restructuring cash flow look like? We want to know that answer also to make sure that there is a real business that can operate profitably after coming out of the restructuring process. Just like in a personal financial restructuring, the company and the LIT must sign off on a realistic cash flow budget to show that the company can operate and survive the restructuring process.

What if the person or company needs immediate protection but is not ready to file the real proposal yet?

Just like in a bankruptcy, the filing of a Proposal brings in an immediate stay of proceedings. What this means is that no creditor can either begin or continue any action against the person or company for the enforcement or collection of a debt. Sometimes the insolvent debtor is under attack from a creditor.

Examples of proceedings against a person or company need protection from are numerous. The more standard ones are:

They need to defend a lawsuit but can’t afford the cost and therefore a default judgment is about to be issued.
Attendance is required at a judgment debtor examination to disclose the nature and whereabouts of their assets.
The Sheriff may be seizing an asset that if successful, it will stop the person or company from conducting business.

The BIA provides a way for an insolvent debtor under such an attack to invoke a stay of proceedings before they are ready to file their formal restructuring plan. That option is to first file what is called a Notice of Intention To Make A Proposal (NOI). This is a BIA filing that serves as a notification to the creditors that the debtor will certainly be making a restructuring proposal but it needs to have the stay of proceedings start right now.

How the concept of NOI evolved is very interesting. Before the 1992 amendments to the BIA, there was no such thing as an NOI. However, people and companies needed to invoke an immediate stay of proceedings, but the BIA did not contain such provisions. So, what was done, is that the LIT would prepare what was called a holding proposal. All the proposal said was that I promise to file a real restructuring proposal as soon as possible. That holding proposal was then filed which brought on a stay of proceedings.

Paperwork and procedures

The LIT needs to be satisfied that: (i) all the relevant details have been gotten; (ii) the person or company has a likelihood of a successful proposal restructuring; as well as (iii) the person’s or company’s cash flow is enough that it can pay its ongoing post-filing debts through the restructuring process.

The LIT then assists the insolvent debtor in completing the necessary paperwork. The LIT also prepares its own report. The LIT then does a mailing to all known creditors to advise them of the filing of the Proposal, a means by which they can file their claim with the LIT and a description of what the process is and what it all means. The documents are:

the Proposal
a statement of the person’s or company’s assets and liabilities
a listing of creditors
the form 31 proof of claim
the voting letter
LIT’s report on the insolvent debtor, the Proposal and the LIT’s recommendation for voting in favour of (or against) acceptance of the Proposal

The meeting of creditors is then held to allow the creditors to vote on the Proposal. If the Proposal is accepted by the required majority of the creditors, then the LIT applies to Court for approval of the Proposal. Once approved by the Court, it forms a contract between the debtor and the creditors is formed. The person or company then needs to perform the promises it made in the Proposal to its creditors. This, of course, includes paying the necessary funding to the LIT for distribution to the creditors.

Executing on the Proposal promise

The Proposal of a person will require that insolvent debtor to make monthly payments to the LIT. The payments are made out of the person’s monthly cash flow, as indicated in its budget. The person can take up to 60 months to fulfill the promise of payments to the LIT for distribution to the creditors.

A company carries out its Proposal as it continues its operations. It hopefully succeeds in operating profitably. The firm would be conserving a particular amount of its earnings in money and paying to the LIT what is needed under the company’s restructuring strategy to create the Proposal fund it promised. The LIT after that makes the distribution to the creditors called for in the restructuring plan. When all the payments have actually been made, the company has effectively reorganized and continues its business having successfully completed its restructuring.

What happens if a Proposal is unsuccessful?

This is a very simple question to answer. What is a division i proposal if not successful? It is called bankruptcy. If a restructuring plan does not get either acceptance by the necessary majority of creditors or approval by the Court, then the person or company is automatically bankrupt. If the person or company fails to make all the payments called for, that also creates an unsuccessful restructuring. In any of those cases, It is as if the insolvent debtor filed an assignment in bankruptcy.

In that case, the LIT administering the restructuring program becomes the LIT administering a bankruptcy.

What is a division 1 consumer proposal?

I have been asked this question several times. Firstly, there is no such thing as a division 1 consumer proposal, but there is such a thing as a consumer proposal. A consumer proposal is found in Part III Division II of the BIA. So, it is called either a division 2 proposal or a consumer proposal.

Is consumer proposal worth it?

Before being able to decide if a consumer proposal is worth it, we need to understand what a consumer proposal is. The same way I described what is a division i proposal, I need to describe a consumer proposal. The consumer proposal process is a streamlined version of the personal division i proposal already described. It is only for people and not companies. Further, the person cannot owe more than $250,000, not including any loans registered against the person’s home, such as a mortgage or home equity line of credit.

I have written many times about different issues concerning consumer proposals. Rather than repeating it in Brandon’s Blog, I recommend you read my earlier blogs on the consumer proposal topic. Some of the blogs I have written for ease of reference are:

Summary

I hope that I have adequately answered the question of what is a division i proposal and how you can like it. The honest answer is that no one really does. However, if it is necessary for you or your company’s survival, it becomes very easy to like it.

Do you or your company have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.

Brandon Blog Post

WHAT IS RECEIVERSHIP – CAN YOU UNDO A PROVEN RECEIVERSHIP ORDER?

Post author By Brandon Smith
Post date October 14, 2019

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

What is receivership: Introduction

Last spring I wrote about a Court of Appeal For Ontario decision. That decision confirmed that the time allowed to appeal a receivership Court order is 10 days under the Bankruptcy and Insolvency Act (Canada) (BIA).

This Brandon’s Blog on what is receivership discusses a decision of the Court of Appeal of Manitoba which further sets out a framework for anyone wishing to appeal an order made in this court-appointed receivership legal process. Prior to discussing this Manitoba case, I ought to go over some receiver 101 facts.

What is receivership?

What is receivership? A receivership is a solution for secured lenders, such as a chartered bank. The bank loans the company money and the company agrees in the loan agreement to pledge the business assets as security for the loan. If the business defaults on its lending arrangement, generally by non-payment, the secured lender can enforce its security against the assets in receivership.

This is the lender using its enforcement rights to recover its secured debt. Other than for a government trust claim, the secured creditor’s debt ranks on a priority basis above all other creditor claims. Enforcement action is definitely a form of legal action. So receivership is a remedy for secured creditors.

There are 2 types of receivers in Canada; 1) a privately appointed receiver or; 2) a court-appointed receivership. A receiver gets its authority and powers from either the security documents in a private appointment or the Court Order in a court appointment. Once appointed, regardless of the type of appointment, the receiver has the power to take possession of all the assets of the company, including sending notices to all customers to advise that the receiver is now collecting the accounts receivable.

The BIA specifies that only a licensed insolvency trustee (previously called a bankruptcy trustee or also can be called a licensed insolvency practitioner) (LIT) can serve as a receiver. A receiver in a private appointment acts on behalf of the appointing secured creditor. A court-appointed receivership creates a responsibility to all creditors upon the court’s receiver, not just the applicant in the court process. This would include any unsecured creditor also. The BIA also requires the receiver to do file notice of its appointment with the Official Receiver at the Office of the Superintendent of Bankruptcy and to send the required statutory notice to all known creditors.

What is a company receivership?

Normally, the procedure starts with the secured creditor, who lent money to a company under a security agreement, talking to the insolvency trustee. The security document tends to secure all company assets, including accounts receivable.

When it is decided that there ought to be a receiver designated, the secured lender needs to decide if it will be a private appointment, or if the assistance of the Court is required. Each situation will dictate what is the best method for receivership. They can either appoint the receiver under an appointment letter (private appointed) or apply to the Court for an Order selecting the receiver (court-appointed receivership). So when considering what is receivership, you must look at all the circumstances and decide what kind of appointment is needed.

what is receivership

As a former employee, what am I entitled to? The Wage Earner Protection Program

Upon a company going into receivership (or bankruptcy), the LIT is obliged to inform workers of the Wage Earner Protection Program (WEPP) as well as offer former employees information about amounts owing to them. From the day of bankruptcy or receivership, trustees and also receivers have 45 days to send out Trustee Information Forms showing the amounts owing to workers. WEPP is administered by Service Canada.

Employees have 56 days to send their Service Canada WEPP application to the WEPP. The Service Canada handling time for a WEPP payment is within 35 days of receipt of a completed WEPP Canada application and Trustee Information Form.

The WEPP gives funds to Canadian former staff members owed money when their employer becomes either bankrupt or goes into receivership. The amount of employee earnings covered is an amount equivalent to 7 times maximum regular insurable earnings under the Employment Insurance Act.

As of January 1, 2020, the max yearly insurable earnings amount is $54,200. This means that the max amount a previous worker can assert under WEPP is $7,296.17 in 2020. A certain portion is a trust claim and the balance is an ordinary claim. Normally, the receiver makes at least the trust claim payment to the former employees. Service Canada will pay the balance.

So in what is receivership, if the receiver does not pay the trust claim, Service Canada will and bill it back to the receiver. This all takes time and will increase the cost of administration. That is why the receiver normally pays the trust portion directly.

What is receivership: Receivers and receiverships

In a private receivership, the receiver needs to get the approval of the party that made the secured loan and appointed the receiver prior to implementing its recommended action steps. In a court-appointed receivership, the receiver needs the authorization of the court for its activities and actions.

The receiver’s very first responsibility is to take possession and control of the assets, properties and undertaking of the company in receivership. In a private appointment, the receiver takes possession of the assets covered by the secured creditor’s security agreement. In a court-appointed receivership, the receiver takes possession of whatever assets it has authority over from the Court Order.

The receiver has to make a decision whether it can obtain a better value for the business asses if it runs the business. Conversely, the receiver might determine that the danger of running the business negates any potential upside in value. In that case, the receiver would not operate the business and merely liquidate the assets.

The receiver after that establishes a strategy for the sale of assets. The receiver also has to make sure that the assets are physically secured and insured. The what is receivership process is fairly complex and all-encompassing.

The receiver, whether in a private appointment or a court appointment, has wide powers to perform its duties.

What is receivership: Challenging a receivership appointment Court Order

On September 19, 2019, the Court of Appeal of Manitoba released its decision in 7451190 Manitoba Ltd v CWB Maxium Financial Inc et al, 2019 MBCA 95. On December 20, 2018, the Court made an Order appointing a receiver (Receivership Order) over the assets of 7451190 Manitoba Ltd. (Company). The Order was made upon the application to Court by the lender who made the secured loan.

On January 14, 2019, the Company launched an appeal to the Receivership Order. The secured lender opposed the appeal on 2 main grounds, being:

the company did not have an appeal as of right, rather, it requires to seek leave to appeal first (which should be declined); and
the appeal was statute-barred as it was not submitted within 10 days of the Appointment Order appealed from.

The issues the Appeal Court needed to consider were::

whether the nature of the Company’s appeal of the Appointment Order in what is receivership requires an application for leave or if it is a right under Section 193 of the BIA;
if the leave to appeal is necessary, should such leave be provided;
whether the Company should be given more time to submit its notice of appeal.
what is receivership

What is receivership: Appealing a business receivership Court Order

So the first issue the Court had to consider in what is receivership was whether or not the Company had an appeal of the receivership Order as a right, or if it needed to first apply to the Court with leave to appeal motion. The Court determined that the Company’s appeal of the receivership Appointment Order is not of right. Rather, leave to appeal needed to be made.

The things that the Appeal Court considered in making its determination included that:

The security documents entered into by the Company clearly outlined the lender’s remedy to appoint a receiver when there was an event of default.
The company was represented and made submissions against the appointment of a receiver at the initial hearing where the Appointment Order was made.
The Appointment Order contained the necessary “comeback clause”. No party made an application under this clause to amend the powers of the receiver under the Appointment Order.
Since appointed, the receiver has actually filed two reports with the Court. The reports notified all stakeholders and the Court of the decisions taken and choices made. The receiver also sought approval of different activities. The Company has actually not filed any type of motion challenging the actions taken by the receiver.

Should leave to appeal the appointment of the receiver-manager be granted?

Section 193 of the BIA allows that an appeal lies to the Court of Appeal from any kind of order of a judge of the court in certain situations. The Court confirmed that the criteria to think about in making a decision whether to give leave to appeal under section 193(e) of the BIA are:

The suggested appeal raises an issue of general importance to the practice of bankruptcy/insolvency matters or to the administration of justice as a whole.
The issue raised is of relevance to the action itself.
The proposed appeal is prima facie meritorious.
Whether the suggested appeal will unduly hinder the progression of the bankruptcy/insolvency case.

The Court went on to say that, regardless of these criteria, the Court retains a residual discretion to grant leave to appeal in what is receivership where the refusal to do so would result in oppression.

When the Court considered these requirements, taking into consideration the whole context, the Court was not persuaded to grant the Company leave to appeal the receivership order.

The Court determined that in this case, the Company’s appeal should be denied. This Court of Appeal of Manitoba is consistent with the Court of Appeal for Ontario case that I mentioned at the top of this Brandon’s Blog and previously wrote about. It also provided additional detail and reasons as to why appealing a receivership order is not a right, but leave to appeal needs to be granted.

What is receivership: Summary

I hope you enjoyed this what is receivership Brandon’s Blog. Is your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the business owner entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides an income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we dealt with this problem and devised a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

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

what is receivership

Brandon Blog Post

TRUSTEE COMPANY RESPONSIBILITY IN REVIEWING BANKRUPTCY PROOF OF CLAIM

Post author By Brandon Smith
Post date September 25, 2019

Introduction

I recently read a case from the Court of Queen’s Bench of Manitoba. The decision deals with the responsibility of a trustee company in reviewing and disallowing bankruptcy proofs of claim.

The case

The case citation is Re 5274398 Manitoba Ltd. o/a Cross Country Manufacturing (Bankrupt) 2019 MBQB 89. This is an appeal of Bellhop Express Corp. (“Bellhop”) from the Notification of Disallowance of Claim by the licensed insolvency trustee (formerly called a trustee in bankruptcy) (Trustee). 5274398 Manitoba Ltd. operating as Cross Nation Production (the Company) filed a Proposal under Division I Part III of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA).

On February 6, 2018, a creditors meeting was held in Winnipeg at which time the creditors of the Company, existing in person or by proxy, elected to approve the proposal. On February 5, 2018, the day prior to the meeting, Bellhop sent its Proof of Claim and also registered its ballot voting down the Proposal.

The Trustee disallowed the Bellhop Proof of Claim for voting. The Trustee also did not count Bellhop’s vote against in the calculation in whether the Proposal received the required majority of creditors.

The Court approved the Proposal. After Court approval, the Trustee again reviewed Bellhop’s Proof of Claim. On September 10, 2018, the Trustee sent a formal Form 77—Notice of Disallowance of Claim, Right to Priority or Security or Notice of Valuation of Claim to Bellman.

Bellhop appealed the Trustee’s decision to the Court. Their right to do so is found in Section 135 of the BIA.

The appeal

In the Canadian bankruptcy system, the obligation to prove a claim is that of the creditor. When a creditor files a Proof of Claim, the Trustee has the duty of examining it in order to identify whether the claim stands. If the Trustee is not pleased with the Proof of Claim, he or she might look for additional details from the creditor. The goal of the Trustee is to figure out whether the claim of the creditor is a claim provable under the BIA.

Once the Trustee has made its determination, the claim is either admitted or disallowed. If disallowed, in whole or in part, the Trustee must issue its disallowance using Form 77—Notice of Disallowance of Claim, Right to Priority or Security or Notice of Valuation of Claim. The creditor receiving such a Notice of Disallowance can appeal the Trustee’s decision to the Court.

In this case, before getting to the merits of the appeal, the Court had to decide if the creditor was allowed to present new evidence in support of its claim not previously provided to the Trustee. In this case, the Court decided that it would be appropriate for this new evidence to be presented.

The Trustee did not handle its investigation properly

The Court was prepared to approve additional Bellhop evidence. The Court said that the Trustee company got Bellhop’s Proof of Claim and made inquiries through the Company regarding it. It obtained specific information and made use of some or all of it. The Trustee then developed its Notice of Disallowance.

The Court was critical of the Trustee’s analysis of the Proof of Claim. The Court stated that the Trustee should have shared with Bellhop the information it obtained from the Company and the Company’s legal counsel which it relied upon to develop the Notice of Disallowance. The Trustee could have also shared a draft of its Notice of Disallowance to see if Bellhop had any other documents or information to refute the Trustee’s analysis. Unfortunately, no such transmittal of details was provided by the Trustee to Bellhop before the issuance of the Notice of Disallowance.

The Court went on to say that it was this failure to share such details, it denied Bellhop of the chance to comment on it. It also, therefore, created this situation where Bellhop had to seek leave of the Court for the chance to submit extra details.

The Court’s view was that a Trustee could prevent this situation by having telegraphed its decision to the plaintiff before the official Notice of Disallowance was issued. The Trustee should have asked for the Bellhop’s remarks of any type of, prior to providing its Notice. If the plaintiff failed to react, or react properly, after that it will certainly have a harder job in obtaining approval to provide more proof of its claim.

So under these circumstances, the Court allowed Bellhop to submit more evidence.

The review of the claim and the Trustee’s disallowance

It is a shame that the Trustee seemed to stop short of a fullsome review of all potential information before reaching its decision to disallow the Bellhop Proof of Claim. The reason being is that the Court spent a great deal of time having to determine the issue of presenting additional evidence. The Court was quite critical of the Trustee in its handling of the adjudication of the claim requiring the motion for leave to present more evidence.

In the end, the Court agreed with the Trustee’s decision to disallow the Bellhop claim. The Court held that the proof sent to the Trustee did not warrant a claim of $3,270,684, or anything near that. To reach a decision to allow the claim, part of which was for the loss of income, the Trustee would have to decide on an arbitrary basis. The role of the Trustee is to be neutral and rely upon evidence; not act arbitrarily.

The Court went on to say that there is a responsibility upon creditors in a BIA proceeding to equip a Trustee with sufficient proof that sustains the claim they are making. That did not happen in this case. The Court went on to say that additionally, there is no responsibility on a Trustee to sustain the cost of a substantial examination of a claim which on its face seems blatantly overvalued. Were that the situation, creditors would certainly be urged to submit extremely pumped up claims.

The far better strategy is to urge a circumstance where creditors file sensible claims with sufficient proof to sustain them. That way creditors ensure that the time, initiative, and expense of a Trustee to examine, analyze and value the claim is reasonable.

So in the end, the Court sided with the Trustee’s decision but admonished the Trustee for essentially wasting the Court’s time.

Trustee company summary

Do you or your business have creditors claiming against you? Are you in financial distress? Do you not have sufficient funds to pay your expenses as they come due?

Call the Ira Smith Team today so we can get rid of the tension, anxiousness, pain and discomfort from your life that your money issues have generated. With the unique roadmap, we establish simply for you, we will promptly return you right into a healthy and balanced problem-free life.

We have years as well as generations of experience helping people and businesses trying to find debt restructuring to avoid bankruptcy. You can have a no-cost evaluation so we can assist you to repair your financial difficulties.

As a Trustee company, we are the only experts recognized, approved and audited by the federal government to offer insolvency guidance and solutions. A proposal is a federal government accredited debt settlement strategy to remove your debt and let you avoid bankruptcy.

Call the Ira Smith Team today. This will definitely enable you to return to a brand-new healthy and balanced life, Starting Over, Starting Now.

Tags Bankruptcy, Bankruptcy and Insolvency Act, Bellhop Express Corp., BIA, court, form 31 proof of claim, Form 77—Notice of Disallowance of Claim, Ira Smith Trustee, licensed insolvency trustee, proof of claim, Re 5274398 Manitoba Ltd. o/a Cross Country Manufacturing (Bankrupt) 2019 MBQB 89, Right to Priority or Security or Notice of Valuation of Claim, trustee company, trustee in bankruptcy