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HOW HERTZ TEACHES US MODERN AND RISKY RULES OF BUSINESS BANKRUPTCY IN CANADA AND THE USA

business bankruptcy in canada
business bankruptcy in canada

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Business bankruptcy in Canada Introduction

Late in the day on Friday, May 22, 2020, Hertz Global Holdings Inc. (Hertz) filed for Chapter 11 bankruptcy in Delaware. The filing gives Hertz some breathing room to operate its business. During this time, Hertz also needs to come up with a business turnaround plan and a debt restructuring plan that creditors can support. The movement of Hertz stock last week teaches us some modern and risky rules of business bankruptcy in Canada and the United States.

Corporate bankruptcies and the Hertz investors

Hertz stock closed on the NASDAQ exchange on May 22 at US$2.84. It dipped to a low of US$0.40 on May 26. Legendary investor Carl Icahn sold all of his Hertz shares at an average price of $0.72. He dumped his 39% stake in Hertz at a loss of nearly $2 billion. Last Friday Hertz shares closed at US$2.57 per share. This morning, the trading touched US$3.40 per share.

So Hertz is up handsomely since May 26. Hertz has filed for bankruptcy protection. It doesn’t make sense that investors should be pushing the stock up. Hertz is selling off its fleet and further depressing the used car market. So far there is no indication that a business plan and debt reduction plan has been developed, let alone accepted by the creditors.

As far as assets, they have locations and a database of customers. But every major rental car company also has locations and a database. Whenever business and leisure travel resumes to pre-COVID-19 levels, if you can’t rent a car from Hertz you will rent it from a different company. So what are the non-fleet assets worth?

So on the surface, the investor money finding a home in Hertz stock and pushing up the stock price doesn’t make sense. So, are there savvy investors getting into Hertz or are they all just following the herd and will all end up losers?

Why Hertz filed for Chapter 11 bankruptcy protection

Since 2014, Hertz has had four different CEOs. It is difficult to develop and implement a cohesive business strategy with such turmoil in the senior management ranks. As the coronavirus pandemic brought travelling to a sudden halt, Hertz suffered dramatically as a mass of its revenue depended on business travellers and vacationers renting vehicles when arriving at their destination airport. Nobody knows how long it will take until travel gets back to where it was and what Hertz needs it to be.

Hertz’s debt has been increasing as it invested heavily in its vehicle fleet. They may have also missed the mark in the mix of vehicles consumers want, requiring it to take on even more debt to make further fleet purchases. Hertz could no longer afford to make the interest payments on its debt load. At the time of its bankruptcy filing, Hertz had US$1 billion of cash and US$13 billion of debt.

The $13 billion in financing Hertz made use of to acquire its fleet of 500,000 automobiles. The financing was done via what is known as asset-backed securities. These are connected straight to the value of the vehicles. When the value of the cars drops, Hertz must make up the difference in cash within about three months, unless values rebound before that time.

However, with the coronavirus pounding the brakes on the economy and eliminating employment for so many, the drop in the value of used vehicles is expected to remain that way for a long time. Hertz knew that it could not make up the difference to its lenders when they made a demand, which was their right. Hence the bankruptcy filing.

The modern risky rules of investing in business bankruptcy in Canada and the USA

Normally, in a public company restructuring, it is not only the creditors that take a hit. Shareholders usually get a good drubbing. Share values fall and new shares are issued to raise capital. This further dilutes the holdings and value of those holdings for shareholders. But investors must believe that Hertz will come back. How else can you explain the surge in the share price?

Before this year, the company had ten consecutive quarters of positive growth. They were still losing money, just not as much. Investors must believe that Hertz will be able to survive. They must believe that the company although leaner and smaller, this is the time to jump on an opportunity to make money.

I am not a financial advisor, I am not saying whether this is a good or bad investment. It certainly is a very risky one. All I am saying is that as a licensed insolvency trustee (formerly called a trustee in bankruptcy) administering business bankruptcy in Canada, this does not make any sense to me.

I guess only time will tell if these investors pushing up the stock price are insightful risk-takers or losers. Carl Icahn doesn’t believe it.

Business bankruptcy in Canada and the USA summary

I hope you have found this business bankruptcy in Canada and the USA Brandon’s Blog helpful.

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

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

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

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

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

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

Stay healthy, well balanced and safe and secure everyone.

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CAN YOU FILE PERSONAL AND CORPORATE BANKRUPTCY? SMALL BUSINESS OPTIONS

Can you file personal and corporate bankruptcy: Introduction

Can you file personal and corporate bankruptcy is a question all small business owners ask us when they come to our office for a free consultation. We discuss local business bankruptcy with entrepreneurs in our office. Their personal and business lives are intertwined. There’s very little distinction between the individual their small business.

This is especially true if their business in unincorporated and is being operated as a proprietorship. Our role is to first understand them as a person and as a business separately. This way we can give the best possible advice. If the business is a proprietorship, then we are only talking personal bankruptcy, or alternatives to avoid bankruptcy, such as a consumer proposal or restructuring proposal.

If their business legal form is that of a corporation, then we look at both the corporate and personal issues separately. The reason for this is because in the eyes of the law, the corporation and the individual are separate people. Many times it is not necessary for both the corporation and the individual to each file an insolvency process. Maybe only one has to.

Separating your business and personal assets and liabilities is a great reason for incorporating your business. When discussing bankrupting an incorporated company, we also need to consider if there are any Director liabilities. We must also consider the owner’s personal situation. This is so we can make sure they do not do themselves more personal harm than good. We also first look to see if there is a way to restructure and save the corporation.

Can you file personal and corporate bankruptcy: What is bankruptcy

Bankruptcy is a lawful method for the honest but unfortunate company or person to get a remedy from the burden of the financial debts that cannot be repaid. When an assignment in bankruptcy is submitted a “stay of proceedings” is invoked.

What the stay of proceedings means

The stay of proceedings results in stopping creditors from beginning or continuing with litigation against the company or person. The stay of proceedings also stops an unsecured creditor who has obtained a judgement. It stops them from garnishing funds from a bank account or part of the person’s wages.

For unsecured creditors, the stay of proceedings also calls a timeout to make sure that one unsecured creditor does not get a benefit over others in regards to the settlement of financial obligations. Keep in mind that the bankruptcy process could also be started by one or more unsecured creditors. They must be owed at least $1,000 in total.

can you file personal and corporate bankruptcy

Can creditors push you into bankruptcy?

The unsecured creditor(s) could file a motion with the Court requesting that a Bankruptcy Order be issued against the company or person. The method of bankrupting a corporation in Canada is the same as that of a person. In addition to being able to prove that the company or person owes this unsecured creditor or group at least $1,000, they also need to prove that at least one act of bankruptcy has been committed in the 6 months prior to the filing of the motion.

The Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) identifies the various acts of bankruptcy. The most common one is “ceases to meet his liabilities generally as they become due”.

Secured creditors are generally not impacted by bankruptcy. They can realize upon the assets of the company or person covered by the security. In return for the original loan, the lender required that the borrower put up the security as a condition of the loan. The reason for this was so that if insolvency happens, the lender could sell the assets to try to repay the loan, interest and costs.

The secured creditor only really takes part in the bankruptcy process if after they have sold all the assets covered by their security, they are still owed money. The balance they are still owed is an unsecured debt.

Personal bankruptcy

If an individual’s business is a single proprietorship or a partnership, but not a corporation, legally, the person or people are also the business. So when they deal with the possibility of bankruptcy, all their assets are included, subject to provincial exemptions. Simply put, the assets of the business are not held different from their individual assets, so a small business bankruptcy of this kind is personal bankruptcy.

Where does Canada Revenue Agency fit in?

There are generally 3 types of claims that Canada Revenue Agency (CRA) has against a business. It does not matter if the business is incorporated or is a sole proprietorship.

The 3 kinds of CRA claims generally are:

  1. Unremitted source deductions from employee payroll
  2. Net HST owing
  3. Unpaid income tax from profitable years

Both the HST liability and income tax, in a bankruptcy, is an unsecured claim. However, the HST liability is also a personal claim against the Director(s) of a corporation. Unremitted source deductions are both a deemed trust claim against the bankrupt’s assets and in the case of a corporation, a personal claim against the Director(s) of the company.

When we do our first consultation with a business owner, when the business is run in a corporation, whenever unremitted source deductions or HST is involved, this always leads to a talk about the person’s situation in the event CRA would make a claim against the Director.

Some bankruptcy statistics

According to the Office of the Superintendent of Bankruptcy Canada, for the 12 months ending September 30, 2017, there were 125,912 insolvencies in Canada. This is a decrease of 3% over the same time period a year earlier. Consumer insolvency filings were 122,296 or 97.1% of total filings. The consumer filings were split into 59,192 bankruptcies and 63,104 consumer proposals – roughly half and half.

Business insolvency filings for the same time period in all of Canada totalled 3,616, a decrease of 8.1% from the 12 month period one year earlier. Business insolvency filings were split into 2,719 bankruptcies and 897 proposals. These statistics do not include filings by very large corporations under the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36).

As you can see, for a country the size of Canada, there were not a lot of business insolvencies during the first 9 months of 2017. The consumer filings were split roughly even between bankruptcy and a consumer proposal, the best consumer bankruptcy alternative.

Alternatives to Declaring Bankruptcy

A consumer proposal entails paying back a part of your financial debts in return for your unsecured creditors forgiving the remaining balance owing. A consumer proposal provides a significant benefit for a proprietor or partner in an unincorporated business. Unlike in a bankruptcy, your assets are not available for seizure by the licensed insolvency trustee (LIT).

You can take up to 60 months to pay off your consumer proposal. How much you will have to offer your creditors depends on what the unsecured creditors could expect in your bankruptcy. Working with a LIT, you work out that amount through discussion and analysis. A LIT can explain the entire process to you.

From a financial viewpoint, a consumer proposal is better than your bankruptcy because it permits the unsecured creditors to recoup a larger part of the debt than they would receive in your bankruptcy.

What is best for you and your business?

If you find you or your business is in a financial danger zone, contact Ira Smith Trustee & Receiver Inc. We’re full-service insolvency and financial restructuring practice serving companies and people throughout the Greater Toronto Area (GTA) facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now.

Your financial problems can be solved with immediate action and the right plan. Give us a call today.

can you file personal and corporate bankruptcy
can you file personal and corporate bankruptcy
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Brandon Blog Post

TORONTO BUSINESS BANKRUPTCY: NDP WANTS PENSION PROTECTION

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Toronto business bankruptcy protection: Introduction

The federal NDP party recently met in Hamilton, just outside of the Greater Toronto Area. There was a rally to argue for federal government regulation changes to safeguard pensioners in business bankruptcy and restructuring administrations.

Toronto business bankruptcy protection: Proposed NDP private member’s bill

Hamilton Mountain MP Scott Duvall, the New Democrats’ pension plan critic, informed a group at the United Steelworkers’ Hall that he will certainly present a private member’s bill to secure employees’ pension plans and benefits, and pressure business to offer termination or severance pay, prior to paying secured lenders.

Toronto business bankruptcy protection: The U.S. Steel Canada saga

The concern has actually been a lengthy simmering one with unions and created significant debate throughout the almost three-year, court-supervised restructuring of U.S. Steel Canada. The company exited from its business bankruptcy protection proceedings with a brand-new owner– Bedrock Industries– as well as an old name, Stelco.

Pensioners were smarting. The court permitted the firm to put on hold health benefit repayments for a year and a half while the business was under bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA).

Generally, these advantages have been maintained by the reorganized business. Pensioners are fretting that a financing system to maintain the pension plan solvent will ultimately fail. It calls for, inter alia, extra Stelco land to be cleaned up, marketed and sold for the net sales proceeds to cover future pension plan commitments.

Toronto business bankruptcy protection: Sears Canada too

Duvall, with NDP leader Tom Mulcair, claimed one more instance of exactly how the regulations are unfair to employees. They cited the Sears Canada situation. Sears Canada remains in business bankruptcy protection. Its employees are encountering a potential decrease in their pension plan benefits.

Toronto business bankruptcy protection: Fairness for employees

They say this should have to do with justness for employees. The NDP wants to see a Canada that benefits every person as well as seeing to it that companies, including multinationals, cannot take the pension plans their employees have earned.

They state that the existing regulation permits funds that ought to go to employees’ pension plans to be given to the secured creditors instead. The NDP is especially concerned when the secured lender is the financially troubled or creditor-protected company’s parent company.

Stelco’s biggest secured lender was U.S. Steel in the United States. The $500 million restructuring saw the American firm get $130 million.

Toronto business bankruptcy protection: Pension plan funding should have first priority

The Duvall proposed private member’s bill would call for pension plans to be 100 percent funded prior to secured lenders being paid. Firms would certainly not be permitted to put on hold retirement benefits in court-supervised restructurings, which occurred with U.S. Steel Canada.

The NDP is calling their proposal “End Pension Theft”. It focuses on altering CCCA legislation as well as the Bankruptcy and Insolvency Act (BIA) to stop companies from placing investors, financial institutions and other lenders ahead of their staff members when they go into bankruptcy protection.

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Toronto business bankruptcy protection: Is there a comparable precedent for such an amendment

Yes there is – the enactment of the Wage Earner Protection Program Act (WEPPA). From 1975, proposals were proactively taken into consideration for the facility of a wage protection plan for when the bankruptcy, liquidation or receivership of a company. The many choices gone over for just how this could be attained consisted of:

  1. very top priority for wages;
  2. acknowledgment of existing provincial/territorial concerns within the BIA structure;
  3. a waiver of the waiting time for EI benefits; and
  4. a wage earner protection fund financed either from basic tax revenue or as a part of the EI coverage regimen.

In November 2003, the Senate Committee on Banking, Trade and Commerce examined the background of these conversations and chose

the alternative for a super priority be taken on. Although the BIA was amended in 2005, these changes did not quickly come into force, as many technical amendments were required to be passed in 2007. The WEPPA came into force on July 7, 2008.

The reason for the timing of creating the WEPPA was a result of NDP pressure put on the minority Liberal government of Prime Minister Paul Martin. The Liberals agreed to the NDP proposal as part of obtaining continued NDP support for the minority government.

So there is precedent for a significant amendment to Canadian insolvency legislation.

Toronto business bankruptcy protection: How likely is such a pension reform in restructuring proceedings to succeed?

At this time, I believe there are certain obstacles from seeing such a significant overhaul being successful. The reasons I say this include:

  1. Today there is a Liberal majority government in power, so the support of the NDP party is not required for the government to pass the legislation it wishes to.
  2. Providing a super priority for all pension shortfalls would dramatically alter the way lending is done in Canada. Banks would be required to include pension plan actuarial shortfall calculations into their borrowing base calculations. It may end up that when there is a pension plan shortfall, there is no borrowing room available at all for a business. This would increase the number of insolvencies.
  3. If the number of business insolvencies increased, that could lead to an increase in job losses. That would hurt employees which would hurt the same group the private member’s bill would be trying the protect.

However, the Liberal government of Prime Minister Justin Trudeau has shown that it does try to play to whichever group the government feels it can gain votes from. So, it is not out of the realm of possibilities that the government would try to enact some legislation to give a limited super priority to a part of an underfunded pension plan liability. Time will tell whether such a proposal has any chance of success at this time.

Toronto business bankruptcy protection: Does your Toronto area business require restructuring proceedings to survive?

If you’re company is struggling with too much debt, give the Ira Smith Team a call. We can help with refinancing and restructuring so that your business can get back on track Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

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