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BANKRUPTCY PROCESS: RIDICULOUS BUT TRUE BANKRUPTCY CHAPTER 11 CASE AND ONTARIO RESTITUTION LAW DEBT

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Bankruptcy process introduction

This week two totally unrelated items caught my attention when thinking about the bankruptcy process. The first is about Hertz Global Holdings Inc. (Hertz) bankruptcy Chapter 11 case in the United States. An update to my recent blog about Hertz titled HOW HERTZ TEACHES US MODERN AND RISKY RULES OF BUSINESS BANKRUPTCY IN CANADA AND THE USA.

The second item that caught my eye is a decision of the Court of Appeal for Ontario. The decision really didn’t have anything to do with bankruptcy. However, the Court of Appeal did reference the Bankruptcy and Insolvency Act (Canada) (BIA) in its decision. It really is about restitution law and the resultant debt.

The zany twist to the Hertz bankruptcy Chapter 11 case

In my June 8 blog about the bankruptcy process used by Hertz, I wrote about the irrational behaviour of investors in trading Hertz stock. Legendary investor Carl Icahn sold his entire Hertz holdings at $0.72 per share. The stock had touched a low of $0.40. For some reason, investors bid the stock up to $5.53. The stock at the time of writing this blog is just under $2.

This made no sense at all. The only thing I can attribute it to is that investors saw an opportunity to buy in during upward momentum, sell-off with a profit, and leave someone else holding the bag. Hertz debentures are selling for pennies on the dollar. The assumption being that those creditors will largely get wiped out as part of the bankruptcy chapter 11 case. If creditors get next to nothing, then for sure shareholders are going to get wiped out. That is what happens in these bankruptcy process cases.

This activity did not escape Hertz’s attention. Now the restructuring team got an idea. What if we could sell more stock, given the interest in our shares. If we sold $1 billion worth, while telling everyone it was worthless, then we would have the necessary cash to fund our restructuring. Better yet, Hertz would not have to borrow money with high rate debtor-in-possession financing. All they needed was to convince the court to approve it. It sounds like a Mel Brooks comedy script!

The Hertz bankruptcy process application for share sale approval motion

June 19, 2020 UPDATE: Late yesterday, Hertz announced that it has determined to end a questionable stock sale of as much as $500 million since the Securities and Exchange Commission questioned and put a hold on the insolvent company’s plans. Hertz is currently in talks for a debtor-in-possession bankruptcy loan of up to $1 billion to fund its business reorg.

On June 11, 2020, Hertz filed its motion for court approval to issue more of its common stock. Since the common shares are being actively traded, Hertz filed its emergency motion to seek emergency relief from the court to allow the Debtor to try to capture value for the unissued Hertz shares for the benefit of the bankruptcy process Estate.

The approval sought from the court was approval to participate in a sale arrangement with Jefferies LLC (Jefferies), to act as the sales representative. Under the sale contract, Hertz might offer and sell common shares of Hertz having an aggregate offering value not to surpass $1 billion. Hertz has 246,775,008 unissued common stock shares. Jefferies will use its best efforts to market, as the sales representative the unissued shares of common stock.

In support of their motion, Hertz advised the court that:

  1. The recent market prices of the trading quantities in Hertz’s ordinary shares creates a special possibility for Hertz to raise funding on terms that are much superior to any kind of debtor-in-possession funding.
  2. If successful, Hertz might possibly offer up to and an aggregate of $1.0 billion of ordinary shares.
  3. Unlike regular debtor-in-possession funding, the issuance of the ordinary shares would certainly not enforce restrictions on Hertz or its bankruptcy process restructuring efforts and would certainly not hinder any of the creditors.
  4. Additionally, the stock issuance would bring no repayment obligations to Hertz.
  5. Other than the Jeffries fee, there would be no other significant costs to obtain the funding through the sale of shares.
  6. Hertz would include disclosure in any prospectus for the sale of the unissued common shares highlighting that a financial investment in these Hertz’s shares involves substantial dangers. This includes the danger that the common stock can inevitably be worthless (emphasis added).

What the court said

After deliberating on the issue, on June 12, 2020, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware granted Hertz’s motion. She ordered that:

  1. Hertz is allowed, but not required, to enter into the Sale Arrangement with Jeffries and perform all obligations called for in the agreement.
  2. Hertz may, but again is not required to, market the unissued common shares.
  3. Jeffries may earn its fee in accordance with the Sale Agreement.

This is truly novel, yet whacky. Anyone who would buy these shares must be gambling on the fact that market activity will remain hot and that they will be able to sell the shares for a profit.

As I mentioned above, creditors are going to be given a haircut. So how can shareholders expect a return on their investment? Any savvy creditor being asked to agree to a bankruptcy process restructuring plan certainly will insist that creditors must receive payments on account of what they are agreeing to give up, should funds become available, before shareholders see one penny.

Lots of people are going to be left without a chair when the music stops. It will be fascinating to see how this all works out.

Restitution law

This matter is totally unrelated to the Hertz bankruptcy process. It is in Ontario and I found the Court of Appeal for Ontario’s decision very interesting. Especially so because it really didn’t have anything to do with insolvency or bankruptcy either.

On June 11, 2020, the appellate court issued its decision in a matter dealing with restitution law. The case involved a 32-year-old man with high school education. In between September 30 and November 6, 2018, he went on a drug-fuelled rampage, that included the robbery of 10 businesses. He was sentenced to 4.5 years in jail and subject to a restitution order in the amount of $15,000. It was the restitution payment that was appealed.

His lawyer argued that the sentencing judge erred by not taking into consideration whether he had the ability to make restitution before imposing the restitution. They also argued that it will likely hinder his possibilities of rehabilitation. They said that the restitution order ought to be vacated.

The appeal court agreed. In allowing the appeal, the appeal court stated that the purpose of a restitution order is not intended to undermine the culprit’s chance for rehabilitation. The appeal court then went on to equate the rehabilitative aspects of restitution law with the rehabilitation intention of Canadian bankruptcies laws in the Bankruptcy and Insolvency Act (Canada). The Court of Appeal for Ontario also correctly stated that a restitution order made by a sentencing judge will survive through any type of bankruptcy of the criminal. This suggests it is there for life and restitution is not meant to be a life sentence.

That is what caught my attention. I never would have equated restitution with bankruptcy or rehabilitation.

Summary

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.

I hope you have found this bankruptcy process Brandon’s Blog interesting. I will eagerly watch what happens in the Hertz common share sale and the subsequent trading in the shares. I also never thought of criminal restitution as part of rehabilitation. I also for sure never thought of it in the area of bankruptcy and insolvency.

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

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

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

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

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

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

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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.

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 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.

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BANKRUPTCY LAW, A SHOE STORE CHAIN AND GOLF: WHAT DO THEY HAVE IN COMMON?

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Introduction

I am writing this Brandon’s Blog more as an interesting story for those that live in the GTA and enjoy golf. Although as you will see, bankruptcy law does play a major role in this tale, it really is a story about what is probably the most famous Canadian golf course.

Bankruptcy and Insolvency Canada

Before getting into the interesting Greater Toronto Area golf course story, by way of background to it, I will first describe the bankruptcy law aspect.

A bankrupt shoe store chain workers lost their jobs when a Receiving Order (as a Bankruptcy Order was then called) was made putting an Ontario shoe store chain, Rizzo & Rizzo Shoes Ltd., into bankruptcy. All salaries, wages, commissions and vacation pay were paid to the date of bankruptcy. The province’s Ministry of Labour audited the company’s payroll books and records.

The Ministry’s audit determined that although the employees were all paid up to date, liability for termination or severance pay was owing to former employees under the Employment Standards Act (ESA). The Ministry delivered a proof of claim to the bankruptcy trustee (now called a Licensed Insolvency Trustee) (Trustee).

The Trustee disallowed the claim under the provisions of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). The Trustee’s disallowance was based on the ground that the bankruptcy of an employer acts to terminate the employment of the workers. This does not constitute termination by an employer. Therefore, no such liability for severance or termination pay exists.

The appeal of the Trustee’s disallowance

The Ministry successfully appealed the Trustee’s disallowance to the Ontario Court (General Division). The Trustee appealed to the Ontario Court of Appeal. The appellate court restored the Trustee’s decision. The Ministry sought leave to appeal to the Supreme Court of Canada but ultimately terminated that application.

After the discontinuance of the appeal, the Trustee paid a dividend to Rizzo’s creditors, therefore leaving much fewer funds in the bankruptcy estate.

After that, five previous staff members of Rizzo applied to set aside the discontinuance, add themselves as applicants to the Supreme Court of Canada leave to appeal. An order was made approving them to continue the appeal.

The Supreme Court of Canada decision

In a 1998 decision, the Supreme Court of Canada ultimately decided that the bankruptcy of an employer does terminate the employment of the workers. However, the Court felt that it was necessary to take a wider view of the ESA. The Court felt that one of the objects of the ESA was to protect the rights of employees when they lost their job. A finding that the severance and termination pay sections of the ESA to not apply in bankruptcy circumstances is incompatible with both the object of the ESA.

The Court went on to find that the legislature does not intend to generate ridiculous results if employees dismissed before the bankruptcy of an employer would generate a completely different result than those employees who lost their job by the bankruptcy of an employer.

Therefore, the Supreme Court of Canada found that employee rights to severance pay or termination pay is a claim provable in bankruptcy even if the dismissal occurred by the bankruptcy of the employer. This claim is an ordinary unsecured claim and does not have any priority.

The broader effect of the Supreme Court of Canada Rizzo & Rizzo decision

The obvious effect of the Rizzo & Rizzo decision is the bankruptcy law decision. However, the decision also stands for the concept that a statue must be looked at in a broader context. The Supreme Court decision in paragraph 21 states that “…statutory interpretation cannot be founded on the wording of the legislation alone”.

It goes on to say that “Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”. This codified what can be called a modern approach to the interpretation of legislation.

So what does this have to do with a golf course?

Looking at the title of this Brandon’s Blog, I think I have now covered off the first two parts, namely, bankruptcy law and shoe store. Now for golf! On October 23, 2019, the Court of Appeal for Ontario released its decision in Oakville (Town) v. Clublink Corporation ULC, 2019 ONCA 826.

All golfers in the GTA know that Clublink owns and operates a chain of golf clubs in Ontario and Quebec, as well as Florida. The most famous and iconic golf course in the Clublink family and all of Canada is Glen Abbey in Oakville, ON. Clublink purchased this golf course in 1999.

Glen Abbey was the initial golf course solely created by Jack Nicklaus, one of the greatest professional golfers of all-time. The style of the course shows a specific focus on the viewer experience. Along with this value, the Town of Oakville believes Glen Abbey has substantial historical value. Glen Abbey has held the Canadian Open 30 times – 3 times greater than any other course in Canada. It, therefore, is connected with some of the most memorable events in Canadian golf history.

The 18th hole is significant as a result of its connection to Tiger Woods. In the final round of the 2000 Canadian Open, he hit a six-iron shot 218 yards from a bunker on the right side of the fairway to about 18 feet from the hole. The shot had to fly over a huge pond protecting the green.

On October 22, 2015, Clublink told the Town that they plan to redevelop Glen Abbey into a residential and mixed-use neighbourhood. Clublink proposed to develop 3,000 to 3,200 residences and 140,000 to 170,000 square feet of office and retail space. If Clublink’s plan to build succeeds, the word “four” will no longer be yelled out on the property!

The Court case

In November 2016, Clublink submitted applications to change the Town’s Official Plan and zoning by-laws and looked for authorization of a plan of subdivision, in connection with its redevelopment plan of Glen Abbey. In 2017, the Town recognized Glen Abbey as a considerable cultural heritage property under s. 29 of the Ontario Heritage Act (OHA). This notification stated the property’s cultural heritage value according to the provincial requirements of the OHA.

Clublink did not object to the heritage designation. Rather, they made an application to the Town under section 34 of the OHA to demolish and remove Glen Abbey. The Town alerted Clublink that their s. 34 application was legally beyond the range of a section 34 OHA application but was correctly within the range of s. 33 of the OHA which permits an owner to relate to altering a designated property.

Clublink commenced its very own application in the Superior Court for an affirmation that they could make an application under s. 34 of the OHA “for the demolition and removal of buildings and structures on the lands municipally known as 1313 and 1333 Dorval Drive … including but not limited to the tees, greens, hazards, fairways and cart paths”. Clublink was successful in its application and the Town of Oakville appealed the decision to the Ontario Court of Appeal.

What is the difference?

A study of the OHA is not why I am writing this Brandon’s Blog. The important point to know is that under s. 33 of the OHA, the owner may appeal to the Conservation Review Board. The Conservation Review Board holds a hearing and produces a report, in which it is to recommend whether the application must or ought to not be authorized. The Conservation Review Board’s report is not binding on the metropolitan council.

Unlike s. 33, if the metropolitan council rejects the owner’s application under s. 34, the owner of the property can appeal to the Local Planning Appeal Tribunal (LPAT). The local council is bound by the LPAT decision.

So as you can see, Clublink needs the Court ruling to stand that its s. 34 application is the correct one.

Is a golf course a structure?

In order to be successful, Clublink needs to prove that a golf course is a structure. The application judge found that Glen Abbey is both composed of structures as well as the golf course itself is a structure for the objective of s. 34 of the OHA. Clublink had actually correctly mounted its application under s. 34.

The application judge reached this decision because of the uncontroverted evidence before him was that Glen Abbey was the product of substantial engineering, design and construction. Relying on judicial and also administrative decisions from other contexts, he decided up that a golf course fits within the meaning of a “structure” as being a “thing constructed”.

After a very lengthy analysis, the Ontario Court of Appeal, with one Judge dissenting, confirmed the lower court’s decision.

So what does this have to do with Canadian bankruptcies laws?

The majority decision relied upon the Rizzo & Rizzo case. The Ontario Court of Appeal followed the confirmation in the bankruptcy law case by the Supreme Court of Canada that a strict dictionary or common usage interpretation of the word “structure” was inappropriate. A “…statutory interpretation cannot be founded on the wording of the legislation alone”.

Rather, a wider modern law approach must be used. The “…words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention…”. Therefore, finding that a golf course has detailed engineering, design and construction, it is a structure and Clublink was correct.

This is how bankruptcy law ties into a bankrupt Ontario shoe store chain and a golf course. It took a bit of a journey to piece it all together, but I am so glad that you stuck with me.

Summary

As you can see, not everything necessarily is how it appears at first blush. When I look out onto a golf course, I would never say, “what a marvellous structure”, but it is.

In the same way, financial decisions that we make along the way do not always turn out as we once thought it would be. Sometimes these decisions are forced upon us by life getting in the way, and sometimes they are voluntary. Nevertheless, when financial hardships strike, you need to find a way to solve your financial problems.

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.

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CANADIAN BANKRUPTCIES LAWS: OPPOSITION TO TRUSTEE DISCHARGE

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

Introduction

Believe it or not, people search online for “Canadian bankruptcies laws” almost 500 times every month. Although the spelling looks a bit off, the point is that people are interested in Canadian insolvency laws. People also search for “Canadian personal bankruptcies laws”.

I recently reviewed an interesting bankruptcy case from British Columbia. The issue is one that does not normally find its way into the courts. The issue deals with the Trustee’s discharge from a bankruptcy administration.

So combining these disassociated events, it gave me the idea for this Brandon’s Blog.

Two kinds of discharges in a personal bankruptcy

In every personal bankruptcy, there are two kinds of discharges. In the normal course, first the bankrupt gets his or her discharge from bankruptcy. Then, when all parts of the bankruptcy administration is finished, the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee), gets its discharge.

I have previously written several blogs on the discharge of a bankrupt, but for information purposes, I will briefly summarize the issues surrounding a bankrupt’s application for discharge. Then I will describe the issues in the BC case about the discharge of a Trustee.

The bankrupt’s application for discharge

A bankruptcy discharge is when the bankrupt person is released under Canadian bankruptcy legislation from his or her financial debts. Some people think that it is filing for bankruptcy that releases the bankrupt from responsibility. This is not the situation. It is the discharge process that “discharges” the debts.

The personal bankruptcy discharge is among the key advantages of the Canadian insolvency system. The discharge is crucial to the insolvency process. Debtors, after bankruptcy, can wipe the slate clean and begin again. This is a central concept under the “Canadian bankruptcies laws”.

A personal bankruptcy discharge provides the discharge of many unsecured financial debts. Certain debts will not be discharged. They are:

  • support payments to a previous spouse or to children;
  • fines or financial charges imposed by the Court;
  • debts emerging from fraudulent behaviour;
  • student loans if fewer than seven years have passed considering that the bankrupt quit being a full or part-time student.

Notice of opposition to discharge

A bankrupt’s bankruptcy discharge application might be opposed by one or more unsecured creditors or the Trustee. This occurs if the bankrupt has not met all of his/her obligations. It can likewise happen if the insolvent has committed a bankruptcy offense. Those are acts provided in Section 173 (1) of the Bankruptcy and Insolvency Act (Canada) (BIA). The Court will assess the overall conduct of the bankrupt and provide its decision.

How bankruptcies work

There are 4 kinds of discharges:

  • Absolute discharge – The bankrupt is released from the commitment to repay the financial liabilities that existed on the day of filing for personal bankruptcy, except for the types of financial obligations indicated above.
  • Conditional discharge – A bankrupt has to fulfill specific conditions to obtain an absolute discharge. As soon as all conditions have been met, an absolute discharge is given.
  • Suspended discharge – An absolute discharge that will be given at a future date identified by the Court.
  • Refused discharge – The Court has the right to decline a discharge.

What does trustee discharge mean?

A recent case decided by The Supreme Court of British Columbia in Kelowna, BC, dealt with the issue of the discharge of a Trustee. After concluding a bankruptcy administration, the Trustee applies for its discharge. The case is McKibbon (Re), 2019 BCSC 848 (CanLII).

William Edward McKibbon is a person who went through the bankruptcy discharge process. His bankrupt’s application for discharge ultimately ended with his getting an absolute order of discharge after fulfilling his discharge conditions on February 24, 2016. His Trustee then received its discharge. The Trustee discharge date was on November 5, 2016.

Mr. McKibbon made an application to the Court for the withdrawal of the Trustee’s discharge. Section 41 of the BIA deals with the discharge of the Trustee. The case was heard on April 25, 2019, in The Supreme Court of British Columbia in Kelowna, BC. The Court’s decision was released on May 30, 2019.

Section 41(1) of the BIA states:

“Application to court

41 (1) When a trustee has completed the duties required of him with respect to the administration of the property of a bankrupt, he shall apply to the court for a discharge.”

The Trustee went through all the steps required and obtained its discharge.

Section 41(5) of the BIA says:

“Objections to be filed with court and trustee

(5) Any interested person desiring to object to the discharge of a trustee shall, at least five days prior to the date of the hearing, file notice of objection with the registrar of the court setting out the reasons for the objection and serve a copy of the notice on the trustee.”

No person objected to the Trustee’s discharge, including Mr. McKibbon. Now in 2019, he was asking the Court to revoke the Trustee’s discharge as he had certain complaints about the Trustee’s conduct.

The allegations against the Trustee

Mr. McKibbon now alleges that the Trustee’s discharge was gotten because the Trustee did not disclose all pertinent facts.

Mr. McKibbon’s allegations were that: (i) the Trustee had experienced issues in the calculation of the surplus income payable by the bankrupt in that the Trustee had miscalculated the surplus income numbers; (ii) the method by which the Trustee calculated the surplus income; and (iii) the Trustee had not finalized the bankrupt’s pre- and post-bankruptcy income tax returns because it had made errors when submitting those tax returns to the Canada Revenue Agency (CRA).

These allegations were disputed by the Trustee. The Trustee claims that the surplus income calculations were appropriate. Concerning the income tax returns, the Trustee stated that the issues relating to the income tax returns were the result of the CRA, incorrectly, re-allocating income and expenses between the pre- and post-bankruptcy periods.

Can the discharge of the Trustee be revoked?

Section 41(8) of the BIA deals with the revocation of a Trustee discharge. It states:

“Effect of discharge of trustee

(8) The discharge of a trustee discharges him from all liability

(a) in respect of any act done or default made by him in the administration of the property of the bankrupt, and

(b) in relation to his conduct as trustee,

but any discharge may be revoked by the court on proof that it was obtained by fraud or by suppression or concealment of any material fact.”.

Mr. McKibbon, in his complaint, said that the Trustee suppressed and concealed material facts.

The Judge’s decision

The Judge in his decision stated that the analysis of BIA section 41(8) goes back to 1899. The case law requires that to revoke the discharge of the Trustee, there needs to be an aspect of fraud in the suppression or concealment.

The Judge also referred to a 2011 decision in the Superior Court of Québec which reached a similar conclusion. That case is Re Delorme, 2011 QCCS 236 (CanLII).

Mr. McGibbon’s position was that these authorities are mistaken and made the wrong decision. He did so with no authorities have actually been pointed out to bring into question those verdicts!

The Judge concluded that in order for there to be a “suppression or concealment of any material fact”, there has to be an element of fraud. He also concluded that Mr. McGibbon had the onus to provide evidence that the Trustee purposely did so with the intent to defraud the court, the creditors or the bankrupt. He found that as Mr. McGibbon failed to do so, he did not have to dig into the details of the allegations.

The Judge also noted that Mr. McGibbon had a bankruptcy discharge hearing, and the Court set the amount of surplus income he needed to pay as part of his conditional discharge from bankruptcy. Therefore, any issue surrounding the surplus income calculation by the Trustee was eliminated with this condition that Mr. McGibbon fulfilled.

Accordingly, the Judge found that there is no basis whereupon any kind of deceptive behaviour can be presumed for the Trustee in failing to reveal any material facts in its discharge application. Therefore, the application to revoke the Trustee’s discharge was rejected. Finally, the Judge allowed for the Trustee to make any submissions it wished to concerning costs to be paid by Mr. McGibbon.

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