Tag: Companies’ Creditors Arrangement Act

CCAA CANADA: OUR EXTRAORDINARY GUIDE TO 2020 TROUBLED CANADIAN COMPANIES SEEKING BANKRUPTCY PROTECTION

Post author By Brandon Smith
Post date August 10, 2020

The Ira Smith Team is totally operational and both Ira and Brandon Smith are here for a telephone consultation, conference calls and virtual meetings.

Keep healthy and safe everybody.

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

CCAA Canada introduction

We are now about 5 months into this COVID-19 pandemic since the state of emergency was announced in Canada. There has also been a lot of media coverage of the many negative effects it has had on Canadians and the Canadian economy. I thought it might be interesting at this point to do some review on CCAA Canada. Now I am not talking about the Canadian Collegiate Athletic Association. Rather, I am going to look at the companies that have so far filed for creditor protection under one of Canada’s insolvency statutes. The Companies’ Creditors Arrangement Act.

When a company tries to reorganize under CCAA Canada – What does CCAA mean?

When Canadian companies who owe more than $5 million experience financial problems, they might go to court to seek creditor protection, filing under the CCAA Canada. That’s federal legislation that primarily offers a company time to try to work out its financial troubles with those to which it owes money.

As I have written before in various Brandon’s Blogs, if the company owes less than $5 million it can file under the Part III Division I reorganization section of the Bankruptcy and Insolvency Act (Canada). Although it is the other Canadian federal insolvency statute and some procedures are more streamlined and handled slightly differently, the net effect is the same as the matters I explain below about the CCAA Canada.

What does CCAA Canada protection mean? CCAA vs Chapter 11

“Bankruptcy protection” is a term closely associated with a US company filing under Chapter 11 of the US Bankruptcy Code. That term has been adopted into the Canadian insolvency dialogue. In Canada, it most likely means that the Canadian company has applied to a Canadian court to look for protection from their creditors by filing under CCAA Canada.

A firm files under CCAA Canada for consent to come up with a restructuring plan strategy that would certainly provide it time to rearrange its financial affairs to make sure that it can keep operating.

As long as a CCAA order continues to be in place, creditors are not allowed to start or continue any kind of action to recover money owed to them. They can’t try to confiscate the firm’s property or try to petition it into bankruptcy, without the prior approval of the court. This is called the CCAA stay of proceedings.

Considering that a CCAA Canada filing is made because a business is deeply in the red, the initial order of business is to strike some kind of satisfactory arrangement with its creditors. That includes secured creditors, unsecured creditors and shareholders.

Can CCAA Canada protection be extended?

Yes, under CCAA Canada, court-ordered protection can be extended. After Algoma Steel filed under CCAA Canada in April 2001, the firm had gotten eight extensions prior to emerging with a new ownership framework.

Who gets priority under a CCAA Canada filing?

Not all creditors are treated equally. There is a priority generally established for the ranking of creditors and the order in which they might be paid by a debtor.

First in a CCAA Canada restructuring, will be any government claims that rank as a priority deemed trust claim. Next will be any new charges ordered by the court as part of the restructuring. Examples of such court-ordered security charges are Key Employee Retention Plans, financing the company needs in order to survive during the restructuring period and the costs of the professionals involved in the restructuring for the company.

Secured creditors, including lenders and bondholders, usually head the list next when it concerns getting back their money. Secured creditors might hold security such as a general security agreement and/or a mortgage as security for their debt held.

Unsecured creditors follow next on the list of creditors. Unsecured creditors have supplied goods or services on credit to the company without being given any security. In the many retailer filings that have been in the news recently, even customers who have paid deposits for items not yet picked up or who have gift cards are also unsecured creditors. Last on the list are the shareholders.

What happens if the court doesn’t approve a CCAA Canada application or the sides can’t agree on how to restructure debt?

If a restructuring effort is not successful, or if the court does not approve it, a company can be placed right into receivership or bankruptcy. The main difference between a CCAA Canada filing and the options of receivership or bankruptcy, suggests that the company can no longer be a going concern and will be liquidated.

The choice between receivership or bankruptcy depends on the nature and extent of the creditors. If there is a major secured creditor who is owed more than the assets are worth, on a failed restructuring, the court will allow that secured creditor to appoint a receiver (or the court will appoint the receiver). The receiver will then liquidate the company’s assets and repay the secured creditor as much as possible. If there are no secured creditors (which is highly unusual), or there will be money left over from the liquidation after full repayment of the secured creditors, then there will be bankruptcy. The licensed insolvency trustee acting as the bankruptcy trustee will make a distribution to the unsecured creditors.

Sometimes the type of company or industry will require both receivership and bankruptcy. Retail liquidations are a good example. The reasons are outside the main topic of discussion for this CCAA Canada Brandon’s Blog, but, one day, I will do one on that topic.

What happens to shareholders in a CCAA Canada restructuring?

Holders of common stock generally come last. On a regular basis in a CCAA Canada restructuring, they tend to get wiped out. Their old shares come to be worthless. Usually, brand-new shares are issued in the restructured company.

Holders of preferred shares rank ahead of common shareholders (for this reason the title “preferred”) yet more often than not do not get back the full value of their shares.

Public company shares in a company if it enters CCAA Canada protection and all trading is halted

When a public company announces that it has filed under CCAA Canada, a trading halt is applied. The listing exchange notifies the marketplace that trading is not taking place. While the stop is in effect, brokers are forbidden from publishing quotations or signs of interest in trading. The listing exchange will end the trading stop by taking the actions called for by its rules. Generally, the marketplace is alerted that a trading halt is about to end either at the same time the halt finishes or a few minutes before.

When a company gets on the edge of bankruptcy, its stock value mirrors the danger of a CCAA Canada administration becoming liquidation. Purely as an example, a business that used to trade at $50 might trade at $2 per share as a result of the bankruptcy environment. After entering into a CCAA Canada filing, the company’s stock price might be up to $2.10. This value is composed of the potential amount that shareholders might get after liquidation and also the possibility that the firm might restructure and run effectively in the future. Investors can buy and sell these $2.10 shares in the market. The actual value does not reach zero unless the likelihood of restructuring is so low that liquidation becomes a certainty.

While the company is in a CCAA Canada restructuring, its stock will certainly still have some value, though it will likely plummet. The regulatory authorities will watch it very closely and shut down trading if any anomalies are encountered where investors could get hurt. This was recently seen in the United States in the Hertz Chapter 11 bankruptcy protection administration.

Nonetheless, if the business restructures and emerges from CCAA Canada reorganization as a solvent going-concern, its share price might start to rise again. How much will depend on the unique restructuring issues. If a business rises from its restructuring stronger than ever, investors can take advantage of the turnaround, as old stock may get cancelled during the insolvency process, and new shares issued.

List of CCAA filings under CCAA Canada during the COVID-19 pandemic so far?

There have been many media reports about companies filing under CCAA Canada during this coronavirus pandemic. I thought it would be useful to look at which companies have filed and what industries seem to be most affected between the calling for the state of emergency and the last date for which these statistics have been published, July 31, 2020. All of this information comes from statistics published by the Office of the Superintendent of Bankruptcy Canada.

The number of companies and the industries that these companies engage in is allocated as follows:

Cannabis	6
Charity	1
Construction	4
Energy	4
Entertainment	1
Hospitality	1
Manufacturing	1
Media	1
Mining	2
Pulp and Paper	1
Real Estate	2
Retail	8
Technology	1
Travel	1

	34

The following chart shows the filings by the province in this same time frame:

ccaa canada graph

CCAA Canada summary

I hope you enjoyed this CCAA Canada Brandon’s Blog. The Ira Smith Team family hopes you and your family are staying safe, healthy and well-balanced. Our hearts go out to every person who has been affected either through inconvenience or personal family tragedy.

We are all citizens of Canada and we have to coordinate our efforts to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Family members are literally separated from each other. We look forward to the time when things can return to something close to normal and we can all be together again physically.

Ira Smith Trustee & Receiver Inc. has always employed clean and safe habits in our professional practice and continues to do so.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. Should you take advantage of the CEBA? I say a resounding YES!. I just wanted to highlight all of the issues that you should consider.

If anyone needs our assistance, 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.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

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

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

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

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

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

The Ira Smith Team is totally operational and both Ira and Brandon Smith are here for a telephone consultation, conference calls and virtual meetings.

Keep healthy and safe everybody.

Brandon Blog Post

COMPANY BANKRUPTCIES: A USEFUL TOOL TO SHOWER EXECS WITH BONUSES?

Post author By Brandon Smith
Post date July 27, 2020

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

If you would rather listen to the audio version of this company bankruptcies Brandon’s Blog, please scroll to the bottom and click on the podcast.

Company bankruptcies introduction

Company bankruptcies have been in the news during 2020. The ones that got the most attention were large US retailers filing for Chapter 11 bankruptcy protection, their Canadian subsidiaries filing for restructuring or pure Canadian retailers who needed to file.

In the United States, almost one-third of 40 big firms seeking U.S. bankruptcy protection during the coronavirus pandemic awarded bonuses to execs within a month prior to filing their cases, according to a Reuters evaluation. Eight companies, consisting of J.C. Penney and Hertz, approved the bonuses as few as five days before seeking bankruptcy protection.

In this Brandon’s Blog, I discuss why this happened and look at could it happen in Canadian bankruptcies cases.

The role of a Key Employee Retention Plan (***KERP) in company bankruptcies***

A KERP is not a new concept in company bankruptcies. KERP refers to an advantage strategy utilized by a debtor company in a bankruptcy situation as incentives to upper management to stay working for the business throughout the bankruptcy. The purpose of this KERP is to help in the retention of particular essential qualified and competent executives of the company and its subsidiaries, by providing a retention bonus offer for such employees in return for their continued employment during the restructuring of the business in bankruptcy protection.

The KERP intends to maintain qualified officers, employees, and directors of the company and its subsidiaries upon whose judgment and effort the company depends upon for the successful conduct of its business. It is expected that providing such persons with a direct stake in the firm’s successful restructuring will assure a more direct alignment of their interests with those of the business and have them working on the company’s behalf throughout the entire financial restructuring. In this way, senior management and key personnel are incentivized to keep their employment with the company throughout its restructuring and not leave for a new opportunity.

So if KERP is normal, why pay out big bonuses ahead of time?

This phenomenon is unique to company bankruptcies restructurings in the United States. So far, it has not been applied directly to Canadian insolvency filings. The main reasons are the legislation and because of the supervisory role and practices of the courts.

KERPs have long caused objections that companies are enriching execs while cutting jobs, stiffing creditors and wiping out shareholders. In March, creditors filed a claim against previous Toys R’ US executives and directors, accusing them of misdeeds that consisted of paying out such rewards days before its 2017 bankruptcy filing. The company liquidated in 2018, terminating 31,000+ workers.

An attorney for the execs and directors stated the benefits were warranted, given the added work and stress on senior executives, as Toys R’ US had wanted to remain in business after its restructuring. As we all know, the restructuring failed and the company was liquidated.

United States legislation in 2005 needed execs and other company insiders to have a competing job offer in hand before getting retention bonus offers through a bankruptcy protection administration. That forced companies to design new means to pay the bonuses.

After the 2008 financial crisis, firms frequently proposed bonuses in bankruptcy court, casting them as incentive plans with goals execs have to satisfy. Courts mostly accepted the plans, ruling that the performance benchmarks placed the payment past the purview of the limitations on retention incentives. The plans, nonetheless, sparked objections from creditors calling them KERPs in disguise.

At some point, companies discovered they could avoid analysis entirely by approving benefits before insolvency filings. US Bankruptcy Trustees have no power to stop bonuses paid even days prior to company bankruptcies.

Why big bonuses are not paid out on the eve of company bankruptcies in Canada

As I mentioned earlier, the treatment of KERPs is really directed by the supervision of the court. A large Canadian bankruptcy protection filing that might involve a KERP is done under the Companies’ Creditors Arrangement Act (Canada) (CCAA). The Canadian legislation and therefore the decisions of the courts in Canada are different than in the United States.

A financial restructuring under the CCAA is a collaborative effort in Canada. It is not as adversarial as in the USA. In a Canadian CCAA restructuring, a Monitor is appointed by the court. The Monitor to a large extent is the “eyes and ears” of the court. The process is that the Monitor acts as a supervisor over the company’s affairs in restructuring and also acts as a mediator between the various stakeholders. The court places a high degree of reliance on the Monitor’s recommendations. The court also expects its Monitor to be in the middle of all important matters and make thoughtful and pragmatic recommendations.

In Canada, the legislation does not directly address the issue of a KERP. Rather, the court will review the terms of a KERP put before it for approval. The court expects that:

Hard evidence will be put before it to show why the KERP is required and will aid in the company restructuring.
Why the employees for whom it is being recommended qualify.
The court will want to see that the KERP was negotiated, that key stakeholders had input, and there is not a “one size fits all” plan for all the employees.
Rather, individual employee characteristics have been taken into account.
The Monitor has been involved in the discussions and is recommending it to the court with reasons.

The proper use of an appropriately-calibrated reward plan is evident:

Company bankruptcies cause staff members now in an insecure position to be prey to competitors able to provide the possibility of a stable and solvent workplace to people whose natural very first top priority is caring for their households.
There is a danger that the top and mobile employees will certainly be cherry-picked while the company in a restructuring might discover itself significantly handicapped in attempting to attract competent senior staff.
Sometimes a restructuring can result in a court-supervised sales process. Employees might commonly find themselves being asked to bring all of their skills and devotion to the task of making themselves unemployed.
Considering that many employers use a mix of base pay and profit-based motivations, company bankruptcies causing a restructuring may put greater demands on key staff including covering for associates who have been laid off or who have actually left for greener fields.

The main factors considered by the court being asked in company bankruptcies to approve a KERP

The main factors a court considers during company bankruptcies are:

Whether the Monitor recommends the KERP agreement and the cost.
For the senior staff to which the KERP is being recommended, how realistic is it that they would seriously consider various other work choices if the KERP was not approved?
Is the continued employment of the senior staff members for which the KERP is being recommended is essential for the security of the business and to boost the performance of the overall restructuring?
Each employee’s background with and expertise in connection with the debtor.
Any problems in replacing each of the senior staff for the employees to which the KERP would apply.
Were the KERP agreement and its cost authorized by the board of directors, including the independent Monitor, as the business judgment of the board needs to not be disregarded?
Is the KERP agreement and charge approved or consented to by secured creditors of the borrower (who might very likely end up paying for it)?
Are payments under the KERP payable upon the conclusion of the restructuring process or are milestones built in that may or may not be realistic.

These are the major issues that the court needs to consider when determining whether or not to approve a KERP. As you can see, in company bankruptcies in Canada resulting in a CCAA restructuring, the issues the court must consider are many. So far, business sense has prevailed in Canada not requiring the shenanigans now taking place in US bankruptcy restructuring cases.

Company bankruptcies summary

I hope you have found this company bankruptcies Brandon’s Blog interesting and 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 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-19, 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 Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Tags Bankruptcy, bankruptcy protection, CCAA, chapter 11, chapter 11 bankruptcy, chapter 11 bankruptcy protection, Companies’ Creditors Arrangement Act, company bankruptcies, coronavirus pandemic, Ira Smith Trustee, kerp, Key Employee Retention Plan, toys r us

Brandon Blog Post

CANADIAN BUSINESS: WHAT WILL BE THE ULTIMATE BUSINESS IN ONTARIO RECOVERY PROGRAM?

Post author By Brandon Smith
Post date July 8, 2020

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

Canadian business introduction

In April 2020, a survey of entrepreneurs who own what could be called a small Canadian business across the GTA was conducted. It found that almost two-thirds of them might have to shut down for good as they struggle to stay on top of rent and other bills throughout the COVID-19 pandemic.

In this Brandon’s Blog, I look at entrepreneurs in Canadian business, both small and large, and talk about the one essential ingredient that will determine Canadian business success or failure. This one necessary item may turn out to be the only Canadian business recovery program that will ultimately work.

Canadian business opening-up again

Many are progressively opening up under local, provincial and federal government guidance. They need to navigate a host of constraints, including restrictions on the number of customers at any one time. I have read that many say the restrictions with their added layer of costs may stop them from being profitable. Even though COVID-19 cases appear to be under control in Ontario, companies have actually reopened to dramatically smaller sized groups, imperilling their survival.

To save local Canadian businesses, and the millions they employ, the federal government developed Canada’s COVID-19 Economic Response Plan. The federal assistance programs for Canadian business include:

Canada Emergency Wage Subsidy (CEWS )
Temporary 10% Wage Subsidy
More time to pay income taxes
Canada Emergency Business Account interest-free loans
Loan Guarantee for Small and Medium-Sized Enterprises
Canada Emergency Response Benefit (CERB) for the self-employed business people and Canadian workers.
Canada Emergency Commercial Rent Assistance (CECRA)

I have already written about most of these support programs. I have attached relevant links above so that you can read up on the various support programs for Canadian business.

Provincial governments have also stepped up. For example, in Ontario, the Doug Ford Conservative government has implemented:

Interest/penalty relief – Canadian business in Ontario will get five months of interest and fine relief to make payments for taxes administered by the Province. From April 1, 2020 – August 31, 2020, Ontario will not apply any penalty interest on any late-filed returns or incomplete or late tax obligation payments under the Employer Health Tax, Tobacco Tax and Gas Tax obligations. This enhances relief from the federal government on interest and other charges from not remitting the amount owing for corporate income tax.
WSIB payment deferments – Employers can delay WSIB payments for 6 months.
Rent support for local Canadian business – Ontario has partnered with the Government of Canada on the Ontario-Canada emergency commercial rent assistance for small businesses and landlords experiencing financial problems throughout the COVID-19 pandemic.

But there are still Canadian business problems

Despite all these support programs, the Canadian business world still has to figure out how to pay the balance of their rent, utility, insurance as well as a host of various other recurring expenses. While some have had the ability to delay these expenses, they can’t do so for life. Companies will become required to take care of their unmet commitments. They will also have to figure out how they are going to go back to paying all their expenses in full once the support programs end and business has not yet come back to the pre-coronavirus pandemic level.

Some companies may have enough cash savings to ride out the pandemic or can access fresh cash resources from owners. That is both good and bad. Entrepreneurs will take from their retirement savings, and in some cases deplete them, in the hopes of keeping their business alive long enough to survive and once again be profitable. It is highly doubtful that Canadian business will be able to borrow from the Banks as a source of fresh capital under these circumstances.

For a lot of others, the crush of past-due costs will certainly limit and maybe even end their business.

What happens when the government support programs end?

That is a big question that I get asked always. The answer is somewhat obvious: Everyone will have to stand on their own two feet just like they had to before the COVID-19 pandemic. Right now all the Canadian business support programs are all scheduled to end August 31. What will happen then?

My personal belief is that the federal and provincial governments will not be able to end the economic response support programs that soon. Rather, I think they will have to extend all the programs again. They may tweak them to begin the process of weaning Canadian business off of government support. Nevertheless, I feel they will have to be extended.

I think the extension will come with stark warnings. I believe the government would not want to extend for more than 90 days, but Christmas will still come in December. Pandemic or no pandemic. Nobody will want to shut off the tap before Christmas. So, that means an extension until the end of the calendar year 2020. With it, the governments will have to warn everyone to get their houses in order now because for certain there will be no more support programs after December 31.

I don’t have any inside information. I am just guessing. But to me, that seems the most realistic to still help Canadian business because entrepreneurs and workers are still all scared. At the same time, the governments’ exit strategy time clock begins ticking. Everyone will have a fair warning.

There is one precious commodity Canadian business will need when the support programs stop

Please humour me. Let us just say you find my prediction to be a reasonable one. On January 1, 2021, Canadian business is not all of a sudden flush with cash. They have survived. Entrepreneurs will still be scared. They certainly will not hire everyone back with an uncertain economic climate. All of the creditors of the businesses will start demanding payment in full. They have been patient and understanding. But now, all business debts will be demanded.

What is the one commodity Canadian business will desperately need? Cash is an obvious one but, no more is coming. Not from the government, the Banks or investors. Entrepreneurs are already tapped out having used personal savings to keep their businesses afloat. The most precious commodity Canadian business will need is TIME. Time to gear up again. Time to get back on their feet and bring in some cash. The Courts will have reopened. Creditors will begin to sue. There will be no more “time-outs” built into our Canadian economic system.

How will businesses get the time they need?

Bankruptcy protection will very likely be the answer

Breathing time that briefly ices up the need to pay off old debt while letting Canadian business function and have the time to find a strategy to keep going. In most cases, that will only be able to happen with a bankruptcy protection insolvency filing.

While bankruptcy is only thought of with going out of business, there are two Canadian federal statutes that allow viable businesses to develop a restructuring plan to lead them back to success. The trouble is that bankruptcy laws don’t give sufficient time to do this while there is still a pandemic. Ongoing COVID-19 health problems will likely suppress the Canadian economy in 2021.

Some out-of-the-box thinking and creativity are going to have to go into bankruptcy restructuring. It will be incumbent on licensed insolvency trustees (formerly called bankruptcy trustees), insolvency lawyers and the courts to recognize viable businesses that deserve to survive. This will be the case even if the processes being recommended are a bit unorthodox. These times are unorthodox and the solutions will have to fit the realities of our time.

I have previously written many blogs on how the two Canadian insolvency statutes can be used to allow Canadian business to restructure. The two statutes are:

Bankruptcy and Insolvency Act (BIA)

Companies’ Creditors Arrangement Act (CCAA)

For the purpose of this blog, I won’t repeat what I have previously written about corporate restructuring under either the BIA or CCAA. For this blog, what you need to know is that CCAA proceedings are for companies with $5 million or more of debt. BIA proceedings are for those companies with $4,999,999 of debt or less. Both statutes allow for bankruptcy protection filing. They are the Canadian equivalent to Chapter 11 bankruptcy protection in the United States.

How will bankruptcy protections help Canadian business?

For numerous companies battling the consequences of COVID-19, the main issue will not be a massive backlog of debt. It will be the inability to pay off the debt fast due to an absence of immediate profits. Cash will be needed to carry on business and make commitments on a go-forward basis. Given enough time, Canadian business will be able to repay its debts which accrued during the coronavirus shutdown. Unfortunately, the time Canadian business will need will be much longer than how much longer creditors will be willing to wait.

This is where bankruptcy protection filing, under either the BIA or CCAA comes in. First, under a bankruptcy protection filing, there is an automatic stay of proceedings. Creditors will not be able to start or continue collection efforts. This includes repossession by secured creditors or beginning or continuing legal proceedings.

Other benefits of a bankruptcy protection filing for Canadian business will be:

Buying some time to come up with a restructuring plan to keep viable businesses in operation.
Saving jobs through restructuring rather than liquidating the assets of many companies.
Allowing for the sale of entire business units to be integrated into other healthier companies in order for businesses to survive, albeit in a different legal format.
To allow for the sale of redundant assets to raise much-needed cash.
Get out of onerous equipment, IP or premises leases/contracts that need to be jettisoned or else a restructuring is not possible.
Stopping secured lenders from calling a default on loan facilities due to either cash or non-cash impairment charges leading to going concern worries.
Obtain operating capital by way of a new debtor-in-possession loan credit facility for restructuring. Most companies outside of a formal restructuring will be unable to borrow any more money as I have already mentioned. However, in a BIA or CCAA Canadian business restructuring, the court can approve emergency funding and raise that operating loan to the top of the pile by giving it a priority secured loan position.
Stopping Canada Revenue Agency (CRA) from starting or continuing garnishee tactics, general collection efforts and especially placing liens on business property for unpaid taxes.
To allow companies to restructure their debt and clean up their balance sheets in a post lockdown economy.

The biggest resource Canadian business will need is also going to be its largest enemy

So as you can see, I believe that the most important resource that Canadian business will need to survive will not be cash. It will be time. Creditors will no longer want to give businesses more time to repay. Companies will need more time to get back on their feet when the COVID-19 Economic Response Plan support programs end.

The only way I can see that truly happening while allowing for proper restructuring of viable businesses will be under bankruptcy protection filings. Those businesses that are not viable, by definition, will fall by the wayside causing more harm to many good people.

So this why I say formal bankruptcy protection proceedings to allow viable businesses to restructure will be the ultimate business recovery program in a post-lockdown Canada.

Canadian business summary

I hope you have found this Canadian business Brandon’s Blog interesting and 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.

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.

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

Brandon Blog Post

HOW TO USE QUADRIGA CX SCANDAL TO IMPROVE FINANCIAL LITERACY

Post author By Brandon Smith
Post date June 15, 2020

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

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

Introduction

Quadriga CX (Quadriga, QuadrigaCX or Quadriga CX) was a subsidiary of Quadriga Fintech Solutions Corp. (Fintech). Fintech operated an online cryptocurrency exchange system where parties interested in acquiring, offering or trading numerous cryptocurrencies were able to complete such purchases on the QCX System.

In this Brandon’s Blog, I explain how the QuadrigaCX financial scandal can be used as an important lesson to aid in our financial literacy.

The Quadriga CX demise

Quadriga was experiencing a liquidity crisis as well as having been incapable to honour withdrawal requests from individuals. Furthermore, Quadriga had not been able to find a substantial amount of cryptocurrency upon the death of QuadrigaCX founder and CEO, Gerald William Cotten.

As a result of the liquidity situation combined with missing cash and cryptocurrency, Fintech and related companies made a decision to call a time out by filing for bankruptcy protection and hope for business restructuring on February 5, 2019, under the Companies’ Creditors Arrangement Act( Canada) (CCAA).

By April 11, 2019, it was obvious that there was no possibility of restructuring. On that date, the Court made a Termination and Bankruptcy Assignment Order was made by the court confirming the process through which the Quadriga CX CCAA procedure would terminate and shift to a corporate bankruptcy under the Bankruptcy and Insolvency Act (Canada) (BIA).

QuadrigaCX 2020 update

The demise of the cryptocurrency trading system QuadrigaCX arises from a fraudulent scam by Gerald Cotten. Clients delegated their assets to Quadriga, which supplied fraudulent guarantees that those properties would be protected. In truth, Mr. Cotten invested, traded and made use of those properties as he pleased. Running with no proper system of oversight or interior controls, he had the ability to misuse those assets, uncontrolled and undiscovered, eventually bringing down the entire trading exchange.

On January 14, 2019, Quadriga CX announced that Mr. Cotten had passed away in India the previous month. With the Quadriga CX CEO death, he could not continue to manipulate the Quadriga CX platform and hide his fraud. The entire business operation imploded as described above.

It turns out that over 76,000 Quadriga CX customers were owed a combined $215 million. About 40 percent of the clients were from the province of Ontario. The bankruptcy trustee recovered $46 million in assets for distribution to unsecured creditors. The people that relied on QuadrigaCX collectively lost at least $169 million.

The Ontario Securities Commission investigation into the Quadriga CX demise

The staff of the Ontario Securities Commission (OSC) carried out an evaluation of the QuadrigaCX business operations to establish how the system was run, what created its collapse, and where the money went. Over a period of approximately ten months, a multi-disciplinary team of OSC Enforcement Branch staff analyzed trading and blockchain information, interviewed key witnesses and worked together with many regulatory bodies.

Most of the $169 million shortfall arose from Mr. Cotten’s fraudulent conduct. It has been widely guessed that the bulk of the losses arose from crypto properties ending up being lost or hard to reach as a result of Mr. Cotten’s death. The OSC found that most of the $169 million shortage arises from Mr. Cotten’s deceitful conduct.

The OSC report states that the bulk of the loss– about $115 million– occurred from Mr. Cotten’s illegal trading on the QuadrigaCX platform. He opened up Quadriga CX accounts under pen names and attributed himself with phony Quadriga cryptocurrency balances which he traded without knowledge by unwary Quadriga CX customers. He incurred losses when the price of the cryptocurrency would change, thus producing a deficiency in the assets needed to satisfy customer withdrawals. Mr. Cotten covered this deficiency with other customers’ deposits. This indicated that Quadriga CX, a state of the art new technology operated an old-time Ponzi scheme.

It is reported that Mr. Cotten lost an additional $28 million while trading customer deposits on three external cryptocurrency trading systems without permission from, or disclosure to, clients. He also misappropriated millions to fund his and his wife’s, Jennifer Robertson, way of living. In its final months, Quadriga CX had virtually no balances left and was running like a revolving door– brand-new customer deposits were quickly re-routed to money needed for Quadrigacx withdrawals.

In summary form, the OSC described the losses as:

$115 million trading losses sustained by Mr. Cotten on the Quadriga CX platform.
$46 million assets recovered or identified by the licensed insolvency trustee (formerly called a bankruptcy trustee).
$28 million trading losses sustained on external platforms.
$23 million which could not be accounted for because of the poor state of the Quadriga CX books and records.
$2 million of client funds misappropriated for living and travel expenses.
$1 million estimated operating loss.

What the Quadriga CX scandal can teach us for improving our financial literacy

In Canada, lots of crypto property trading systems are not registered. They have taken the view that they do not need to sign up with regulatory authorities. This is an essential message to users and possible users of these platforms. So we need to keep in mind that there may be no regulatory oversight at all on these cryptocurrency trading platforms.
Cryptocurrency trading and the trading platforms are risky. Trading in crypto assets carries threats. Many platforms preserve safekeeping and control of their clients’ crypto assets. Clients just have ordinary unsecured claims against the platform for their assets. Clients are relying upon the solvency and stability of the system operators. Crypto asset trading systems might not operate transparently. Clients might have restricted or no details regarding how the platform is protecting and managing their assets.
Cryptocurrency system clients ought to perform due diligence and look out for signs of fraud. Anyone considering delegating their assets to a crypto asset trading platform should take action to learn more about the platform’s operations and approach to control the risk of monitoring. I recognize that this may not be feasible with the present degree of disclosure supplied by some systems. Cryptocurrency trading platforms are a bit of a black box that ordinary people do not really understand.
If cryptocurrency trading platforms were required to sign up with the provincial regulatory authority, perhaps there would be some oversight and protection for consumers.
Platforms need to make sure that they have systems as well as controls in a position to take care of risks. Having an internal control system to take care of risks, including those pertaining to business protection, vital employees and compliance with regulations is an important step for consumer confidence. The trading platforms should be able to describe the systems used to protect client assets. That way the public at least has a chance of being able to properly evaluate between different systems.
Systems should reveal key details to customers. Supplying clients with exact details regarding crucial aspects of their operations – such as asset wardship and storage techniques, charges, reported volumes, system protection actions and internal controls will help with educated decisions by investors and also advertise capitalist confidence in the platform.

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 Quadriga CX scandal Brandon’s Blog helpful. Cryptocurrency trading is still in the realm of the Wild West. Further work must be done before crypt currency can be widely used as a cash replacement. There are many financial literacy lessons we can garner from the Quadriga CX story. Even if Mr. Cotten had lived, the Ponzi scheme could only have been kept afloat for a finite time period before it would implode.

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.

Tags Bankruptcy and Insolvency Act, bankruptcy protection, BIA, business restructuring, CCAA, Companies’ Creditors Arrangement Act, Corporate Bankruptcy, debt relief, fintech, Ira Smith Trustee, quadriga, quadriga cx, quadriga cx ceo death, quadriga cx scandal, quadrigacx, QuadrigaCX founder, Termination and Bankruptcy Assignment Order

Brandon Blog Post

BANKRUPTCIES IN ONTARIO: OUR EXCLUSIVE 6 THINGS LIST CREDITORS MUST KNOW ABOUT CANADIAN BANKRUPTCY

Post author By Brandon Smith
Post date June 3, 2020

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.

Bankruptcies in Ontario -Introduction

Much of the insolvency chatter developing from the COVID-19 pandemic world in which we find ourselves is now concentrating on the waterfall of brand-new bankruptcies in Ontario that are predicted to arrive. I have previously written about some of the big-name US retailers that have filed for Chapter 11 bankruptcy protection.

Businesses shut down, job losses, government funding for people and businesses to try to hang on through this coronavirus are all in the headlines. What our “new normal” will look like and which companies and jobs will survive, right now, is anybody’s guess.

In this Brandon’s Blog, I want to highlight things creditors must know about canadian bankruptcy and bankruptcies in Ontario. By being well-versed, creditors will hopefully be able to better understand what is in store for them and for the debtors.

1. Bankruptcies in Ontario – the automatic stay of proceedings

In Canadian insolvency matters, an automatic stay of proceedings happens when a company or person files under the Bankruptcy and Insolvency Act (Canada) (BIA) for either:

The stay of proceedings is automatic under the BIA. Other than in one specific situation which I will touch on in a minute, absent proof that some sort of fraud is being committed on the court, a judge will not interfere with the automatic stay provisions. So an unsecured creditor will not be able to start or continue any action for collecting on a debt.

The one exception is in a restructuring where the major secured creditor goes to court and provides evidence that no matter what the restructuring may look like, they will never support it. The secured creditor would at the same time be requesting the court to lift the stay of proceedings so that they can enforce on their security.

Absent a restructuring proposal that promises to pay out that secured creditor 100% PLUS proof that the company or person has a realistic chance of refinancing to take out that secured creditor. Even in that situation, the court could give the debtor some time to pull it off, but it will be a very short lease. Otherwise, the secured creditor will probably get their wish and the restructuring effort will end.

In the case of a privately appointed receiver, there is no automatic stay of proceedings. This is notwithstanding that the conduct of the receiver in a private receivership is also governed by the BIA. The reason there is no automatic stay of proceedings is that a private receivership is not a filing under the BIA.

In either a court-appointed receivership or a corporate restructuring under the Companies’ Creditors Arrangement Act (Canada) (CCAA), the stay of proceedings authority does not come from statute per se. The respective statutes allow for the judge to order a stay of proceedings. That language is then incorporated into the court order appointing the receiver or authorizing the bankruptcy protection CCAA filing. In these cases, the court is available for anyone to make an application to lift the stay if they can prove that they are being prejudiced. Again, normally only secured creditors will be able to show prejudice.

2. Bankruptcies in Ontario – **Know whether, when, and where proof of claim needs to be submitted**

For bankruptcies in Ontario and restructurings, it is important to know what kind of insolvency proceeding is taking place. The notice you receive from the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) will tell you what kind of proceeding it is. It will also provide a proof of claim form to be completed. The notice will provide all the details.

It is important that you know:

The details.
How to complete a proof of claim form.
Where to send it into.
What timelines there may be.

Some creditors wish to file a proof of claim only so that if a dividend is declared they will get one. In that case, you can complete and file the proof of claim any time before the Trustee issues a final dividend. The Trustee must send a final notice to all named creditors who have not yet filed a proof of claim before issuing a final dividend.

Some creditors wish to actively participate in the insolvency process. They may wish to attend the meeting of creditors, vote on a restructuring proposal under the BIA. If creditors wish to actively participate in bankruptcies in Ontario, they should complete and file the proof of claim with the Trustee within the time-frame indicated in the notice accompanying the proof of claim form.

In a receivership, there will only be a need to file a proof of claim if the receiver has realized enough money from the sale of assets to pay out the trust claims and secured creditor claims in full and now has money for the unsecured creditors. This is very rare. In that situation, the receiver will conduct a claims bar process later on in the administration. That is when a notice with a blank proof of claim form will be sent out to the known creditors.

In a restructuring under the CCAA, first, the restructuring plan, called the Plan of Arrangement, is finalized. Then the Trustee will send out notices and blank proof of claim forms for creditors to complete and submit. Filling out the form at that stage will allow creditors to actively participate in the meeting and voting on the plan, as well as be in line to receive a payment.

3. Bankruptcies in Ontario – Obtaining a preference repayment from a future bankrupt debtor is not illegal or unethical, but you may have to give it back

If a customer of yours offers to pay you money, even if it turns out to be on the eve of an insolvency filing, take it! Always take the money; stress over any claim for it by a Trustee later.

The premise of the BIA is that all unsecured creditors will be treated equally. So, if certain unsecured creditors receive partial or full payment on the eve of filing, and then the debtor goes bankrupt, there is a presumption of a preference. The onus is on the creditor who received payment to rebut the presumption of a preference. If the Trustee is successful in attacking such a transaction, then the creditor must pay over the money to the Trustee. The creditor will also have spent money on its own legal fees. There will also probably be a cost award for all or a portion of the Trustee’s legal costs also.

Notwithstanding all this, it is better to have the money than not. Perhaps the Trustee will not knock on your door. Or, maybe you can avoid a lot of heartache by agreeing to and paying over a settlement amount that is less than 100% of what you received. Finally, there is a very limited number of defences to rebut the presumption of a preference. Perhaps your situation falls under one of them.

Taking the money is not immoral, unethical or illegal. You just may not be able to keep it if your customer files for bankruptcy after making the payment to you.

4. Bankruptcies in Ontario – review the Trustee’s Report very carefully and ask questions

The Trustee’s report outlines issues of importance regarding the conduct of the debtor both pre and post-filing. Sometimes, there may be an action that the Trustee could take to enhance the recovery of an asset, but lacks the funding to do so.

In those cases, a creditor or a group of creditors can choose to either:

Fund the Trustee to take the action for the general benefit of all unsecured creditors.
Get court approval to take the action in their own name under s.38 of the BIA.

It would be unusual for creditors to fund the Trustee. The simple reason is that they would be responsible for 100% of the costs but have to share any recovery with all the other unsecured creditors on a pro-rata basis. For this reason, it is not done.

Many times a creditor or group of creditors will choose to obtain court permission to take on the action in their own name. The court will insist that the creditor group make the opportunity to all creditors. However, a “buy-in” will be set. Most of the time other creditors won’t pony up to join in. Either they are not sophisticated enough to realize the potential benefit or they feel it is not worth their spending money in that way.

Under an s.38 action, if successful, the creditor can first pay back all its costs in doing the action. Next, they are entitled to keep up to the full amount of their claim. If any funds are left over, they must be paid over to the Trustee.

I am administering a bankruptcy file right now where there was foreign real estate. I did my investigation and determined that although saleable, the properties would take many years to sell and then to repatriate the money back to Canada. The major unsecured creditor wished to take control of the sales process. So, her lawyer got court approval for her to do so under s.38 of the BIA. No other creditor joined in with her. The properties are now sold, we have so far received a six-figure payment from the surplus sitting in her Canadian lawyer’s trust account after she was fully repaid all of her costs and the amount of her claim.

There is another six-figure amount sitting in a foreign country. We have retained legal counsel in that country now to get the rest of the funds repatriated into our trust account. Once received, we will finalize our vetting of all proofs of claim and make a distribution to the unsecured creditors.

5. A discharge from personal bankruptcies in Ontario ends the debtor’s liability for pretty well all debts

Unless the Trustee of a bankrupt corporation raises enough money for all of the creditors to be paid off in full, with interest, a corporation is never discharged from bankruptcy. In personal bankruptcy, the debtor is eventually entitled to an absolute discharge. The absolute discharge can be:

Received straight away when the debtor is able to be discharged.
Given once the bankrupt fulfills all of the conditions of discharge.

There are only a handful of claims that are not discharged upon the discharge of the bankrupt. Those are:

Trust claims.
Secured claims.
Those claims which fall under s.178 of the BIA.

If a debtor wishes to get out of a liability where the creditor holds security, such as vehicle financing, the debtor needs to trigger a default prior to filing for bankruptcy. So continuing with the vehicle example, the debtor could tell the lender that it cannot afford to make any more payments. The debtor would then give the vehicle and the keys to the lender.

The debtor should then wait for notice from the lender that the vehicle has been sold, the lender has suffered a shortfall and demands payment for the shortfall. The shortfall is an unsecured claim. The debtor now files for bankruptcy after the shortfall claim has crystallized. There now is no longer a secured claim for this debt.

If the debtor does not wait for the shortfall notice from the lender, they run the risk that the shortfall occurs after the date of bankruptcy. In that case, the shortfall unsecured claim will not be a debt discharged by the bankrupt’s discharge.

I have previously written about the s.178 claims. You can read about them in my blog.

Lacking affirmative action by a debtor or Trustee, all secured claims go through the bankruptcy unaffected. It is incumbent on the Trustee to get a lawyer’s security opinion on the validity of any secured creditor’s security as against the Trustee. I have a corporate bankruptcy file now where the legal opinion was that the security was not valid. I advised the creditor who did not object. I guess they already knew!

6. Bankruptcies in Ontario – A fully completed restructuring also discharges most debts

The most essential element of reorganization situations under the BIA and CCAA that creditors need to know is about how debts get discharged in a restructuring. Similar to a personal bankruptcies in Ontario, in a successfully completed corporate restructuring, the debtor’s debts are discharged. Again, except for trust claims and secured creditor claims, the ordinary unsecured debts of a corporation are fully discharged when a restructuring plan that has been accepted by the creditors and approved by the court is fully completed. When the payout is made to the creditors and the company has successfully completed it, there are no pre-filing debts remaining.

So what is the significance to creditors? Well, if you are a director of the company, any debts that would have been a director liability, other than for a trust claim, vanishes. As there is no debt left, there is nothing left for the director to be responsible for.

Likewise, if someone personally guaranteed a premises lease to the landlord, if the lease is disclaimed as part of the restructuring, then the landlord has an unsecured claim. Once that claim is fully discharged in the restructuring, there is no debt left for the guarantor to be responsible for.

Creditors should also know that a company in a restructuring, may come to you to renegotiate your agreement with the company. If you refuse, the company could disclaim the agreement and any claim you have will be an unsecured claim in the restructuring.

7. Bankruptcies in Ontario bonus tip

It is better to get professional advice about extending credit to a customer and the best way to do it before you approve the credit. Getting professional advice after they have filed for bankruptcy limits your options.

Bankruptcies in Ontario – Summary

I hope you have found this bankruptcies in Ontario Brandon’s Blog helpful.

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.

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.

Tags bankrptcy and insolvency act, bankruptcies in ontario, bankruptcy trustee, BIA, CCAA, Companies’ Creditors Arrangement Act, Consumer Proposal, corporate restructuring, Court-appointed receivership, covid-19, Ira Smith Trustee, licensed insolvency trustee, plan of arrangement, privately appointed receiver, proof of claim, restructuring proposal, trustee

Brandon Blog Post

HOW TO USE DEBT RELIEF CANADA COVID TO ACHIEVE THE BENEFIT OF MORE TIME

Post author By Brandon Smith
Post date May 25, 2020

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.

If you wish to listen to the audio version of this debt relief Canada COVID Brandon’s Blog, please scroll to the bottom and click play on the podcast

Debt relief Canada COVID introduction

I have written before many blogs about debt relief in Canada and debt relief Canada COVID. I have written about:

Personal insolvency –

Corporate insolvency

Bankruptcy protection restructuring, both under the Companies’ Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada)
Receivership
Liquidation
Bankruptcy

Debt relief Canada COVID specific:

Personal insolvency
Corporate insolvency
Office of the Superintendent of Bankruptcy (OSB) going to court in every province to get timelines extended.

Now the federal government has drafted legislation to guarantee that Canadians, as well as Canadian companies, have the ability to meet governing time frames and target dates found in federal statutes. Some key target dates for debt relief Canada COVID found in the BIA and other statutes, such as the Canada Labour Code, given the COVID-19 pandemic and the courts essentially being shut down and only hearing emergency matters.

In this Brandon’s Blog, I discuss the proposed Time Limits and Other Periods Act (COVID-19). The purpose of this proposed statute will aid debt relief Canada COVID.

Canadian Department of Justice concerns

On May 19, 2020, the Canadian Department of Justice unveiled draft legislation. The government has posted it online and is allowing 10 days for any comments to be submitted on the proposed Time Limits and Other Periods Act (COVID-19). The federal government is concerned about debt relief Canada COVID and all other issues federal legislation deals with.

As I previously wrote, the OSB, went to court in each province to get certain deadlines suspended so that debt relief in Canada would not suffer. The OSB ensured that the system would work for debt relief Canada COVID. The federal government believes that so many Canadians, as well as Canadian companies, could be impacted in other federal statutes not designed for financial restructuring or debt settlement. The government is concerned that they may encounter possible legal jeopardy if, due to the COVID-19 pandemic, they fall short to meet target dates.

Consequently, the Government of Canada published draft legislation, which outlines prospective remedies that the Federal government might apply to deal with these essential problems. The draft legislative proposal for dealing with debt relief Canada COVID is online for 10 days. Interested stakeholders are invited to share their comments by May 29.

What the draft legislation is designed to do

The draft legal proposal is designed to suspend specific time frames as well as enable government ministers to prolong or put on hold other time limits consisted of in government regulations to:

Ensure that Canadians, as well as Canadian companies, are able to satisfy governing time frames and deadlines found in federal statutes, such as some key due dates found in the BIA for debt relief Canada COVID and under the Canada Labour Code during the coronavirus pandemic.
Protect Canadians’ rights and access to justice in the context of civil proceedings before the courts, by making sure that people and companies are protected to assert their rights and not miss a time limit or deadline during the COVID-19 pandemic.

The draft legislation includes stipulations to make certain that short-term extensions or suspensions cannot be made after September 30, 2020, and could be retroactive to March 13, 2020 when the COVID-19 pandemic officially began.

What the draft legislation says

As already mentioned, the draft relief is designed to protect Canadians under federal statutes designed for debt relief Canada COVID and other federal laws. So here are the highlights of what the draft Time Limits and Other Periods Act (COVID-19) currently proposes.

Section 3 defines a time frame. It says such time periods that are either suspended or prolonged under this Act, then, during the period that the suspension or extension holds, every mention in any Act of Parliament to that time restriction or duration is to be read as referring to the time limit or period as it is suspended or expanded.

Section 4 states that the Act does not refer to any time frame or any other duration related to the investigation of an offence or a proceeding arising from an offence.

Sections 6 and 7 deal with time limits related to proceedings. The proposed legislation purports to:

Put on hold, as of March 13, 2020 as well as until September 13, 2020, or an earlier day set by the Governor in Council, certain time frame certain proceedings, aside from proceedings from offences, before the courts.
Allow courts to adjust the suspension within particular limits and take measures regarding the results of a failure to satisfy a put on a hold time limit.
Allow the Governor in Council to waive such suspensions in particular scenarios.
Permit ministers, in respect of defined regulations, to put on hold or prolong time limits and also prolong other durations for no greater than six months, as well as to offer such suspensions or extensions retroactive to March 13, 2020.
A time frame might be put on hold or extended and also a time duration might be expanded for a total maximum period of 6 months.
permit ministers in the case defined in the previous point to give specified persons, bodies or tribunals some adaptability in applying these suspensions or expansions.
Prevent these powers from being exercised after September 30, 2020.

This draft Act would certainly permit the Governor in Council to restrict or enforce conditions on the powers provided to ministers. Having a federally mandated “time out” will certainly aid debt relief Canada COVID.

Summary

It appears that the federal government realizes that there are many federal laws where time periods must be met. During the coronavirus emergency shutdown of the courts, it may not be possible to meet all the deadlines. So, this omnibus proposed legislation aims to suspend or expand time frames to September 13, 2020. The hope is that it will allow for more orderly conduct for debt relief Canada COVID under the BIA and for other purposes different federal legislation allows.

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.

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.

CONSTRUCTION LIEN ACT: CAN YOU TRUST AN INSOLVENCY PROCEEDING?

Post author By Brandon Smith
Post date May 6, 2020

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

Introduction

Matters involving the Construction Act, R.S.O. 1990, c. C.30 ( formerly known as the Construction Lien Act) is very complex. In this Brandon’s Blog, I will use the term that laypeople are most familiar with, being the former name of the provincial legislation.

Construction law is a specialty unto itself. It gets even more complex when a company involved in construction enters insolvency proceedings. There is normally a conflict in these kinds of files between:

the contractors who did work claiming a construction lien trust claim in the project;
any secured creditors; and
the licensed insolvency trustee (formerly called a bankruptcy trustee) administering the insolvency file.

In this Brandon’s Blog, I describe a recent 5 member panel decision of the Court of Appeal for Ontario who had to decide whether a trust created under section 9(1) of the provincial Construction Lien Act survives a sale by the Monitor in an insolvency proceeding under the federal Companies’ Creditors Arrangement Act (CCAA).

The case is Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197 (Urbancorp). The matter was heard on October 3, 2019. The unanimous decision was recently released on March 11, 2020.

Some background matters

Before getting into the actual case, there are two background matters that I should first explain. When I thought of these concepts and then the decision this way, it made it easier for me to understand.

The first issue is the types of insolvency proceedings. There are essentially four types of insolvency proceedings. Some are not mutually exclusive. Each one of them can be used for the assets of the insolvent debtor to be sold. I break down the insolvency proceedings list in this way:

Using the restructuring provisions of either the Bankruptcy and Insolvency Act (Canada) (BIA) or CCAA.
A bankruptcy administration under the BIA.
A secured creditor taking enforcement proceedings on the assets subject to its security through the security itself by privately appointing a Receiver or Receiver and Manager.
A secured creditor making an application to the Court that it is just or convenient for the Court to appoint a Receiver to act on behalf of all creditors in stabilizing an insolvent debtor situation and to come back to Court with recommendations on how to proceed, including the sale of assets.

The second issue has to do with trust claims under the Construction Lien Act. There are several sections in the legislation dealing with trust claims. As I stated above, it is a very complex topic. So, I am going to only focus on the one that is the subject matter of this case. That is section 9(1) of the Act. That section deals with a trust claim against the vendor of the construction assets. It states:

“9 (1) Where the owner’s interest in a premises is sold by the owner, an amount equal to,

(a) the value of the consideration received by the owner as a result of the sale,

less,

(b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises,

constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 9 (1); 2017, c. 24, s. 9, 70.

Obligations as trustee

(2) The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement. R.S.O. 1990, c. C.30, s. 9 (2).”

The distinction here that I want you to keep in mind is the words in the very first line “Where the owner’s interest in a premises is sold by the owner…”(emphasis added).

Now for the case.

The Urbancorp Construction Lien Act case

This case deals with Urbancorp and related companies that developed and was building a residential condominium project. Urbancorp was insolvent and filed first a Notice of Intention to Make A Proposal under the BIA. The proceedings were later converted by the Court into proceedings under the CCAA. The insolvency proceeding was in both cases under a Federal restructuring statue. The Court appointed a Monitor to oversee the insolvency administration. Through various Court applications and court orders, the Monitor was given the authority to market and sell the condominium assets. The Monitor did so.

Now the cash the Monitor received from the sale stood in place of the original condominium assets. Subcontractors brought an application before the lower Court claiming they had a valid trust claim under the Construction Lien Act. The lower court judge carefully reviewed the evidence and prior decided cases and came to the conclusion that the subcontractors did not have a valid trust claim against the assets. The subcontractors appealed the lower court’s decision.

In addition to appealing the lower court’s decision, they also raised with the Court of Appeal a constitutional question that comes up many times. The constitutional question is, does federal law always take priority, or trump (with a small “t”!!) provincial law. This is otherwise known as the concept of paramountcy. Stated slightly differently, the issue can be stated as does section 9 of the Construction Lien Act remain to have application after a bankruptcy or initial order under the CCAA? The Attorney General of Ontario also stepped in on that part of the case.

The Court of Appeal accepted this constitutional question to be decided so there were now two issues before the Court of Appeal; the issue of paramountcy and the trust claim issue.

The constitutional question

The Court of Appeal went through a very thoughtful and careful analysis. It confined the constitutional question to the facts of this case. The court concluded in this case:

The trust created under section 9(1) of the Construction Lien Act is a valid trust under provincial law.
The BIA excludes from property available to the creditors any property held in trust.
Therefore, this provincial trust can be effective when there is an insolvency proceeding under the BIA.
Similarly, with the CCAA legislation, it follows that a section 9(1) provincially created trust might be effective when the insolvency administration is subject to the CCAA.

Now for the actual appeal

The Appeal Court now turned to the lower court judge’s decision that a section 9(1) of the Construction Lien Act trust did not apply in this matter. The five-member panel again went through a careful analysis of the statute and the case law. They spent a lot of time reviewing an earlier Court of Appeal for Ontario decision which the lower court judge relied upon in his decision.

The Court of Appeal highlighted that in that decision the lower court relied upon, the owner, being the insolvent debtor, had no interest in the asset that the subcontractors were claiming a trust claim against. The reasons were:

The asset was part of a package of assets sold.
There was a secured creditor who had security over all of the assets of the developer.
The proceeds less the expenses to produce the sale were less than what was owed to the secured creditor.
The court allowed the cash from the sale to stand in place of the assets.

Using this framework, the Court of Appeal stated that a s.9( 1) trust only arises if the value of the consideration received by the owner from the sale of assets, which have actually been enhanced by the work or materials of the contractor, surpasses the amount of the mortgage debt. A trust will not occur if the value is zero, or if the mortgage debt is equal to or above any kind of sale proceeds.

Therefore, the decision that the lower court relied upon in disallowing the trust claim does not stand for the suggestion that control by a CCAA Monitor of a sales process, or the receipt by the Monitor of the proceeds of the sale by itself, avoids a s.9( 1) trust against the proceeds of the sale of the enhancement are shown to have a positive worth that surpasses the mortgage debt on the asset. That fact pattern was absent from the case relied upon.

The decision

Now, you remember at the beginning of this blog I went through the essentially four types of insolvency proceedings. The Court of Appeal also considered the various types. The court drew a distinction in them as it relates to section 9(1) of the Construction Lien Act. Also remember that from my quotation above of this section, it starts with “Where the owner’s interest in a premises is sold by the owner…”(emphasis added).

In a receivership or bankruptcy, the owner loses control of the assets. The vendor in a sale is either the receiver/receiver and manager or the trustee in bankruptcy, respectively. In those examples, it is not the owner selling its own assets. It is the licensed insolvency trustee (formerly known as a bankruptcy trustee) selling its right, title and interest, if any, in the assets of the debtor. So the vendor is the licensed insolvency trustee in its specific capacity.

The Urbancorp matter started out as a restructuring under the Proposal provisions of the BIA and was then converted by the Court and continued under a different restructuring statute, the CCAA. In an insolvency administration under the restructuring provisions/statue, the owner does not lose control of its assets. True that the Monitor is given court authority to make decisions, market and then sell the assets. However, one of the cornerstones of the appointment of a Monitor is that the owner does not lose control of the assets and the Monitor does not become the owner of the assets.

Rather, the Monitor gets its powers from the court. The Monitor is actually selling the insolvent company’s assets as the company’s representative or agent. So even though it is the Monitor doing the selling, it is doing so on behalf of the owner. This is very different than a sale by a receiver/receiver and manager or trustee in bankruptcy.

In the Urbancorp situation, the value of the consideration received by the owner from the sale of assets, which have actually been enhanced by the work or materials of the contractor, surpasses the amount of the mortgage debt.

Highlighting these distinctions, the Court of Appeal for Ontario overturned the lower court decision and upheld the subcontractors’ trust claim. It substituted the lower court decision with an order that a s.9( 1) trust under the Construction Lien Act applies for the sum of $3,864,429 held in the accounts of the Monitor on account of the Urbancorp companies, for the benefit of the subcontractors, pro-rata in accordance with the amount owing to each of them.

Summary

I hope you found this case review helpful. It should be of particular interest to contractors, developers and builders in Ontario.

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, 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.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

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

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

Tags Bankruptcy and Insolvency Act, bankruptcy trustee, BIA, CCAA, Companies’ Creditors Arrangement Act, construction lien act, corporate restructuring, Court of Appeal for Ontario, insolvency, Ira Smith Trustee, licensed insolvency trustee, monitor, proposal, restructuring, secured creditor, trustee, trustee in bankruptcy, urbancorp

Brandon Blog Post

INSOLVENCY TRUSTEE TORONTO NEWFANGLED COVID-19 BUSINESS RESTRUCTURING PLAN

Post author By Brandon Smith
Post date April 16, 2020

The Ira Smith Team is totally operational and both Ira and Brandon Smith are here for a telephone consultation, conference calls and virtual meetings.

Keep healthy and safe everybody.

Introduction

The COVID-19 pandemic has upended our world. Everyone is scared, has many questions and there is a lot of misinformation out there. So many businesses have shut down and do not know if they will ever be able to start up. As a licensed insolvency trustee Toronto, I fully understand the fear and panic that has set in.

First, I hope you and your family are safe and healthy. The purpose of this Brandon’s Blog is to show a newfangled business restructuring approach that recently occurred in the United States. As far as I can tell, there is no reason why this kind of restructuring plan could not work in Canada also.

Modell’s Sporting Goods, Inc. et al Chapter 11 bankruptcy proceedings

On March 12, 2020, U.S. Bankruptcy Court District of New Jersey Judge Victor Papalia issued the Order approving the Chapter 11 bankruptcy protection application of Modell’s Sporting Goods, Inc. and related companies (Modell’s) filed on March 11.

Modell’s is America’s oldest, family-owned ran store of sporting products, athletic footwear, active clothing and fan gear. It was founded in 1889 by Morris A. Model. The initial Modell’s store was located on Cortlandt Road in lower Manhattan, New York City. Four generations of the Modell household have run and grown the family company into a chain of over 150 stores throughout the Northeast.

Mitchell Modell, the company’s CEO and President said the company’s poor financial performance resulting in the Chapter 11 bankruptcy protection filing was because of many reasons, including:

unseasonably warm winter season;
six fewer days in the shopping season this year between Thanksgiving and Christmas;
competition from Amazon;
the futility of NYC’s sports franchises business like the Knicks, Jets and Giants has not helped either; and
the coronavirus pandemic

I personally doubt the losing records of the local sports franchises was a reason for Modell’s failure. How many years were the Toronto Maple Leafs awful but you always saw lots of Leaf fans with jerseys, caps and flags?

The novel court Order

On March 27, 2020, the Honourable Justice Papalia granted Modell’s court application making an order providing for both a bankruptcy suspension and an operational suspension. The bankruptcy suspension froze the bankruptcy protection proceedings until April 30, 2020 (the Suspension Period). The operational suspension, allows Modell’s to shut down all stores and not operate. The judge also gave Modell’s the right to apply on short notice to the court to extend the Suspension Period. The order went on to state the stay of proceedings is in effect during the suspension.

Novel times call for novel solutions. As part of their application, Modell’s filed a modified budget to indicate what sources of cash it would have and what expenditures it would pay during the Suspension Period. It also indicated what expenditures were being incurred, but not paid. Commercial rent on all of its stores was one of the items being accrued, but not paid.

The reason Modell did not include any commercial rent payments in its modified budget was simple. They had to close down all of their stores as a result of the coronavirus pandemic. Stores closed means no sales. They were not going to pay rent on stores that were not generating cash.

The court order approved the modified budget. It also confirmed that the only payments that Modell’s would make were those indicated as essential. The company deemed payments to all of its landlords as non-essential. The court order did indicate that the accrued but unpaid expenditures were not and were not deemed to be waived or not payable at some time.

Pier 1 Imports took a page from the Modell playbook

In February 2020, Pier 1 Imports, Inc. (Pier 1) filed for Chapter 11 bankruptcy protection as part of looking for a buyer of its operations. It then closed all of its stores in Canada and many in the United States.

On Tuesday, March 31, 2020, following the Modell’s precedent, sent a request to the U.S. Bankruptcy Court for the Eastern District of Virginia to temporarily stop paying commercial rent on its retail locations along with certain payments to suppliers, shippers, and distributors.” Pier 1 has now had to shutter all of its shops as a result of the COVID-19 outbreak.

Judge Kevin Huennekens throughout the hearing provided approval of these activities while allowing for it to be reassessed each month. Judge Huennekens additionally provided authorization to hold off on any motions anyone other than Pier 1 may wish to file up until at the very least 45 days after Pier 1 returns to normal operations and payments.

Could this happen in Canada?

So the question is, could an insolvency trustee Toronto help a company get this newfangled Modell’s/Pier 1 precedent happen in a Canadian bankruptcy protection restructuring? Right now landlords are reeling from their commercial tenants telling them that rent for April is not going to be paid due to the business closures. No doubt this will be the same story for every month that the closures continue.

Most landlords should be willing to work with their tenants. The reason behind the non-payment is from forces outside of everyone’s control. But what if a commercial landlord plays hardball. Can a Canadian company file for bankruptcy protection in Canada and obtain a Court order approving the non-payment of rent?

The two corporate restructuring statutes in Canada are the Part III Division I section of the Bankruptcy and Insolvency Act (Canada) (BIA) and the Companies’ Creditors Arrangement Act (CCAA).

There are no express provisions in either statute to invoke a bankruptcy or operational suspension. In fact, the opposite is true. In either a restructuring or liquidation, rent is calculated on a per diem basis for as long as the company in a restructuring or the insolvency trustee Toronto in a corporate bankruptcy, is using the premises. Fairness is part of the Canadian insolvency landscape. There are years of cases on this issue and they all end up the same. If you are in occupation, the rent must be calculated and ultimately paid.

However, there are two similar sections in each of the BIA and CCAA. Section 183(1) of the BIA reads as follows:

“183 (1) The following courts are invested with such jurisdiction at law and in equity, as will enable them to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by this Act…”.

The words “auxiliary and ancillary” has been interpreted by the courts to mean that the bankruptcy court in each province has the jurisdiction to sanction and authorize all acts required to be done for the proper administration of the Canadian insolvency system. This holds whether it is a bankruptcy protection filing or outright bankruptcy.

The CCAA offers more flexibility in a bankruptcy protection corporate restructuring than the BIA does. In general, the Court will reach its decisions in a CCAA restructuring on the basis of fairness and reasonableness. The court needs to be concerned that what is being proposed is not illegal and there are cogent reasons as to why what is being proposed serves to benefit all or the majority of creditors affected by the restructuring.

The CCAA, therefore, offers more judicial discretion than the BIA. Courts err on the side of giving the CCAA statue a large and liberal interpretation. The court supervising a CCAA restructuring will exercise its equitable jurisdiction. The application of equitable jurisdiction can be interpreted to mean equity considers done what ought to be done.

The judge in a CCAA bankruptcy protection case overseeing the CCAA proceeding is in a unique position. He or she is in the best position to determine whether or not an agreement should be suspended in the face of overly aggressive creditors who if allowed to act, would upend the entire CCAA process. Finally, Section 11 of the CCAA allows a judge to “…make any order that it considers appropriate in the circumstances.”.

So, to answer the question as to whether a Modell’s or Pier 1 type order could be made under a BIA or CCAA corporate restructuring in Canada, my answer would have to be yes. It is possible. I don’t believe it could be gotten on a regular basis, but, in this COVID-19 pandemic world, I can see it being obtained in the face of an aggressive and uncooperative commercial landlord. It would, of course, be uncommon, but these are unique times.

So the answer for a large Canadian retailer facing an unreasonable and aggressive landlord when the commercial rent is not being paid may be to file for bankruptcy protection under either the BIA or CCAA, as appropriate.

Insolvency trustee Toronto summary

The Ira Smith Team family hopes you and your family are staying safe, healthy and well-balanced. Our hearts go out to every person who has been affected either through inconvenience or personal family tragedy.

Ira Smith Trustee & Receiver Inc. has always employed clean and safe habits in our professional practice and continues to do so.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

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

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

The Ira Smith Team is totally operational and both Ira and Brandon Smith are here for a telephone consultation, conference calls and virtual meetings.

Keep healthy and safe everybody.

Tags Bankruptcy, Bankruptcy and Insolvency Act, BIA, CCAA, chapter 11, chapter 11 bankruptcy protection, commercial rent, Companies’ Creditors Arrangement Act, coronavirus, corporate restructuring, covid-19, insolvency trustee toronto, Ira Smith Trustee, licensed insolvency trustee Toronto, modell's, pier 1, restructuring

Brandon Blog Post

CANADIAN TRANSPORTATION AGENCY APPROVES CEASE OPERATIONS TO CASH REFUNDS

Post author By Brandon Smith
Post date April 6, 2020

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

Introduction

As a result of the unprecedented situation caused by the COVID-19 pandemic, global airlines have either suspended operations entirely or are flying a shadow of their former schedule. Travellers are clamouring to get their money back. People who cannot work due to the coronavirus pandemic, need their money back to buy groceries or make their next rent or mortgage payment. While the Canadian government is working at warp speed to try to make things financially better for Canadians in the face of this virus crisis, it has also given the Canadian Transportation Agency the approval to give the airlines the clear for takeoff to ground your cash refund.

In this Brandon’s Blog, I describe how the government has given the airlines the green light to red light your refund and provide some useful suggestions.

The contract of carriage

Practically every country shut its borders to outsiders. On March 13, 2020, the Government of Canada provided a blanket travel advisory against all non-essential travel outside of Canada. Airlines, in action to the travel limitation, have cancelled trips. The friendly skies are a lot quieter these days.

When you purchase a flight you become a party to the airline’s contract of carriage. It is full of the usual legalese that you don’t read and just click accept as fast as you can. You do this because you really want to buy the ticket and you are afraid of losing that special reduced fare. It is a contract that sets out obligations between the airline and you and what happens in various events such as delay, cancellation by the airline and cancellation by the passenger.

The initial response of the airlines to COVID-19

Early on, the COVID 19 virus was just something that happened in China. It wasn’t something close to home. As the COVID-19 situation unfolded, the airlines implemented a number of policy changes to try to instill consumer confidence in members of the public who were thinking of voluntarily choosing not to fly. Most waived change penalties and allowed customers to seek credit for a future flight.

Most airlines became generous and allowed credit for even the most restrictive tickets, ones that normally become worthless when the passenger cancels. But what if the passengers didn’t proactively cancel and are left holding tickets for flights that aren’t operating because of the airlines, for one reason or another, cancelled on the passenger? Canadians are wondering now what happens to their money, at a time where they are already worried about an uncertain economic landscape.

Then the Canadian Transportation Agency changed everything

It is generally accepted under most contracts of carriage that when an airline cancels your flight they need to rebook you or provide a refund back to the original payment. COVID-19 has put all airlines in a liquidity crisis and they, like everyone else, need to conserve their cash. So, they do not want to give refund payment for all the cancelled flights. Especially with little to no revenue coming in right now.

Then the Canadian Transportation Agency came out with some important announcements. They were framed as public service announcements in keeping their staff and the general public safe from the coronavirus.

In reality, it is to help Canada’s airline industry. I am not saying that protecting Canada’s airlines is unnecessary or wrong, it isn’t. It just works against Canadians who need to be counting every penny. The announcements are:

Exempting the airlines from having to pay additional compensation to anyone whose flight was either delayed or cancelled.
Paused the dispute resolution mechanism between airlines and passengers until June 30, 2020. While passengers can continue to submit complaints, nothing is going to be done with them. The June 30 date is also subject to extension, depending on circumstances at that time.
Canadian regulations concerning the conduct of our airlines were created in anticipation of relatively localized and temporary flight interruptions. None contemplated the kind of global mass flight terminations that have taken place over recent weeks as a result of the pandemic. It is necessary to consider just how to strike a reasonable and also sensible balance between airlines and their passengers in these remarkable and also unprecedented situations. They went on to say that in general, a suitable method in the existing context could be for airlines to provide affected travellers with coupons or credits for future travel, as long as the vouchers or credits do not expire in an unreasonably short period of time (24 months would certainly be considered practical most of the times).

So there you have it. In one fell swoop, the Canadian government, through the Canadian Transportation Agency, sanctioned the airlines to not have to pay compensation or give people back their cash when the airline cancelled flights because of the travel bans.

What the airlines are doing

The airlines’ stance is that they are offering affected passengers a credit equal to the value paid, for use on future travel, for up to 24 months. I was one of the affected travellers. In response to an email, I received advising my flights were cancelled, my airline was insistent that I had to state, either in writing or on a recording, that I was cancelling my flight before I could receive the credit.

Hold on – I am not cancelling; the airline already cancelled my flight and my contract entitles me to a refund. The airlines are referring to the statement issued by the Canadian Transportation Agency which, after suspending hearing passenger disputes, seeks fairness amongst parties because they see the COVID-19 pandemic as a force majeure. Something outside of anyone’s control. Their guidance seeks to balance things by directing airlines to provide credit, not a refund.

So what can affected passengers do?

Customers who bought their tickets from the airline and paid by credit card may wish to attempt to initiate a chargeback. Credit card issuers are pushing back and a 3-way fight will ensue as they act as a mediator between passengers and airlines. I believe in most cases the offer of credit will be viewed as a reasonable compromise by the card issuers, in light of the Canadian Transportation Agency CTA guidance. Otherwise, they will have to either take the credit or see if they can book the same trip far enough out to guess when the “all clear” will be sounded and when they think they could get time off work to travel again.

Now, some people may think that since they bought insurance for their trip, they can claim against the policy. Wrong! If you have trip interruption insurance, that only covers you if you have already gone on at least the first leg of your journey, and are away from home. It covers your additional expenses if you need to return home sooner or later than planned and compensates you for non-refundable portions of unused, pre-paid travel arrangements.

Similarly, trip cancellation coverage also won’t help you. That coverage is in case you need to cancel your trip at the pre-departure stage. It can repay 100% of your trip price if you require to cancel your trip for a reason that is covered by the insurance.

What is so bad about credit for future travel?

So what’s so bad about a credit? When everything returns to normal, whenever that may happen, people will want to travel again and will have credit. Unfortunately, that doesn’t help anyone who really needs the money now that they paid for a vacation they can’t take anyway.

Worse, a credit, as opposed to a future confirmed reservation, is not payment for a defined service. Rather, it is your prepaid deposit and the airline’s ordinary unsecured debt to you. What if the airlines need to seek bankruptcy protection as a result of the financial stress being placed on them? What if like Air Canada bankruptcy protection, which it has already done twice before, they need to restructure under the Companies’ Creditors Arrangement Act (Canada) (CCAA). That unsecured debt could easily be compromised to the point where it either partially or totally vanishes. At least a future reservation cannot be eliminated (we hope!).

On March 27, 2020, a class-action lawsuit was filed in the Federal Court in Vancouver, B.C. It is on behalf of all Canadians who paid for flights not taken, cancelled and not refunded. The class is seeking a refund of the payment in its original form. So, if you paid by credit card, you get the cash put back on your card. If you paid in cash, you get back the cash. It will be interesting to see how that litigation eventually shakes out.

Summary

The Ira Smith Team family hopes you and your family members are remaining safe, healthy and balanced. Our hearts go out to every person who has been negatively affected either by mere inconvenience or misfortune. We salute Canada’s front line health care, police, fire emergency and safety workers.

All Canadians need to do their part to stop the spread of this infection. Social distancing and self-quarantining are sacrifices that are not optional. Unfortunately, families are separated from each other.

Ira Smith Trustee & Receiver Inc. has always employed clean and safe techniques in our professional practice. We continue to do so. We are not allowing any visitors to our office. If anyone needs our assistance, Ira or Brandon are available to help you. Telephone consultations and/or virtual meetings are available for anyone wanting to discuss their personal or corporate situation.

Are you now worried about how you are going to survive? Are you worried about how long your company will be able to pay employees who are not working and meet all of its other obligations? Those worries are normal. The executives at Canada’s airlines are also worried about the survival of their respective companies. Airlines may have to file for bankruptcy protection in order to do restructuring and turnaround.

The Ira Smith Team understands these fears. More notably, we know the requirements of the business owner or the person who has too much individual debt. Because you are dealing with these stressful financial issues, you are anxious.

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

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Tags Air Canada bankruptcy, canadian transportation agency, canadian transportation agency cta, cash refund, CCAA, class-action lawsuit, Companies’ Creditors Arrangement Act, contract of carriage, coronavirus, covid-19, credit card, flight cancellation, Ira Smith Trustee, liquidty crisis, OTC-CTA Canada, pandemic

Brandon Blog Post

CREDITORS: ALARM BELLS RING WHEN FINANCIAL RESTRUCTURING HEADS SOUTH

Post author By Brandon Smith
Post date February 26, 2020

Introduction

The purpose of this Brandon’s Blog is to describe the final type of bankruptcy in Canada. I will describe it from the viewpoint of creditors. Previously I’ve blogged about the three types of bankruptcies in Canada. I also wrote about the personal bankruptcy process and the corporate bankruptcy process in Canada.

Personal bankruptcy and corporate bankruptcy in Canada

From the first two, the personal bankruptcy process and the corporate bankruptcy process, that was from the perspective of a person or company filing an assignment in bankruptcy. I also wrote about a person or company being pushed into bankruptcy by one or more creditors through a bankruptcy application and a bankruptcy order.

Today’s blog is to talk about the third type of bankruptcy and that is a deemed assignment in bankruptcy. The deemed assignment is most commonly associated with when a financial restructuring under the Bankruptcy and Insolvency Act (Canada) (BIA) heads south.

Creditors and a deemed assignment in bankruptcy

In Canada, very large corporate restructurings are done under the Companies’ Creditors Arrangement Act. A person or a company of any size can also restructure under the BIA. This blog is about restructuring under the BIA to illustrate the third way a person or company can go bankrupt through a deemed assignment in bankruptcy.

The reason people or companies would file for a financial restructuring is to get a time out from its creditors taking action against them trying to collect on debts. People who owe more than $250,000 and companies who have too much debt qualify to restructure under the financial restructuring debt settlement provisions of the BIA. A restructuring filing gives them the needed time out to formulate a plan for settling the debt.

If a person owes $250,000 or less, then there is a different restructuring provision of the BIA available. That provision is the consumer proposal restructuring debt settlement section. If a consumer proposal restructuring attempt fails, that ultimately does not end up in being a deemed assignment in bankruptcy.

The deemed assignment in bankruptcy, the third type of bankruptcy in Canada, is really the topic of this blog.

Financial restructuring under the BIA

So the BIA has a financial restructuring section. The debtor needing a timeout can either file their restructuring proposal straight away or first buy some extra time by filing a notice of intention to make a proposal. If a debtor first files a notice of intention to make a proposal, within 10 days after that, they need to file a cash flow statement in the prescribed form plus related extra documents (unless the time period is extended by the court). The restructuring proposal must be filed within 30 days after the filing of the notice of intention to make a proposal.

When a debtor files the actual restructuring proposal a cash flow statement has to be filed with it as well. It will be an original one if the debtor goes straight away to the filing of the proposal or an updated one if they first filed the notice of intention to make a proposal.

Meeting of creditors to consider the proposal

Once filed the Licensed Insolvency Trustee (formerly called a bankruptcy trustee) (Trustee) must notify the creditors of the filing of a notice of intention to make a proposal and the restructuring proposal. The Trustee must call a meeting of creditors within 21 days of the filing of the restructuring proposal.

The creditors get to vote to approve or not approve the restructuring proposal creditor acceptances by voting and must be in the requisite majority calculated as a simple majority in number and at least 2/3 of the dollar value of all claims voting either in person at the meeting or by proxy and voting letter delivered to the trustee prior to the start of the meeting.

The need for Court approval

After creditors accept the Proposal, the Trustee must get the restructuring proposal approved by the court. For the court approval process, the court considers if:

the restructuring proposal, are the terms of the restructuring proposal fair and calculated to benefit the general body of creditors?
Did the Trustee properly follow all required procedural steps including properly holding and counting the voting by the creditors?

As long as the answers to these questions are yes and the restructuring proposal took the interests of all stakeholders into account, then the court will approve the restructuring proposal. Then the company or the person must successfully complete it including making all payments required under the restructuring proposal.

How can a restructuring proposal fail or head south?

A financial restructuring plan under the BIA can fail if:

the person or company fails to file the required cash flow statement and related documentation within the 10 day period after the filing of the notice of intention to make a proposal or the debtor;
fails to file a financial restructuring proposal within the 30-day time limit after the filing of the notice of intention to make a proposal or such greater time period authorized by the court;
the requisite majority of creditors voting do not accept the restructuring proposal;
the court does not approve the restructuring proposal; or
the restructuring proposal is accepted by the creditors and approved by the Court but the debtor fails to make the payments and do any other things contained in the restructuring proposal.

When the debtor is automatically bankrupt when there is an event of default in the Proposal

Under the following situations, the person or company will be deemed to have filed an assignment in bankruptcy if the person or company:

fails to file the required cash flow statement;
the debtor fails to file the financial restructuring proposal on time;
the requisite majority of creditors voting do not accept the restructuring proposal; or
the court does not approve the restructuring proposal

Under any of these conditions, the person or the company is automatically deemed to have filed an assignment in bankruptcy. You can go back and review my earlier blogs for the personal bankruptcy process and for what the corporate bankruptcy process is all about.

You can do the same thing when the restructuring proposals are accepted by the creditors and approved by the court but the debtor fails to make payments or do any of the other things contained in the restructuring proposal.

A Proposal default that does not automatically mean bankruptcy

Unlike the other events of default, when the debtor fails to make a payment under the Proposal, there is not an automatically deemed assignment in bankruptcy. Rather the Trustee has to give notice to the debtor and if there are any the inspectors in the restructuring to them also. The person or company attempting to restructure then has 30 days to remedy the default. If they do not remedy the default after the 30 day period then the Trustee has to issue a notice of default which is sent to the debtor, the creditors, and to the Superintendent of Bankruptcy.

After giving notice of default, the Trustee does not have to do anything else. Any one of the creditors can then bring a court motion to annul the restructuring proposal. If the Trustee has the funding to do so and is directed by the inspectors, the Trustee can also bring that motion.

If the motion is brought and is successful then and only then is the person or company deemed to have filed an assignment in bankruptcy.

But if nobody brings the motion the company or person actually just floats out there and the Trustee is entitled to go for taxation of its receipts and disbursements, make whatever distribution it can with the funds on hand and then go get its discharge.

Three types of bankruptcy in Canada

So to recap, the three types of bankruptcies in Canada are:

filing an assignment of bankruptcy;
a bankruptcy application and the issuance of a bankruptcy order; and
as explained in this blog, a deemed assignment in bankruptcy.

I hope you enjoyed this blog on creditors, a financial restructuring proposal and the process for a deemed assignment in bankruptcy. The IraSmith team is available to help you at any time. We offer sound advice and a solid plan for Starting Over Starting Now so that you’ll be well on your way to a debt-free life in no time.

Do you have too much debt? Are you banking on some outside event that you have no control over, like an inheritance or gambling winnings to save you or your company?

If yes, then you need immediate help. The Ira Smith Team comprehends just how to do a debt restructuring. Much more notably, we know the demands of the business owner or the person who has too much debt. Due to the fact that you are managing these stressful financial problems, you are anxious.

It is not your fault you cannot fix this issue on your own. You have just been shown the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief now.

At Ira Smith Trustee & Receiver Inc., we take a look at your whole condition and layout a strategy that is as unique as you are. We take the load off of your shoulders as a part of the debt negotiation approach we will create just for you.

We understand that individuals facing financial troubles require a lifeline. That is why we can establish a restructuring procedure for you as well as end the pain you feel.

Call us now for a no-cost consultation. We will certainly get you or your business back on the road to a well balanced and healthy life and end the pain factors in your life, Starting Over, Starting Now.

Tags Bankruptcy, Bankruptcy and Insolvency Act, BIA, Companies’ Creditors Arrangement Act, Corporate Bankruptcy, court approval, creditors, deemed assignment in bankruptcy, financial restructuring, Ira Smith Trustee, licensed insolvency trustee, meeting of creditors, notice of intention to make a proposal, personal bankruptcy, restructuring, restructuring proposal, trustee

CCAA Canada introduction

When a company tries to reorganize under CCAA Canada – What does CCAA mean?

What does CCAA Canada protection mean? CCAA vs Chapter 11

Can CCAA Canada protection be extended?

Who gets priority under a CCAA Canada filing?

What happens if the court doesn’t approve a CCAA Canada application or the sides can’t agree on how to restructure debt?

What happens to shareholders in a CCAA Canada restructuring?

Public company shares in a company if it enters CCAA Canada protection and all trading is halted

List of CCAA filings under CCAA Canada during the COVID-19 pandemic so far?

CCAA Canada summary

Company bankruptcies introduction

The role of a Key Employee Retention Plan (KERP) in company bankruptcies

So if KERP is normal, why pay out big bonuses ahead of time?

Why big bonuses are not paid out on the eve of company bankruptcies in Canada

The main factors considered by the court being asked in company bankruptcies to approve a KERP

Company bankruptcies summary

Canadian business introduction

Canadian business opening-up again

But there are still Canadian business problems

What happens when the government support programs end?

There is one precious commodity Canadian business will need when the support programs stop

Bankruptcy protection will very likely be the answer

How will bankruptcy protections help Canadian business?

The biggest resource Canadian business will need is also going to be its largest enemy

Canadian business summary

Introduction

The Quadriga CX demise

QuadrigaCX 2020 update

The Ontario Securities Commission investigation into the Quadriga CX demise

What the Quadriga CX scandal can teach us for improving our financial literacy

Summary

Bankruptcies in Ontario -Introduction

1. Bankruptcies in Ontario – the automatic stay of proceedings

2. Bankruptcies in Ontario – Know whether, when, and where proof of claim needs to be submitted

3. Bankruptcies in Ontario – Obtaining a preference repayment from a future bankrupt debtor is not illegal or unethical, but you may have to give it back

4. Bankruptcies in Ontario – review the Trustee’s Report very carefully and ask questions

5. A discharge from personal bankruptcies in Ontario ends the debtor’s liability for pretty well all debts

6. Bankruptcies in Ontario – A fully completed restructuring also discharges most debts

7. Bankruptcies in Ontario bonus tip

Bankruptcies in Ontario – Summary

Debt relief Canada COVID introduction

Canadian Department of Justice concerns

What the draft legislation is designed to do

What the draft legislation says

Summary

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.

Introduction

Some background matters

The Urbancorp Construction Lien Act case

The constitutional question

Now for the actual appeal

The decision

Summary

Introduction

Modell’s Sporting Goods, Inc. et al Chapter 11 bankruptcy proceedings

The novel court Order

Pier 1 Imports took a page from the Modell playbook

Could this happen in Canada?

Insolvency trustee Toronto summary

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

Introduction

The contract of carriage

The initial response of the airlines to COVID-19

Then the Canadian Transportation Agency changed everything

What the airlines are doing

So what can affected passengers do?

What is so bad about credit for future travel?

Summary

Introduction

Personal bankruptcy and corporate bankruptcy in Canada

Creditors and a deemed assignment in bankruptcy

Financial restructuring under the BIA

Meeting of creditors to consider the proposal

The need for Court approval

How can a restructuring proposal fail or head south?

When the debtor is automatically bankrupt when there is an event of default in the Proposal

A Proposal default that does not automatically mean bankruptcy

Three types of bankruptcy in Canada

The role of a Key Employee Retention Plan (***KERP) in company bankruptcies***

2. Bankruptcies in Ontario – **Know whether, when, and where proof of claim needs to be submitted**