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DEEMED TRUST CANADA REVENUE AGENCY CLAIM: CAN THE CANADA REVENUE AGENCY SUPER PRIORITY LIEN BE PRIMED IN A CORPORATE RESTRUCTURING?

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Deemed Trust Canada Revenue Agency claim: Introduction

Section 227 (4) of the Income Tax Act (Canada) (ITA) and the mirrored provisions in the Employment Insurance Act (Canada), create deemed trusts against the property of a tax debtor. When a tax debtor doesn’t remit employee source deductions or HST collections, a deemed trust Canada Revenue Agency claim arises.

Deemed Trust Canada Revenue Agency claim: Parts of the Initial Order

In every Court-supervised restructuring under the Companies’ Creditors Arrangement Act (CCAA), there are several standard provisions in the Initial Order issued by the Court. In addition to the stay of proceedings provision, there’s also the need to make sure that the insolvent company has:

  • sufficient debtor in possession (DIP) funding to survive the restructuring process;
  • the Directors incentivized to stay in their capacity; and
  • the services of the Court-appointed Monitor and its legal counsel properly retained.

The normal way of achieving this is to give Court-ordered priority charges. Examples are for the borrowing authority, the Directors’ Charge and the Administrative Charge. This is so the lender, the Directors and the Court-appointed Monitor and its legal counsel know that there is a source of (re)payment.

Priority charges are made when certain affected parties may not be represented in Court. Therefore, a standard “comeback clause” is also in the standard Initial Order. This allows any affected party to make a motion before the Court to amend such Court-ordered priority charges.

Deemed Trust Canada Revenue Agency claim: The Canada North Group Inc. decision

A decision was recently released by the Alberta Court of Queen’s Bench in Canada North Group Inc. (Companies’ Creditors Arrangement Act), 2017 ABQB 550. The Court case reviewed several issues, but the one I found most interesting was one specific question. Can Court-ordered priority charges under a CCAA restructuring prime the deemed trust Canada Revenue Agency claim?

The decision goes through a very interesting analysis as to whether a deemed trust Canada Revenue Agency claim provides Her Majesty with the ownership of the property of the company or is merely a secured interest in the property. Section 227 (4) of the Income Tax Act (Canada) and the mirrored provisions in Employment Insurance Act (Canada), create deemed trusts. Section 37(2) of the CCAA explicitly preserves their operation. Specifically, can Court-ordered priority charges under a CCAA restructuring prime the deemed trust Canada Revenue Agency claim.

Deemed Trust Canada Revenue Agency claim: Section 227(4.1) of the ITA

Section 227(4.1) of the ITA states:

“Extension of trust

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the way and when provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

and is property beneficially owned by Her Majesty despite of any security interest in such property and in their proceeds, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.”

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Deemed Trust Canada Revenue Agency Claim: What is the nature of Canada Revenue Agency’s interest?

The Court raised, amongst other things, the following two questions:

  1. What is the nature of Canada Revenue Agency’s interest?
  2. Does the statutory secured status deemed trust Canada Revenue Agency claim elevate it above a priority charge?

Canada Revenue Agency relied on the trust provisions in the Fiscal Statutes. It argued that it holds a proprietary and not secured interest in the debtor’s property. Key to its position under its deemed trust claim is the concluding phrase in s 227(4.1) described above.

Canada Revenue Agency asserted that these words take it beyond a mere secured creditor. They stated it was so because they do not just consider the Crown to be the owner of the interest. Rather, the statute says that it is the owner. However, previous decisions in Canada have found that the deemed trust is not in truth a real one as the subject of the trust cannot be identified from the date of creation of the trust.

The Court also stated that, in principle, the deemed trust is similar to a floating charge over all the assets of the tax debtor. This is because the tax debtor is free to deal with its property. When it does, the trust releases the disposed-of property and attaches to the proceeds of sale. To find otherwise would freeze the tax debtor’s assets and prevent it from carrying on business. The Court found that this was not a result intended by Parliament.

The Court concluded that Canada Revenue Agency’s interest is a security interest, not a proprietary interest.

Deemed Trust Canada Revenue Agency Claim: Can the statutory deemed trust Canada Revenue Agency claim be raised?

The Court stated that it may seem that certain sections of the CCAA conflict with the deemed trust sections in the Fiscal Statutes on a strict reading of only the above-noted section of the ITA. That is what Canada Revenue Agency did to support its interpretation.

However, the Court went on to say that one must not read these provisions in a vacuüm. The Fiscal Statutes, the BIA, and the CCAA are part of complex legislative schemes that run concurrently. They must be read in their entire context. The aims of the statutes and Parliament’s intention kept in mind.

The Court agreed with earlier cases that the purpose of the CCAA is to let the debtor to continue to carry on business and, where possible, avoid the social and economic costs of liquidating its assets. The Court also stated that the CCAA legislation is remedial in the purest sense. It provides a means whereby the devastating social and economic effects of bankruptcy or creditor initiated termination of business operations can be avoided. It allows for a Court-supervised attempt to reorganize the financial affairs of the company.

Deemed Trust Canada Revenue Agency Claim: The Supreme Court of Canada on the Indalex deemed trust

Following the Supreme Court of Canada decision in the Indalex deemed trust decision, the Court agreed that the securing of the DIP facility is a key aspect of the debtor’s ability to attempt a workout. The harsh reality is that commercial imperatives govern the lending practices of the lenders, not the interests of the policy considerations that lead the government to legislate in its favour.

The Court also found that the priority charges aid in the restructuring process. Certain examples of such priority charges are:

  1. Interim DIP lender’s charge providing both an incentive and guarantee to the lender the recovery of funds advanced during the restructuring.
  2. The priority charge in favour of Directors is important. The charge keeps the captains aboard the sinking ship. Without the benefit of this charge, directors might abandon the ship.
  3. A priority charge for administrative fees is critical to a successful restructuring. It is the only protection the Court-appointed Monitor and its legal counsel have to make sure that their bills are paid.

Further, the Court found that the Section 11.52(2) of the CCAA codifies and elaborates on priority charges. Previously, the Court used its inherent jurisdiction in granting priority charges. The Court found that this shows Parliament’s intention that secured creditors’ interests could be eroded if the Court felt the need.

Deemed Trust Canada Revenue Agency Claim: The Court’s Decision

The Court stated that Canada Revenue Agency’s position that the deemed trust Canada Revenue Agency claim cannot be primed, fails to reconcile that the goal of the Canadian insolvency restructuring regime and Parliament’s continued commitment to facilitating complex corporate CCAA restructurings, even if it requires erosion of security.

For this and the other reasons listed above, the Court determined that the CCAA gives the Court the ability to rank the priority charges ahead of the deemed trust Canada Revenue Agency claim and the resultant security interest.

Deemed Trust Canada Revenue Agency Claim: Is Your Company In Need of Financial Restructuring?

The CCAA’s aim is to help business survival and avoid the multiple traumas caused by business failure. The Ira Smith Team have decades of experience in both complex personal and corporate financial restructurings.

If you or your company cannot survive without a restructuring, contact Ira Smith Trustee & Receiver Inc. NOW for a free consultation. You are just one phone call away from getting back on the road to financial health and reducing your stress levels, Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

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

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TORONTO BUSINESS BANKRUPTCY: NDP WANTS PENSION PROTECTION

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Toronto business bankruptcy protection: Introduction

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

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

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

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

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

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

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

Toronto business bankruptcy protection: Sears Canada too

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

Toronto business bankruptcy protection: Fairness for employees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

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

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SEARS CANADA NEWS TODAY: ARE THEY SABOTAGING THEIR OWN RESTRUCTURING?

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Sears Canada news today: Introduction

“I will certainly not invest one red cent in your shop … no severance, no sale,”

A (typical comment) posted on the Sears Canada Facebook page before the company blocked new comments and made old ones vanish.

Well there has been a lot of Sears Canada News today and in the last month. The company sought bankruptcy protection only last June 22, 2017. It has been only a little over 1 month, but there has been so much media attention it seems a lot longer.

Sears Canada news today: Social media backlash

We’ve seen on social media that Sears Canada is facing a backlash when it comes to how they’re handling this liquidation. Notice that I am using the word liquidation, as opposed to restructuring. This is in spite of they are currently operating under the Companies’ Creditors Arrangement Act (Canada) (CCAA). This statute is designed as a restructuring statute.

Sears Canada news today: Why KVETCH about a KERP?

It comes just as the company began its liquidation sales at those fifty-nine stores they’re looking to close. There is a boycott in Canada that is gaining some traction on social media. People are upset with Sears Canada’s senior management. They obtained on the first Court application, approval from the Court on their plan to pay themselves retention bonuses. These bonuses would be paid under the terms of what is commonly called in complex corporate restructurings a “Key Employee Retention Plan” (KERP).

The retailer introduced that, as part of a Court-supervised restructuring procedure. It is shutting 59 of its 255 shops and letting go 2,900 workers. None of them will get severance pay. Sears also will stop payments to the employees’ defined benefit pension plan. The retailer recently accepted to delay that pension plan payment issue till September 30th.

Sears also accepted the compromise with the former employees to maintain paying health benefits for an extra 3 months until the end of September. This is so the people could have that time to get alternate coverage. It is still not great though. The employee pension plan will remain underfunded. The employees will have to look for a new health plan. To date, there is no provision for former staff to receive any sort of package.

Sears Canada news today: What exactly is a KERP?

It is normal in complex corporate restructurings to set up a KERP. The concept of a KERP began in US corporate restructurings in the 1990’s. The theory is that to have a successful restructuring, senior management have specific knowledge and ability. If they walked away from the company in bankruptcy protection, such as to accept a senior position elsewhere, the company would have a much more difficult and costly time in restructuring. Hence the idea was born that those essential managers should be promised a bonus to create the most value possible in the restructuring for the stakeholders. This is in addition to their normal compensation.

Often KERPs are now viewed as either:

  1. a standard item that senior management expects to receive; or,
  2. a greedy money grab negatively affecting other stakeholders.

I have not yet read any material to show why the Sears Canada bankruptcy protection case is so complex. I have not read how Sears Canada could not liquidate without existing senior management. It is earlier and current senior management who have not created a retail vision niche for Sears Canada for years.

Sears Canada news today: Time to “come back”

Thankfully, all CCAA protection orders have a standard “come back” clause. The reason for this is that not every stakeholder receives notice of the company applying for the bankruptcy protection order. Any stakeholder can come back to Court to oppose any part of the original order they did not receive notice of. They could not tell the Court of their position, and now want to come to Court with their complaints.

The Court appointed a law firm to represent the interests of the employees and former employees. As part of their motion material filed with the Court, they are asking the Court to amend the Sears Canada KERP. They state:

  1. the amounts are excessive under the circumstances; and
  2. the KERP does not incentivize senior management to enhance the value of Sears Canada.

It will be very interesting to follow this.

Sears Canada news today: It didn’t have to be this way

You may recall that Target Canada took a slightly different route towards its former employees when it decided to liquidate and leave Canada. It also liquidated under the CCAA. In our blog “TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING”, we told you about the liquidation and that Target US established a trust fund for payment of the Target Canada obligations to its employees. For sure personal hardships occurred. At least they tried to soften the blow.

So now, while Sears Canada wants customers to come and buy at the liquidation sale, they have a PR nightmare on their hands.

Sears Canada news today: No comments please

It is so bad, that Sears Canada is not permitting public messages on its Facebook page. Most the messages from the public so far are negative against the company. CBC News recently noted that Sears Canada’s Facebook page was riddled with remarks from Canadians objecting exactly to what was happening to the company’s employees. Sears Canada has removed those comments from its Facebook page as well as blocking new comments.

sears canada facebook comments layoffs
Picture courtesy of CBC News

Sears Canada news today: Certainly a funny way to stay in business

You must wonder if Sears Canada really wants to restructure, or if they are just liquidating their inventory. They are also trying to sell whatever other assets they can. If it was a true restructuring, you would think that senior management would want to see more customers who would be loyal to (the new) Sears Canada when it would exit bankruptcy protection.

So instead of growing a loyal customer base, Sears Canada’s actions have spawned a strong and growing “Boycott Sears” momentum. They’re going to have to deal with that. It’s going to be interesting to see exactly how this plays out while Sears Canada currently is shopping for a buyer.

According to Sears Canada, the unhappy remarks did not motivate it to close the public articles or to remove many of the bitter statements. Regardless, the former employees are still faced with now with the question “how do you collect salary owed to you from an employer that goes out of business”.

Sears Canada news today: What to do if you or your company have too much debt

If your company or you are experiencing financial problems, contact Ira Smith Trustee & Receiver Inc. We’re here to tell you on your restructuring and other options to avoid bankruptcy. If necessary, we can also talk to you about your bankruptcy options.

We can help you put your financial house back in order and set you on a path to debt free-living. You’ll be amazed at the difference one phone call to Ira Smith Trustee & Receiver Inc. can make.

Contact us today. We are a licensed insolvency trustee and will listen to your issues and offer compassionate, professional assistance to aid you to avoid bankruptcy.

With our help, you can regain control of your life, Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

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HOW TO SOLVE THE BIGGEST PROBLEMS WITH BANKRUPTCY PROTECTION MEANING

Bankruptcy protection meaning: Introduction

The Cambridge English Dictionary gives us the bankruptcy protection meaning as follows:

“bankruptcy protection noun [ U ]

UK ​ US ​ also bankruptcy-law protection

​LAW, FINANCE laws that limit the amount of money a bankrupt company (= one that owes more money than it can pay) must pay to those it owes money to:

The firm filed for bankruptcy protection after a massive accounting scandal.

We have filed for bankruptcy protection from creditors.

It’s the second time the company has sought bankruptcy protection in 25 months.

The Chicago-based business, already forced into Chapter 11 bankruptcy protection, said that a complete collapse is now a “distinct possibility”.

See also

Chapter 11”

Bankruptcy protection meaning: Bankruptcy protection meaning

The above definition is helpful, but, I would make one small change to it. There is a difference between a company that does not have enough cash to meet its expenses, or whose assets are worth less than the value of its liabilities. Such a company is insolvent. Such a company is only bankrupt if it has filed an assignment in bankruptcy or a Court has issued a Bankruptcy Order against it. Insolvency is the financial condition; bankruptcy is a legal state.

So, I will give you my bankruptcy protection Canada definition:

Bankruptcy protection is a legal state where the insolvent company (or person) has filed under the country’s bankruptcy laws to restructure and avoid becoming a bankrupt.

Bankruptcy protection meaning: How does it begin?

A company starts to go into “bankruptcy protection” by putting together its motion to the Court to tell that:

  1. they are admitting that they cannot pay their debts generally as they come due;
  2. their assets are worth less than the amount of their liabilities;
  3. they cannot continue in business in their current financial and business condition;
  4. there may be come calamity about to befall them if they do not have the time and breathing space to focus only on a restructuring and running of their business to regain profitability;
  5. and they’re asking for the Court’s help and protection while they formulate a proposal or a plan of arrangement to present to the creditors.

The company is not seeking “bankruptcy protection”. Rather, it is seeking protection from its creditors. It is seeking a “time out” from the Court so that the company’s creditors cannot begin or continue legal action against the company. It wishes to be protected from such outside influences so that nobody can tip it over.

Management is saying that if given time, it believes that it can come up with a plan to restructure the company so that it can emerge a better and financially healthy company. It wishes to take the opportunity to see if its creditors, and the Court, will agree to a restructuring plan. It wishes to continue in business to continue to buy and sell goods and services and to continue to be an employer.

Bankruptcy protection meaning: We have all heard about Chapter 11 bankruptcy protection

We have all heard about Chapter 11 bankruptcy protection proceedings. This refers to the restructuring provisions of the United States Bankruptcy Code. A case filed under chapter 11 of the United States Bankruptcy Code is often called a “reorganization” bankruptcy.

The Chapter 11 filing provides bankruptcy protection to the company and allows it to restructure itself and its assets to attempt to maximize creditor and shareholder value and avoid bankruptcy. A Chapter 11 case begins with the petition being filed with the bankruptcy court serving the area where the debtor can show a domicile or residence. A petition may be a voluntary petition, a debtor filing, or it may be an involuntary petition, a filing by creditors that meet certain requirements.

You have probably just heard about Chapter 11 this week, as Takata Corp., the Japanese company that made faulty airbag inflators and is now the subject of many lawsuits in the United States and elsewhere just filed Chapter 11 bankruptcy protection proceedings this week.

Bankruptcy protection meaning: Does Chapter 11 exist in Canada?

Chapter 11 is not a Canadian term or provision. In Canada, there are two federal statutes that a company wishing to reorganize can rely upon. Because they are federal statutes, they apply across the country. So, it does not matter if you are applying for bankruptcy protection Ontario Canada or in any other province.

The first statute is the Part III Division I Proposal restructuring provisions of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). The second, and today more common statute large companies file under, is, the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA).

There is no such thing as a bankruptcy protection act Canada. The BIA and CCAA are also not new bankruptcy laws in Canada. They have been on the books for some time and form part of the corporate bankruptcy laws in Canada . This vlog does attempt to give a bankruptcy protection Canada definition.

Bankruptcy protection meaning: The Canadian restructuring laws

Both companies and people can file under the restructuring provisions of the BIA. Only companies that meet the test can file under the CCAA. The CCAA is a relatively brief statute which allows a company the time for them to restructure their affairs. The CCAA is more flexible than the BIA and that is why it is the restructuring statute of choice for large and complex Canadian corporations. It has often been called the Canadian Chapter 11.

The reason for filing under the restructuring provisions of either the BIA or CCAA, is for the company to avoid bankruptcy. So there is a big difference when considering bankruptcy protection vs bankruptcy. That will be a topic for another blog or vlog.

A company would file for restructuring if management believes there is a viable business to be saved. Management believes that it has a viable business within the corporation and the corporation can be nursed back to good health by taking certain steps, including:

  1. reducing debt;
  2. preparing and implementing a new business plan;
  3. reducing expenses; and
  4. perhaps shedding redundant assets and/or unsuccessful business units.

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Bankruptcy protection meaning: What happens to the company when it is in restructuring mode?

The premise is that management remains in control of the business, its assets and operations while restructuring. As part of the plan, there may be senior management changes if confidence has been lost in the old management. However, management remains in control and the company continues to run.

The further assumption is that the company has enough cash flow, and/or enough lines of credit while in reorganization mode, to run and ultimately emerge from its restructuring proceedings. The Court needs to know that there will not be prejudice to any creditor by providing the bankruptcy protection to the company. Ultimately, the creditors and the Court will consider the company’s restructuring plan and decide whether to approve it.

Bankruptcy protection meaning: Some examples please

There have been many CCAA filings over the last few years. Some very well-known household names in fact, such as:

  1. Sears Canada Inc. – June 22, 2017
  2. Express Fashion Apparel Canada Inc. and Express Canada GC GP, Inc. – May 04, 2017
  3. Grafton-Fraser Inc. – January 25, 2017
  4. Performance Sports Group Ltd., Bauer Hockey Corp. – October 31, 2016
  5. Urbancorp Group of companies – May 18, 2016 and October 6 and 18, 2016
  6. Golf Town Canada – September 14, 2016
  7. Victorian Order of Nurses for Canada – November 25, 2015
  8. Verity Energy Ltd. – May 1, 2015
  9. Target Canada Co., et al – January 15, 2015 (this was just a liquidation, not a restructuring, but they used the CCAA)
  10. U.S. Steel Canada Inc. – September 16, 2014

Bankruptcy protection meaning: What to do if your company cannot carry on because of too much debt

If your company has too much debt and insufficient cash flow, you need your plan and strategy in place NOW. Contact us now. The Ira Smith Team is here to solve your debt problems and help you carry out that winning strategy, no matter the reason. We’re here to help and get you back on solid financial footing Starting Over, Starting Now. We’re just a phone call away.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

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

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BANKRUPTCY TRUSTEE IN VAUGHAN BECOMES LICENSED INSOLVENCY TRUSTEE

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The bankruptcy trustee in Vaughan: Why did we transform into a licensed insolvency trustee?

Similar to caterpillars turning into butterflies, this bankruptcy trustee in Vaughan went through a metamorphosis. The Office of the Superintendent of Bankruptcy officially changed the name “bankruptcy trustee” to “licensed insolvency trustee” (LIT). As of April 1, 2017, all licensed trustees must have fully transitioned to the use of the LIT designation.

The purpose of this blog is to offer an overview of the Canadian insolvency process. Think of it as a bankruptcy and insolvency lesson 101.

What is the purpose of the Bankruptcy and Insolvency Act

Among the primary functions of this insolvency process, it is to release the individual from specific financial debts. It is to give a straightforward honest but unfortunate debtor a “new beginning.”. The debtor has no responsibility for discharged financial obligations.

A discharge is available to personal bankrupts, not to corporations. Although a personal case typically causes a discharge of financial debts, the right to a discharge is not absolute. Some sorts of debts may not be released. Section 178(1) of the Bankruptcy and Insolvency Act (Canada) (“BIA”) sets out the types of debts that are not released by the discharge of the bankrupt. The kinds of debts that are not released are:

1. child support and alimony;

2. fraud or near fraud;

3. debts arising from Court orders.

Where can I do some of my research?

You must initially do some of your own research to get an idea of exactly what your choices are. One place to start is our website to learn about:

  1. Personal Services
    1. Credit Counselling
    2. Consumer Proposals
    3. Bankruptcy Alternatives
    4. The Bankruptcy Process
    5. Why use a Licensed Insolvency Trustee?
    6. Rebuilding Credit
    7. Personal Bankruptcy
    8. TOP 20 PERSONAL BANKRUPTCY FAQs
  1. Corporate Services
  2. Creditor Services
  3. Our Blog titled Brandon’s Blog

Once you have a good handle on what to expect, speak to a LIT to begin discussing what actions you have to take next.

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bankruptcy trustee in vaughan

The BIA

The BIA allows for a procedure that permits people and companies to be released from all of their financial debts through either:

  1. a restructuring (Consumer Proposal, Division I Proposal or the Companies’ Creditors Arrangement Act) under secure arrangements of the federal insolvency statute; or
  2. through bankruptcy by turning over their property to a licensed insolvency trustee to realize upon it for the general benefit of creditors.

Either way, the funds available for distribution to the creditors are paid out by the licensed insolvency trustee. It is according to the scheme of priority laid out in the BIA.

The Court will consider approving a repayment plan that will repay the approved part of the financial obligations in no more than 5 years. When you use the restructuring provisions of the BIA (Consumer Proposal or Division I Proposal), you need to have a payback strategy to show your creditors just how you are going to pay back your debts. A successful restructuring plan is an alternative to bankruptcy and will allow a person or company to avoid bankruptcy.

There are various rules and ways that must be followed. Your licensed insolvency trustee can go over all the issues with you and is there to aid you through the process.

How does it all work?

Canada’s insolvency legislation is designed for debtors experiencing financial problems who cannot pay their present financial obligations and don’t have enough cash flow to offer a restructuring plan to avoid bankruptcy. The aim is to get a release from their existing debts.

The premise of the BIA is that the individual must deliver all of his or her non-exempt assets to the licensed insolvency trustee. The trustee will sell them for distribution to the creditors. In return, other than for either secured debts or the class of debts not released by a discharge from bankruptcy discussed above, the person’s debts will be erased. The person will be able to maintain any type of property that is categorized as exempt under provincial regulations. In this way, a discharge allows the individual to return to society as discharged bankrupt. This allows the person to start all over again.

Your credit score

Filing in an insolvency process could impact your financial resources and credit score for years. You should very carefully weigh all your options before choosing the bankruptcy option. That is a discussion a licensed insolvency trustee will be happy to have with you and will help you in first trying to find one of the possible bankruptcy alternatives. Hopefully, together you can see which one is best for you. Only if there is not an available alternative, will the trustee recommend bankruptcy?

A current bankruptcy filing may prevent you from acquiring a mortgage or other financing for years. Credit card businesses will instantly end your charge cards when you file for bankruptcy. Likewise, if you are trying to find a job or rent a place to live, some employers or property owners might look unfavourably on a current bankruptcy filing. If other applicants are as qualified as you and don’t have a bankruptcy on their record, you probably won’t be chosen.

Fresh start

Bankruptcy permits people or companies that are unable to pay their debts to settle their monetary difficulties and start restoring their credit. Declaring bankruptcy will trigger the “stay of proceedings”, preventing creditors from starting or continuing any legal action to collect their debts.

A bankruptcy filing will stay on your credit report for about 7 years. Since many financial debts can be discharged in bankruptcy with certain exceptions, people can take certain steps to begin boosting their credit rating after filing for bankruptcy and for sure after obtaining their discharge.

What to do if you are experiencing financial hardship

I hope this bankruptcy trustee in Vaughan Brandon’s Blog was helpful to you. People experience financial hardship for many reasons. If you’re experiencing financial hardship and are looking for a way out, contact Ira Smith Trustee & Receiver Inc. With immediate action and the right plan for moving forward, we can set you on a path to debt-free living Starting Over, Starting Now. All it takes is one phone call.

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Brandon Blog Post

PERSONAL BANKRUPTCY BLOG – TRUSTEE EXPLAINS BANKRUPTCY OPTIONS

Introduction

Our Brandon’s Blog certainly is a personal bankruptcy blog, but it is more than that. Brandon writes on various finance and insolvency-related topics including corporate restructuring, corporate bankruptcy, alternatives to bankruptcy, credit counselling, restructuring through a consumer proposal or a Division I Proposal or the Companies’ Creditors Arrangement Act (CCAA).

Every Monday and Wednesday night Brandon posts to Brandon’s Blog. Monday night is a blog and Wednesday night is a vlog. Just to remind you what this means, here are dictionary definitions:

blog Pronunciation: /blɒɡ/noun

A regularly updated website or web page, typically one run by a person or small group, written in an informal or conversational style: you can add personal bankruptcy blog to the growing list of insolvency-related material popping up on the Web

vlog Pronunciation: /vlɒɡ/ noun

A blog in which the postings are primarily in video form: you can add personal bankruptcy vlog to the growing list of insolvency-related material popping up on the Web

Differences between US and Canadian insolvency statutes

In the United States, people filing for bankruptcy have many “chapters” from which to choose. Similarly, Canada has one chief insolvency law, the Bankruptcy and Insolvency Act, or BIA, and several supporting pieces of legislation. In perusing a personal bankruptcy blog, the potential filer can find the information he or she seeks.

In the United States, Chapter 11 bankruptcy is the most complex because it applies to large businesses and usually involves gigantic sums of money. In Canada, the equivalent is the Division I proposal. In such a proposal, the debtor’s business can keep assets necessary for its role so that it can generate streams of income from other places to repay its debts. Management also stays in control of the company and business operations.

What are the Choices in Canada?

The BIA sets out the ground rules, and several smaller pieces of legislation fill in the details. Although we Canadians don’t call them various chapters, our legislation is like that of the U.S. Here are the options for filing bankruptcy in Canada:

Personal bankruptcy in Canada is most similar to Chapter 7 in the U.S. By filing bankruptcy, the debtor seeks to deal with his or her entire debt load at once. The debtor does not believe that he or she has the means to attempt a restructuring. There are certain assets that are exempt for any one of a number of reasons, so anyone filing bankruptcy should consult a Trustee to find out more.

If a debtor decides to file a consumer proposal (because his or her debt load is $250,000 or less, not including any mortgages against the principal residence) or a Division I Proposal (for unsecured debts $250,000 or greater) instead, he or she is seeking a restructuring of debt so for repayment over a five years or less. Many times, debtors can negotiate with their creditors for part of the amount owed and work out deals on monthly payments, rates of interest, and other such considerations. A proposal is most similar to Chapter 13 in the U.S. and used by people who wish to AVOID bankruptcy.

Basically, the business operates as usual while making an offer to its creditors of payments over time, totalling an amount greater than the creditors would receive if everything was sold off in liquidation in bankruptcy. The largest businesses might even have several layers of debt that would need restructuring as part of a Division I proposal, and each layer might have different guidelines and restrictions based on the proposal.

For companies with greater than $5 million in debt, they could also make use of a different Federal restructuring statute called the Companies’ Creditors Arrangement Act (CCAA). Both the Proposal under the BIA and restructuring under the CCAA are for large complex corporate reorganizations.

Is a Lawyer Required?

Unlike citizens of the United States, Canadians don’t need a lawyer to file for bankruptcy. A Licensed Insolvency Trustee acts as the “referee” between debtor and creditors. In this way, people file and handle bankruptcy proceedings on their own in Canada. If the debtor has various complex issues or is a defendant in litigation where the plaintiff wishes to continue the litigation perhaps to attempt to prove that their claim is one not released by the person’s discharge from bankruptcy, then they may very well need a lawyer for those issues.

What to do if you have too much debt and want to read a personal bankruptcy blog?

To find out more, check out our Brandon’s Blog entries for the topic of personal bankruptcy blog. If you’re dealing with serious financial issues, contact a trustee, who is the Canadian bankruptcy expert. For the reasons already given, you should do this whether or not you’re contemplating bankruptcy. The reason is very simple: the licensed insolvency trustee will assess your situation, offer you all of your available options and will do this for you for free! You can’t find a better deal anywhere.

We’re not only bankruptcy experts; we’re experts in dealing with debt. Contact Ira Smith Trustee & Receiver Inc. today for a free consultation and you will be well on your way to regaining your former quality of life Starting Over, Starting Now.

THIS VLOG WAS INSPIRED IN PART BY OUR eBOOK – PERSONAL BANKRUPTCY CANADA: Not because you are a dummy, because you need to get your life back on track

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BUSINESS RESTRUCTURING PROPOSAL: REASONS WHY GOODWILL TORONTO IS NOT ALWAYS ENOUGH

The issue of a business restructuring proposal of Goodwill Toronto has recently been in the news. This video is an interview aired on TV Ontario, The Next Ontario show, with Dr. Sarah Kaplan, Professor of Strategic Management at Rotman School of Management, University of Toronto. The purpose of the interview is to obtain Dr. Kaplan’s views on the Goodwill Toronto closure of 16 Goodwill stores.

Toronto Goodwill thrift stores were operated, not unlike a Salvation Army thrift store, to raise funds to support the aims of the non-profit; in this case job skills and job creation for those who might otherwise be unemployable.

It takes money to restructure

We have all heard the expression “It takes money to make money”. I would like to make a slight twist on that expression by stating that it takes money to have a successful business restructuring proposal. Not only does the company and business have to be able to have sufficient cash flow in order to operate during the restructuring period, but there are also extraordinary one time expenditures related to the restructuring. Examples of such one time expenditures are reasonable one time exit fees to get out of uneconomical contracts, bonus payments to key personnel to ensure that they perform throughout the entire restructuring rather than resign for a new position elsewhere and professional fees.

Our Goodwill Toronto analysis

Our firm was consulted early in January to act as the licensed insolvency trustee in a business restructuring proposal of Goodwill Toronto. We spent half a day meeting with representatives of Goodwill Toronto in order to learn of their plight and to determine what sort of restructuring proposal might be possible.

In our meeting we learned that the main assets of Goodwill Toronto consisted of: (i) cash or liquid investments pledged to a Canadian chartered bank on account of business loans; (ii) accounts receivable with a certain percentage collectability; and (iii) inventory of items for sale, mainly used clothing, spread across 16 stores in leased locations.

We also learned that there were over 400 unionized employees, the majority of which had long term service with Goodwill Toronto. This is significant for three main reasons: (i) a viable restructuring proposal would be required to save the jobs of many, but probably not all of the employees; (ii) if the business restructuring proposal was unsuccessful, Goodwill Toronto would automatically be deemed to have filed an assignment in bankruptcy (a deemed assignment); and (iii) in a bankruptcy, the employees would have a claim under the Wage Earner Protection Program Act (WEPPA).

It takes money to implement a successful business restructuring proposal

So, why is this significant? The reasons it is significant for a restructuring vs. bankruptcy are:

  1. The secured portion of the employees’ WEPPA claim coming ahead of all creditors, including the chartered bank, totalled approximately $900,000.
  2. Next in priority was the claim of the chartered bank.
  3. There were no free assets after the above 2 claims that Goodwill Toronto could use to fund operations or the extraordinary expenses associated with a business restructuring proposal discussed above.

So as you can see, with no free cash flow, no excess realizable assets or a third party who could fund a business restructuring proposal (or in the worst case a bankruptcy proceeding), it would not be possible for a knowledgeable licensed insolvency trustee to agree to act as there was no source of funding available.

This is why the best of intentions and goodwill (toronto) is not always enough!

The Sarah Kaplan interview

Professor Kaplan raises many good points in this interview, including:

  1. We should first think about what the whole business model of the goodwill is.
  2. The goods that they get to sell are aimed at just generating revenues that allow them to perform their actual services like job.
  3. It may be that the retail environment is tougher in some ways if we think about the alternative for people who buy things at goodwill would be to go to discount stores or dollar stores.
  4. As the market is becoming more and more competitive we could imagine that people would not need to shop at Goodwill if they can get a t-shirt for $5 at WalMart.
  5. Goodwill’s in other areas though are doing fine so we may need to look a little bit more deeply into the problem.
  6. The entire board resigned so there could be some other management issues that led to Goodwill Toronto to be running a deficit.
  7. You have to be well managed and being a social enterprise is not an excuse to not be well managed; you need the same skills capabilities and maybe even more skills and more capabilities than in the for-profit world.
  8. The fact that they’ve taken this extraordinary really drastic measure leads me to believe that the difficult retail environment is not the whole story and therefore not the whole story for other social enterprises.

NOTE: After writing this blog, Goodwill Toronto filed an assignment in bankruptcy.

Is your company in need of a business restructuring proposal?

If your company is trapped with too much debt, you need a professional trustee to help you manage debt and create a viable business restructuring proposal (either under the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act – BIA or CCAA) before it reaches a critical stage where bankruptcy is your only option. We have been able to help many companies carry out a successful business restructuring proposal. Successful completion of such a program, will free you from the burden of your company’s financial challenges to go on to be a productive, profitable employer allowing management to focus on business growth and not be plagued by debt problems.

Contact the Ira Smith Team today in order to look at the bankruptcy alternative of a business restructuring proposal. We can help and Starting Over, Starting Now you can be restored to financial health.

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STALKING HORSE BID: DO YOU REALLY WANT 2 STALK YOUR ADORABLE HORSE?

stalking horse bid
stalking horse bid

This blog was originally published on July 21, 2015. It was updated on March 22, 2021.

Bankruptcy Sales: What Is a Stalking-Horse Bid?

A stalking horse bid, in the Canadian insolvency context, is an attempt by a company (and/or its Monitor, Receiver or Trustee ) in a Court supervised insolvency proceeding, to set what will be the baseline that must be met and beaten by any other bids for the assets. The intent is to maximize the value of its assets as part of a Court supervised sales process and to discourage any bid below a certain value.

A stalking horse is a process that allows a potential buyer (the stalking horse bidder) to make a public bid for a company’s assets in order to set a floor price for the amount of money to be received by the company’s creditors in a (bankruptcy) sale. The stalking horse bidder will get to purchase the company’s assets if no other bidder comes forward. The stalking horse provision allows for the bidding process terms and conditions to be set in a court-supervised sale.

In this Brandon Blog, I describe the stalking horse bid process and how it works

What’s a stalking horse bid? Example of a stalking horse bid

According to Wikipedia:

“The term stalking horse originally derived from the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle. Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses.”

In an insolvency context, a stalking horse bid stands to test the market to see how the market values the assets for sale. If the market values the assets less than the amount of the stalking horse bid, then no one will bid higher and the party who made the stalking horse bid will be successful in acquiring the assets.

If the market values the assets more than the amount of the stalking horse bid, the higher offers will be made for the assets and for the Court to consider for approval. Presumably, a higher offer will be approved, the purchaser will purchase the assets and the stalking horse bid will not prevail.

stalking horse bid
stalking horse bid

How a Stalking-Horse Bid Works

The stalking-horse bid method allows a distressed company to avoid receiving low ball bids as its assets are being sold. Once the stalking-horse bidder has made its offer and it has been negotiated and court-approved, other potential buyers may submit competing bids for the company’s assets.

By setting the low end of the bidding range, the insolvent company hopes to realize a higher price on its assets. Insolvency proceedings are public. The public nature allows for the disclosure of more information about the deal and the buyer than what would be available in a private deal.

Stalking-horse bidders can generally negotiate which particular assets and liabilities it hopes to acquire. After the stalking horse bid is negotiated resulting in an asset purchase agreement, it will be necessary for the company, Receiver or Trustee to obtain Court approval of not only the stalking horse bid but also for the entire sales process to be implemented.

If the company is attempting to restructure and requires “bankruptcy protection”, then those corporate proceedings would be either under the Companies’ Creditors Arrangement Act (“CCAA”) or the Proposal provisions of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In that situation, it is the company making an application to the Court with the support and assistance of the monitor or proposal trustee.

If it is a corporate receivership or bankruptcy proceeding, then it is either the receiver or bankruptcy trustee making the application. In the case of bankrupt corporations, then it is the bankruptcy court that needs to approve the stalking horse bid, the entire sales process and approve the sale.

What does it take to get bankruptcy court approval?

When applying to the Court, approval for an entire sales process is being sought, a component of which is the stalking horse agreement. The Court has various considerations in determining if a stalking horse sale process should be approved. They are:

  • Is a sale transaction warranted at this time?
  • Will the sale benefit the whole “economic community”?
  • Do any of the debtors’ creditors have a bona fide reason to object to a sale process of the business?
  • Is there a better viable alternative?”

In the event the stalking horse bid is not the successful winner because of the other potential bidders at least one made a better offer, it is normal for the stalking horse purchaser to receive some form of compensation. The compensation is for the time, cost and resources invested to perform its due diligence, to make its offer which was found to be reasonable in the circumstances and to expose that offer to the marketplace to stand as a stalking horse bid, and for that bidder to not end up as the successful purchaser.

Our Firm has been involved in situations where the stalking horse bid has been both the successful bid unsuccessful bid. If the compensation, commonly known as break-up fees, is fair and reasonable, it will not dissuade other purchasers from coming forward in the sales process, and it will also be fair to the stalking horse bidder if they are unsuccessful. It is fair to the stalking horse bidder to have these bid protections incorporated into their offer.

The Court in considering the approval of a stalking horse bid also considers if the breakup fee, and the entire stalking horse bid, has been negotiated between arms’-length parties and has the support of the stakeholders involved in the insolvency proceeding.

stalking horse bid
stalking horse bid

The Pros and Cons of Being A Stalking Horse Bidder for Assets In Bankruptcy

There are various pros and cons to being a stalking horse bidder and making the stalking horse bid. First the advantages:

  • First to tie up the company’s management, perform due diligence thereby dealing exclusively with the company for the proposed purchase of its assets.
  • Gaining the advantage of time and access to the company’s financial information.
  • Having the time to be able to understand the company’s problems and challenges.
  • Getting under contract for the assets the purchaser wants to acquire.

The cons of making the stalking horse bid are:

  • Making sure that you set the break fee high enough to fully compensate the stalking horse bidder.
  • Not having too long a time period between approval of the stalking horse bid and the time when other bids must be submitted to avoid the assets or the company’s operations worsening through the process.
  • Would it have been better not to have been the stalking horse bidder and see how the company and its assets fare before having to submit a bid?
  • If the stalking horse bidder is not a secured lender, is there a likelihood the secured lenders will bid their security which will outbid yours?
  • If there is more than one acceptable bid, then an auction process is required to determine the successful bidder. The stalking horse bidder may not wish to participate in such an auction and will end up losing out.

Can a secured creditor credit bid? Cirque du Soleil agrees to ‘stalking horse’ takeover bid from lenders worth $375M

One of the most recent high-profile successful stalking horse bids was the Cirque du Soleil insolvency proceeding under the CCAA. In that case, a takeover proposal from the Cirque du Soleil’s secured creditors has been approved as the benchmark bid for a court-supervised auction of the insolvent entertainment company.

That is called a credit bid. When the secured creditor bids all or a portion of its outstanding loan. This will be done in situations where the secured creditor believes that the value of the assets to be sold is less than the amount owed, yet the company’s assets can be used to run a viable business. In that situation, the secured creditor would rather bid its security with the company debt to take over the assets.

By making a credit bid, the secured creditor potential purchaser does not need to come up with cash for the purchase price. However, cash will be required to make certain payments to parties the company business cannot operate without and to have working capital going forward.

If they bid the full amount of their loan and get outbid in other purchase agreements, it means they get fully paid out. Otherwise, they get the assets to run the company, bring it back to financial good health and profitability. Eventually, then they will sell the healthy company to recoup their money plus make a profit.

Stalking horse bid summary

If your company is experiencing financial difficulties, don’t waste your time stalking horses or any other animal. Seek the advice of your professional advisers. The earlier you seek financial help the more options will be open to you. Contact Ira Smith Trustee & Receiver Inc. today. We’ll review your corporate issues and come up with a sound plan so that Starting Over, Starting Now you can enjoy financial peace of mind.

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RESTRUCTURING AND TURNAROUND IS NOT ROCKET SCIENCE! HERE’S WHY

restructuring and turnaround, assignment in bankruptcy, bankruptcy, bankruptcies, Bankruptcy and Insolvency Act, BIA, Companies Creditors Arrangement Act, CCAA, Casimir Capital Ltd., deemed assignment in bankruptcy, trustee, proposal, starting over starting nowA restructuring and turnaround process that does not garner the support of the creditors can lead to bankruptcy. Bankruptcy ends up being a result of an attempt to save the business that has gone awry.

There are two statutes which set out the law of bankruptcy and insolvency law in Canada, including the Canadian regimes for a corporate restructuring and turnaround:

  • Bankruptcy and Insolvency Act (“BIA”): Contains 275 sections and is intended to be a complete code for bankruptcies. The law dealing with bankruptcies is within the BIA itself
  • Companies’ Creditors Arrangement Act (“CCAA”): Deals with corporate restructuring and turnaround (as does the BIA) and contains 22 sections. Most of the law dealing with the CCAA has developed from Court decisions as the statute is very thin!

Once in motion it’s extremely difficult to set aside an assignment into bankruptcy. That is why the interests of all stakeholders must be carefully considered and addressed in order for a restructuring and turnaround plan to be successful. Take for example the motion which was recently brought before the Ontario Superior Court of Justice (In Bankruptcy and Insolvency) by Casimir Capital Ltd., an intermediary or broker of various underwritings and placements. Up until January 31, 2014 when it resigned, it was a member and registered as a securities dealer with the Investment Industry Regulatory Organization of Canada (“IIROC”).

Casimir Capital Ltd. brought a motion seeking to set aside its deemed assignment into bankruptcy, and a review of a decision of a trustee to allow certain creditors to vote against a proposal put forth by the firm to settle its debts. At that meeting, 93.7% of the creditors voted against the proposal. However, in the motion, Casimir argued that some of the creditors should not have been allowed to vote as it disputes the validity of their claims.

The decision: In Re Casimir Capital, 2015 ONSC 2819 (CanLII), Casimir’s motion was dismissed. In his ruling The Honourable Mr. Justice Pattillo stated that the trustee “…was correct in allowing the Disputed Creditors to vote.” and “…the steps taken by the Proposal Trustee in reviewing and validating the proofs of claims filed, including the Disputed Creditors, for the purpose of voting at the first meeting were more than sufficient.”

The court noted that even if the votes of the disputed creditors were disallowed, 69.4% of the other creditors, whose claims are not disputed, voted against the proposal. The Court also agreed with the trustee that the debtor’s motion to have its deemed assignment in bankruptcy set aside fails in any event because even if the disputed creditors votes are set aside, the votes of the remaining creditors still defeat the proposal. As you can see, this restructuring and turnaround attempt was doomed for failure, as essentially none of the needs of the stakeholders were successfully addressed. Therefore in this case, a deemed assignment in bankruptcy was the end result. I am sure the professionals involved did the best they could with what they had to work with, but it obviously was not enough.

Unfortunately many companies and individuals find themselves in financial difficulties and surviving these financial difficulties can be a daunting task. Ira Smith Trustee & Receiver Inc. has helped many companies to not only survive, but prosper. Our corporate restructuring and turnaround strategies not only deal with short term crisis management but the long term viability of corporations. Contact us today so that Starting Over, Starting Now once again your company can a financially viable entity.

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TARGET CANADA LIQUIDATION BEGINS FEBRUARY 5; ATTENTION TARGET CANADA SHOPPERS

Target Canada liquidation, Target Canada, Companies’ Creditors Arrangement Act, CCAA, 17,600 employees, debt, Target Corporation, liquidation plan, creditor protection, Ira Smith Trustee & Receiver Inc., Starting Over Starting Now, restructuring of insolvent corporations, restructuringThe Target Canada liquidation plan for the sale of its inventory, fixtures, store leases and other real estate was approved by Order of The Honourable Regional Senior Justice Morawetz on February 4, 2015. In this blog, we will focus only on the Target Canada liquidation of the inventory, furniture and fixtures located at its retail stores, distribution centres and corporate head office. Hopefully, we will succeed in explaining it in plain English!

Target Canada sought and obtained creditor protection on January 15, 2015 under the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (“CCAA”), a Canadian federal statute. As we indicated in our earlier blog, TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING, the CCAA, which is normally used for the restructuring of insolvent corporations with debts over $5 million, in order to preserve all or a portion of the business and jobs. This time, rather than being used for a restructuring and turnaround, it is being used to provide for an orderly liquidation.

The closing of the Target Canada stores will put 17,600 people out of work over the next five months. The Initial Court Order provided for an Initial Stay Period was to expire on February 13, 2015. In order to carry out the Target Canada liquidation plan, part of the relief it sought and obtained was an extension of the Stay Period to May 15, 2015.

The two questions that we have been asked the most are: 1. what is the Target Canada liquidation plan for its inventory and chattels and how long will it take; and 2. will the suppliers receive everything they are owed from the liquidation?

The first question is easier to answer than the second. First, below in point form is a summary of the Target Canada liquidation plan for its inventory and chattels which is now approved by the Court:

  1. An exclusive agent was approved to conduct the Target Canada liquidation of the inventory, furniture and fixtures located at the retail stores, distribution centres and corporate head office, to liquidate in its entirety.
  1. The exclusive agent is a contractual joint venture comprised of Merchant Retail Solutions ULC (“ULC”), Gordon Brothers Canada ULC and GA Retail Canada. ULC will collectively act as the exclusive agent.
  1. The current time estimate is that the Target Canada liquidation will end no later than May 15, 2015 for the stores, April 30, 2015 for the distribution centres and March 31, 2015 for the corporate office. Circumstances may alter this schedule, but this is the current plan.
  1. All sales will be “final sales” and “as is” and all advertisements and sales receipts will reflect same.
  1. The exclusive agent has guaranteed that Target Canada will receive a net minimum amount of 74% of the “Cost Value” of the Merchandise (the “Guaranteed Amount”), computed in accordance with the Agency Agreement, and subject to adjustment in accordance with the Agency Agreement, if: (i) the aggregate Cost Value of the Merchandise is less than $445 million or greater than $475 million; and/or (ii) the Cost Value of the Merchandise as a percentage of the Retail Price of the Merchandise exceeds 63%. (This part was not plain English!!).
  1. What this means is that if there is no adjustment to the Guaranteed Amount calculation based on the Agreement, Target Canada is guaranteed to receive a minimum estimated amount of $340 million from the liquidation of the inventory, furniture and fixtures (based on an average Cost Value of $460 million).

Now for the second question. Target Canada owes money to nearly 1,800 businesses around the world, from India to Shanghai and Brampton to Winnipeg. It is impossible to estimate at this time what suppliers may expect to receive from the Target Canada liquidation, for the following reasons:

  1. There is no current estimate for what the net proceeds may be from the sale of the Target Canada store leases and real estate.
  1. There will be further deductions from the Target Canada liquidation including the:
  • trust claims of any party, statutory or otherwise, against the assets, properties and undertaking of Target Canada;
  • operating costs and liquidation specific costs for which Target Canada will have used its own cash flow rather than having borrowed those funds;
  • exclusive agent’s Charge and Security Interest (on the Limited Inventory Charged Property only);
  • Administration Charge (to the maximum amount of $6.75 million);
  • KERP Charge (to the maximum amount of $6.5 million);
  • Directors’ Charge (to the maximum amount of $64 million);
  • Financial Advisor Subordinated Charge (to the maximum amount of $3 million); and
  • DIP Lender’s Charge.
  1. The final amount of claims to ultimately be filed and admitted in the Target Canada liquidation are unknown. All we know is that in its initial motion material, Target Canada stated that it owed a total of $5.1 billion, of which $3.1 billion was owed to an entity related to Target Corporation in the United States. Target Corporation has stated that it will subordinate its $3.1 billion claim to those of the unsecured creditors.
  1. What claims may come before the claims of unpaid suppliers? The unpaid suppliers are ordinary unsecured creditors. The scheme of distribution, which has not been developed yet by Target Canada or submitted to the Court for approval, will have to reflect that the claims of trust claimants, other secured creditors and preferred creditors must be paid first before the claims of the ordinary unsecured creditors.

On paper, it seems that the Target Canada liquidation will provide sufficient proceeds to pay off all creditors in full, with assets and liabilities both in the $5-billion range. But the true value of the recorded assets will be less than stated. So for now, this second question cannot be answered.

We will continue to watch and blog about the Target Canada liquidation. If your business is showing signs of financial stress, contact Ira Smith Trustee & Receiver Inc. before your business problems lead to your business closing. The earlier you begin to deal with debt, the more options you’ll have. We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can live a debt free life.

Call a Trustee Now!