Tag: Corporate Bankruptcy

NAVIGATING BUSINESS INSOLVENCY IN CANADA: A LAWYER AND ACCOUNTANT’S COMPREHENSIVE GUIDE TO MASTERING INSOLVENCY LAW

Post author By Brandon Smith
Post date April 22, 2024

Introduction to Business Insolvency

Welcome to our Brandon’s Blog where we will explore the intricate world of insolvency and its profound impact on businesses in Canada from my perspective as a professional in the field. In this exploration of business insolvency, we will uncover the implications that insolvency brings for creditors, shareholders, their lawyers and accountants, and employees alike.

Understanding the complexities of financial distress is crucial for businesses to navigate through turbulent times successfully. Join me as we discuss effective strategies and best practices to mitigate the challenges of insolvency, ensuring a smoother transition toward financial stability.

Definition of Business Insolvency

Business insolvency in the Canadian context refers to the financial state of a business where it is unable to pay its debts as they become due. It is a financial condition, not a legal one. Do not confuse the business or company with the financial condition of being an insolvent person with the legal condition of being involved in bankruptcy proceedings. Corporate insolvency is not corporate bankruptcy.

Corporate insolvency results in the business being unable to pay its debts when due which may make it impossible for the business to continue its operations. Insolvent companies may very well end up in the legal state of bankruptcy or as an alternative to bankruptcy, in insolvency restructuring proceedings.

Business insolvency can force the business to choose one of the insolvency options for businesses, including bankruptcy filings or proposals for restructuring and repayment plans under the Bankruptcy and Insolvency Act (Canada) (BIA).

In Canada, the number of business insolvencies has been on the decline for many years, but the impact of the COVID-19 pandemic has seen a reversal of this trend. Business insolvency filings are on the rise again. However, there are many small businesses where a business bankruptcy process does not make any sense as there are either no or few assets to offset the large company debts. We get calls daily from entrepreneurs of such companies where we tell them it is in their best interests to merely close the business doors rather than spend money to put their company into bankruptcy.

Causes and Warning Signs of Business Insolvency

Economic Downturn and Market Volatility

One of the primary contributors to business insolvency in Canada is the unpredictable nature of economic fluctuations and market volatility. As businesses strive to adapt to shifting market trends and consumer demands, they are often met with unforeseen challenges that can strain financial resources. Economic downturns, changes in consumer behaviour, and global market dynamics all play a pivotal role in determining the financial health of businesses across various sectors.

Cash Flow Problems: Overleveraging and Excessive Debt Burden

Another significant factor that can precipitate business insolvency is overleveraging and an excessive debt burden. While leveraging can be a strategic tool for growth and expansion, it becomes problematic when businesses accumulate debt beyond their capacity to repay. High levels of debt, coupled with declining revenues or profitability, can create a precarious financial situation, ultimately leading to insolvency if left unaddressed.

Poor Financial Planning and Management

Effective financial management and planning are essential components of sustainable business operations. However, inadequate financial oversight and poor planning can leave businesses vulnerable to insolvency. From misaligned budgeting strategies to ineffective cash flow management, deficiencies in financial management practices can exacerbate existing challenges and hasten the onset of insolvency.

Regulatory Compliance and Legal Challenges

Navigating the complex regulatory landscape in Canada can pose significant challenges for businesses, especially concerning compliance and legal matters. Failure to adhere to regulatory requirements, such as tax obligations or industry-specific regulations, can result in legal disputes, penalties, and fines, placing additional strain on financial resources. Moreover, litigation and legal challenges can further impede business operations and contribute to business insolvency.

Technological Disruption and Industry Shifts

The rapid pace of technological innovation and industry shifts can disrupt traditional business models and market dynamics, presenting both opportunities and challenges for businesses in Canada. Failure to embrace technological advancements or adapt to changing industry trends can render businesses obsolete or inefficient, leading to a decline in competitiveness and financial viability. As such, businesses must remain agile and proactive in leveraging technology to stay ahead of the curve and mitigate the risk of insolvency.

External Shocks and Unforeseen Events

External shocks and unforeseen events, such as natural disasters, geopolitical instability, or pandemics, can have profound implications for business continuity and financial stability. The unprecedented disruptions caused by such events can severely impact supply chains, disrupt operations, and erode consumer confidence, thereby jeopardizing the financial health of businesses. While certain external shocks may be beyond the control of businesses, proactive risk management and contingency planning are essential to mitigate their adverse effects.

Remember, proactive planning, decisive action, and collaboration with knowledgeable professionals are the cornerstones of navigating business insolvency effectively.

Business Insolvency: Overview of Insolvency Law in Canada

In Canada, insolvency law plays a vital role in guiding businesses through financially distressed situations. As a professional knowledgeable in this field, I will delve into the types of insolvency proceedings and the key legislation and regulations that govern insolvency processes.

Types of Insolvency Proceedings: In Canada, businesses can navigate various types of insolvency proceedings:

- bankruptcy;
- proposal;
- corporate restructuring;
- receivership.

Bankruptcy involves the liquidation of assets to repay creditors, while a proposal allows for negotiating repayment plans to avoid bankruptcy. For larger corporations, corporate restructuring under different legislation than a proposal (discussed next) is available. Finally, when a secured creditor enforces its security to liquidate the business assets, that is receivership.

Understanding the nuances between these proceedings is essential for businesses facing financial challenges. All of these proceedings are described in detail in my previous blogs in the Lawyer and Accountant Series over the last few weeks.

Key Legislation and Regulations: The BIA applies to all business bankruptcy, proposal and receivership proceedings in Canada. The Companies’ Creditors Arrangement Act (CCAA) applies to corporations that owe more than $5 million to creditors who wish to avail themselves of Canadian bankruptcy protection to restructure their operations and finances.

These are the pivotal legislation for an insolvent person, be they a consumer, individual, proprietorship, partnership or corporation. They govern personal insolvency and business insolvency in Canada. The BIA will govern any personal bankruptcy or corporate bankruptcy.

Understanding these aspects of insolvency law is imperative for businesses as they navigate through financial difficulties. By recognizing the procedures and regulations outlined in the key legislation, businesses can protect their interests and work towards a successful resolution of insolvency issues.

As we continue to unravel the intricate landscape of insolvency law in Canada, I will now explore the specific roles of lawyers and accountants in business insolvency, shedding light on their invaluable contributions to navigating insolvency proceedings effectively.

Role of a Lawyer in Business Insolvency

Lawyers play a critical role in guiding businesses through the challenging landscape of insolvency. There are many complexities and responsibilities involved in representing clients during financial distress. Let’s explore the legal responsibilities and duties, as well as effective strategies for representing clients in insolvency proceedings.

Legal Responsibilities and Duties

A lawyer’s primary responsibility is to ensure that their clients navigate the legal proceedings smoothly, legally and ethically. Upholding the highest standards of professionalism and compliance with relevant laws is paramount in protecting the interests of all involved parties. From providing sound legal advice to negotiating on behalf of clients, every action must align with the legal framework outlined in insolvency law.

In insolvency proceedings, it’s essential to draft and review legal documents meticulously, such as restructuring plans and agreements, to safeguard the rights of creditors, shareholders, and employees. Transparency and adherence to the law are non-negotiable aspects that guide a lawyer’s responsibilities in representing clients effectively.

Strategies for Representing Clients

When representing clients in business insolvency cases, adopting a strategic approach is key to achieving successful outcomes. Clear communication with clients to understand their objectives and concerns forms the foundation of developing a tailored strategy. By conducting in-depth research, analyzing financial documents, and collaborating with other professionals like accountants and insolvency practitioners, lawyers can offer comprehensive legal services.

Each client’s situation is unique, requiring a personalized strategy that addresses their specific needs and goals. Through a combination of legal expertise, practical considerations, and proactive communication, lawyers strive to navigate the complexities of insolvency proceedings effectively. By working collaboratively with clients and other professionals, especially the insolvency professionals, they can secure the best possible resolutions for their clients’ insolvency challenges.

Role of an Accountant in Business Insolvency

Accountants also play a critical role in the realm of business insolvency. The CPA understands the importance of financial analysis and compliance with accounting standards in navigating through the complexities of insolvency. Let’s explore how accountants play a pivotal role in helping businesses facing financial distress.

Financial Analysis and Reporting

Financial analysis and reporting are fundamental aspects of dealing with business insolvency. The accountant’s role involves carefully assessing the financial health of a company experiencing insolvency issues. By analyzing crucial financial statements, cash flow projections, and other relevant data, CPAs can provide insights that help the business understand its current financial situation.

Through their expertise in financial analysis, CPAs identify key areas of concern and create accurate reports that are essential for stakeholders, including creditors, shareholders, and employees, to make informed decisions. Effective financial analysis enables businesses to develop strategies for managing financial distress, paving the way for a smoother resolution of insolvency issues.

Compliance with Accounting Standards

Compliance with accounting standards is a cornerstone for businesses navigating insolvency in Canada. The CPA will ensure that the financial statements are prepared in adherence to the relevant accounting principles and regulations. This commitment to compliance promotes transparency and upholds the integrity of financial reporting.

By maintaining strict compliance with accounting standards, businesses demonstrate their dedication to ethical practices and financial accuracy. This, in turn, fosters trust among creditors, shareholders, and other stakeholders during times of financial distress. Upholding accounting standards is crucial for businesses to mitigate legal and financial risks, emphasizing the need for meticulous attention to regulatory requirements.

CPAs recognize the significance of financial analysis and compliance with accounting standards in guiding businesses through the insolvency process. By providing invaluable financial expertise ensuring adherence to regulatory guidelines, and working with other professionals, especially the insolvency professionals, the external CPA supports businesses in making well-informed decisions and navigating the complexities of business insolvency successfully.

This is how both non-insolvency lawyers and accountants can still play a meaningful role in business insolvency, especially in a business restructuring process. A successful outcome of the business restructuring is the best way for the existing lawyer and accountant to maintain both the client but also a close meaningful business relationship for the long term.

Impact of Business Insolvency

Job Losses and Unemployment

The impact of Canadian business insolvency on job losses and unemployment can be significant. When a business becomes insolvent, it may be forced to lay off employees or shut down entirely, leading to job losses. This can result in a higher unemployment rate as workers find themselves without a job and struggle to secure new employment.

The COVID-19 pandemic has exacerbated these challenges, with many entrepreneurial businesses in Canada continuing to face financial difficulties and the continued risk of closure. Such businesses are still struggling to return to normal revenues, carry unpaid debt taken on during the pandemic, and face rising costs and a shortage of labour.

Targeted measures and support for small businesses are crucial to prevent closures and job losses. By assisting, such as financial aid, access to resources, and support for restructuring, the impact of business insolvency on job losses and unemployment can be mitigated. Additionally, policies like the recent amendments to prioritize creditor claims related to defined-benefit pension plans can help protect employees’ financial security in the event of insolvency.

Effects on Suppliers and Creditors

The effects of Canadian business insolvency on suppliers and creditors can be significant. When a business becomes insolvent, suppliers may face challenges in receiving payment for goods or services provided to the business. This can result in financial difficulties for the suppliers themselves, especially if they rely heavily on the insolvent business as a major customer.

Creditors, including financial institutions and other lenders, may also experience losses when a business files for bankruptcy or proposes a restructuring plan. In most cases, creditors will not receive the full amount owed to them, or they may have to wait a significant amount of time to receive any repayment.

Overall, Canadian business insolvency can have a ripple effect on suppliers and creditors, leading to financial challenges and losses for those involved in the business’s operations. Suppliers and creditors need to assess their credit risks before extending credit and take appropriate measures to protect their interests in the event of a business insolvency.

Potential Closure or Sale of the Business

In Canadian business insolvency, the potential closure or sale of the business can have significant implications for the business owner, employees, creditors, and the economy as a whole. If an entrepreneurial business is unable to meet its financial obligations and is forced to close its doors, it can result in job losses, financial losses for creditors, and a decrease in economic activity in the local community.

For the business owner, the closure or sale of the business can mean the end of their entrepreneurial venture, financial loss, and potential personal liability for both Director liabilities as well as any corporate debt personally guaranteed by the entrepreneur. Such liabilities can have a significant impact on their financial well-being and prospects.

For employees, the closure of a business can result in job loss, uncertainty, and financial hardship. They may struggle to find new employment, especially if the closure is due to broader economic challenges in the industry or region.

For creditors, the closure of a business can mean they probably will not recover the full amount owed to them. They may have to write off the debt as a loss, which can impact their financial stability and ability to extend credit to other businesses.

In terms of the economy, the closure or sale of a business can contribute to a decrease in economic activity, reduced consumer confidence, and a negative impact on the overall business environment. It can also lead to a loss of tax revenue for the government, further impacting public services and infrastructure.

Overall, the potential closure or sale of a business in a Canadian business insolvency is a complex and challenging situation that requires careful consideration of the implications for all stakeholders involved. It underscores the importance of effective financial management, planning, and risk mitigation strategies for entrepreneurial businesses to avoid insolvency and closure in the first place.

Reputation Damage

Reputation damage arising from a Canadian business insolvency can have long-lasting effects on a company. When a business becomes insolvent, it is unable to fulfill its financial obligations, leading to creditors and suppliers losing trust in the company. This can result in difficulty in securing credit, partnerships, and contracts in the future.

Moreover, news of a business insolvency can spread quickly, damaging the company’s reputation among customers and stakeholders. Customers may lose faith in the company’s ability to deliver products or services, leading to a loss of business and revenue. Employees may also become concerned about job security and employee wages. Morale suffers and the most qualified employees can find new jobs quickly. All of this leads to morale suffering which makes the business insolvency closer to a self-fulfilling prophecy.

Reputation damage from a business insolvency can be difficult to overcome. Rebuilding trust with creditors, suppliers, customers, and employees may take time and effort. Companies trying to implement a restructuring insolvency plan need to implement strong communication strategies to address concerns and demonstrate a commitment to financial stability and responsibility.

Overall, reputation damage arising from Canadian business insolvency can have significant consequences for a company’s long-term success and viability. Businesses need to address insolvency issues promptly and transparently to mitigate potential reputational harm.

Navigating Business Insolvency Proceedings

Initiating the Insolvency Process

In Canada, the process of initiating insolvency proceedings is a critical step for businesses facing financial distress. There are two kinds of processes; 1. voluntary and 2. involuntary.

The voluntary process normally begins with the insolvent business formally declaring insolvency by filing for bankruptcy protection under either the BIA or CCAA to begin the restructuring process. Alternatively, the insolvent business can file corporate bankruptcy if liquidation is the only answer for a business that is no longer viable.

The involuntary process would normally begin with either a secured creditor privately appointing or making an application to the Court for the appointment of a receiver. Alternatively, one or more unsecured creditors owed in total at least $1,000 can launch a Bankruptcy Application against the insolvent company.

Seeking professional guidance from experts like insolvency lawyers and licensed insolvency trustees is essential to navigate this complex process effectively. Businesses can begin addressing their financial challenges by initiating insolvency proceedings and working toward a resolution.

Managing Stakeholder Relationships

Managing stakeholder relationships is paramount during times of business insolvency in Canada. Creditors, shareholders, and employees all have vested interests in the outcome of insolvency proceedings. Effective communication and transparency are essential to build trust and mitigate potential conflicts. By keeping stakeholders informed, addressing their concerns, and involving them in decision-making processes, businesses can navigate insolvency proceedings with clarity and confidence.

Business insolvency is a complex issue that requires careful navigation. By understanding the implications for all stakeholders and seeking professional advice, businesses can better prepare for financial challenges.

Resolving Legal issues Within a Business Insolvency

There are two main avenues for addressing legal issues within insolvency cases: 1. Negotiation and Mediation Techniques, as well as 2. Litigation and Court Proceedings. I will now delve into the strategies and approaches essential for navigating through challenging financial times successfully.

Negotiation and Mediation Techniques

When faced with legal issues within insolvency cases, negotiation and mediation techniques can be powerful tools for finding amicable solutions. Insolvency trustees find that engaging in constructive dialogue with stakeholders can often lead to mutually beneficial outcomes. By exploring innovative and collaborative approaches, businesses can avoid unnecessary conflicts and costly legal battles.

Effective negotiation involves understanding the concerns and needs of all parties involved.
Mediation offers a platform for open communication, ensuring that diverse perspectives are heard and respected.
Skilled mediators facilitate the process, guiding toward agreements that protect the interests of creditors, shareholders, and employees.

By adopting a strategic and empathetic approach to negotiation and mediation, businesses can navigate the complexities of insolvency issues with resilience and integrity. The ability to find common ground and explore creative solutions is essential in any business restructuring.

Litigation and Court Proceedings

While negotiation and mediation are preferred methods for resolving legal issues within the insolvency case, there are instances where litigation and court proceedings become inevitable. This is more so within a liquidating bankruptcy proceedings rather than in a business reorganization. Licensed insolvency trustees understand the importance of legal recourse in protecting the rights and interests of all stakeholders involved.

Litigation provides a formal platform for resolving disputes and making legally binding decisions.
Court proceedings ensure that insolvency matters are adjudicated fairly and by the law.
Legal experts specializing in insolvency law offer invaluable guidance throughout the litigation process.

By preparing meticulously and engaging competent legal representation, businesses can navigate the complexities of court proceedings with confidence. While litigation may signify a more adversarial approach, it can also lead to definitive resolutions that provide clarity and direction in times of financial turmoil.

4 Common Business Insolvency FAQs

What is the difference between company insolvency and personal bankruptcy?

Company insolvency refers to a company that is unable to pay its bills and debts owed, while personal bankruptcy is a legal process for individuals who cannot pay their bills to eliminate debt.

When should a company consider filing for bankruptcy?

A company should consider filing for bankruptcy or bankruptcy protection to restructure when they are facing overwhelming financial difficulties, such as a loss of income, high levels of debt, inadequate cash flow, and reliance on personal credit to meet obligations. This only makes sense if action is taken relatively early in the insolvency when there are still assets that can be used in perhaps a different corporate form to continue to run the viable part of the insolvent business.

How much debt does a business need to owe to file for bankruptcy in Canada?

In Canada, an insolvent person or insolvent business needs to owe $1,000 or more to unsecured creditors to be eligible to file for bankruptcy.

Can sole proprietorships and partnerships file for business bankruptcy?

Yes, sole proprietorships and partnerships can file for business bankruptcy, and they would need to work with a Licensed Insolvency Trustee to do so. In these forms of business, it is the sole proprietor or partners who would be filing bankruptcy. As this would be a consumer insolvency, the bankruptcy rules dealing with the insolvency of individuals would guide this kind of bankruptcy process.

Business Insolvency Conclusion

Navigating business insolvency in Canada is a multifaceted challenge that requires careful consideration and strategic planning. As a licensed insolvency trustee, I have explored the intricacies of insolvency law and its impact on businesses, creditors, shareholders, and employees. Understanding the complexities of insolvency is pivotal for businesses to weather financial storms successfully for a brighter financial future.

The role of corporate lawyers and accountants in helping to guide businesses through insolvency proceedings is an important one. By recognizing the significance of legal responsibilities, financial analysis, and compliance with accounting standards, businesses, with the help of a Licensed Insolvency Trustee and insolvency legal counsel can tackle insolvency issues with confidence and resilience.

I hope you enjoyed this business insolvency Brandon’s Blog. Individuals and business owners must take proactive measures to address financial difficulties, consumer debt and company debt and promptly seek assistance when necessary. It is crucial to recognize that financial stress is a prevalent concern and seeking help is a demonstration of fortitude, rather than vulnerability. Should you encounter challenges in managing your finances and find yourself burdened by stress, do not delay in pursuing aid.

Revenue and cash flow shortages are critical issues facing people, entrepreneurs and their companies and businesses with debt problems that are in financial distress. Are you now worried about just how you or your business are going to survive? Are you worried about what your fiduciary obligations are and not sure if the decisions you are about to make are the correct ones to avoid personal liability? Those concerns and more associated with your company debt are obviously on your mind.

The Ira Smith Team understands these overwhelming debt financial health concerns. More significantly, we know the requirements of the business owner or the individual who 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 and it does not mean that you are a bad person. 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 uses innovative and cutting-edge methodologies, to adeptly navigate you through the intricacies of your financial challenges ensuring a resolution to your debt-related predicaments without resorting to the rigours of the bankruptcy process. We can get you debt relief now! We have helped many entrepreneurs and their insolvent companies who thought that consulting with a Trustee and receiver meant their company would go bankrupt.

On the contrary. We helped turn their companies around through financial restructuring. 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.

The Ira Smith Trustee & Receiver Inc. team understands 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, to begin your debt-free life, Starting Over, Starting Now.

Tags bankruptcy proceedings, benefit of creditors, business bankruptcy, business insolvency filings, canadian businesses, company debts, consumer insolvency, Corporate Bankruptcy, corporate insolvency, employee wages, financial distress, insolvency of individuals, insolvency options, insolvency process, insolvency professionals, insolvency trustee, insolvency trustees, legal proceedings, secured creditor

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CORPORATE BANKRUPTCY FAQ: USE OUR HACK TO SOLVE YOUR CHALLENGING INSOLVENT COMPANY ISSUES

Post author By Brandon Smith
Post date May 23, 2022

Corporate bankruptcy: An overview

Corporate bankruptcy is a legal process by which businesses can reorganize their financial affairs or liquidate their assets. Although bankruptcy can be complicated and stressful, it can provide businesses with a fresh start.

When it does happen, the corporate bankruptcy process can be complicated. Insolvency can take a toll on your company’s employees, customers, and shareholders. A solid understanding of corporate bankruptcy can help you properly restructure and reorganize your company using an insolvency process without killing your business.

Last week, I gave my best FAQ answers to common questions about personal bankruptcy services. A business partnership or sole proprietorship means that the individual(s) operate the business in their personal name. Answers about business bankruptcies for those forms of business would fall under the personal bankruptcy process that was covered in last week’s personal bankruptcy FAQ blog.

When a corporation conducts business, some of the questions, and answers, are different. In this Brandon’s Blog, I answer the most frequently asked questions about corporate bankruptcy.

**Can a business declare corporate bankruptcy?**

As stated previously, only a corporation can declare corporate bankruptcy. A corporation is its own legal entity. A “person” is eligible for relief under federal bankruptcy law. A “person” is typically defined in the Canadian bankruptcy legislation to include an individual, part of a partnership, a proprietorship, a company, an unincorporated association, a cooperative society, or a cooperative organization. corporate bankruptcy canada

What are the different types of corporate bankruptcy in Canada?

There are 2 different types of bankruptcy that a company can file for under the Bankruptcy and Insolvency Act Canada (BIA). They are:

Liquidation: This is when the insolvent company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay its secured creditors and unsecured creditors as best as possible since it files for bankruptcy in the priority outlined in the BIA.
Restructuring: This is when the company is insolvent and is incapable to repay its debts due to its financial difficulties, yet all or a sufficient portion of the company’s business is still viable. So, the company negotiates brand-new terms with creditors to lower its financial obligations and also might have the ability to sell some assets to settle its financial debts. Restructuring is the most well-known alternative to bankruptcy. Restructuring under insolvency legislation is also described in the media as bankruptcy protection.

**What factors lead to corporate bankruptcy proceedings?**

A company always shows signs of trouble before it needs to file for corporate bankruptcy. Some of the early danger signals are:

continued history of losses;
dwindling cash position;
the departure of key management or employees;
difficulty meeting loan or lease obligations;
the breaking of loan covenants; and
difficulty meeting payroll.

Corporate bankruptcy: What does it mean for a company when it liquidates?

As stated above, when a company liquidates it means that the company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay secured creditors and unsecured creditors as best as possible through bankruptcy and then shut down. corporate bankruptcy canada

**What happens to debt in corporate bankruptcy?**

If the purpose of the corporate bankruptcy is to shut down and have liquidation of business assets, then we first need to see what the net proceeds of sale from those assets are. The BIA describes the order in which funds must be distributed by a licensed insolvency trustee (formerly called a bankruptcy trustee) in bankruptcy. The order in which the debts must be repaid, in whole or in part, is called the priority.

The priority of the rights of creditors to be repaid in a corporate bankruptcy is:

Trust and deemed trust claimants – These are parties whose property is being held or is deemed to be held in trust for them by the bankrupt corporation. The most common type of deemed trust claim in a corporate bankruptcy is Canada Revenue Agency for unremitted employee source deductions.
Secured creditors – Creditors who hold valid security over the assets of the company get paid next. There could be more than just one secured creditor. Within the secured creditor group, the order of priority is based on the ranking of the security registration dates.
Preferred creditors – These are unsecured creditors who have been given certain priority in a corporate bankruptcy under federal bankruptcy laws. The most common examples in a corporate bankruptcy would be Trustee fees, the Trustee’s lawyer’s fee, the levy payable to the Office of the Superintendent of Bankruptcy Canada on any distribution made by the Trustee to a creditor and certain salary, wages or commissions due to employees.
Ordinary unsecured creditors – This group comes after the preferred creditors. They are all creditors who have supplied goods or services and do not hold any security and do not fit into the definition of a preferred creditor.

The balance of any unpaid debt ends up getting written off on the books of the creditors because there are no assets left in the company to claim against.

**How does a company get into corporate bankruptcy and what happens to the company?**

The way a company gets into bankruptcy is the exact same way an individual can. For a liquidation, either the company can file a voluntary assignment into bankruptcy. If it is one or more creditors owed at least $1,000 trying to push the company into bankruptcy, then they would file a Bankruptcy Application with the court requesting the court to make a Bankruptcy Order. corporate bankruptcy canada

**Why might a company choose to file for corporate bankruptcy protection and restructure under a BIA proposal?**

Corporate bankruptcy protection and restructuring under a BIA proposal can provide a company with financial difficulties a much-needed relief and a chance to return to profitability. When a company files for protection, the BIA proposal offers an orderly and reliable process for restructuring, which can be appealing to businesses that have a good chance of a turnaround.

A corporation that has a viable business and can return to profitability after restructuring, with support from creditors, has all the right ingredients for a successful restructuring. This is why a company might choose to file for corporate bankruptcy protection and restructure under a BIA proposal. The company will survive and jobs will be saved.

Who is responsible for developing the reorganization plan for the company?

Reorganization is the restructuring of a business to gain efficiency, improve workflow, and drive profits. Reorganization plans vary in length and detail and take a certain period of time to properly develop. They generally describe desired outcomes and final goals. Sometimes a company will undergo a complete reorganization, while other plans focus on aspects that require reorganization, such as a business unit or department.

The reorganization plan of a company is essential to ensure its smooth transition. The reorganization plan involves restructuring various departments of the business, reducing operational costs, and streamlining the workflow. Writing a reorganization plan requires a lot of time, effort, and money.

When a business downsizes, it reduces its workforce to a smaller number. Such a reduction can be a painful process that even threatens to collapse the business. The company needs to have a plan in place to accomplish this reorganization while still running the business. When downsizing occurs, businesses require reorganization plans. Involving and informing employees of the process makes them more likely to follow new plans and less resistant to change.

All of the various individual department organization plans and product sales plans need to be combined into an overall business plan. This overall business plan must also include financial information to show how the company, emerging from restructuring, will operate profitably.

Now that the overall plan is set, senior management must work with its outside financial and legal restructuring professionals to establish the restructuring commercial proposal or plan of arrangement to be presented to the creditors to be voted upon. An excellent communication program must be put into place so that creditors can understand the benefits to them of supporting and voting in favour of the restructuring proposal. Normally negotiations with certain creditors or creditor groups must take place in order to come up with a final and successful restructuring plan that will gain both creditor support and pass through the legal proceedings of court approval. corporate bankruptcy canada

**What becomes of a corporation after corporate bankruptcy?**

Going through corporate bankruptcy means your company’s assets have been sold to pay off some portion of its debts. Bankruptcy also by operation of law terminates all of the employees. So the corporation is left with no assets and no employees. All it has is debt and a deficit equal to the total debt less the amount that is shown on the balance sheet for the company’s preferred and common stock.

Therefore, the corporation, as a legal entity, is then left to just float away into the stratosphere. There are only 2 ways that a company can survive a corporate bankruptcy:

from the sale of the corporate assets, pay off 100% of all of its business debt plus interest; or
file a BIA proposal, obtain creditor support and court approval and successfully complete it.

The first way will almost never happen. The second way can happen if there is a good reason to try to make sure that the corporation as a legal entity survives. A reason for doing this might be that there is value to the shares. After becoming bankrupt, a successfully completed proposal annuls the bankruptcy. By definition, the proposal will discharge all of the company’s outstanding debt. The company is now debt-free.

The common stock may have value because it is a public company and the shares can be relisted on the stock exchange. Now the corporate shell is attractive to a private company that wishes to go public and can do so by amalgamating with this public shell. Alternatively in a private company, or in a public company, there may be significant tax loss carryforwards available for use if this corporate shell is merged with the right kind of profitable company. the only way to use the tax losses is first by owning all the shares.

This is all possible, but, the normal outcome for a company that has gone through a corporate bankruptcy is just to fade away, never to be heard from again.

**When a company declares corporate bankruptcy, what will happen to your stock or bond?**

When you invest money in a company by investing your capital, your money is legally represented by the stock or bonds that you purchased. When you see a company declaring bankruptcy, it means the company can no longer afford to pay its debts.

If a company just liquidates its assets during corporate bankruptcy, the existing shares will likely be worth very little or nothing at all. For a private company, a successful corporate restructuring might increase the value of the shares as the company will emerge from its restructuring with much less debt than before.

The value of a company’s shares is most likely to lower if it effectively restructures its financial affairs. It might have to issue brand-new stock to creditors that will not be paid back in full, watering down the value of the business’s shares.

As far as corporate bonds are they secured or unsecured against the company’s assets? If secured, they could be repaid in whole or in part depending on where they stand in the secured assets pecking order. If unsecured, then it just becomes part of the larger unsecured creditor pool. In a corporate bankruptcy that is a liquidation, those bondholders will receive their share of any distribution made by the Trustee to the ordinary unsecured creditors if there is such a distribution made.

Corporate bankruptcy and insolvency at a glance

In conclusion, bankruptcy and insolvency of course go together, although many people prefer to think of bankruptcy as an economic failure while insolvency is more accurately a sign of a business’s financial failings.

In the same way I hoped last week’s personal bankruptcy blog helped your understanding, I hope this Brandon’s Blog on corporate bankruptcy was helpful to you in understanding more about the corporate bankruptcy system in Canada.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

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DECLARING BANKRUPTCY: REAL ESTATE COMPANY LOSES CHALLENGE ON CORPORATE BANKRUPTCY APPEAL

Post author By Brandon Smith
Post date May 2, 2022

Declaring bankruptcy: Business insolvency

When the corporate finances are such that the business has an insufficient cash flow to cover its operating expenses and pay its debts when they come due, these financial difficulties create the financial condition of insolvency for the business. Another indicator of insolvency often exists at the same time: if you were to sell all of the company’s assets, you would not be able to raise enough money to pay off its outstanding debt.

Medcap Real Estate Holdings Inc. (Medcap) is an Ontario corporation that owns certain commercial real estate. Medcap’s principal, through other companies which he owns or controls, operates various fitness facilities.

Several creditors made a bankruptcy application to the Court to wind up Medcap’s business through a corporate bankruptcy. In December 2021, the Judge released his decision to issue a bankruptcy order and place the company in the legal position of bankruptcy. Medcap appealed the decision to the Court of Appeal for Ontario.

In this Brandon’s Blog, I discuss the two ways there are for declaring bankruptcy and highlight the reasoning of the Court of Appeal for Ontario in dismissing this company’s appeal for its corporate bankruptcy.

Declaring bankruptcy: An overview of corporate bankruptcy

In Canada, a company is a separate legal entity from its shareholders or Directors and Officers. So a company can go into corporate bankruptcy, as opposed to a person entering personal bankruptcy, also known as consumer bankruptcy. There are two ways a company (or a person) can go bankrupt.

The first way is that a company (or person) files for bankruptcy by filing an assignment in bankruptcy with a licensed insolvency trustee. This is called a voluntary assignment into bankruptcy. The second way, which is what happened to Medcap, is that they are pushed into bankruptcy.

To push a limited company (person) into bankruptcy, one or more creditors, each owed at least $1,000, make a bankruptcy application to the court. The application will include a sworn affidavit from the people with knowledge of the situation providing evidence as to why the company (the person) is insolvent, what acts of bankruptcy the business (person) committed within 6 months preceding the date of the application and requesting that a bankruptcy order be made against the debtor.

Regardless of the types of bankruptcy proceedings that may be involved, these are the only two ways for companies with crippling debt to become bankrupt. It is either voluntary or an involuntary one.

declaring bankruptcy

Declaring bankruptcy: Types of Corporate Bankruptcy

A company that ends up declaring bankruptcy may be doing so for a variety of reasons, all of which relate to significant financial losses. In Canada, there are two primary types of bankruptcy filings under the Bankruptcy and Insolvency Act (Canada) (BIA).

Once the company is insolvent and no longer viable, declaring bankruptcy in order to have liquidation of assets and end the business in that legal entity is the next step. In this situation, there may be certain business debts that are also a personal liability of the corporate Directors. Unremitted source deductions and HST and unpaid wages and vacation pay fall into this category.

Bankruptcy is a tricky topic. Many people tend to fear it, thinking of it as the end of the road. Given my description above of bankruptcy being for liquidating the company assets, that is understandable.

But what about the company that is insolvent but the business is very viable if the bad parts are cut out? In this kind of situation, filing under the BIA using the restructuring provisions of this federal statute, or for larger companies, the Companies’ Creditors Arrangement Act (CCAA), is a legal way for the company to restructure its debts to get its finances back in order. In a successful restructuring, the good parts of the business are restructured and preserved, the company’s finances are right-sized and most if not all jobs are saved. This form of declaring bankruptcy is what is referred to in the media as bankruptcy protection.

So in Canada, declaring bankruptcy is one type, but declaring bankruptcy protection is also possible. That is why I suggest in Canada, there are 2 types of business-specific options in corporate bankruptcy filings.

Declaring bankruptcy: Does corporate bankruptcy affect personal assets?

The legal separation of personal and corporate assets is clear. However, a company declaring bankruptcy may have an impact on the personal assets of certain people. There are situations where personal assets may be at risk. If you are concerned about your personal assets, you should consult with a legal professional to assess your individual case.

Before making any business or investment decisions, is when you should get that professional advice. Once a corporate bankruptcy filing has been made, it will be too late to properly plan for that situation. Personal assets could be at risk if it is a bankruptcy liquidation and not a successful restructuring.

Examples of when personal assets may be at risk because of business bankruptcies include:

the entrepreneur who had to give a personal guarantee of certain corporate debt financial obligations to the company’s primary secured creditor lender and in a liquidation of the company’s assets, the lender suffers a shortfall;
there is not enough money left over from the liquidation after any trust claims and secured creditor claims to pay the outstanding wages and vacation pay so the Directors’ personal assets may be at risk;
the liquidation value of the assets is essentially zero so the Directors are called upon by Canada Revenue Agency to repay any unremitted employee source deductions or HST amounts;
in bankruptcy liquidation, there is generally nothing available to repay investors or shareholders so the money an individual investor or shareholder loses certainly affects their personal assets and personal property. The stock of companies that liquidated their assets after declaring bankruptcy is worthless; and
any creditors that are unincorporated, being either a proprietorship or partnership who lose some or all of the amounts owed to them as ordinary unsecured creditors clearly affect the personal assets of those business owners.

Declaring bankruptcy: The Medcap case

With this discussion of corporations declaring bankruptcy, there are some interesting points to be learned from the Medcap appeal case and the bankruptcy process. The application judge dismissed the bankruptcy applications of all but one of the applicants. He issued the bankruptcy order and appointed the licensed insolvency trustee (formerly called a trustee in bankruptcy or bankruptcy trustee) which began Medcap’s administration of bankruptcy.

The Medcap company appealed the bankruptcy order on only one ground; the judge who made the original order failed to exercise his discretion on whether or not to dismiss the application. Medcap did not appeal the application judge’s finding that the prerequisites to the making of a bankruptcy order – a debt owing to an applicant of at least $1,000 and the commission of an act of bankruptcy within six months of the commencement of the application – had been met!

The most interesting part of the Court of Appeal’s decision is the discussion of the two factors that a court could look at where a judge could exercise discretion to justify refusing an otherwise proven bankruptcy application.

declaring bankruptcy

Declaring bankruptcy: Appealing a bankruptcy order

As mentioned previously, Medcap did not contest the judge’s conclusion that the creditor whose bankruptcy application was allowed had met the requirements under s. 43(1) of the BIA. This is that Medcap owed them a debt exceeding $1,000 and that Medcap committed an act of bankruptcy within 6 months before the filing of that bankruptcy application.

The application judge found that Medcap had failed to pay that creditor’s debt, for which a judgment was issued, despite demands. This is defined as an act of bankruptcy in s. 42(1)(j) of the BIA. In its appeal, the Medcap company argued that, even though the debt and the act of bankruptcy were proven, the application judge made a mistake by not using his discretionary power under s. 43(7) of the BIA to dismiss the application.

Medcap made three arguments to support its appeal: (i) that the trial judge erred in finding that Medcap was unable to pay its debts; (ii) that he erred in finding that the application was brought for an improper motive; and (iii) that he erred in finding that the bankruptcy order would serve no purpose.

Let’s see what the Court of Appeal for Ontario said about this.

Declaring bankruptcy: Unable to pay its debts

This is the first of the three bankruptcy issues that the Court of Appeal looked at. Medcap argued that the application judge dismissed the applications of all applicants but one because there was potential that they were not creditors. Medcap also stated that the application judge had not taken into account that Medcap had reached a settlement with the one creditor whose application was allowed to be heard. Medcap submitted that the application judge erred in not taking this into account as there was no debt owing because of the settlement and the payment of that settlement.

The appellate court found that the lower court judge did not err in rejecting Medcap’s argument. An application for bankruptcy is not solely for the benefit of the applicant creditor, but for the rights of creditors, ALL creditors. Further, the arrangements between the applicant creditor and the debtor will not be able to justify the withdrawal or dismissal of a bankruptcy application, unless the court is satisfied that the debtor is solvent and that other creditors will not be prejudiced by the withdrawal or dismissal.

To be able to pay debts as set out in the BIA, the evidence must be provided for all debts owed, as well as the debtor’s ability to pay them. In other words, the debtor must prove that they are solvent. Medcap did not provide such evidence. Therefore this ground of appeal was dismissed.

Declaring bankruptcy: Bankruptcy application for improper motives

Medcap argued that in cases where a creditor has an ulterior motive for filing a bankruptcy application, this can be sufficient cause for dismissal of the application. The Court of Appeal said that the existence of a motive is a question of fact, and the application judge considered and rejected the suggestion that there was such a motive in this case.

The Court of Appeal found that the application judge was within his rights to reject the argument based on the record. Therefore, the Court of Appeal for Ontario found no justification to interfere and dismissed the appeal on that ground. declaring bankruptcy

Declaring bankruptcy: There is no purpose for this bankruptcy

Medcap argued that the application judge erred in failing to find that no purpose would be served by bankruptcy. He ought to have dismissed the application on the basis that there was nothing to be gained by making a bankruptcy order.

The Court of Appeal emphasized that safeguarding creditors is crucial to insolvency proceedings. A debtor who has (a) committed an act of bankruptcy by not paying debts when they come due, and (b) failed to provide evidence to the court demonstrating the ability to do so, carries the burden of proving that bankruptcy would be pointless. The judge was correct in finding that Medcap had not met that burden.

The three-panel judge went on to say that, in order to demonstrate that there is no purpose for the Medcap bankruptcy, they would need to show that a better result would be achieved for creditors if it were allowed time to restructure under the commercial proposal provisions of the BIA or the provisions of the CCAA.

Medcap did not argue that doing either would have the requisite creditor support but rather suggested that leaving it up to them would be best.

The three appellate court judges hearing this case unanimously rejected Medcap’s appeal, upholding the lower court’s ruling and allowing the bankruptcy process legal proceedings to continue. At this point, the licensed trustee named in the bankruptcy order begins administering the bankruptcy legal process.

Declaring bankruptcy: The final word

What fascinated me most about this case was the nerve of Medcap to argue that the application judge should have declined to make the bankruptcy order, regardless of all the evidence against it.

The Court of Appeal for Ontario soundly rejected the appeal of the bankruptcy order being issued after analyzing the bankruptcy application process in Canada. It concluded that only a real possibility of a successful restructuring under either the BIA or CCAA to avoid bankruptcy liquidation would be a reason to do so.

I hope this Brandon’s Blog on the Medcap case was helpful to you in understanding more about declaring bankruptcy, corporate bankruptcy and how the Ontario court would decide if it was appropriate to issue a bankruptcy order. Hopefully, you have also gained insight into how a corporate bankruptcy decision is made and how a successful corporate bankruptcy protection filing and restructuring can be beneficial.

We understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

Call us today and get back on the path to a healthy stress-free life.

Brandon Blog Post

SMALL BUSINESS IN CANADA: MUST A STAGGERING 200,000 CANADIAN SMALL BUSINESSES DECLARE BANKRUPTCY DUE TO THE PANDEMIC?

Post author By Brandon Smith
Post date January 25, 2021

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

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

If you would prefer to listen to the audio version of the small business in Canada Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

Small business in Canada introduction

The Canadian Federation of Independent Business (CFIB) is the country’s champ of small business in Canada. CFIB is Canada’s biggest non-profit organization devoted to producing and sustaining an atmosphere where your small business in Canada can succeed.

CFIB promotes small business in Canada issues with political leaders as well as decision-makers. As a non-partisan company, it influences public policy based upon its members’ views. It tries to ensure that small business owners have an opportunity to impact the regulations and policies that impact Canadian business.

A member survey was performed by CFIB and the results were announced on Thursday, January 21, 2021. The results suggest that greater than 200,000 organizations could shut permanently because of and during the pandemic.

The federation states that it could throw greater than 2.4 million people out of work. The study suggests 1 in 6, or about 181,000 small companies, are currently seriously considering closing down. That’s up from 1 in seven or around 158,000 last summer.

The CFIB is contacting provincial and federal governments to try to help small businesses by presenting secure pathways to re-open and end lockdowns that may kill off these businesses.

The question I wish to explore with you today is if a small business in Canada needs to shut down, does it have to become one of the statistics of Canadian business bankruptcies? Must it file for corporate bankruptcy? For this small business in Canada Brandon Blog, I will assume that the small business is a corporation.

Small business in Canada: When is a corporation bankrupt, or insolvent?

As I have discussed with you in previous blogs, a company is insolvent under the BIA if:

it is not able to satisfy its debts as they generally come to be due; or
it has ceased paying current debts in the normal course of business as they end up being due; or
the company’s property is not enough, at a fair valuation, to permit settlement of all debts (significance that even if all the property was to be sold, the proceeds would not provide sufficient cash to pay all financial obligations which are owed, or will certainly soon end up being due).

A company is bankrupt under the Bankruptcy and Insolvency Act (Canada) (BIA) if it has made an assignment in bankruptcy, or if a bankruptcy order has actually been made against it. Bankruptcy is a legal process to eliminate debts if the small business in Canada is unable to pay them.

To be bankrupt, in the case of an assignment, the company, and in the case of a court order, the applicant creditor would have engaged the services of a licensed insolvency trustee (formerly called a bankruptcy trustee or a trustee in bankruptcy). Licensed insolvency trustees are the only professionals allowed to administer bankruptcies in Canada and are licensed and supervised by the Office of the Superintendent of Bankruptcy (OSB).

Every corporate bankruptcy is what is called an “ordinary administration“. Unlike in personal bankruptcy, there is no streamlined method for corporate bankruptcy. Remember this point as it serves as the basis for answering the question “Must a small business in Canada declare bankruptcy in order to close down due to the pandemic“?

***Small business in Canada*: Is small business bankruptcy the right choice?**

One of the most difficult decisions that an entrepreneur owner of a small business in Canada ever needs to make is whether or not to put his/her business into bankruptcy. Obviously, every entrepreneur goes into business hoping for success, so thinking about bankruptcy isn’t just an economic decision; it is a psychological emotional one too. It’s very crucial to understand the truths regarding local business bankruptcy and also the various other options that may be available to you before you make that decision. This will aid you to avoid making a rash choice that could be the wrong one.

The reality is that, for many companies, there are choices besides small business in Canada bankruptcy. One possible choice is a proposal to creditors. In a proposal, you make a deal to your unsecured creditors to pay off a percentage of what is owed to them and/or stretch out (commonly lower) monthly payments over a longer amount of time. This ensures that creditors receive either some or all of what is owed to them in a way the company can afford. This enables small business in Canada to avoid bankruptcy and remain in operation.

The whole concept of a proposal is that you have a corporate entity that is insolvent, but, the underlying business is viable. If you can cut away the layers of debt, the business could continue to operate and employ people. You may even need to transition the business assets to a new corporation. All of this is possible under a Division I Proposal under the BIA. A proposal under the BIA is the same as the term you hear in the news all the time – bankruptcy protection. The company ultimately comes up with a plan of reorganization to tell its unsecured creditors what the company can do for them because it does not have the necessary money to pay them 100%.

If the business is not that complex and there are only a few creditors, possibly an informal proposal would work. The entrepreneur would discuss his company’s problems with each creditor and make an offer to them that is both appropriate and something the company can pay. If successful, the company can avoid formal restructuring proceedings. If there are too many creditors to do it on an informal basis, or if the restructuring is too complex, the small business can restructure under the BIA.

A proposal can be an excellent option for a small business that has actually encountered recent economic issues while having had success in the past. It can also be useful for a small company that was profitable but is now having a hard time due to the fact that past issues are weighing it down. A proposal is one of the alternatives to bankruptcy that I implement to save a company by allowing it to develop its plan of reorganization to emerge healthy to stay in business and to save jobs.

However, for some organizations, filing for small company bankruptcy is the choice that makes the most sense. A Trustee can help you recognize the alternatives available to ensure that you can decide if a bankruptcy filing is a proper alternative for your small business.

***Small business in Canada*: Is just closing the door an alternative?**

Over the years we have consulted with many entrepreneurs about their small businesses in Toronto or other small business Ontario locations. Many times we end up advising them that it does not make sense to spend the money on any of the various types of bankruptcy proceedings. The size of the company and the nature of its assets makes either a proposal in bankruptcy or any bankruptcy process unnecessary. None of the forms of bankruptcy make sense. Let me explain.

Most small business opportunities in Canada started by entrepreneurs are funded using a variety of methods including:

investment by the owners;
small business start up grants Canada; and
small business loans.

More recently, the small business loan covid 19 Canada ($40000 Canada Emergency Business Account (CEBA) loan which has now been increased to $60,000) has also been used. The combination of owners taking stock in exchange for cash, loaning money to the small business and having a small business bank loan, perhaps even the official government-guaranteed Canada small business loan is pretty standard.

The bank will take security over all of the assets of the small business in Canada. By the time the business needs to shut down, there are not many assets left. Whatever assets there are, they are all fully secured by the bank. If the business is no longer viable, then although it is insolvent, it cannot be restructured as the business itself does not work anymore. If the assets are all fully encumbered, then there is no restructuring that can take place.

So a Division I Proposal under the BIA is not possible. Bankruptcy is a remedy for the unsecured creditors. If there are not many assets left, and what is left is fully secured by the bank, then the bank will suffer a shortfall and there are no assets available for the Trustee to use to make a distribution to the unsecured creditors. So why have any type of bankruptcy or any bankruptcy proceeding? It does not make sense to spend that money.

In this situation, it just makes sense to tell the bank that the business is shutting down, turn the key in the lock to the front door and give the key to the bank.

***Small business in Canada*: So what happens if I just close the door and lock it?**

I call this the self-help remedy. There are too many problems with the business that it is not viable anymore. Perhaps the COVID-19 lockdown is just too tough to recover from and the small business cannot survive. Perhaps the assets are not worth much – think restaurant equipment where the cost of the leasehold improvements may be as much as the cost of the equipment. Because of this, the only choice is to walk away.

As a director of the company, you have a responsibility to make sure that all final government returns are completed and filed. If the company’s books and records are stored on-site. Perhaps the accounting information is stored on a computer hard drive. The directors should make sure that the books and records, be they electronic or physical, are safeguarded by taking them off the business premises.

You may need them not only to prepare final returns but also in case Canada Revenue Agency or any other regulatory authority has any questions or wishes to perform an audit. The directors will also want to make sure that all final employee records are completed and distributed to the former employees.

Next comes the bank. In Canada, the bank loan would have been either fully or partially guaranteed by the entrepreneur. The entrepreneur may have also personally guaranteed the premises lease of the business. The entrepreneur may also have personal liability for director obligations such as unremitted source deductions, unpaid HST and outstanding employee wages and vacation pay.

If the individual does not have sufficient personal assets or other resources to make good on their personal guarantee, then rather than focussing on bankruptcy for the business notwithstanding all the business debts, we need to focus on the person’s situation. Perhaps they will need to look at the various bankruptcy options, be it a consumer proposal, Division I Proposal or as a last resort, bankruptcy.

It will be much more productive for the entrepreneur to retain me to help them with their personal financial problems arising out of the closure of the small business in Canada rather than on the business itself that has little in the way of assets and no viable business left to salvage.

Must 200,000 Canadian small businesses declare bankruptcy due to the pandemic?

So given the above, the answer to the question is no. If the small business in Canada is viable, then perhaps it can be restructured to avoid bankruptcy, maintain operations and save jobs. If it is not viable, then, bankruptcy may be necessary depending on the complexity of the business and the issues facing it.

If it is not complex and there are no free assets, then just closing the doors of that small business in Canada is all that needs to happen. The individual will then have to deal with their personal liabilities arising from that.

Small business in Canada summary

I hope you enjoyed this small business in Canada Brandon Blog post. If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of this seems familiar to you and you are serious about getting the solution you need, Contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

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

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Brandon Blog Post

BANKRUPTCY FRAUD: QUICK GUIDE TO BANKRUPTCY FRAUD AND BANKRUPTCY EXAMINATIONS

Post author By Brandon Smith
Post date January 18, 2021

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

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

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

Bankruptcy fraud introduction

Bankruptcy fraud is not something that the vast majority of individual Canadians engage in. Personal insolvency case filers can be for either a consumer proposal, Division I proposal or consumer bankruptcy filings under the Bankruptcy and Insolvency Act (Canada) (BIA) so that individuals can get the debt relief they need. Entrepreneurs can file a Division I proposal, or for corporate bankruptcy for when their company needs to either restructure or liquidate under the BIA. They can also file a Plan of Arrangement under the Companies’ Creditors Arrangement Act if their company qualifies under Canada’s insolvency laws.

Most of these individuals are honest and would never even think about bankruptcy fraud. They or their company have actually experienced such substantial financial difficulties leading to their insolvent financial condition, that the only thing they can do to solve the financial problems is to get relief within the Canadian insolvency system. Their problems may result from a job loss, a change in their household situation like divorce, a major disease resulting in loss of income and/or medical bills they cannot pay, bad financial advice, or most recently, the bottom falling out of their lives because of the COVID-19 pandemic.

There are instances, however, where an individual is not a victim and perhaps they are trying to pull off a bankrupt fraud crime. They will use misconduct to create abuse of the system and continue to trade and get credit understanding that they will never be able to pay back the money they are borrowing. There are people who try to use the insolvency system in Canada to get out of problems that they have created themselves through bad faith or fraud. They may even unknowingly cross the line into a white-collar financial crime and bankruptcy fraud.

In this Brandon Blog, I first discuss what bankruptcy fraud is and then comment on a very recent decision of the Supreme Court of British Columbia in Bankruptcy and Insolvency on what level of suspicion is necessary in order for the court to order an examination of the bankrupt or by extension, the designated officer of the bankrupt company.

What is bankruptcy fraud?

When I talk about bankruptcy fraud, it could include criminal fraud under the Criminal Code of Canada, but not necessarily. Bankruptcy fraud is a white-collar criminal activity that can be in several different forms.

The more common fraudulent activity that either is or are indicators of bankruptcy fraud committed under Canadian bankruptcy law (which may be just a bankruptcy offence or can also be a criminal code crime, depending on the circumstances) are:

Disposing of or concealing assets prior to or right after the bankruptcy to avoid having to hand them over to the licensed insolvency trustee (formerly called a bankruptcy trustee or a trustee in bankruptcy).
Records false transactions in a statement of account or hides, destroy or purposely misstates a schedule or other document pertaining to his/her/its assets or affairs.
Obtains credit or any other goods or services arising from false depictions;
Conceals claims or debt obligations against the debtor;
Obtains credit without advising the people he is dealing with that he/she is bankrupt;
Refuses to answer fully and honestly to questions posed in an examination taking place under the Bankruptcy and Insolvency Act (Canada) (BIA).

Anyone who is found guilty of an offence, whether from criminal fraud charges or not and is responsible, on a summary conviction basis, to a dollar fine not exceeding $5,000 or to jail time for a term not going beyond one year or to both, or on conviction on indictment, to a penalty not surpassing $10,000 or to jail time for a term not going beyond three years, or to both. So there are penalties from a bankruptcy offence finding and a bankruptcy fraud conviction.

What are bankruptcy offences and how are they and bankruptcy fraud discovered?

The bankruptcy offences are set out in sections 198-201 of the BIA, Canada’s bankruptcy law. They represent the kinds of activities that form the types of bankruptcy fraud outlined above. There are 3 normal ways that a Trustee can start identifying bankruptcy offences and bankruptcy fraud.

When a consumer proposal, larger corporate or personal restructuring proposal or a bankruptcy is filed, the licensed insolvency trustee is required to review the available books and records. Insolvency trustees must look for transactions that appear questionable.

Insolvency trustees prepare a report for the creditors in which the conduct of the insolvent debtor, including any issues like suspicious transactions, entered into, or suspected bankruptcy fraud, are reported. In a restructuring, the bankruptcy trustee must also advise what effect the transaction has on the creditors and what actions, if any, the licensed insolvency trustee is going to take. That is the first way that bankruptcy fraud and bankruptcy offences can be discovered.

The second way that bankruptcy offences and bankruptcy fraud can be discovered is from information available from creditors. The creditors have been dealing for some time with the individual or company filing for bankruptcy or the restructuring proposal. Creditors may very well have information about the debtor’s affairs that would be very useful. That information might just lead the licensed trustee to discover the offences.

The third way of getting more information about suspected bankruptcy fraud and offences is through conducting examinations.

Examination of the bankrupt or the designated officer of the bankrupt company

In this section, I will use the examination of the bankrupt regarding his or her property and examination of the designated officer concerning the company’s property and affairs, interchangeably.

Section 161(1) of the BIA allows for the examination of the bankrupt by the official receiver. An official receiver is a qualified person in the local office of the Superintendent of Bankruptcy Canada. In personal bankruptcy, this examination could be held any time prior to the discharge of the bankrupt.

The official receiver can examine the bankrupt under oath relative to the insolvent’s conduct, the reasons for the bankruptcy and the disposition of the bankrupt’s property. The official receiver can generally ask any questions they wish about the bankrupt’s conduct and affairs.

Section 163(1) of the BIA allows the Trustee, by ordinary resolution passed by the creditors or inspectors, may, without a court order, examine under oath before the registrar of the court or other authorized person:

the bankrupt;
any person fairly believed to have knowledge of the bankrupt’s affairs; or
anyone who is or has been an agent, or a clerk, an officer, management or an employee of the bankrupt.

Essentially, anyone who has knowledge of the bankrupt’s affairs. This also includes anyone in possession of any books, records or documents regarding the affairs of the bankrupt. Such persons would also have to hand over those documents.

Section 163(2) allows any creditor or another interested person on sufficient cause being revealed (such as the suspicion of bankruptcy fraud) can apply for an order to be made for the examination of the bankrupt, under oath, before the registrar or other accredited person.

So as you can see from this description, the existence of this section of the BIA allowing for the ability to examine a person in connection with a bankruptcy filing is quite generous. The suspicion of the bankrupt trying to commit bankruptcy fraud can lead to a request for an examination of the bankrupt.

So the question becomes, can the examination process be used for a fishing expedition or does the Trustee or creditor need to have some evidence of wrongdoing? Do they need to have more than just a hunch? The BC court decision I am going to now describe seems to answer that question.

***Bankruptcy fraud*: Examination of the bankrupt court case background**

The matter is Hanlon (Re), 2021 BCSC 40. Mr. Hanlon wants his bankruptcy discharge. However, a major creditor of his has reason to suspect that there is more information to be learned about Mr. Hanlon’s conduct, affairs and property. The creditor made an application under section 163(2) of the BIA.

A lady called Ms. Johnson acquired a judgment against Mr. Hanlon after a five-day defamation trial that occurred in August 2018. Ms. Johnson was granted an award of $27,500 against Mr. Hanlon.

On June 14, 2019, Mr. Hanlon filed a proposal under BIA. The proposal was unsuccessful and Mr. Hanlon was deemed to have filed an assignment in bankruptcy. The effect was as if Mr. Hanlon chose himself filing for bankruptcy. At the meeting of creditors, Mr. Hanlon said, which is recorded in the Minutes, that “there was an expectation that any amounts owing to his mother would be deducted from his inheritance.” The lawyer from the law firm representing Ms. Johnson was appointed an Inspector in the bankruptcy administration.

Ms. Johnson opposed the bankrupt’s discharge as she suspects bankruptcy fraud. On February 3, 2020, she filed an amended proof of claim. In it, she made an unsecured claim for $94,443.01, consisting of the original judgment, post-judgment interest, and a claim of $66,788.26 for special costs.

***Bankruptcy fraud*: The position of the bankrupt, creditor and Trustee**

The creditor

Ms. Johnson is concerned that the bankrupt is trying to commit bankruptcy fraud. She argues that Mr. Hanlon and his mother should each be subjected to an examination for the purposes of finding more information to ensure that she can canvass concerns connected to:

If he is a beneficiary under his mother’s will and the potential of an inheritance being received.
Info about the status of his chequing account and credit cards, including his use of his mom’s bank card.
Cash and loans Mr. Hanlon might have received from his mom and step-father.
Exactly How Mr. Hanlon is paying for expenditures.
Particulars any businesses the bankrupt runs, the revenue he gains, and whether he has been purposefully underemployed.

She says that examinations are necessary considering that the evidence produced to date sustains that “something is amiss” and also there is “a disconnect” with his current financial situation.

Ms. Johnson also wants approval to examine his mother about any financial arrangements between them. She also wants to examine the mother about any inheritance that her son is entitled to. Finally, she also wants to see a copy of the will. She suggests that his mother is directly attached to the bankruptcy estate.

The Trustee

The Trustee did not take any position on Ms. Johnson’s application. The Trustee advised the court that:

An examination of Mr. Hanlon under oath happened already.
Mr. Hanlon has been extremely honest with everything that he has been asked
To her knowledge, there are no outstanding requests.
It would be an uncommon request to demand the supply of a will from a person who is still living. If Mr. Hanlon’s mom passes away then the Trustee will take all needed actions to investigate the situation and the bankruptcy estate.

Ultimately, the Trustee is of the view that the bankrupt’s discharge hearing should happen as soon as possible. It has already been postponed. The Trustee had no indication that the bankrupt was trying to commit bankruptcy fraud.

The bankrupt

The bankrupt stated that his mom and stepfather are alive and generally in good health. If his mother passes away everything will certainly go to his stepfather. They have been wed for 40 years and their house remains in joint-tenancy. He advised that his mother is currently 85 years of age, she does need the use of a wheelchair and is deaf in both ears. His stepfather is either 72 or 73 years old. He opposes the examination of his mom as being in the nature of a fishing exploration.

He disputed that there is anything amiss about the documents provided and that he has not committed any bankruptcy offence or crime and that he has not entered into any suspicious transaction. He explains that there is a senior’s discount referral on his bank account due to the fact that it is a joint account with his stepfather who is elderly. He described that the only time he has used his mom’s charge card was to pay a process server (in one of his prior paralegal businesses) who called for a credit card over the phone. He rejects ever accessing his mother’s bank account.

He submits that he has supplied a description of his work history, consisting of what companies he was paid by. He also stated that he has provided all items the Trustee has ever asked for. He further submitted that the application should be dismissed as it is without benefit, a fishing expedition, and is being made solely for the purpose of delaying his discharge hearing.

Mr. Hanlon presented himself as an honest but unfortunate person that is not trying to commit bankruptcy fraud.

Bankruptcy fraud: The court decision for the request to examine the bankrupt

The court accepted there were issues raised that need more information. An example of one is that the bankrupt did not list any debts owing to either his mother or stepfather in his sworn Statement of Affairs. He stated at this hearing that he was not conscious that such household debts were to be included in his bankruptcy. The situation of loans from his mother or stepfather and the arrangements need more clarification.

It is not totally clear to what degree there has actually been some intermingling of the bankrupt’s affairs with his mother’s yet the evidence does support that he has utilized her credit card. He claims it was only once however the creditor is entitled to explore this issue. The bankrupt admitted that his mom supplies him with money to pay a specific expense or expenses. He is living with his mother and stepfather in a self-contained bachelor suite and is not paying rent.

The particulars of his revenue and work are also uncertain and there was a discrepancy between the bankrupt’s evidence and one record of employment he received. An examination would shed additional light on this incongruity in addition to the allegation made that he is purposefully underemployed.

The judge was persuaded that sufficient cause has been revealed by Ms. Johnson to support an examination of Mr. Hanlon under s. 163( 2) of the BIA. The judge was also satisfied that such an examination has the possibility of benefitting the general body of creditors and it is not just a fishing expedition. Accordingly, the court ordered that the bankrupt attend an exam at a time and location to be fixed. The assessment will be limited to two hours. The expenses of the exam and getting a transcript will certainly be for Ms. Johnson’s account.

The court decision about the request for documents and to examine the bankrupt’s mother

The court felt that the applicant was looking for too wide an order for the production of documents. The court directed that Ms. Johnson set the particulars of the documents she is looking for using a letter to Mr. Hanlon, with a copy to the Trustee. This letter laying out the particulars of the documents should be supplied at the very least three weeks before the exam takes place. The judge ordered that the bankrupt will deliver the files he has in his possession or control no later than 7 days prior to the day scheduled for his exam.

Concerning his mother’s will, the court was not encouraged that the production of the will to prove that the bankrupt will be getting any type of inheritance was necessary. Even if he is a beneficiary under his mom’s will, she is alive and there was no evidence that he will certainly acquire anything as a beneficiary either now or in the future.

The evidence established that his mother is married with the majority of the value of her assets registered in joint-tenancy with her husband. The evidence also showed that his stepfather is more than 10 years younger than his mother. The court decided that the will should not be produced, but that did not restrict Ms. Johnson from checking out issues associated with any kind of prospective inheritance at the examination.

The judge was not satisfied that his mother ought to be required to participate in interviews. Such an examination would be oppressive because of his mother’s age, being 85 years old, her current health standing, although she did not have any specific illness, as well as the existing COVID-19 pandemic.

The court also took judicial notice of the fact that in the sworn statement of service, the server deposes that when he served the application on the bankrupt’s mother, she did not appear to comprehend that she was being served with legal papers. So any inquiries regarding the use of her credit cards by the bankrupt or how he is paying for his living expenditures can be canvassed at the exam of the bankrupt. Ms. Johnson’s application to examine the mother was denied.

Bankruptcy fraud and examination of the bankrupt: Other matters

The judge was also completely satisfied that an order should be made that any discharge hearing happens after the examination has been completed. In order that there is no delay, the court directed that the examination is to be finished before February 28, 2021. The bankrupt is to cooperate by establishing a day for the exam within this period. The discharge hearing can be set up for a day beginning in March 2021.

It will be up to the presider of the discharge hearing to ultimately decide what consideration ought to be given on any kind of possible inheritance when determining the disposition of the bankrupt’s application for discharge.

Finally, Ms. Johnson was awarded costs against the bankrupt. This cost award is a post-filing debt that will not be released by the bankrupt’s discharge from bankruptcy.

Bankruptcy fraud summary

I hope you enjoyed this bankruptcy fraud Brandon Blog post. If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of this seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

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

Tags bankrupt fraud crime, Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy examination, bankruptcy fraud, bankruptcy offences, BIA, consumer bankruptcy, Consumer Proposal, Corporate Bankruptcy, criminal fraud, Designated Officer, Division I Proposal, examination of bankrupt, financial difficulties, Ira Smith Trustee, licensed insolvency trustee, personal bankruptcy

Brandon Blog Post

DECLARING BANKRUPTCY IN CANADA: NEVER WORRY WHAT TO DO AGAIN WITH THESE AWESOME TIPS

Post author By Brandon Smith
Post date January 11, 2021

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

If you would prefer to listen to the audio version of this declaring bankruptcy in Canada Brandon Blog, please scroll to the bottom and click play on the podcast.

***Declaring bankruptcy in Canada*: Introduction**

Declaring bankruptcy in Canada is a legal process through which you may be discharged from your financial obligations (with certain minor exceptions). Its purpose is to permit an honest but unfortunate debtor to obtain a discharge from many financial debts, based on affordable conditions.

The Office of the Superintendent of Bankruptcy (OSB) is charged with the administration of the Bankruptcy and Insolvency Act (Canada) (BIA), the Companies’ Creditors Arrangement Act (CCAA) and their respective rules. All documents associated with filings under either of those Acts can be found at the OSB’s internet site. The OSB likewise licenses and supervises the actions of licensed insolvency trustees (LITs ). LITs are accredited to:

administer the estates of bankrupts;
manage alternatives to bankruptcy such as consumer proposals and commercial proposals in order for debtors to get creditor protection and restructure in order to avoid bankruptcy; and
serve as a monitor under the CCAA.

When can you declare bankruptcy in Canada?

Any insolvent person in financial difficulty can declare bankruptcy in Canada any time through a bankruptcy assignment after they have seen a licensed insolvency trustee and made suitable arrangements for the Trustee to administer handle the bankruptcy administration. The bankruptcy trustee prepares the necessary documents for the debtor to sign for filing for bankruptcy.

The licensed trustee then files certain legal documents with the OSB. The OSB then issues its Certificate to evidence the bankruptcy of the person or company. The date and time indicated on the Certificate are when a voluntary bankruptcy starts.

If you are not able to get a LIT to accept your data, or if you cannot afford to work with a LIT in order to declare bankruptcy in Canada, the OSB’s Bankruptcy Assistance Program might have the ability to help. This is provided that you are not and have actually not just recently been, involved in commercial activities or you are not in jail.

What happens when you declare bankruptcy in Canada?

There are three different avenues that can have someone declare bankruptcy in Canada:

Voluntary assignment – A financially troubled insolvent person or company can make a voluntary assignment in bankruptcy. This is where they voluntarily make a general assignment in bankruptcy for the general benefit of all of their creditors.
Bankruptcy application – A creditor who is owed at least $1,000 on an unsecured basis submits an application to the court for obtaining a bankruptcy order against the debtor and the debtor’s property.
Deemed bankruptcy – When a debtor who has made the choice to start an insolvency process under the BIA to gain debt relief through trying to restructure their unsecured debt, has fallen short to satisfy the requirements for:
1. submitting a Division I proposal;
2. gaining the necessary votes in favour of the proposal from the unsecured creditors; or
3. obtaining court approval for the proposal.

Under a deemed bankruptcy, the moment the debtor fails in one of these ways, the BIA says that the debtor is deemed to have made an assignment in bankruptcy.

The bankrupt is able to earn a living after filing for bankruptcy. For this objective, the bankrupt can work or run a company, after the bankruptcy event. However, an undischarged bankrupt cannot be a director of a company. Also, upon the onset of the bankruptcy, the debtor must turn over to the licensed insolvency trustee, any shares of companies owned by the bankrupt.

The Trustee will send a notice to your creditors informing them of the bankruptcy. If there needs to be a meeting of creditors, the Trustee will hold it. The Trustee will also provide the bankrupt person with two credit counselling/financial counselling sessions with an individual who is an OSB qualified credit counsellor from the Trustee’s office, as part of the overall bankruptcy administration.

As you can see, not every way of declaring bankruptcy in Canada is totally voluntary.

Declaring bankruptcy in Canada: What assets do you lose in bankruptcy?

One of the most important tasks a Trustee has in the entire personal bankruptcy process or corporate bankruptcy process after the debtor chose declaring bankruptcy in Canada is to:

take an inventory of the debtor’s assets;
make sure they are physically secure and insured;
formulate a plan to sell the assets for the most amount possible under the circumstances;
review the financial affairs of the bankrupt, including the household income and financial situation of the bankrupt in a personal bankruptcy filing, and prepare a report to the creditors; and
then pay a dividend to the creditors.

There are however certain exemptions allowed for people. Few are based on federal law. Most are based on provincial law. So exempt assets may differ from province to province. In Ontario, assets that are exempt, and therefore not subject to seizure by a Trustee, are:

The equity in your home of no greater than $10,000.
A vehicle with an equity value of no more than $6,000.
Garments and medical/dental aids.
Household furnishings up to a worth of $13,100.
Tools of the trade with a value of no greater than $11,300.
Pension plans, RRIF, RRSP (other than any kind of RRSP payments made within 12 months of the date of bankruptcy).
Farmers– no greater than $29,100 for animals and also tools & equipment.

Even though someone has decided that filing bankruptcy is the route they must go, there are certain assets they will not have to give up.

Declaring bankruptcy in Canada: Does Bankruptcy clear tax debt in Canada?

The short answer is yes. Income taxes payable calculated on your tax return but not paid is a type of debt that is released when a person gets their bankruptcy discharge. However, you should know that there is a wrinkle for anyone who owes $200,000 or more in income tax debt and if that debt to Canada Revenue Agency (CRA) equals 75% or more of the total unsecured proven claims in the bankruptcy. If that is the case, then that affects the bankrupt’s ability to get a discharge after declaring bankruptcy in Canada.

If it is the person’s first time filing bankruptcy and they do not have to make surplus income payments, then they are still entitled to a discharge after 9 months from the date of bankruptcy. If it is their first time but they do have surplus income payments, then they cannot apply for a discharge until after 21 months.

If this is the person’s second time filing bankruptcy, if they do not have any surplus income payments, then rather than being able to apply for a discharge after 9 months, they must wait 24 months. If they do have surplus income payments, then it is extended to 36 months.

If someone has been bankrupt more than one time before and has at least $200,000 of income tax debt representing 75% or more of the total proven unsecured claims, then regardless of their surplus income payment situation, they must wait 36 months.

Such a bankrupt is called a high tax debtor. A high tax debtor is not entitled to have the Trustee issue an automatic bankruptcy discharge when the time has expired. Rather, there must be a court hearing for the bankrupt’s application for discharge.

CRA will oppose an absolute discharge at least on the basis of the fact that they are a high tax debtor. The Trustee does not have to oppose the discharge on this basis. However, if the bankrupt has failed to live up to any of their duties, including making the required surplus income payment, the Trustee will oppose.

The court will make a conditional order of discharge. At least one of the conditions will be to pay a certain amount to the Trustee for the benefit of the unsecured creditors. The amount depends on the unique circumstances of that bankrupt, but you can assume that the amount will be about 25% of the income tax owing.

So anyone how has income tax debt and is contemplating declaring bankruptcy in Canada, needs to look at their total liabilities carefully. If at all possible, you do not want to be a high tax debtor when declaring bankruptcy in Canada.

***Declaring bankruptcy in Canada*: What debt does bankruptcy not cover?**

Some people think that in a personal bankruptcy filing, the bankruptcy filing itself is what eliminates the person’s debts. That is wrong. At the moment of declaring bankruptcy in Canada, nothing actually happens to your debts. It is the person’s discharge from bankruptcy that “discharges” the person from their debts.

Yet, there is still a category of debts that are not covered and not discharged when a personal bankruptcy discharge occurs. The debts that are not covered or discharged, are outlined in section 178(1) of the BIA. These such debts are:

any type of penalty, fine, restitution order or other order comparable in nature to a penalty, fine or restitution order, enforced by a court in regard of an offence, or any kind of debt developing out of a recognizance or bond;
any damages award by a court in civil process for:

( i) physical injury intentionally caused, or sexual assault, or

( ii) wrongful death resulting therefrom;
any type of financial debt or responsibility for spousal support or alimentary pension;
any kind of financial obligation or liability developing under a judgment establishing an association or about support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, previous common-law companion or child not living with the bankrupt;
any type of financial obligation or liability occurring out of fraudulence, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;
any financial debt or liability resulting from getting property or services by false pretenses or fraudulent misrepresentation, apart from a debt or responsibility that arises from an equity claim;
liability for the dividend that a creditor would have been qualified to receive on any kind of provable claim not disclosed to the trustee unless the creditor had notification or understanding of the bankruptcy and fell short to take reasonable activity to confirm the claim; or
student loans if the bankruptcy filing happened before the person stopped being a full or part-time student or within seven years after the day on which the bankrupt stopped to be a complete- or part-time student

Declaring bankruptcy in Canada summary

I hope you enjoyed this declaring bankruptcy in Canada Brandon Blog post. If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore. The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of this seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

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

Tags alternatives to bankruptcy, avoid bankruptcy, Bankruptcy and Insolvency Act, commercial proposals, Companies’ Creditors Arrangement Act, consumer proposals, Corporate Bankruptcy, credit counselling, credit counsellor, declaring bankruptcy in canada, filing for bankruptcy, financial counselling, financial difficulty, Ira Smith Trustee, licensed insolvency trustee, Office of the Superintendent of Bankruptcy, personal bankruptcy, undischarged bankrupt

Brandon Blog Post

TRUSTEE BANKRUPTCIES FEES IN A SCARY CORONAVIRUS WORLD

Post author By Brandon Smith
Post date November 23, 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. We hope that you and your family are safe and healthy.

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

Trustee bankruptcies introduction

Are trustee bankruptcies filings high right now?

Every day we read or hear in the media about the life-threatening health challenges faced daily by Canadians. We also hear sad stories about people who have lost their job because of businesses having to close down.

The general public thinks that right now there is a lot of personal bankruptcy and corporate bankruptcy filings. In actual fact, the numbers are low. The 2 main reasons are:

Government support programs have helped support people and businesses. Most of the programs ended effective September 30, 2020.
Creditors are not chasing or harassing borrowers right now. Given that we are about 5 weeks away from Christmas, that will not change until some time in 2021.

I am receiving a lot of inquiries from people and entrepreneurs about their personal and business debt situation. I am doing a lot of initial consultations by telephone or video meeting. That tells me that there should be an increase in insolvency filings in 2021.

It may surprise you to hear that even a licensed insolvency trustee (formerly called a bankruptcy trustee or trustee in bankruptcy) business could be having cash-flow problems. A recent court decision out of Ottawa highlights this issue. The purpose of this Brandon’s Blog is to discuss the court case and what it means for a trustee bankruptcies fee collection.

What are the fees of a licensed insolvency trustee?

This question is quite relevant, but the answer depends on what role the licensed insolvency trustee takes on.

A trustee in bankruptcy performs a wide variety of services, such as:

administrator in a consumer proposal;
the monitor under a Companies’ Creditors Arrangement Act (CCAA) corporate restructuring;
licensed insolvency trustee in either a summary administration or ordinary personal bankruptcy;
receiver over a company’s assets, either by private appointment or court appointment;
the licensed insolvency trustee in a corporate restructuring under the proposal provisions of the Bankruptcy and Insolvency Act (Canada) (BIA);
as the licensed insolvency trustee in a corporate bankruptcy; or
act as a consultant in either a corporate or personal insolvency situation, advising either a creditor or the debtor.

The fee will certainly differ depending on what duty is played. Keep in mind that the costs of trustee bankruptcies are established under the BIA itself for all insolvency administrations under the BIA.

Personal bankruptcy administration where the non-exempt assets are estimated to be worth less than $15,000 is called a summary administration bankruptcy. Rule 128 of the BIA General Rules dictates the cost and disbursements in such trustee bankruptcies. This kind of fee is called a tariff. A tariff also exists in a consumer proposal file.

A bankruptcy is called an “ordinary” bankruptcy when the realizable assets are estimated at $15,000 or greater in personal bankruptcy. Every corporate bankruptcy is an ordinary administration. The BIA also regulates the trustee bankruptcies fee and disbursements.

With this information as background, I will now discuss the recent case out of the court in Ottawa.

**A bankruptcy trustee needs cash flow too**

The case involves a court application by an Ottawa bankruptcy trustee on 3 separate ordinary administration personal bankruptcy files. Normally, when a bankruptcy trustee wishes to get an interim draw towards its fees and disbursements in an ordinary administration, they either get the approval of the creditors at a meeting of creditors or, approval of the inspectors appointed in the bankruptcy administration.

The First Meeting of Creditors has to take place within 21 days of the date of bankruptcy. It is rare to have to call another meeting of creditors. So if the Trustee does not get approval for an interim draw at the outset from the creditors present at the First Meeting, that chance is gone quickly. If no inspectors are appointed, or a long time has passed and the Trustee has trouble finding the inspectors, getting inspector approval may also prove difficult.

But there is one more way for a Trustee to get approval to get an interim draw for its cash flow.

Office of the Superintendent of Bankruptcy (OSB) Directive no. 27R

The OSB publishes Directives from time to time. Trustees are bound by and obliged to follow all regulations provided by the OSB. This is so there will be consistency in the insolvency process across Canada. Directive 27R is titled “Advance of Trustee’s Remuneration for Bankruptcies Under Ordinary Administration.”. It was issued on February 10, 2010. The purpose of this Directive is to set out the correct procedure the Trustee should comply with when making an interim withdrawal or taking out an advance on remuneration for ordinary trustee bankruptcies.

To withdraw an advance on its compensation, the Trustee needs to obtain consent in the form of:

a resolution of a duly comprised meeting of creditors;
the resolution of a majority of the inspectors at a properly convened meeting of inspectors; or
make an application to the Court for an order approving such interim advance.

This is what this Ottawa Trustee did for 3 of its trustee bankruptcies.

The OSB did not like the court application

The OSB did not like the fact that the Trustee made this application. The OSB actually opposed the application, notwithstanding the Trustee was properly following all the requirements of Directive 27R. The Trustee brought to the court’s attention that it would still take some time to prepare its Final Statement of Receipts and Disbursements, submit it to the OSB to receive their comment letter and then apply to the court for taxation. The process would take many months.

The Trustee also highlighted for the court that these are not normal times. Due to the coronavirus pandemic, government and court staff were not working at their normal pace. The Trustee also pointed out that its own business had to lay off staff and its own cash flow was suffering. Therefore, the Trustee was making an application to the court for approval for an interim draw, as allowed. The Trustee highlighted what has gone on to date in each bankruptcy estate. The Trustee also provided proof of proper service on the OSB of this motion.

The decision does not indicate why the Trustee did not just go for inspector approval. Nevertheless, its position was that it was within its rights to make this application to the court and for the court to approve it.

The OSB’s basis for opposing this motion can be summarized as:

Interim draws approved by a court under Directive 27R are just to be made in special circumstances.
While COVID-19 is an exceptional situation, it is insufficient to call for the orders asked for by the Trustee.
The OSB additionally argues that the motion was not on notice to the creditors in the respective trustee bankruptcies estates concerned, who might actually object to the amount being claimed by the Trustee.
The OSB is worried that, if the motion is granted and the court order made, it could cause more need on the court’s time as more Trustees will seek similar orders in other trustee bankruptcies estates.
Finally, the OSB says that this matter is not urgent and therefore ought to not be dealt with right now. The Trustee should just go for final taxation in the normal course.

The OSB also provided two earlier court decisions where interim draws were not approved in support of its opposition.

The court sees COVID-19 creating urgencies, even for trustee bankruptcies

The court considered the OSB’s submissions and the cases it relied upon. The court distinguished those cases from the current motion for these trustee bankruptcies. Due to COVID-19, the Court found that it is not practical for the Trustee to need to wait on the receipt of the OSB Letter of Comment and then proceed to final taxation.

The court stated these are not normal times. The timelines for any of the steps involved in the final taxation process could be much longer, taking into consideration the stay-at-home orders that have been issued, even including the OSB team.

The judge stated that the court must deal with the situation as it presently exists and as it advances each day, and also make appropriate decisions as necessary. He stated that businesses in all industries have been laying workers off. This includes the insolvency industry. A lot of the businesses that are still operating are doing so with minimized staff. Those businesses are attempting to make the most out of their limited cash flow to sustain operations.

The court stated that it understands that the choice it makes on this motion might bring about an influx of cases for interim draws in trustee bankruptcies. If that becomes the case, the court will deal with it. In addition, the court recognized that, because of coronavirus, interim draws are a practical method of managing the liquidity crunch presently being experienced by Trustees. Even if there had been no coronavirus pandemic, Directive 27R still allows for such an application to the court in the trustee bankruptcies.

The Court was also conscious that accounting firms, and consequently licensed insolvency trustee businesses, have been proclaimed essential services in the Province of Ontario.

**The court’s decision on the trustee bankruptices motion**

As a result of all these findings, the court decided that licensed insolvency trustees must have the tools essential to maintain their operations and to permit people and companies to get access to the Canadian insolvency system. Therefore, the court held that Trustees need to be able to access the funds in their trust accounts that they have actually earned as fees, inclusive of HST.

Taking all this into account, the court exercised its discretion and ordered that the Trustee is approved to withdraw 75% of the fee that has been earned in the three trustee bankruptcies, including HST. The Trustee should then move to final taxation. There are already safeguards built into the final taxation process where creditors in each of the trustee bankruptcies estates can object to the taxation and the total fees if they wish to.

If the total final fees are approved, then the Trustee can withdraw the remaining 25%. If final taxation results in any fees less than the 75% interim draw approved in any of the trustee bankruptcies, then the Trustee will have to repay into the bankruptcy estate the specific amount(s).

The court ordered that any costs incurred on the motion was an overhead cost of the Trustee and was not recoverable from the trustee bankruptcies. Costs were neither sought nor awarded. My understanding is that the OSB is not appealing this decision.

Trustee bankruptcies summary

I hope you have enjoyed this trustee bankruptcies Brandon’s Blog. It is the first decision I am aware of that deals with the reality that like any other entrepreneur, a licensed insolvency trustee is running a business too.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

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

Tags bankruptcy administration, Bankruptcy and Insolvency Act, bankruptcy trustee, Consumer Proposal, Corporate Bankruptcy, insolvency, Ira Smith Trustee, licensed insolvency trustee, personal bankruptcy, trustee, trustee bankruptcies, trustee in bankruptcy

Brandon Blog Post

CLOSING A BUSINESS DOES NOT AUTOMATICALLY MEAN AN ALARMING BANKRUPTCY

Post author By Brandon Smith
Post date November 18, 2020

At the end of this blog, we have a special gift for you!

Closing a business introduction

Many times I am consulted by an entrepreneur about closing a business. This may sound odd coming from a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee), but not all business closures involve a formal bankruptcy. In fact, there are more business closures that do not involve bankruptcy

Now with so many businesses hurting due to a slowdown or complete destination due to the result of the coronavirus pandemic, I expect more entrepreneurs are going to want to know about closing a business.

In this Brandon’s Blog, I provide the reasons why. I also go through the various steps in closing a business that you can use as a checklist.

Closing a business that does not have many (free) assets

Many times I get a call from someone whose business is not doing well. They probably cannot afford to pay the business rent next month and it does not make sense to stay open. They think bankruptcy is the only way they have for closing a business. The business does not have many assets, or all the assets are secured by a bank that loaned the corporation money. Think of a business where the assets were bought through a bank loan. The funding may or may not have been under a government small business loan program.

The entrepreneur gave a personal guarantee to the bank ranging from 25% to 100% of the total loan amount. The entrepreneur may also have provided a personal guarantee to the landlord. The business may or may not be current in its employee source deduction remittances and harmonized sales tax (HST) payments. The entrepreneur does not believe the assets have any value above the amount of the secured loan and wishes to place the company in bankruptcy as the answer to closing a business.

Here is why bankruptcy will not help:

The assets are fully secured by the bank.
Canada Revenue Agency (CRA) may have a trust claim over the assets because of unremitted source deductions.
A corporate bankruptcy will not solve the entrepreneur’s personal debt issues under the personal guarantee to the bank for any shortfall claim and the landlord for any claim due to the failure of the corporate tenant.

In this type of situation, there is not much I can do. I tell the entrepreneur that if they are going to shut the business down before the first of the next month, they should do so. Then, they should go to the bank, advise them and cooperate with the bank to allow them to realize their security. I tell them to make sure that they follow the steps for closing a business that I outline below.

I tell the entrepreneur that when the bank and the landlord each make a demand for their obligations under the respective personal guarantees to call me. We will then work together on their personal situation. Perhaps a consumer proposal will be possible. I also tell them that it is not worth spending the money they don’t have in order to bankrupt the company.

That is why in this case a corporate bankruptcy will not help an entrepreneur in closing a business. I call this the self-help remedy.

The business is still operating – will anyone buy it?

Before making any decisions about closing a business, you should first think in terms of is your business worth anything? You have spent many years building your business. It may be insolvent because it has suffered losses for several years, cash flow is weak and the corporation cannot pay its debts generally as they come due.

Although the current corporate body may be weak, you need to determine if your business is still viable. Does the marketplace still have a need for the service or product you provide? Are there competitors who seem to be doing well? Your business has a customer base and trained staff. One of your competitors may find your customer base and some or all of your staff something they want to amalgamate into their existing business.

If that is the case, you need to understand what your business might be worth. The selling prices of similar organizations in your geographical area or market will be a good barometer of what you can anticipate getting for your company. Innovative buyers might evaluate your business on the basis of projected cash flow for the next few years. They may very well mark down the worth of that cash flow to mirror the perceived threats and risks inherent in your business.

In the case of an insolvent but viable business, it may be that an insolvency process is necessary to allow the purchaser to buy the assets it wishes to purchase and take on all or some of your employees, maybe even including you.

The range of options available includes:

So with the right insolvency process, the assets of the business can be put back to good use and be very productive. It may very well help get a good M&A deal done.

I have written before many blogs on how these insolvency proceedings could help in getting the healthy parts of a business into a purchaser while leaving the sick parts behind and then be used for closing a business. Those details are beyond the scope of this Brandon’s Blog.

**When does corporate bankruptcy make sense in closing a business?**

Corporate bankruptcy is not a simple process. An entrepreneur needs the advice of their lawyer and also needs to retain a Trustee. This costs money. More often than not, there are no free assets in the company. That means the entrepreneur needs to personally fund the cost of the bankruptcy process for closing a business.

A bankruptcy of the company may make sense in several situations. Some of the most common are:

Certain government claim priorities need to be reversed and that only can be done in bankruptcy. The most common one is unremitted HST. Absent a bankruptcy, the HST obligation is a trust claim and will come before the claim of any other creditor, including a secured creditor. As probably the sole director of the corporation, the entrepreneur may be willing to bankrupt the company to put the HST behind the bank. The director may very well choose as part of closing a business, to take their chances on the claim for unpaid HST as a director liability, rather than increase the bank’s shortfall by the amount of that HST claim.
There may be value in the premises lease. If the rent under the lease is below market and can be sold, a bankruptcy will be necessary. That is because the combination of the Commercial Tenancies Act Ontario and the Bankruptcy and Insolvency Act (Canada) Trustee has certain rights to sell the lease that the corporation tenant does not have. So, bankruptcy may be a good idea in that case.
The security of a lender for which no personal guarantee has been given is invalid against a Trustee. The corporation may be able to restructure with that liability moved from secured to unsecured. Alternatively, a bankruptcy will allow for assets to be better protected for the secured creditors first and then provide some value for the unsecured creditors if there is a bankruptcy.

**My closing a business checklist**

This is what I tell any entrepreneur for a self-help remedy for closing a business that is most appropriate:

Advise the utilities that they should do a final meter reading and shut down the account.
Prepare and issue all records of employment to the former employees.
Remove the books and records (probably computerized) from the business premises so that the information can be secure.
Advise your bank lender that the business is shut down and that you are delivering the keys to the banker so that they can get their security.
If there is no bank lender, and no trust claims over the assets, hold a going out of business sale.
Tell the landlord the business is over and deliver the keys.
Cancel insurance policies. There may be an unearned premium refund coming back to the business.
Redirect the business mail to a different address. Most of the mail will be bills, but there may also be cheques you don’t want to miss so you can deposit them into the bank account.
Cancel any corporate credit cards.
Deal with the termination and return of any business license and permits.
Deal with your business social media accounts, website, and any other digital or intangible assets. You will have to decide when it comes up for renewal if you wish to retain the URL in light of your closing a business decision. The URL may have a value that you can unlock.
Make sure that the final financial statements and tax returns are prepared. File the tax returns with the government. If there is a balance owing, don’t worry about it as the business cannot pay and corporate income tax owed is not a director liability.
Prepare and issue final T4 statements of remuneration paid. Issue them to the former employees. Figure out if there are any employee source deductions owing. If there is and you can pay them as it is a director liability.
Calculate, prepare and file the final HST return. If there is a balance owing and you can pay the amount as it is also a director liability.
Maintain the books and records as CRA may want to perform an audit.
Send a letter to all creditors advising of your closing a business decision was due to financial problems, express your gratitude for the relationships you have built, tell them that there is no money for them and let them know that you have also lost money.
Mail a letter to your customers/clients advising of the closure of the business and thank them for their loyalty and patronage over the years.

Closing a business summary

I hope you have enjoyed this closing a business Brandon’s Blog. A sick insolvent company’s business might be saved by a debt restructuring.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

Call us now for a free consultation.

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

CLOSING A BUSINESS INFOGRAPHIC. CLICK ON THE INFOGRAPHIC TO DOWNLOAD YOUR OWN COPY

Tags Bankruptcy, bankruptcy trustee, Canada Revenue Agency, closing a business, Corporate Bankruptcy, CRA, hst, Ira Smith Trustee, licensed insolvency trustee, liquidating proposal, proposal, receivership, restructuring, restructuring proposal, small business, trustee

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.

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

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

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

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

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

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

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

Introduction to Business Insolvency

Definition of Business Insolvency

Causes and Warning Signs of Business Insolvency

Economic Downturn and Market Volatility

Cash Flow Problems: Overleveraging and Excessive Debt Burden

Poor Financial Planning and Management

Regulatory Compliance and Legal Challenges

Technological Disruption and Industry Shifts

External Shocks and Unforeseen Events

Business Insolvency: Overview of Insolvency Law in Canada

Role of a Lawyer in Business Insolvency

Legal Responsibilities and Duties

Strategies for Representing Clients

Role of an Accountant in Business Insolvency

Financial Analysis and Reporting

Compliance with Accounting Standards

Impact of Business Insolvency

Job Losses and Unemployment

Effects on Suppliers and Creditors

Potential Closure or Sale of the Business

Reputation Damage

Navigating Business Insolvency Proceedings

Initiating the Insolvency Process

Managing Stakeholder Relationships

Resolving Legal issues Within a Business Insolvency

Negotiation and Mediation Techniques

Litigation and Court Proceedings

4 Common Business Insolvency FAQs

Business Insolvency Conclusion

Corporate bankruptcy: An overview

Can a business declare corporate bankruptcy?

What are the different types of corporate bankruptcy in Canada?

What factors lead to corporate bankruptcy proceedings?

Corporate bankruptcy: What does it mean for a company when it liquidates?

What happens to debt in corporate bankruptcy?

How does a company get into corporate bankruptcy and what happens to the company?

Why might a company choose to file for corporate bankruptcy protection and restructure under a BIA proposal?

Who is responsible for developing the reorganization plan for the company?

What becomes of a corporation after corporate bankruptcy?

When a company declares corporate bankruptcy, what will happen to your stock or bond?

Corporate bankruptcy and insolvency at a glance

Declaring bankruptcy: Business insolvency

Declaring bankruptcy: An overview of corporate bankruptcy

Declaring bankruptcy: Types of Corporate Bankruptcy

Declaring bankruptcy: Does corporate bankruptcy affect personal assets?

Declaring bankruptcy: The Medcap case

Declaring bankruptcy: Appealing a bankruptcy order

Declaring bankruptcy: Unable to pay its debts

Declaring bankruptcy: Bankruptcy application for improper motives

Declaring bankruptcy: There is no purpose for this bankruptcy

Declaring bankruptcy: The final word

Small business in Canada introduction

Small business in Canada: When is a corporation bankrupt, or insolvent?

Small business in Canada: Is small business bankruptcy the right choice?

Small business in Canada: Is just closing the door an alternative?

Small business in Canada: So what happens if I just close the door and lock it?

Must 200,000 Canadian small businesses declare bankruptcy due to the pandemic?

Small business in Canada summary

Bankruptcy fraud introduction

What is bankruptcy fraud?

What are bankruptcy offences and how are they and bankruptcy fraud discovered?

Examination of the bankrupt or the designated officer of the bankrupt company

Bankruptcy fraud: Examination of the bankrupt court case background

Bankruptcy fraud: The position of the bankrupt, creditor and Trustee

The creditor

The Trustee

The bankrupt

Bankruptcy fraud: The court decision for the request to examine the bankrupt

The court decision about the request for documents and to examine the bankrupt’s mother

Bankruptcy fraud and examination of the bankrupt: Other matters

Bankruptcy fraud summary

Declaring bankruptcy in Canada: Introduction

When can you declare bankruptcy in Canada?

What happens when you declare bankruptcy in Canada?

Declaring bankruptcy in Canada: What assets do you lose in bankruptcy?

Declaring bankruptcy in Canada: Does Bankruptcy clear tax debt in Canada?

Declaring bankruptcy in Canada: What debt does bankruptcy not cover?

Declaring bankruptcy in Canada summary

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

Trustee bankruptcies introduction

**Can a business declare corporate bankruptcy?**

**What factors lead to corporate bankruptcy proceedings?**

**What happens to debt in corporate bankruptcy?**

**How does a company get into corporate bankruptcy and what happens to the company?**

**Why might a company choose to file for corporate bankruptcy protection and restructure under a BIA proposal?**

**What becomes of a corporation after corporate bankruptcy?**

**When a company declares corporate bankruptcy, what will happen to your stock or bond?**

***Small business in Canada*: Is small business bankruptcy the right choice?**

***Small business in Canada*: Is just closing the door an alternative?**

***Small business in Canada*: So what happens if I just close the door and lock it?**

***Bankruptcy fraud*: Examination of the bankrupt court case background**

***Bankruptcy fraud*: The position of the bankrupt, creditor and Trustee**

***Declaring bankruptcy in Canada*: Introduction**

***Declaring bankruptcy in Canada*: What debt does bankruptcy not cover?**

**A bankruptcy trustee needs cash flow too**

**The court’s decision on the trustee bankruptices motion**

**When does corporate bankruptcy make sense in closing a business?**

**My closing a business checklist**