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BANKRUPTCY AND BUSINESS FAILURE: WHY THE STATISTICS UNDOUBTEDLY DO NOT TELL THE FULL STORY

bankruptcy and business
bankruptcy and business


bankruptcy and business

Bankruptcy and Business: Introduction

As a licensed insolvency trustee, (previously referred to as a trustee in bankruptcy), my role involves assisting individuals and businesses in managing the complexities associated with entrepreneurship. The conclusion of a business often occurs without fanfare; it is not typically marked by formal announcements or celebratory farewells but rather unfolds quietly amidst the ongoing activity of the market. Despite rising bankruptcy and business failure through the recorded insolvency numbers, many businesses close without it showing up in the insolvency statistics, revealing a deeper truth about economic resilience.

For every corporate insolvency file that I administer, be it the legal process of a bankruptcy protection financial restructuring or a bankruptcy liquidation, there have been many more inquiries from entrepreneurs where the best advice I can give is rather than spending money on corporate bankruptcy, just shut down the business yourself.

In this Brandon’s Blog, which is aimed at Canadian entrepreneurs and their professional advisors, be they financial advisors, lawyers or accountants, I explore the complexities of bankruptcy and business failures, where one fact stands out: the numbers can be deceiving. The current rise in reported business insolvencies has raised eyebrows. But what’s behind these figures? Many businesses close their doors without formally declaring bankruptcy.

Bankruptcy and Business: Types of Business Structures Affected by Bankruptcy

It is essential to understand the different types of business structures that can be affected by or are eligible for bankruptcy. In this section, I’ll explore the impact of bankruptcy on sole proprietorships, partnerships, and incorporated companies.

Sole Proprietorships

A sole proprietorship is a business owned and operated by one individual personally. In the event of bankruptcy, the sole proprietor’s personal assets, including their home, savings, and other personal property, can be used to pay off business debts. This is because, from a legal perspective, the business and the individual are considered one and the same.

Partnerships

A partnership is a business owned and operated by two or more individuals. In the event of one or more partners filing for personal bankruptcy, the partnership’s assets are typically divided among the partners, and each partner is responsible for paying off their share of the debts. However, if one partner files for bankruptcy protection, then the partnership is automatically dissolved. If one partner is unable to pay their share, the other partners are responsible for paying off the remaining business debts.

Incorporated Companies

An incorporated company, also known as a corporation, is a separate legal entity from its shareholders. In the event of bankruptcy, as the corporation is a separate entity, the corporation’s assets are typically liquidated to pay off its debts, and the shareholders are not personally responsible for paying off the debts. However, if the corporation is insolvent, the shareholders may still be at risk of losing their investment.

Key Takeaways

  • Sole proprietorships: The business and the individual are considered one and the same, and personal assets can be used to pay off business debts.
  • Partnerships: Partners are responsible for paying off their share of the debts, or alternatively, each partner is responsible for paying off the entire amount of all debts. If one partner is unable to pay, and especially if one or more partners file for personal bankruptcy, the other partners are responsible for paying off the remaining business debts.
  • Incorporated companies: The corporation’s assets are typically liquidated to pay off its debts, and shareholders are not personally responsible for paying off the debts, but may still be at risk of losing their investment.

Why Understanding Business Structure is Important

Understanding the type of business structure you have is essential in the event of insolvency, as it influences the appropriate debt relief solution that can be developed and executed. The relationship between bankruptcy and your business structure will affect how your assets are managed and how your debts are settled. For instance, if you operate as a sole proprietorship, you may be personally liable for the repayment of business debts. In contrast, if your business is incorporated, your personal assets are typically safeguarded from creditors.

Bankruptcy can impact any business structure; sole proprietorships, partnerships, and corporations. It is important to comprehend the specific business structure you operate under and the implications a bankruptcy protection filing may have on both you and your business. For Canadian entrepreneurs facing challenges with business debt, it is advisable to consult a licensed insolvency trustee to explore available options and make informed decisions regarding your financial situation.

Although parts of the balance of this article will focus on the corporate business structure, most will also be applicable to Canadian business regardless of the business structure.

bankruptcy and business
bankruptcy and business

Understanding Bankruptcy and Business in Canada: A Guide for Businesses

As a Canadian entrepreneur, it is important to recognize that operating a business involves various risks and challenges. Even with diligent management, financial difficulties may arise that jeopardize the viability of your company. In these circumstances, it is essential to be well-informed about the options at your disposal. One widely recognized and effective solution in such situations is corporate bankruptcy.

What is Corporate Bankruptcy in Canada?

Corporate bankruptcy, arising from a corporate insolvency, occurs when a business is unable to pay its overwhelming debts as they become due – that is the definition of an insolvent company. This can happen due to a variety of reasons, including poor cash flow management, increased competition, unexpected expenses, or even a downturn in the economy. When a business becomes insolvent, it may be forced to cease operations, leading to financial losses for its creditors, employees, and shareholders.

Types of Bankruptcy For Corporations in Canada

There are two main types of corporate bankruptcy in Canada: proposal and bankruptcy.

  • Proposal: A corporate proposal is an alternative to bankruptcy. It is a formal payment plan under the Bankruptcy and Insolvency Act (Canada) BIA that allows a business a period of time to settle its debts with its creditors. The proposal is presented to the creditors, who then vote on whether to accept it. If accepted, the proposal then goes to court for approval. When the court approves the proposal, it then is binding on the debtor business and the creditors.

Once the proposal becomes binding, the business can restructure its debt and continue operating by making the monthly payments to the Trustee that it promised to make for the benefit of its creditors. This is otherwise known as a corporate restructuring plan.

  • Bankruptcy: Bankruptcy is also a formal process under the BIA where the business assets are liquidated by selling off its assets. The Trustee then uses the net proceeds of sale to pay for the cost of the corporate bankruptcy process and then to distribute what remains to the unsecured creditors on a pro rata basis according to their claims.

Benefits of Corporate Bankruptcy in Canada

While bankruptcy protection may seem like a last resort, it can actually be a beneficial option for businesses facing financial difficulties. Some of the benefits of corporate bankruptcy in Canada include:

  • Protection from Creditors: Bankruptcy provides a stay of proceedings, which means that creditors cannot take or continue legal action against the business or its assets.
  • Reorganization: Bankruptcy allows businesses to restructure their debt and reorganize their operations to become more sustainable.
  • Fresh Start: Bankruptcy can provide a fresh start for businesses, allowing them to emerge from insolvency and start anew.

When to Consider Corporate Bankruptcy in Canada

If your business is experiencing financial difficulties, it’s essential to seek professional advice from a licensed insolvency trustee. Here are some signs that may indicate it’s time to consider corporate bankruptcy:

  • Cash Flow Problems: Cash flow problems can indicate underlying financial issues within a business. If a company is consistently struggling to pay its bills on time, it is essential to investigate the root causes of this cash flow challenge, as it may reflect broader financial health concerns.
  • High Debt Levels: When a business is burdened with significant debt and faces challenges in meeting its repayment obligations, considering bankruptcy may be a viable option to explore.
  • Loss of Key Customers or Suppliers: Loss of key customers or suppliers can indicate underlying issues within a business that require attention. It is important to analyze the reasons behind this loss, as it may reflect broader challenges affecting the organization’s performance and stability. Addressing these issues promptly can help mitigate potential negative impacts on operations and profitability.

Corporate bankruptcy in Canada is a multifaceted process that can present challenges for businesses in financial distress. However, it can serve as an effective mechanism for companies to address their financial challenges and restructure. By familiarizing themselves with the available options and consulting with qualified professionals, businesses can effectively navigate the bankruptcy process, potentially emerging in a more resilient and sustainable position. Entrepreneurs in Canada facing significant business debt are encouraged to reach out to a licensed insolvency trustee to explore their available options.

Bankruptcy and Business: The Overlooked Landscape of Business Closures

Understanding Bankruptcy and Business Insolvency Filing vs. Closure

Have you ever wondered the difference between a business going bankrupt and closing its doors? It’s important. Business insolvency is the financial condition that the business cannot pay all of its debts as they come due. Business bankruptcy is a legal process where a business files for bankruptcy in order to deal with the distribution of its assets among its creditors in a fair and orderly fashion, as far as the money can go. On the other hand, closure can happen for many reasons, like poor management or market changes. Bankruptcy and business failure many times go hand in hand, but just as often, they don’t.

Reasons For Bankruptcy and Business Failure

Understanding the Common Causes

As a licensed insolvency trustee, I’ve seen firsthand the devastating impact of business bankruptcy on entrepreneurs, employees, and the economy as a whole. While no business is immune to financial difficulties, understanding the common reasons for business bankruptcy can help entrepreneurs take proactive steps to mitigate risks and avoid insolvency.

In this section, we’ll explore the three main categories of reasons for business bankruptcy: Financial Challenges, Operational Issues, and External Factors.

Financial Challenges

Financial challenges are often the most obvious reason for business bankruptcy. Some common financial challenges that can lead to insolvency include:

  • Cash flow management issues: Inability to manage cash flow can lead to delayed payments, missed deadlines, and ultimately, insolvency.
  • High debt levels: Carrying too much debt can put a significant strain on a business’s finances, making it difficult to meet financial obligations.
  • Inadequate funding: Insufficient startup capital or ongoing funding can hinder a business’s ability to grow and operate successfully.
  • Poor budgeting: Failing to create a realistic budget or failing to stick to it can lead to financial difficulties.

Operational Issues

Operational issues can also contribute to business bankruptcy. Some common operational issues that can lead to insolvency include:

  • Inefficient operations: Poorly managed operations can lead to wasted resources, increased costs, and decreased productivity.
  • Lack of scalability: Failing to adapt to growth or changes in the market can lead to operational inefficiencies and financial difficulties.
  • Poor management: Ineffective leadership or management can lead to poor decision-making, which can ultimately result in insolvency.
  • Failure to innovate: Failing to innovate or adapt to changes in the market can lead to stagnation and financial difficulties.

External Factors

External factors can also play a significant role in business bankruptcy. Some common external factors that can lead to insolvency include:

  • Economic downturns: Economic recessions or downturns can lead to reduced consumer spending, decreased demand, and financial difficulties.
  • Competition: Increased competition can lead to reduced market share, decreased revenue, and financial difficulties.
  • Regulatory changes: Changes in regulations or laws can lead to increased costs, decreased revenue, and financial difficulties.
  • Natural disasters: Natural disasters or other external events can lead to significant financial losses and insolvency.

By understanding the common reasons for business bankruptcy, entrepreneurs can take proactive steps to mitigate risks and avoid insolvency. This includes creating a solid business plan, managing cash flow effectively, and staying adaptable to changes in the market. As a licensed insolvency trustee, I’ve seen firsthand the devastating impact of business bankruptcy on entrepreneurs and the economy. By being aware of the common causes of business bankruptcy, entrepreneurs can take steps to avoid insolvency and achieve long-term success.

Statistical Insights

Recent statistics highlight an important trend that merits our attention. Following the 2008 financial crisis, we saw a notable rise in business closures, with many not opting to file for bankruptcy. This is quite surprising, isn’t it?

In the first quarter of this year, Canada experienced 2,003 insolvencies, which included 1,599 bankruptcies and 404 proposals. This marks an 87 percent increase compared to the same quarter last year and represents the highest number of insolvencies in the first three months since early 2008.

Additionally, Statistics Canada provides insights into active businesses by tracking their monthly payroll filings with the Canada Revenue Agency (CRA). Due to a slight delay in data reporting and analysis, the latest figures are from January, showing there were 936,327 active businesses in Canada. However, there were also 43,121 closures, being companies that reported employees to the CRA in December 2023 but did not in January 2024.

“The real tragedy of business closures hides in the shadows of insolvency statistics.”

In light of all this, understanding that a business can disappear without ever declaring bankruptcy is crucial. It paints a clearer picture of our economy. Whether due to management issues or other challenges affecting the viability and solvency of the business, this is a landscape that deserves attention. What are your thoughts on this?

bankruptcy and business
bankruptcy and business

Bankruptcy and Business: The Hidden Truth Behind Business Closures

Understanding the Landscape of Business Failures

Did you know that the actual number of business closures is likely much higher than what insolvency figures reveal? It’s a shocking reality. Business insolvencies are soaring to heights we haven’t seen since the financial crisis of 2008. But here’s the catch: these numbers only represent a fraction of the businesses that are truly shutting down each year.

Why Do Businesses Fail?

Let’s dig into some reasons why businesses fail:

  • Lack of Cash Flow: Many businesses struggle with cash management. Without enough cash coming in, they can’t pay bills.
  • Poor Decision-Making: Sometimes, choosing the wrong direction can lead to disaster. It’s like sailing without a compass.
  • Competition: It’s a wild world out there. If you can’t keep up with your competitors, you may find yourself left behind.

The Significance of Measuring Failures

When you think about it, why are these insolvency numbers so important? They give us a glimpse into the broader economic conditions. However, they don’t paint the full picture. Countless businesses fold without ever going through the insolvency process. This raises the question: how can we better support these struggling businesses?

What Can Be Done?

We need to think creatively. Here are some strategies to consider:

  1. Strong Cash Flow Management: Maintaining robust financial practices can prevent major setbacks.
  2. Seek Guidance: Consulting with business mentors can provide invaluable insights.
  3. Flexibility is Key: Being adaptable to changing market demands can keep a business afloat.

A detailed examination of these factors reveals that each statistic embodies a narrative. Gaining insight into these dynamics enhances our understanding of the current business environment and facilitates the development of more effective solutions.

Bankruptcy and Business: Understanding Business Failures vs. Insolvency Rates

The current trend of rising bankruptcy and business failures can be alarming. We’re seeing numbers that remind us of the financial crisis back in 2008. But here’s the kicker: the official insolvency figures don’t tell the whole story. They only reflect a fraction of the businesses that close each year. So, what’s going on?

The Hidden Truth Behind Business Closures

When a business shuts down, sometimes bankruptcy and business do not go together. The business is insolvent, but as I stated in the introduction to this bankruptcy and business Brandon’s Blog, sometimes the wisest choice for owners is simply to close their doors rather than declare bankruptcy. Of course, in doing so, the business must treat its employees fairly in making sure that all wages and vacation pay are paid up in full, the books and records should be finalized, any leased equipment or consignment goods returned to their owners and all final government returns are filed.

A voluntary business closure raises a few questions:

  • Are entrepreneurs running away from the stigma of bankruptcy and business failure?
  • Do businesses fear the legal complexities of bankruptcy?

The Reality of Business Closures

Many businesses succumb to market pressures, competition, or changing consumer preferences. So even if a business doesn’t file for bankruptcy, it’s still part of a broader trend of bankruptcy and business failure.

Here are some factors contributing to these closures:

  1. Economic downturns: A slowdown can hit sales hard.
  2. Shifts in consumer behaviour: Staying relevant is crucial.
  3. Operational inefficiencies: Sometimes, a business just can’t keep up.

The data presented reflects not merely statistics, but real stories of individuals whose dreams and aspirations have faced significant challenges. Recognizing this broader context is crucial for comprehending the current realities of the business landscape.

bankruptcy and business
bankruptcy and business

Bankruptcy and Business: Understanding Business Failures Beyond Insolvency Numbers

Every year, countless businesses close their doors. But did you know most failures don’t make it to the insolvency list? It’s a striking fact. There’s a lot more happening beneath the surface.

The Real Picture of Business Failures

Business insolvencies are currently rising, reaching levels reminiscent of the 2008 financial crisis. However, these numbers only tell part of the story.

  • Insolvency counts are just the tip of the iceberg. Many businesses close without ever filing for bankruptcy.
  • They might choose to liquidate assets instead, avoiding formal insolvency procedures.
  • Some simply shutter their operation quietly, leaving no trail that stats can follow.

Why Do They Close?

Now, let’s dig deeper. Why do businesses close? Here are a few key reasons:

  1. Market changes: Trends shift rapidly. A product that sells today may be yesterday’s news tomorrow.
  2. Lack of funds: Often, owners run out of cash. It’s not always about being in debt.
  3. Poor planning: Without a solid business plan, success becomes a game of chance.

It’s critical to understand these points. When we consider the broader picture, it becomes clear that the narrative of bankruptcy and business failure encompasses much more than insolvency figures. So, when you hear those numbers, remember: behind every statistic, there’s a unique story. It’s worth exploring.

Bankruptcy and Business Behind the Scenes: A Personal Journey with Business Failure

Let me describe to you, with no names of course, about an entrepreneur who recently consulted with me. He truly believed in his retail business. It was welcoming, colourful, and brimming with potential. He had dreams of providing the best customer service in town. But, not long after the grand opening, he saw that it wasn’t working out. The foot traffic was lower than he anticipated, and the expenses kept piling up. He had to close the doors within a year of opening. It felt like a hard punch to his gut.

Lessons Learned

From this experience, he learned a few invaluable lessons:

  • Resilience is Key: Every setback can teach us something. We just need to be open to those lessons.
  • Adaptability Matters: The ability to pivot quickly can save a business. If he had been more flexible and had some staying power, perhaps he could have found a way to make it work.
  • Not All Bankruptcy and Business Failures Reflect Capability: Just because a venture doesn’t succeed it doesn’t mean that the person is not capable as an entrepreneur.

The Emotional Toll

Closing his store was not just a business decision; it hit him hard on a personal level. There’s a saying:

“Failure isn’t the opposite of success; it’s part of success.”

This resonated with him throughout the process. He felt a profound sense of loss—not just for his dream, but for his team and the community, albeit small, that had begun to form around his business. It’s important to recognize that every business closure affects many lives.

He will cherish the memories, good and bad. We often think of success as the ultimate goal. However, failures

can be just as important. After all, they prepare us for the next big opportunity.

Bankruptcy and Business: The Economic Ripple Effect of Silent Failures

Have you ever stopped to think about the impact of a business closing its doors quietly? It’s alarming. Each silent closure sends ripples through our communities. But how exactly does this happen?

Understanding the Broader Economy

When a business goes unnoticed, its effects are profound. For small towns and cities, local businesses are often the lifeblood of the economy. They provide jobs and foster a sense of community. But when they fail, a series of consequences unfold.

  • Potential job losses: Every unnoticed closure often results in job losses. It’s estimated that thousands of jobs are impacted as small businesses close each year.
  • Supply chain impacts: Smaller firms are interwoven into larger supply chains. When they disappear, disruptions occur, affecting many others reliant on their goods or services.

A Community Heartbreak

The silence surrounding these closures can be deafening.

“Every business closure is a community heartbreak.”

This isn’t just a catchy phrase; it’s the reality for many.

Large corporations may withstand economic struggles, but small businesses often can’t. Imagine a local diner you frequently visit, or a beloved independent bookstore. If these establishments close, the repercussions extend beyond just lost revenue. They can alter job security and change local culture.

We often overlook just how many jobs depend on these small firms. Have you considered what happens to job seekers when they vanish?

bankruptcy and business
bankruptcy and business

Bankruptcy and Business: Preventing the Silent Nightmare of Business Closure

We all know that running a business can feel like navigating through a storm. Sometimes, even the most resilient enterprises can face economic downturns that threaten their very existence. So, how do we ensure survivability? Here are some strategies to consider:

1. Embrace Innovation

  • Adapt to Market Trends: Staying ahead means constantly evaluating what’s working and what’s not. Are your customers shifting their preferences? Innovate to meet their needs.
  • Leverage Technology: Digital tools can streamline operations and reach wider markets. Tools like social media and e-commerce platforms can significantly boost visibility.

2. Cultivate Adaptability

We must understand that adaptability is key. If we don’t learn and pivot, we risk stagnation. Have you ever noticed how quickly the business landscape shifts? Continuous learning is not just a phrase; it’s a necessity. Training programs and workshops can enhance our expertise.

3. Build Community Support

One of the most effective strategies is building a strong support system. Entrepreneurs often feel isolated—this needn’t be the case. Engaging in community networks or mentorship programs can provide valuable guidance.

Imagine a gardener tending to a plant. It needs nurturing, sunlight, and sometimes a bit of pruning. Similarly, businesses thrive in supportive environments where they can learn and adapt. We need to reinforce this sense of community, where sharing experiences can lead to encouragement and growth.

Finally, I want to acknowledge that the journey is indeed tough. Yet, it is essential to focus on personal resilience. Everyone faces challenges. But through understanding and support, we can not only overcome but also flourish!

I urge you to seek out success stories, too. Businesses that have pivoted successfully often serve as a beacon of hope. They illuminate paths we never considered. By sharing our experiences and challenges, we help each other to thrive.

Bankruptcy and Business: Shining a Light on Shadows

As we’ve explored the complexities of business failures, one fact stands out: the numbers can be deceiving. The current rise in business insolvencies has raised eyebrows. But what’s behind these figures? Many businesses close their doors without formally declaring bankruptcy. This distinction is critical for understanding the health of our economy. Not all failures are recorded in official statistics. Every year, countless ventures close down quietly, leaving little trace. Each shuttered business represents dreams, investments, and hard work.

As we wrap up our discussion, it’s clear that *business failures* are more common than we often admit. Many business owners might feel isolated, and that’s understandable. But recognizing the reality of these failures is essential. It reminds us that every entrepreneur’s journey is difficult yet filled with opportunities to learn and grow.

Here are some key points we’ve explored:

  1. The numerous factors that contribute to business closures.
  2. The impact of community support on a business’s survival.
  3. How understanding failures can lead to future successes.

    bankruptcy and business
    bankruptcy and business

Bankruptcy and Business in Canada: FAQ

1. What is the difference between a business closing and a business going bankrupt?

Business closure and bankruptcy are distinct concepts in the realm of business operations.

Business closure refers to the termination of a business’s operations for various reasons. These reasons may include factors such as ineffective management, shifts in market conditions, or a deliberate choice by the owner to cease operations.

On the other hand, business bankruptcy is a legal process defined by the BIA in Canada. This occurs when a business officially declares its inability to meet its financial obligations. The bankruptcy process typically involves either restructuring debts through a formal proposal or liquidating business assets to repay creditors.

It is important to note that while bankruptcy often results in the closure of a business, not all closures are accompanied by bankruptcy proceedings. A business can close without filing for bankruptcy, opting instead to liquidate its assets and settle any outstanding debts on its own.

2. What are the main types of corporate bankruptcy in Canada?

Canada provides two main avenues for corporations encountering bankruptcy:

  • Proposal: This option involves submitting a formal payment plan to creditors for their approval. If the proposal is accepted and subsequently sanctioned by the court, the business can restructure its debts, continue its operations, and repay creditors over an extended period.
  • Bankruptcy: In this scenario, the corporation liquidates its assets to settle debts with creditors. The proceeds from the asset sales are allocated to creditors, starting with secured creditors, followed by a proportional distribution of any remaining funds to unsecured creditors.

3. What are some common reasons for business failure?

Business failure can result from various issues that can be categorized into three main areas:

Financial Challenges:

  • Poor cash flow management
  • High levels of debt
  • Insufficient funding
  • Ineffective budgeting practices

Operational Issues:

  • Inefficient operational processes
  • Inability to scale operations
  • Subpar management practices
  • Lack of innovation

External Factors:

  • Economic downturns
  • Heightened competition
  • Changes in regulations
  • Natural disasters

4. Why is the number of business closures likely higher than official insolvency statistics suggest?

Many businesses choose to close their doors without formally filing for bankruptcy. This could be due to several reasons:

  • Avoiding the stigma of bankruptcy: Some entrepreneurs may perceive bankruptcy as a personal failure and opt for a quiet closure.
  • Complexity and cost of bankruptcy proceedings: The legal processes involved in bankruptcy can be daunting and expensive, deterring some businesses.
  • Strategic decision to liquidate independently: Owners may decide to manage the closure process themselves, selling assets to settle debts outside of formal insolvency proceedings.

5. What are the economic consequences of unrecorded business closures?

Unrecorded closures have a significant impact on the economy:

  • Job losses: Closures, whether reported or not, often lead to job losses, impacting individuals, families, and communities.
  • Supply chain disruptions: Small businesses are often integral to larger supply chains. Their closures can disrupt these networks, impacting other businesses reliant on their goods or services.
  • Reduced economic activity: Closures reduce overall economic activity in communities, impacting local spending, tax revenue, and overall economic health.

6. What are some strategies to help businesses avoid closure?

  • Embrace innovation: Adapting to market trends, leveraging technology, and developing new products or services can help businesses remain competitive.
  • Cultivate adaptability: Continuous learning, training, and willingness to adjust strategies can improve resilience in the face of change.
  • Build community support: Engaging with local networks, seeking mentorship, and fostering collaboration can provide valuable resources and guidance.
  • Prioritize financial management: Strong cash flow management, responsible budgeting, and careful debt management are crucial for business stability.

7. How can we better understand the true landscape of business closures?

  • Improved data collection: Implementing better tracking mechanisms to capture closures beyond formal insolvency filings could provide a more accurate picture of business failure rates.
  • Research and analysis: Studying the reasons behind unrecorded closures can offer insights into common challenges and potential solutions.
  • Open dialogue and awareness: Encouraging entrepreneurs to share their experiences, both successes and failures, can normalize conversations about business closure and facilitate learning.

8. What is the key takeaway from understanding the difference between business closures and bankruptcy?

Recognizing that business closures are more prevalent than official insolvency statistics indicate is crucial. It highlights the challenges faced by entrepreneurs and emphasizes the need for support systems, innovation, adaptability, and sound financial management to foster business success and resilience. Acknowledging the silent failures allows for a more accurate understanding of the economic landscape and can help policymakers and support organizations develop strategies to address these challenges and better support businesses.

Bankruptcy and Business: Conclusion

So, why is it important to acknowledge these failures? It’s simple. They are not just numbers on a report; they are the culmination of hard work, dreams, and sometimes missteps. When a business fails, it can feel like a dark cloud, but it can also be the start of something new.

I hope you enjoyed this bankruptcy and business Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring due to distressed real estate or other reasons? 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 someone with 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 the bankruptcy process. We can get you debt relief freedom using processes that are a bankruptcy alternative.

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 plan, we know that we can help you.

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

That is why we can develop a 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 about 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.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

bankruptcy and business
bankruptcy and business
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BILL C-228: WILL HUGE PENSION PRIORITY IN CANADIAN INSOLVENCY BE REAL FINALLY?

Bill C-228
Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228: Are pensions protected in Canadian insolvency proceedings?

The long-awaited Bill C-228, an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985 proposes to give priority and therefore some financial security to pensions of workers in the event of a Canadian insolvency of their employer, may finally soon become law. This is a significant victory for pensioners and unions across the country who have been advocating for this change for many years.

This new law will provide much-needed protection for pensioners in case of the insolvency of pension plan sponsors. It is a major step forward in ensuring that pensioners are able to retire with dignity, security and frankly, what they bargained for.

Bill C-228: Right now pensions in bankruptcy can be taken away

The Canadian insolvency system has come under heavy analysis and criticism for years for its treatment of pensioners when the employer goes bankrupt or files for bankruptcy creditor protection. Bill C-228 comes from a long line of private members’ bills presented in the House of Commons of Canada that never went anywhere – until now. It makes every effort to make previous employees getting a pension, and those who someday expect to get payments from their pension plan, a priority in the insolvency process.

In this Brandon’s Blog, I discuss the current status of Bill C-228 and its implications in making pensioners a priority in bankruptcy if it becomes law as presently composed.

Bill C-228
Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228: What can cause you to lose your pension?

Underfunding is a major concern for traditional, defined-benefit pension plans (DB Pension Plans). In other words, do they have enough pension assets and therefore enough money to meet their projected future pension obligations of insolvent pension funds? Inadequate actuarial assumptions, poor investment returns, and mismanagement can lead to pension plan underfunding. In the case of corporate insolvency of a large employer with a DB Pension Plan, this issue always arises. Underfunded pensions in bankruptcy wind up hurting retirees.

The Sears Canada court-supervised liquidation forced us to again focus on the treatment of pensioners in corporate bankruptcies under the Bankruptcy and Insolvency Act (Canada) (BIA) or restructurings and liquidations under the Companies’ Creditors Arrangement Act (CCAA). It was widely reported that representative for 17,000 Sears Canada retirees says insolvency laws are unjust when it comes to underfunded pensions.

When a company is insolvent and its DB Pension Plan is underfunded, pensioners suffer pension losses and ultimately income losses. In practice, pensioners’ rights are weak and highly inadequate, especially when pension plans are underfunded.

Although pension legislation at the provincial and federal level purports to offer some protection for amounts owing to an underfunded pension plan, insolvency legislation does not preserve that protection for the majority of those amounts. The insolvency protection of pensioners and pensions in bankruptcy proceedings is therefore limited.

Dr. Janis Sarra is the founder and director of the National Centre for Business Law and a professor at the Peter A. Allard School of Law. In her opinion, Canadian pensioners and employees are among the worst-protected pensions in bankruptcy and/or insolvency among 60 countries.

The history leading to Bill C-228

Let’s look at some history of attempts to protect pensions in bankruptcy. The Canadian Association for Retired Persons (CARP), a nationwide advocacy organization for Canadian seniors and retirees, lobbied politicians on Parliament Hill about legislation changes. According to CARP, the unfunded pension liability should be given priority so that it is handled first.

There is no priority for retirees when it comes to dividing up assets in bankruptcy, and CARP wanted to protect underfunded DB Pension Plans when the employer company goes through restructuring or bankruptcy.

CARP estimated that roughly 1.3 million Canadians, aside from the retired Sears employees, may be at risk due to underfunded DB Pension Plans. The closure of Sears Canada stores made the plight of retirees a top priority for CARP.

Marilène Gill, Bloc Québécois MP, introduced a member’s BILL C-372, on Oct. 17, 2017. It was intended to change the BIA and the CCAA. The change sought to correct the injustice faced by retired workers whose pension and health insurance policy benefits are not secured when their company declares bankruptcy or undergoes restructuring.

On October 17, 2017, Bill C-372 passed its first reading. The House rarely passes private member’s bills like this one. The Liberal Party did not support taking it further and allowed it to die.

Hamilton Mountain NDP MP Scott Duvall asked for leave to introduce Bill C-384 in the House of Commons on November 6, 2017. He proposed amending Canada’s insolvency laws so that companies must bring any pension fund to 100% before paying any other secured creditors. Additionally, it required companies to pay termination or severance pay owing before paying secured creditors. Similarly, this bill passed the first reading and then died.

Then, Senator Art Eggleton, P.C., proposed BILL S-253 shortly before his retirement to amend the insolvency legislation to deal with a pension deficit in Canada. After the first reading passed on September 18, 2018, the second reading followed on September 25. By introducing this bill, the BIA and CCAA would be amended. The plan proposed to give priority to claims for unfunded obligations or solvency deficiencies of pensions. This was applicable to both solvent companies as well as companies that might become insolvent if certain shareholder payments were made. That bill never went any further.

Bill C-228
Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

The current Bill C-228: Pension Protection Act

Then, Conservative MP Marilyn Gladu put forward her pension reform private member Bill C-228: An Act to amend the BIA, the CCAA and the Pension Benefits Standards Act, 1985. It passed 2nd reading on June 22, 2022.

According to the Hansard transcripts, she noted that the proposed legislation would ensure that pension funds would be paid before secured and unsecured claims. Unremitted source deductions for the Canada Pension Plan, Quebec Pension Plan, Employment insurance, and taxes would be taken first. Suppliers who take back goods delivered within a month of bankruptcy or receivership and unpaid wages or salaries would be paid next. Then payment for insolvent pensions would come next before the claims of secured and unsecured creditors.

It then got a referral to committee, the Standing Committee on Finance. Once the referral to the Finance Committee happened, it did not take long to get through the committee. The committee held three meetings between October 17 and 31. It passed through the committee and on November 23, 2022, it passed 3rd reading and Bill C-228 was adopted.

A cross-party collaboration of New Democrat, Bloc and Conservative MPs was now finally achieved in order to move forward with key legislation to protect workers’ pensions in commercial bankruptcy or insolvency proceedings. The Liberal government which previously did not have this on its radar also voted in favour. In fact, PM Trudeau has tried to take some credit for this private member’s bill in the House of Commons.

The bill has now moved on to the Senate of Canada for review and amendment before returning to the House for final approval. It passed its first reading in the Senate on November 24. It now seems to have sufficient support and momentum to ultimately become law.

The current Bill C-228: What will the Pension Protection Act do?

The purpose of the private member’s Bill C-228, which will be known as the Pension Protection Act. is to deal with the insolvency of an employer where there is an unfunded liability or solvency deficiency in an employee pension plan or the employer ceases to fund a group insurance plan. It will prioritize the pension payments for such pensioners and employee claims for pension entitlements.

The proposed legislation would also amend the Pension Benefits Standards Act, 1985 to require the annual tabling of a report on the solvency of pension plans.

The current wording of the proposed legislation proposes to accomplish pension security for retirees by amending existing legislation to deal with deficiencies of pension plans as follows:

  • BIA section 60(1.‍5)‍(a)‍, is the section that deals with employers trying to restructure through a BIA restructuring proposal. It already states that any pension amounts deducted from employees that were not paid into the pension fund must be in order for the court to consider approving the proposal.
  • It will be amended such that the court cannot approve any employer restructuring proposal unless it stipulates that any amount required to make all special payments, as determined by section 9 of the Pension Benefits Standards Regulations, 1985, that should have been paid to correct any unfunded liability or solvency deficiency will be funded by the employer.
  • It will also be amended so that any amount required to liquidate any other unfunded liability or solvency deficiency of the fund as determined at the time of the filing of the notice of intention or of the proposal if no notice of intention was filed, will be included.
  • BIA sections 81.5 and 81.6, are the sections that deal with the event of bankruptcy proceedings and receivership proceedings. They will similarly be amended.
  • CCAA section 5, which deals with the employer company with a pension plan, will be amended the same as the proposed amendments to the BIA. This will state that if the company participates in a prescribed pension plan for the benefit of its employees, the court may not sanction a compromise or arrangement unless there are the same provisions stated above to protect the interests of the employees.
  • The Pension Benefits Standards Act, 1985 will be amended to require greater annual report requirements on the solvency of pension funds and their success in meeting funding requirements, and the corrective measures taken or directed to be taken by the Superintendent of Financial Institutions to deal with any pension plan not meeting the funding requirements.

As indicated above, there appears to be enough momentum for Bill C-228 to get through the Senate and ultimately receive Royal Assent to become an Act of Parliament. This will no doubt be a major change to bankruptcy protection insolvency proceedings in Canada relating to benefit plans if it becomes the new law dealing with pension plan deficits.

We will have to see if this Bill becomes law, once implemented and if there will be any unintended consequences. Time will tell if these changes will not have negative consequences on corporate restructuring and advisory, preventing what previously would have been successful restructurings of Canadian businesses, albeit on the backs of hard-working Canadians being the employees and retirees.

No doubt the insolvency community and the lending community will have to adjust to the new business environment. I will provide you with updates as they occur.

Bill C-228
Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228 transition period

The Bill, if passed, would introduce a four-year transition period between its implementation and the implementation of the proposed amendments. My guess is that such a long transition period has been established for two main reasons:

  1. to allow companies who currently are behind in their defined pension benefit payments to catch up; and
  2. to allow the lending community to try to figure out how they are going to adjust their commercial lending practices in this new reality.

Bill C-228: Pension reform to insolvency

I hope you enjoyed this Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, Brandon’s Blog.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. Are you now worried about just how you or your business are going to survive? Those concerns are obviously on your mind. Coming out of the pandemic, we are now worried about its economic effects of inflation and a potential recession.

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

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

We 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.

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

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

Bill C-228
Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

 

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RESTRUCTURING OF COMPANY: SOMETIMES AN UNPOPULAR CORPORATE BANKRUPTCY IS NEEDED TO RESTRUCTURE YOUR COMPANY TO IMPROVE PROFITS

restructuring of company

We hope that you and your family are safe, healthy and secure during this COVID-19 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.

Restructuring of company introduction

Following its bankruptcy, Canadian retailer Le Château announced that it would relaunch online under new ownership. Although extreme, in certain unique circumstances, corporate bankruptcy could be used to restructure a company’s debt and operations.

Often, companies realize they need to restructure too late when fewer options remain and saving the company is more challenging. A restructuring process started on a voluntary basis can generate greater value than a company restructuring done under the imminent threat of bankruptcy.

A restructuring plan is more likely to succeed when managers understand the fundamental business/strategic challenges their company faces. In a corporate restructuring, creditors are often required to make significant concessions, which have significant implications for them as well as for the company.

Using the Le Château case as an example, this Brandon Blog discusses certain aspects of the restructuring of company debt, assets, and operations.

restructuring of company
restructuring of company

Restructuring of company: Le Château relaunches online following bankruptcy

Following its filing for bankruptcy protection last year, Le Château, now run by Suzy’s Inc., announced its comeback from bankruptcy by launching an eveningwear collection online before the holidays. YM Inc., which owns many brands including Suzy Shier, acquired the intellectual property assets and certain merchandise and other assets.

Herschel Segal founded Le Château Inc. in 1959 as “Le Chateau Men’s Wear”, a menswear store in downtown Montreal’s Victoria Square. Le Château began selling imported clothes from Europe when it added women’s clothing in 1962. As time passed, Le Château sold more fashionable imports to young people instead of its original traditional clothing style. Since then, Le Château has designed, imported, and retailed apparel, accessories, and footwear for women and men.

Its 240 locations at its peak made the Canadian retailer a staple of nearly every mall and shopping district in the country. Le Château Inc. (and its US subsidiary Château Stores Inc.) filed for bankruptcy protection in October 2020 under the Companies’ Creditors Arrangement Act (“CCAA”). It also announced it would close all 123 stores in Canada. The Court granted the companies permission to run a liquidation process in November 2020. It used the CCAA to liquidate its assets rather than for the restructuring of company operations and finances.

To adapt to new retail industry trends, the company implemented efforts to right-sized its brick-and-mortar locations. 122 of its 243 stores were closed during the eight years prior to filing for bankruptcy. The Company’s right-sizing efforts and its important investment in its e-commerce platform helped mitigate the decline in brick-and-mortar revenue, but not enough to compensate. During the three fiscal years prior to its insolvency filing, the Company lost about $130 million in net income. As COVID-19 arrived in March 2020, the end of Le Château was sealed. Proms, weddings, galas, and parties were cancelled, decimating the retailer’s dress sales.

Le Château began liquidating its 121 stores in November 2020, as well as its transactional website. In December 2020, the licensed insolvency trustee acting as CCAA Monitor was also appointed Receiver because all assets were secured by loans to various financial institutions. A court granted the Company’s request to approve a sale transaction with Suzy’s Inc. in June 2021. Le Château’s intellectual property, merchandise, furniture, fixtures, equipment, and signage were purchased by Suzy’s. At that point, the inventory liquidation was completed. Before the Canadian company filed for bankruptcy, the companies changed their names to plain numbered companies as part of the sale of the intellectual property.

A bankruptcy filing was made by the company formerly known as Le Château Inc. on September 2, 2021. Le Château, now run by Suzy’s Inc., has announced its comeback from bankruptcy with the launch of an eveningwear collection ahead of the holidays.

restructuring of company
restructuring of company

Restructuring of company: Reasons for corporate restructuring

If the company is both insolvent and not viable in its existing form, the normal insolvency process would be receivership, bankruptcy or both. Instead of using the provisions of the CCAA to liquidate a major retailer, a Court-appointed receiver appointed under Quebec law as well as the Bankruptcy and Insolvency Act (Canada) would have accomplished the same thing as the CCAA process used.

In the example of Le Château, selling assets out of a financially sick corporation to a new owner who will operate the assets in a similar business is actually a form of restructuring of company operations. Because the old corporation has too much debt and too many operational problems, it cannot continue. However, as Suzy Shier has shown, there was a good business reason for them to buy certain assets, and they now plan to run a new Le Château business. A new owner was responsible for the restructuring of company operations and finances.

As a result of a financial crisis, a company may undergo restructuring to change the financial or operational aspects of its business. Restructuring can occur for several reasons, including:

  • deteriorating financial fundamentals;
  • a lack of profitability;
  • disappointing sales revenue;
  • debt that is too high; and
  • an industry with too much competition or the company is no longer competitive.

Under financial duress, a company engages in restructuring when it makes significant changes to its financial or operational structure. In reorganizing internally, a company’s operations, processes, departments, or ownership may change, enabling it to be more integrated and profitable. If shareholders and creditors reach an agreement on a reorganization of assets, issuance of equity to reduce debt, or bankruptcy as long as the business maintains operations, the company may sell its assets.

Restructuring a company usually involves cutting costs, such as payroll, or shrinking the company through asset sales. After restructuring is completed, the business operations should become smoother and more economically sound.

restructuring of company
restructuring of company

Restructuring of Company: The company restructuring process

Restructuring a company has many benefits, as well as many reasons for a company to restructure. The benefits of corporate reorganization can be summarized in two words: survival and success. The right financial advisory firm can help business owners deal with these challenging issues, whether they are reorganizing for survival or strategic repositioning for the future.

Your company should select restructuring professionals who are experienced in your specific industry as well. As soon as major problems are discovered, the company should begin restructuring its operations and finances. Early diagnosis allows a company to fully evaluate its options and avoid being cornered.

Corporate business restructuring can be divided into several stages:

  • assessing the organizational restructuring needed;
  • implementing the organizational restructuring;
  • identification of weaknesses;
  • developing detailed plans to correct these weaknesses through restructuring;
  • calculating and securing funding;
  • raising private equity to help improve operations and balance sheet;
  • evaluating the impact of implemented strategies and amending them as necessary;
  • comparing actual financial results to the budget to ensure the restructuring remains on track; and
  • making necessary corrections.

Companies often do not allow enough time to plan and implement restructurings. A successful restructuring of a company’s finances and operations depends on how much upfront assessment work was done, how detailed the plan is, and how well the restructuring strategy is implemented.

Reorganizations can take a long time depending on whether they are reactive or proactive. An example of a reactionary restructuring is when bankruptcy proceedings force a company to make changes within a specified period. A corporate executive officer who recognizes a change in consumer preferences and positions their company to be a leader in tomorrow’s market is an example of being proactive.

In today’s economy, companies face many challenges, and company restructuring can be a short- and long-term answer to maintaining company viability. Company restructuring concerns vendors and consumers, stockholders and financial relationships, employees and inventory, quality control and environmental impact, equipment and technology, and management and marketing.

In addition to the reasons for restructuring, every major restructuring has some of these common elements:

  • an improved balance sheet;
  • reduced tax obligations;
  • divesting underproductive assets;
  • Outsourcing some functions that can be more cost-effectively done by outside suppliers rather than by company employees;
  • reducing debt loads;
  • relocating operations;
  • restructuring marketing, sales, and distribution;
  • renegotiating employment contracts;
  • refinancing debts; and
  • changing the company’s public image.

Restructuring company operations and finances are expected to result in long-term survival, profitability, and viability, regardless of the reasons and the specific steps taken.

restructuring of company
restructuring of company

Restructuring of company summary

I hope this restructuring of company Brandon Blog post was helpful for you. Are you worried about your financial situation because you are dealing with substantial debt challenges as a business owner or as an individual? Call me if you have too much debt. It is not your fault. To deal with financial problems, you have actually only been shown the old ways. These old methods no longer work.

The Ira Smith Team employs new modern methods to get you out of debt while avoiding bankruptcy. Let us help you obtain the relief you deserve.

You are under a lot of pressure. We understand your discomfort. A new approach will be designed for you that is as unique as you and your issues, both financial and emotional. Your burden will be lifted and the dark cloud hanging over you will be blown away. We will design a debt settlement strategy for you. We are confident that we can assist you right away.

People and businesses facing financial troubles need a realistic lifeline. There is no one-size-fits-all approach with the Ira Smith Team. Even though we are licensed insolvency trustees, we have found that not everyone has to declare bankruptcy in Canada. Most of our clients never declare bankruptcy. We help people and companies avoid bankruptcy.

This is why we can create a new restructuring process for paying off debt that will be custom-built for you. You’ll have a unique experience, just like the economic difficulties and discomfort you are experiencing. If any of these describe you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation. Let us get you or your business back on track, driving to healthy and balanced trouble-free operations and eliminating the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 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.

restructuring of company
restructuring of company
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REVERSE VESTING ORDER: 1 REMARKABLE CREATIVE WAY TO DO FINANCIAL RESTRUCTURING

reverse vesting order

We hope that you and your family are safe, healthy and secure during this COVID-19 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 Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

Vesting order and reverse vesting order

In a corporate insolvency case, a court may grant a vesting order, which authorizes the sale of a company’s assets to the buyer once the purchase price is paid. A vesting order vests ownership in the purchaser as a result of this court order. This is proof that the purchaser is entitled to transfer the assets into its name. No matter what insolvency process is used, this is the use of a vesting order.

In the past year or so, a new trend has emerged regarding the sale of the assets of insolvent companies as part of a restructuring under the Companies’ Creditors Arrangement Act (CCAA). That new trend is the use of a reverse vesting order.

In this Brandon Blog, I explain what a reverse vesting order is and why I believe its use will be a significant feature of Canadian firm restructurings in 2021 and beyond.

Reverse vesting order – A powerful tool for maximizing recovery in complex insolvencies

A reverse vesting order can be very useful in complex insolvencies. A timely recovery can benefit creditors, and the process can maximize recoveries for all parties. Reverse vesting orders are a good solution for an insolvent debtor corporation when:

  • there are a large number of secured creditors, unsecured creditors and assets;
  • all of the assets do not have an immediate buyer;
  • the company is insolvent; and
  • the company must deal with unwanted assets and a group of creditors in a particular way.

It is best used in a large-scale CCAA corporate restructuring but is not limited to that.

reverse vesting order

Reverse vesting order as a third restructuring tool

There have traditionally been two insolvency processes available to licensed insolvency trustees, insolvency lawyers, and company stakeholders. The two are (i) liquidating assets; and (ii) reorganizing companies. In general, assets are liquidated through either receivership or bankruptcy. Incorporated companies can restructure either under the provisions of the Bankruptcy and Insolvency Act (Canada) (BIA) or, for larger and more complex restructurings, under the CCAA. It is obvious that assets must be sold in order to liquidate them.

Sometimes, as part of a corporate restructuring, there are redundant and unwanted assets that can be sold to raise cash. The question is, what if the real value, especially a going-concern value of a company in a commercial insolvency case is not in its tangible assets. Rather, its real value lies in:

  • the ability to operate in a specific industry and such licenses cannot be sold by their very nature and wording – think of the cannabis and nursing home industries as two examples;
  • tax losses and tax attributes that can be monetized if the licensed insolvency trustee is also able to take over the shares; or
  • being listed on the stock exchange and thus as a public company having a greater market value than a private corporation.

As a result, it is extremely difficult to realize any value from such assets.

What is the importance of the reverse vesting order? How a reverse vesting order works will tell you all you need to know about why it is important as a third restructuring tool. Under a reverse vesting order, a newly incorporated residual corporation is added as a party to the CCAA proceedings.

As part of the CCAA restructuring, the operating debtor company transfers undesirable assets and liabilities to the newly incorporated non-operating company. With its assets and liabilities selected by the purchaser, the debtor company holds only the desirable assets and liabilities, which means its common shares can be sold rather than the company’s assets. As a result, valuable permits, contracts, tax losses, and statutory authority are preserved, which can otherwise be lost in a disposition of assets.

Why is reverse vesting order important?

A reverse vesting order is an alternative to the traditional CCAA plans of arrangement, particularly for companies operating in highly regulated environments or when there is no value remaining after the realization of secured debt and the parties intend to continue the running of the debtor company.

A reverse vesting order is an alternative to the traditional CCAA plans of arrangement, particularly for companies operating in highly regulated environments or when there is no value remaining after the realization of secured debt and the parties plan to continue operating the debtor company.

By using a reverse vesting order, existing corporations, which have been streamlined to become solvent through an innovative solution, are transferred to new investors instead of desirable assets being sold through a court-approved sale. The debtor corporation that initially filed for bankruptcy protection under the CCAA can now be removed from the restructuring proceedings. There are certain unwanted assets and unwanted liabilities that are transferred to the newly incorporated residual corporation. There can then be asset sales allowing for some sort of distribution to creditors (either in a plan of arrangement or in bankruptcy) in order to allow some creditor recovery.

A reverse vesting order may prove to be the most efficient approach to facilitate a going concern operation transfer through restructuring proceedings, letting businesses emerge from CCAA proceedings quickly without having filed a plan of arrangement, while preserving key attributes of the corporate entity and its existing corporate structure.

Legal challenges to the use of reverse vesting orders have been unsuccessful. I would like to discuss the case of Nemaska Lithium Inc.reverse vesting order

Reverse vesting order issued by Québec Superior Court after first contested hearing

In December 2019, Nemaska Lithium Inc. and related companies (Nemaska Lithium or the Nemaska entities) commenced CCAA proceedings. A lithium mining project was developed in Quebec by them. A CCAA judge approved an uncontested sale or investment solicitation process (SISP) in January 2020 that led to the acceptance of a bid that was subject to the condition that a reverse vesting order is issued.

A proposed reverse vesting order provides that Nemaska entities will be acquired by the bidder free of the claims of the unsecured creditors, which will be transferred as part of a pre-closing reorganization to a newly incorporated non-operating company.

The reverse vesting order will allow the purchaser to continue to operate the Nemaska entities in a highly regulated environment by maintaining their existing permits, licences, authorizations, essential contracts, and fiscal attributes. In essence, it is a credit bid in which the shares of the Nemaska entities are acquired in exchange for the assumption of the secured debt.

A shareholder (who was also an alleged creditor) filed motions opposing the reverse vesting order issuance on multiple grounds, including:

  • a vesting order cannot be granted for anything other than a sale or disposition of assets through a vesting order for sales of assets;
  • the reverse vesting order is not permissible under the CCAA because it allows the Nemaska entities to exit CCAA protection outside of a plan of arrangement or plan of compromise;
  • this reverse vesting order contemplated a corporate reorganization that is not permitted by securities laws; and
  • in light of the proposed transaction, the directors and officers of Nemaska Lithium Inc. should not be released.

The Honourable Justice Gouin, J.S.C., reviewed and assessed:

  • the SISP process which led to the offer;
  • the lack of alternatives to the offer;
  • the potential harm to Nemaska Lithium‘s stakeholders, including its employees, creditors, suppliers, and the Cree community;
  • stopping the restructuring process to relaunch a SISP in the future following what was already a thorough examination of the market or, alternatively,
  • bankrupting the Nemaska entities.

In light of all these factors, the judge approved the reverse vesting order on October 15, 2020. Limiting the remedies available under the CCAA would unnecessarily hinder the development of innovative solutions for more complex commercial and social issues in Canadian insolvency matters.

The decision and formal recognition of reverse vesting order by the Court of Appeal

Leave to appeal the CCAA judge‘s decision was sought by the parties who objected to the reverse vesting order being made. The Appellate Court carefully considered the judge’s decision-making process and particularly that the Québec Superior Court judge relied extensively on the principles set out by the Supreme Court of Canada in the matter of 9354-9186 Quebec inc. c. Callidus Capital Corp., namely the:

  • development of CCAA proceedings and the role of the CCAA supervising judge;
  • remedial objectives of Canadian insolvency laws to provide timely, efficient, and impartial resolution of a debtor’s insolvency, secure fair and equitable treatment of creditors’ claims against a debtor, protect the public interest, and balance the costs and benefits of restructuring or liquidating the debtor company’s assets;
  • CCAA‘s goal of preventing social and economic losses from liquidating insolvent companies by facilitating their reorganization and survival as a going concern; and
  • CCAA judge‘s broad discretion under s. 11 of the CCAA in an effort to advance the CCAA’s remedial objectives while taking into account three fundamental factors that the debtor company application must prove: (1) the requested order is appropriate in the circumstances, and (2) good faith on the part of the applicant, and (3) the applicant has been acting with due diligence.

It was determined by the Court of Appeal judge that the risk of potential harm to stakeholders outweighed any legal merits of any arguments raised by the opposing parties. Therefore, the Quebec Court of Appeal denied the leave to appeal the decision of the CCAA judge.

Canada’s Supreme Court has denied leave to appeal. Having now established reverse vesting as an option for CCAA restructurings, the law is now set in stone.

The Nemaska case is the first reverse vesting order transaction to withstand judicial scrutiny in Canada and reaffirms the flexibility of CCAA proceedings for distressed M&A transactions of distressed businesses.reverse vesting order

Reverse vesting order and distressed M&A opportunities

I hope that you found this reverse vesting order Brandon Blog interesting. Problems will arise when you or your company are in business distress, cash-starved and cannot repay debts. There are several insolvency processes available to a company or a person with too much debt.

If you are concerned because you or your business are dealing with substantial debt challenges, you need debt help 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 with debt relief options as alternatives to bankruptcy. We can get you the relief you need and so deserve. Our professional advice will create for you a personalized debt-free plan for you or your company during our no-cost initial consultation.

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 with credit cards maxed out 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 as we know the alternatives to bankruptcy. We help many people and companies stay clear of filing an assignment in 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 these seems familiar to you and you are serious about getting the solution you need to become debt-free, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We hope that you and your family are safe, healthy and secure during this COVID-19 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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EARNOUT DEALS AND INSOLVENCY: THE BOLD WAY THEY NEED TO INTERSECT DUE TO TORONTO CORONAVIRUS

earnout
earnout

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

Earnout introduction

Our firm has recently started consulting with a business that has been deeply negatively affected by the Toronto coronavirus. I cannot tell you what it is, but I can confirm it is not in the food and beverage industry. Their cash flow budget shows they are going to soon run out of cash. That is bad news. The good news is that they are being courted by a company that wants to acquire them. The purchaser is proposing to pay a certain amount of cash on closing with an earnout deal as an upside.

The question they asked us, and the retainer that we will get, is to review the various options available to the target company. They want recommendations in case an insolvency process must be used to get either a refinancing deal with their banker or the sale completed.

We have had a very high-level discussion so far. It was immediately obvious to me that an insolvency process was not just a potential, it was a necessity. Not because the target company is going to crater tomorrow. Rather, for a different reason.

The business is currently viable but insolvent. That is the perfect combination in order to do a debt settlement plan combined with a corporate debt restructuring. My initial impression was that we can enhance either the refinancing or the sale by doing a corporate restructuring of debt.

Such a combination will enhance either option because:

  • In a refinancing, the restructuring will allow for a finite amount of money to go towards discharging all of the company’s unsecured debt, with the majority going to future operations.
  • For the sale, the purchaser will not be taking on many liabilities which will allow for a higher negotiated selling price.

You might think that the purpose of this Brandon’s blog is to focus on corporate restructuring, but it isn’t. Rather I want to focus on giving a basic primer on earnout deals.

What is an earnout structure?

An earnout structure is the combination of all the components which add up to the negotiated earnout sales agreement (merger agreement or earnout agreement). These elements consist of the purchase price, monetary and/or operating targets to be met or exceeded, upfront payment, as well as contingent payment.

The framework of the earnout agreement will have the earnout formula spelled out. The formula and full arrangement will be described in the particular clauses within the earnout agreement

Earnout clauses are part of the legal contract between the seller and the buyer. They normally contain 7 essential elements in the merger agreement: (1) overall acquisition price (2) the amount to be paid on closing (3) what the total potential additional purchase price contingent payment is based on the earnout formula (4) the length of time that the earnout deal applies for (earnout period) (5) what the financial and operational targets are (6) how the performance will be measured, and (7) the earnout cash payment formula and time frame each measurement period to make the calculated payment.

Why agree to an earnout arrangement?

When the buyer and seller have a difference of opinion on what the purchase/sale price should be, earnout clauses can bridge that void. It is a way to attempt to negotiate a deal that will be a win for both parties.

A remedy can be found through earnout payments. The buyer agrees to a purchase price which includes both a set payment on closing and a variable amount over a defined amount of time. It is computed depending upon the future growth of the target business. The earnout payments come to be due if the targets (both in performance and time frame) are met by the target business.

How does an earnout work?

As indicated above, there is an earnout formula in the agreement of purchase and sale. The earnout formula will be based on certain milestones being met in the future over the earnout period. Examples of earnout milestones can include on or more of:

  • sales revenue of brand-new modern technologies or products;
  • certain accomplishments with a predefined client base;
  • meeting or exceeding specific key financial results; and/or
  • hitting a minimum level of financial performance measured by earnings before interest, taxes, depreciation, and amortization (EBITDA).

It is not uncommon in earnouts in m&a transactions, if the targets are not met, the seller gets absolutely nothing. This is notwithstanding there may have been performance improvement. That is because the target business did not meet the defined milestones. When putting together an earnout agreement, very close attention must be paid to both the computation and the definitions in the earnout clauses for the earnout payments. The parties must ensure that the language is as clear as it can be. If not, then disputes and probable litigation will be inescapable.

earnout
earnout

Earnout milestones and the good faith of the parties

When looking at any contract, there is a basic question. Does Canadian legislation place a duty on parties to a contract to carry out those duties honestly and in good faith? Must there be fair dealing between the parties? I believe the leading case on this topic is the decision of the Supreme Court of Canada (SCC) in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494.

The answer to that question, as decided in that case, was yes. There must be fair dealing.

Nonetheless, in doing so, the SCC stated that the buyer does not act in the capacity as a fiduciary for the seller. The court also stated that there is nothing to prevent one party to legitimately obtain an economic benefit from the merger agreement over the other. The court was not asked to, and therefore did not, express any views on if a party goes out to frustrate or prevent a milestone from being met, does that constitute bad faith? It obviously won’t be fair dealing, but the court did not opine on the issue.

Earnout and Toronto coronavirus

The coronavirus pandemic has created so much uncertainty in all of our lives. The economy is just one of them. It has created a financial crisis for many. Entrepreneurs who had prepared to put their company up for sale in 2020 have been thrown a curveball. Buyers are of course looking to take advantage of the current financial crisis conditions to pay less for a viable business than they would have just 9 or 10 months ago. Sellers want to value their business on a historical average basis so that when the coronavirus financial crisis is over and the economy returns to normal, they will be fairly compensated. Buyers are looking for an advantage based on today’s economic realities.

An earnout clause may just be the way to bridge the gap. Perhaps both an earnout and a reverse earnout may be a way to go. The business gets valued on a historical average basis, but part of the purchase price is held in escrow invested. Over the agreed-upon earnout period, if the milestones are reached, including getting back to historical average earnings, then the earnout is paid out, in whole or part, to the seller. If not, the invested escrow funds are returned to the buyer.

Earnout deals and insolvency

In the current situation, we are being retained on, the viable but insolvent company has too much unsecured debt. Nobody is going to offer them new financing in order to pay off old debts. Financing is realistically available for go-forward expenses only.

The potential purchaser is not going to agree to assume the unsecured debt. The purchaser wants to buy assets of the target business, not the shares. They are going to want to make sure that if they purchase the assets, unsecured liabilities are not going to tag along. They will not want to just rely on common law. They are going to want a court order authorizing the purchase and getting proper title through a vesting order.

An insolvency process will accomplish both. It will be a debt settlement corporate restructuring. The merger agreement or earnout agreement will give both the seller and buyer certainty. The process will be conducted under either the proposal provisions of the Bankruptcy and Insolvency Act (Canada) (BIA) or under the Companies’ Creditors Arrangement Act (Canada) (CCAA).

A portion of the purchase price will be held back and used to create a proposal fund to offer a settlement to the unsecured creditors. If the sale does not take place and the company goes into bankruptcy, our current assessment is that the unsecured creditors will receive nothing. So, an offer through a restructuring plan to the unsecured creditors will get them a better result than in the bankruptcy of the company.

With a willing buyer and seller, both in fair dealing with each other to get an agreement of purchase and sale done, I am certain that we will get the debt settlement corporate restructuring done.

Earnout summary

I hope you have enjoyed this earnout deals and insolvency Brandon’s Blog. Hopefully, you have better insight now into the fact that a sick insolvent company’s business can be saved by doing a sale of its assets to a healthy organization.

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.

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.

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Brandon Blog Post

INSOLVENCY CANADA: IS IT ILLEGAL FOR INSOLVENT COMPANY TO APPLY FOR THE CEWS

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, healthy and secure.

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

insolvency canada
insolvency canada

Insolvency Canada introduction

Canadian business restructuring, a type of insolvency Canada, has been in the news lately and no doubt will continue to be for some time. The COVID-19 pandemic, the lockdown and general fear have affected everyone; both Canadian business, employees and all other Canadians. Everyone is forecasting that business insolvencies will rise as a result of the coronavirus.

An interesting question posed to us recently is, is it illegal for an insolvency Canada company to apply for the Canada Emergency Wage Subsidy (CEWS). I have written a couple of blogs specifically on the CEWS previously:

In this Brandon’s Blog, I discuss the concept of CEWS and try to answer the question about insolvent companies applying for COVID-19 support.

Insolvency Canada CEWS refresher

The CEWS was established for an initial 12-week period from March 15 to June 6, 2020, offering a 75-per-cent wage help to qualified firms. Then on May 15, 2020, PM Justin Trudeau announced a CEWS expansion for 3 additional months to August 29. The CEWS safeguards work by assisting organizations to maintain workers on the payroll as well as also encouraging firms to re-hire staff members previously laid off. To date, 296,030 employers, representing 924,970 applications, have applied to the CEWS program.

Former Finance Minister Bill Morneau then announced in July that the CEWS extension would consist of program changes that would broaden the reach of the program. It would certainly offer much better-targeted assistance to guarantee that more workers can return to their work without delay as the economy reboots.

The modifications announced in July for the CEWS extension would:

  • Prolong the program up until November 21, 2020, with the intent to provide additional support up until December 19, 2020.
  • Make the aid available to a more variety of companies to include those with a revenue decline of less than 30%.
  • Provide a slowly lowering base help to all eligible companies. This would assist various companies with much less than a 30% earnings loss get aid to keep employees.
  • Present a top-up aid of around an added 25 percent for companies that have really been most adversely affected by the pandemic. This would be particularly practical to firms in markets that are recovering far more slowly.
  • Offer assurance to firms that have really already made business decisions for July as well as August by ensuring they would not have their benefits less than they would have had under the previous CEWS program.
  • Address particular issues brought to the government’s attention by various stakeholder groups.

By helping people get back to work and sustaining companies as they try to grow their income, these modifications gave companies some certainty that they needed to recall workers. It is very possible that some employers would fall into an insolvency Canada category.

Insolvency Canada: The current CEWS statistics

The Canadian government has approved 910,940 of the total applications so far. The approved applications by value are:

Under $100K 863,700

$100K to $1M 44,990

$1M to $5M 2,010

Over $5M 240

Total 940,940

To look at is it illegal for an insolvent company to apply for CEWS, we first need to see what the requirements are. Could it be that applications have been made by insolvency Canada employers? For sure it is!

Insolvency Canada: When is an employer eligible for the CEWS

The CEWS was first set up through the passage of BILL C-14, A second Act respecting certain measures in response to COVID-19. It received Royal Assent on April 11, 2020. It establishes the rules for the CEWS program, as amended and extended.

For the purposes of the wage subsidy, an eligible employer is:

  • a company or a trust, besides a corporation or a trust fund that is excluded from tax obligation under Part I of the Income Tax Act or is a public institution;
  • an individual aside from a trust;
  • a registered charity (other than a public institution);
  • a person that is exempt from tax obligation under Part I of the Income Tax Act (aside from a public institution), that is:
    • a farming organization;
    • a board of trade or a chamber of commerce;
    • a non-profit corporation for SRED activities;
    • a labour organization or society;
    • a benevolent or fraternal benefit society or order; and
    • a non-profit organization;
  • a partnership where each member of which is an individual or partnership in this listing;
  • a prescribed company, including certain Indigenous companies or businesses.

As you can see, the list is very exhaustive. The legislation does not exclude an insolvent company or mention anything about insolvency Canada. The legislation also does not exclude a company that has filed for a corporate restructuring being either a proposal under the Bankruptcy and Insolvency Act (Canada) (BIA) or under the Companies’ Creditors Arrangement Act (Canada) (CCAA).

Insolvency Canada: How does an eligible employer qualify for the wage subsidy?

In order to get the wage subsidy in respect of a specific claim period, an eligible company needed to have on March 15, 2020, an open payroll program account with the CRA and was using that account to make its payroll remittances.

Concerning the revenue test, a company’s income for the subsidy includes its revenue earned in Canada on an arm’s length basis, calculated utilizing the employer’s regular bookkeeping approach. Companies can pick to calculate their earnings using either a cash basis or the accrual technique of bookkeeping. Companies have to make use of the method they select when they first make an application for the CEWS for the duration of the program. Employers cannot combine the methods.

When a qualified employer has computed its qualifying revenue for each and every relevant claim period, it would determine if it has actually experienced the needed reduction in income to qualify for the wage subsidy for that claim period. However, the company is under no obligation to prove that the decrease in income is connected to the COVID-19 situation. If it does not qualify for one claim period, it is not barred from determining if it qualifies for any other claim period.

There is nothing in the legislation that disqualifies an insolvent company that is an eligible employer from calculating if it meets the test for eligibility for the CEWS. The phrase “insolvency Canada” does not appear anywhere.

Insolvency Canada: It is not illegal for an insolvent company to apply for the CEWS

From my research, as described above, I have not found anything in the legislation that established the CEWS that would make it illegal for an insolvency Canada employer to apply for the CEWS. If you think about it, this makes sense.

The Canadian government was worried that companies shutting down meant all workers were laid off and be applying for the Canada Emergency Response Benefit (CERB). As the economy opened up again, the government wanted to make it easier for businesses to bring back some or all of their workers in a very unsettling and uncharted time. The aim of all the Canadian government support programs is to give assistance to struggling companies.

There is an implicit assumption that companies could very well be insolvent and would therefore not be able to reopen unless they had financial support. So not only is it not illegal for an insolvent company to apply for the CEWS, it is quite logical that an insolvent company would not reopen or if it did, not hire back many workers.

This is, in my view, one of the reasons why the CEWS was established; to bring back Canadian workers to companies that could not otherwise afford to pay its employees if it could not receive back a refund for what it was spending on wages or salaries.

Insolvency Canada: How would the CEWS be treated under a formal restructuring

Whether the company is restructuring under the BIA or CCAA, the treatment of the CEWS is the same. The CEWS is taxable. You need to include the amount you get on the company’s or business’s income tax return when calculating your taxed revenue.

You will certainly likewise be expected to report the amount of the CEWS that was used to pay each of your staff members’ incomes by utilizing a unique code in the “other information” area at the end of the respective employee’s T4 slip. That specific information on the reporting needs has not yet been made public by the government. It presumably will be before the end of the year.

So in either a BIA or CCAA insolvency business restructuring, the CEWS should be shown as:

  • revenue in any cash flow statement prepared with anticipated receipt dates;
  • income for accounting and financial statement purposes; and
  • disclosed in the Trustee’s/Monitor’s reporting to stakeholders.

If it turns out that the employer involved in a formal restructuring did not qualify for a CEWS payment for one or more of the periods that it applied and received one, then it is a liability to the government. How is that handled in the restructuring? There could be two answers. From my research, I do not see this specifically being addressed.

You may need to return all or part of the CEWS you have actually already received if you:

  • send to the Canada Revenue Agency (CRA) any type of modifications to a previous application;
  • terminate an application;
  • made a calculation or data mistake for a claim;
  • learn you do not qualify after getting a subsidy payment for a claim made; or
  • receive a notice from the CRA that, following an evaluation, your claim has actually been lowered or disallowed.

Any type of CEWS overpayment you received that is not returned will be subject to interest charges. In the very next insolvency Canada section, I discuss what kind of liability a CEWS overpayment would be in a formal insolvency restructuring.

Insolvency Canada: What kind of liability is a CEWS overpayment

The CEWS is a subsidy payment made to you by CRA based on an application the insolvent company makes. Unlike a claim for unremitted source deductions or HST, it is not an amount the insolvent company collected, held in trust for and failed to remit to CRA. So as far as I am concerned, it is not a trust claim. It would be an ordinary unsecured claim.

The overpayment claim may not necessarily be caught in the restructuring. If the insolvent company applied for the CEWS AND received the subsidy payment BEFORE making the restructuring filing under either the BIA or CCAA, then I believe it would be an ordinary unsecured claim in the restructuring. However, if the company applied for the CEWS AFTER filing for restructuring, regardless of the claim period, the overpayment claim would be a post-filing claim and not caught in the restructuring. All of the overpayment would have to be repaid notwithstanding the formal restructuring.

If not repaid, presumably CRA would offset any other amount payable to the company, such as for HST input tax credits, against the CEWS overpayment liability in such an insolvency Canada situation.

Again, I caution that none of this appears in the CEWS legislation. It is my opinion based on my experience and the review of the relevant legislation.

Insolvency Canada summary

I hope you have found this Insolvency Canada CEWS Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

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

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

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

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

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

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Brandon Blog Post

EASY COMMERCIAL RENT RELIEF CANADA: THE SECRET TO CREATING A CORPORATE RESTRUCTURING

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

Keep healthy and safe everybody.

Commercial rent relief Canada introduction

Commercial rent relief Canada is one of the biggest needs of Canadian businesses. This is a result of the COVID-19 induced economic shutdown. I have written before on this problem and about the Canadian government Canada Emergency Commercial Rent Assistance (CECRA) Program.

This program is part of Canada’s COVID-19 Economic Response Plan. The CECRA has been updated from its original version which I also wrote about. You can view the updated discussion in my blog – COMMERCIAL TENANCIES ACT ONTARIO: NEW FIX FOR YOUR UNRULY LANDLORD’S COVID-19 COMMERCIAL LEASE TERMINATION.

The purpose of this Brandon’s Blog is to discuss how “unused” leased premises have been treated differently so far under both US and Canadian corporate restructuring. I will also fill you in on the secret to get commercial rent relief Canada for Canadian bankruptcy protection and financial restructuring. Unfortunately, as you will see, it isn’t much of a secret!

Commercial rent relief Canada – The US version

The US bankruptcy courts have been generous and pragmatic in cutting companies who filed under Chapter 11 some slack in relation to leased premises that were unused due to the economic shutdown. There were two cases in particular that I previously wrote about.

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

On March 12, 2020, the U.S. Bankruptcy Court District of New Jersey issued the Order authorizing the Chapter 11 bankruptcy application of Modell’s Sporting Goods, Inc. et al (Modell’s) submitted on March 11. Modell’s is America’s earliest, family-owned ran store of sporting items, sports footwear, clothing and equipment. It was founded in 1889.

On March 27, 2020, the court granted Modell’s court application making an order attending to both a bankruptcy suspension and an operational suspension. The bankruptcy suspension maintained the bankruptcy protection proceedings until April 30, 2020 (the Suspension Period). The operational suspension enables Modell’s to shut down all shops and also not operate. The judge additionally gave Modell’s the right to apply on brief notice to the court to extend the Suspension Period. The order went on to state the stay of proceedings holds throughout the suspension.

As part of their application, Modell’s submitted a modified budget to show what sources of cash it would have and also what expenditures it would pay during the Suspension Period. It likewise showed what expenditures were being incurred, but not paid. Commercial rent on every one of its shops was among the expenditures being accumulated but left unpaid.

Modell did not put any of the commercial lease payments in its amended spending plan. They needed to shut down every one of their stores as a result of the coronavirus pandemic. Shops shut suggests no sales. They were not going to pay rent at the same time the stores were not generating cash.

The court order accepted the modified budget plan. It also verified that the only payments that Modell’s would make were those indicated as most important. The business considered payments to every one of its landlords as non-essential. The court order did indicate that the accumulated and overdue commercial rent payments were not and also were not deemed to be waived or not payable.

Pier 1 Imports took a page from the Modell playbook

In February 2020, Pier 1 Imports, Inc. (Pier 1) declared Chapter 11 bankruptcy protection as part of trying to find a purchaser of its operations. It then closed all of its shops in Canada and most in the United States.

On Tuesday, March 31, 2020, following the Modell’s precedent, Pier 1 applied to the court to stop paying commercial rent on its US retail locations on a temporary basis. Pier 1 had to shutter all of its shops as a result of the COVID-19.

Following the Modell’s model, the court provided its approval. It is interesting to note that no commercial rent relief Canada was sought from the Canadian court.

commercial rent relief canada
commercial rent relief canada

Could this commercial rent relief Canada occur under Canadian bankruptcy protection?

So the concern is, could a business get this new Modell’s/ Pier 1 precedent to take place in a Canadian bankruptcy protection restructuring? Put another way, could Canadian companies being formally restructured get commercial rent relief Canada?

Under the CECRA program, landlords and tenants need to cooperate and agree with each other to apply for that commercial rent relief Canada. However, what if the landlord plays hardball? Can a Canadian firm declare bankruptcy protection in Canada and be successful in having the court order commercial rent relief Canada?

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

There are no express arrangements in either statute to conjure up commercial rent relief Canada. Actually, the reverse is true. In either a restructuring or liquidation, the case law says that if a leased premise is being used then rent must be paid to the landlord. Fairness is part of the Canadian bankruptcy landscape. There are years of cases on this problem and they all wind up the very same. You don’t even have to be open for business. If you are tying up the location and preventing the landlord from the right of reentry, the rent needs to be paid.

However, there are two comparable sections in each of the BIA and CCAA. Section 183( 1) of the BIA says:

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

The wording has been interpreted by the courts to imply that the bankruptcy court in each province has the sole responsibility to supervise and approve all acts needed to be done for the correct administration of the Canadian insolvency system. This holds whether it is bankruptcy protection restructuring or straight-out bankruptcy liquidation.

The CCAA offers more adaptability in an insolvency business restructuring than the BIA does. Generally, the court will reach its decisions in a CCAA restructuring on the basis of fairness and also reasonableness. The court is required to be worried that what is being recommended is not prohibited and there are cogent reasons regarding why what is being proposed serves to benefit all or most of the creditors affected by the restructuring.

Until recently, a Canadian court has not published a decision in response to an application for commercial rent relief Canada due to the coronavirus pandemic shutdown in a BIA or CCAA restructuring.

We now have a commercial rent relief Canada answer from British Columbia

The case is Quest University Canada (Re), 2020 BCSC 921. Quest University Canada (Quest) filed for CCAA bankruptcy protection in January 2020. It had several motions between January and May to extend the restructuring proceedings.

Also in May, Quest premised its request for a boost in its restructuring interim loan facility, somewhat, on it deferring lease payments on four of its university residences from June-August 2020. Southern Star Developments Ltd. (Southern Star) is the owner of the residences and also Quest’s landlord. Southern Star and its mortgagee Bank of Montreal (BMO), objected to any lease deferment. The court had to figure out whether it is appropriate to allow Quest to delay rent payments to its landlord, Southern Star.

Quest mandated that as part of the educational experience, all students going to Quest were required to reside on campus in the residences. A significant percentage of Quest’s students (some 75%) were international students. In addition, some faculty members resided in the residences.

Effects developing from the COVID-19 pandemic, as experienced in BC, across Canada and all over the world, are well known. On March 12, 2020, Quest’s board of governors declared the closure of Quest to the general public. Students had to leave the campus and finish the springtime and summertime semesters online. All occupants vacated the residences. Only a small number of personnel stayed behind for security purposes.

Then the BC government issued a Ministerial Order whereby it declared a state of emergency. The federal government prohibited the entry of foreign nationals into Canada, initially except the United States under the Quarantine Act. The Canadian government then extended the ban to most travellers from the USA also.

The timing of the pandemic as well as its extreme repercussions couldn’t be worse for Quest in regards to its restructuring efforts.

Quest’s commercial rent relief Canada application like Modell’s and Pier 1

Without referencing the US bankruptcy protection court orders I discussed above, Quest made a similar application to the court. Quest was looking for commercial rent relief Canada just like was given to the US companies in the Chapter 11 cases.

On May 18, 2020, Quest advised Southern Star that it would not be making rent payments for the residences starting in June 2020. Quest said it needed to conserve cash due to the fact that the residences could not be used (the same argument as the Modell’s and Pier 1 cases). Quest mentioned the continuous restructuring process, the closure of on-campus learning and the unpredictability of what academic instruction it would be able to offer in fall 2020 as reasons for the deferral.

The court had so far accepted and approved interim financing to permit the restructuring to continue. Quest told Southern Star that it wished to discuss a rent deferral arrangement over the following numerous months. Quest hoped that Southern Star would be accommodating given their history of working together and the COVID-19 pandemic.

Unfortunately, Southern Star right away showed its unwillingness to do so. Southern Star stated that, without receipt of lease payments from Quest, Southern Star will certainly not have the ability to make its mortgage loan payments to BMO. For apparent reasons, that is not an enviable situation for Southern Star, nor obviously, BMO, to be in.

In late May 2020, Quest sought and obtained an increase in the approved interim financing by $3 million. The cash-flow forecast that supported that application, included the Monitor‘s Second Report, did not reference any kind of rent payments by Quest to Southern Star until October 2020. Accordingly, the accepted interim funding is not adequate to fund Quest’s lease payments over the summer season.

Quest contended that it is critical to preserve the use of the residences and its relationship with Southern Star. Quest says that its ability to restructure and continue as a university depends on it. They also content that Southern Star and BMO will not suffer any prejudice if the rent deferral is allowed. Quest believed that it would be able to make up the deferred payments sometime in the future.

Southern Star and BMO opposed the court granting that relief. They contend that they will be prejudiced if Quest does not have to make the rent payments.

The court’s decision in Quest’s commercial rent relief Canada application

The court’s analysis was very detailed. The BC court reviewed precedent decisions from various provinces, including Ontario. For Quest, an important question that it wanted the court to answer was were the residences being used?

Quest suggested that it left the residences because of safety issues and provincial health and wellness orders relating to the COVID-19 pandemic. It stated that it is only allowed to make use of the residences for student housing. The court did not equate this absence of physical use of the leased facilities by students with a total absence of “use”.

The court concluded that Quest is “using” the residences within the CCAA restructuring because:

  • Quest is allowing some staff members to live there.
  • It is insisting, as against Southern Star as landlord of the residences, according to its right to quiet enjoyment of the residences. Simply put, Quest is exercising its right to “use” the residences, as usual, notwithstanding they are mostly vacant.
  • Certainly, since June 2020, Quest was able to populate the residences with students or other persons safely. This would be consistent with what they have done every past summer season.
  • The court did not see the use over the summertime as being irregular with the specified and allowed use of the residences.
  • As of June and proceeding right into July and August 2020, the principal reason the residences are vacant is no different than from previous summers. In previous summers, Quest had to pay rent to Southern Star because it was still “making use of” the residences.
  • Quest has actually not chosen to disclaim the (Sub)leases. On the contrary, Quest’s evidence is that the residences are essential and it must maintain them to advance the possible restructuring options available to them. The existence of the residences, and Quest’s legal rights to their use, remain a crucial marketing factor in relation to possible financial partners.

Fairness is a typical touchstone in CCAA and all insolvency proceedings. In the court’s view, substantial indicia of unfairness arise by permitting the rental fee deferment. The court stated that it had the option to allow Quest to choose to pay the rent. The court stated however that it did not have the right to prevent Southern Star from requiring payment and taking action in the face of any kind of default.

The court found that it was not appropriate to grant the rent deferment sought and dismissed Quest’s application. In doing so, the court followed the long line of cases in both CCAA and BIA restructuring cases as well as bankruptcy liquidation cases. By not granting the commercial rent relief Canada requested, it differentiated the Canadian insolvency system from the US system as seen in the Modell’s and Pier 1 cases.

A word of caution:

  • There is no discussion in the decision that Quest attempted to claim or rely upon a force majeure argument.
  • Notwithstanding how detailed the court’s analysis is, this BC court decision is not binding on courts in other provinces.

So as I said at the beginning, the secret to getting commercial rent relief Canada in a formal restructuring simply based on this court decision is either reach a deal with the landlord on your own or just hand the premises back to the landlord. Those are the only ways!

Commercial rent relief Canada summary

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

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

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

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

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

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

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

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

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

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

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

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

Keep healthy and safe everybody.

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Brandon Blog Post

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

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

Stay healthy, well balanced and safe and secure everyone.

Bankruptcies in Ontario -Introduction

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

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

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

1. Bankruptcies in Ontario – the automatic stay of proceedings

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

  1. Bankruptcy
  2. Consumer proposal
  3. Corporate or large personal restructuring

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

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

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

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

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

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

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

It is important that you know:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

7. Bankruptcies in Ontario bonus tip

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

Bankruptcies in Ontario – Summary

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

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

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

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

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

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

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

Stay healthy, well balanced and safe and secure everyone.

bankruptcies in ontario
bankruptcies in ontario
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Brandon Blog Post

OFFICE SUPERINTENDENT BANKRUPTCY CANADA – COVID-19 AND “THROWBACK THURSDAY”

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

Stay healthy and safe everybody.

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

Introduction

As issues about COVID-19 in Canada grows, insolvency practitioners are doing their part by having determined it is needed to take steps to reduce in-person contact. The Office Superintendent Bankruptcy Canada has helped Licensed Insolvency Trustees (formerly called bankruptcy trustees) (Trustee) in these initiatives while keeping all aspects of Canada’s insolvency system running.

In my April 29 Brandon’s Blog, CONSUMER PROPOSALS IN ONTARIO TEST POSITIVE FOR COVID-19, I described how the Superintendent of Bankruptcy went to Court in Ontario. They made a motion to have the Court direct how certain procedures would change during the state of emergency lockdown. Part of that will be how the government wants to have Trustees resurrect an old methodology in personal debt settlement plans and corporate restructuring plans not really been used in the last 25 years.

Since then the government has come out with additional information and clarifications on how they see the bankruptcy Canada process continuing to work during the coronavirus shutdown. In Brandon’s Blog, I talk about these issues.

Office Superintendent Bankruptcy Canada approves social distancing

There are many ways that the Office Superintendent Bankruptcy Canada has approved social distancing for Trustees.

Initial free strategy session – Most if not all Trustees will provide a no-cost consultation for a personal or corporate insolvency discussion. In the pre-coronavirus era, most of these were done in a face to face meeting. Trustees can and do use methods aside from in-person assessments. These methods were always reserved for extraordinary circumstances. Boy, are we in one now!

So, the Office Superintendent Bankruptcy Canada has reminded Trustees that the COVID-19 pandemic is such a phenomenal circumstance and Trustees can conduct assessments making use of approaches other than face to face. Where video-conferencing is not viable, assessments may be done using a mix of telephone conversations and e-mail.

Credit counselling in personal debt settlement or bankruptcy cases – Trustees can offer counselling through telephone conversations or videoconference. The government is updating its software to allow for Trustees to file confirmation of credit counselling done this way as before it was not available. I am finding that our “customers” like this way of being able to deal with credit counselling. They don’t need to travel to our office and appreciate that we are still checking in with them.

Meetings of Creditors – The Office Superintendent Bankruptcy Canada is encouraging Trustees as the Chair of the creditors’ meeting to hold the meetings on time using either telephone conference call or video methods. Trustees can rely on the oral representation from everyone on the call as proof of attendance. The notice and legal ad calling the meeting of creditors looks a bit different than we are normally used to seeing because of this change. At the top of this Brandon’s Blog is an image of the legal notice I ran in a local newspaper.

Signatures/Oaths – I am now circulating papers that call for signature by means of e-mail. I then supply debtors the necessary support to explain the papers via videoconference. I then ask the debtor over the Zoom meeting if they swear or affirm that what is in the document is true. When they respond affirmatively, I then ask them to sign in the space provided. I then commission the document on my end, ask them to email me a copy of the signed document and put the original signed paper in the mail to me. So far it has been working smoothly.

Closure of non-essential businesses

The provinces have ordered the closure of non-essential businesses. So far, the businesses of lawyers and accountants have been deemed essential. The Office Superintendent Bankruptcy Canada has confirmed to Trustees that it wants the Canadian insolvency system to continue operating smoothly. So, the Trustee business is considered to fall under these same categories as being essential.

As you are aware, creditors right now seem to be choosing to either explicitly or implicitly forbear on amounts owing to them. They are trying to be supportive of people by recognizing that with reduced or no income, they need some breathing room. Although there are media reports to the contrary, as of now, debtors seem to be getting a break. Trustees are also encouraged to do the same if someone is having trouble making a surplus income payment in their bankruptcy right now. In fact, Trustees will probably be held to a very high standard when their conduct is reviewed by the Court.

In my April 29 Brandon’s Blog, I spoke about the whole issue of a debtor in a consumer proposal who misses three payments. If that happens, the consumer proposal is considered annulled. In this case, the Order the Ontario Court issued essentially gives debtors up to the end of 2020, and in some cases, beyond that date, to make up the missed payments.

COVID-19 insolvency frequently asked questions

There are some frequently asked questions that are coming up. So, I want to give the questions and answers to help people better understand what is going on right now in the Canadian insolvency system.

Q: Do consumer proposal debtors need to make up all missed payments by December 2020?

Response: This was not previously well explained. The answer is No. As much as an extra three monthly payments can be missed between March 13, 2020, and December 31, 2020, before a consumer proposal is considered annulled. Missed payments will need to be made up by the end of the proposal or a modified proposal will certainly need to be authorized by creditors. I am advising debtors to carefully think about whether it is necessary to miss making payments. There is no guarantee that later on, debtors will be able to make up the missed payments. So I am telling debtors that if they can still afford to make the payments, they should. Don’t choose to miss payments you otherwise can afford to. What if you can’t catch up? Do you really want your consumer proposal to be annulled later on after potentially you have paid everything except a few payments? That would be terrible..

Q: If a proposal was deemed annulled before April 27, 2020, when does it need to be revitalized to be covered by the order?

Response: A proposal that is revived by the steps taken under the Bankruptcy and Insolvency Act (BIA) on or prior to June 30, 2020, will certainly be covered by the order.

Q: If three payments were missed on or before April 27, 2020, but the Trustee did not send notices of deemed annulment, does anything require to be done to be covered by the order?

Response: Yes. When three payments prior to April 27, 2020, are missed out on the BIA states that a consumer proposal is regarded annulled despite administrative actions that may or might not have been taken. Thus, where the equivalent of three or even more payments has been missed out on, the consumer proposal will certainly need to be revived according to the BIA on or before June 30, 2020, in order to be active under the order.

Q: Is the duration under which a consumer proposal can be automatically revived likewise extended?

Response: No. The order allows the equivalent of as much as three extra payment defaults or an added three months time during the March 13 to December 31, 2020 timeline, prior to a deemed annulment of a consumer proposal. After this happens, a notice of revival has to still be filed within 30 days of the deemed annulment.

Q: Will the five-year restriction on consumer proposals be lengthened in order to offer debtors the time required to make up the missed out on payments?

Response: The BIA says that a consumer proposal needs to say that it will be completed within 5 years. Consequently, all payments, including missed repayments, have to be made during this same timeline. The only thing that will change that is if an amended proposal is filed and approved. After saying that, the BIA does not offer instant repercussions for defaults that lead to non-performance during this 5 year time period. If a consumer proposal has exceeded the five-year period but has actually not been annulled, it remains in force and therefore, in my view, can be completed.

This assumes no interested party goes to Court to ask for a court-ordered annulment. The Office Superintendent Bankruptcy Canada has formally stated that where hold-up in completion is due to COVID-19 reasons, they will not be seeking an annulment.

Everything old is new again or “Throwback Thursday”

There is one area that has not yet been covered off by the Order obtained by the Office Superintendent Bankruptcy Canada. When a person who does not fit under the $250,000 debt limit of consumer proposals, and for all companies, debt settlement restructuring plans under the BIA are done under Part III Division I Proposal section.

If a restructuring proposal cannot be filed straight away, the BIA allows for the filing of a Notice of Intention To Make A Proposal (NOI). The BIA statute says that unless extended by the Court, a Proposal needs to be filed within 30 days after the filing of the NOI. The Court can extend the timeline for a period not exceeding 45 days for any individual extension. In total, extensions cannot be more than 5 months. So in total, a debtor who has filed an NOI can be operating under the NOI for a maximum of 5 months and 30 days.

The Court has to order the extension prior to the expiry of the earlier time period trying to be extended. But the Courts are currently closed. They are only hearing emergency applications via telephone conference call or videoconference. Are a bunch of businesspeople fighting over money with the debtor asking for more time to file a Proposal an emergency? I can’t answer that right now. So if they can’t get into Court, what is the answer?

The Office Superintendent Bankruptcy Canada has recommended an old method. In the “old days”, before 1992, there was no NOI provision. So what did a person or company who needed more time to formulate and file a Part III Division I Proposal debt settlement plan, but needed to hold off creditors right now, do? They filed what was called a “holding proposal”. A holding proposal is no more than a proposal that says I promise to file a debt settlement plan that will clearly say how I plan to settle my debts either by a certain date or when a specific set of events happen.

The benefit was that the debtor got help from the immediate stay of proceedings. If the debtor could, he, she or it filed an amended proposal at the meeting of creditors which really said how the debts would be settled and then paid. If not, the creditors could consider the issues holding up the filing of the real proposal. If they felt it was in their best interests, they voted in favour to give the debtor the necessary time. If not, they voted it down and the debtor was immediately deemed to have filed an assignment in bankruptcy.

Where the creditors gave the debtor more time under the holding proposal, the Court approved them as long as the requirements the Court had to review were met. It was ultimately the creation of the NOI that was made to make it easier for debtors who were not ready to file a definitive proposal but needed relief from creditors to get it.

So now, the Office Superintendent Bankruptcy Canada is recommending for those cases where you just can’t get into Court, file a holding proposal. I am glad that Ira has kept a copy of a holding proposal in our document template file!!

Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

Stay healthy and safe everybody.

 

Categories
Brandon Blog Post

CONSTRUCTION LIEN ACT: CAN YOU TRUST AN INSOLVENCY PROCEEDING?

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

Stay healthy and safe everybody.

Introduction

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

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

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

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

Some background matters

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

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

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

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

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

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

less,

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

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

Obligations as trustee

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

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

Now for the case.

The Urbancorp Construction Lien Act case

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

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

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

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

The constitutional question

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

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

Now for the actual appeal

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

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

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

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

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

The decision

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

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

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

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

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

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

Summary

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

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