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OFFICERS AND DIRECTORS: NAVIGATING THEIR RESPONSIBILITIES IN AN INSOLVENT CANADIAN CORPORATION

officers and directors
officers and directors

officers and directors

Officers and Directors: Introduction

In Canada, it is essential that the individual orchestrating any criminal activity must have the necessary competency to commit the offence before any corporate responsibility can be assumed. The executives and board members of the enterprise are viewed as the ultimate custodians of the company’s ethical obligations.

Welcome to Brandon’s Blog! Here I’ll be discussing the court’s ruling on fraudulent intent by officers and directors, and how it affects the transfer of assets at undervalue in insolvent corporations. I’ll be focusing on the 2022 Court of Appeal for Ontario decision in the Bondfield Construction Company Limited (“Bondfield”) and Forma-Con Construction (“Forma-Con”) case as creating new law.

After two court decisions over nearly two years, the Supreme Court of Canada has delivered their decision on the Court of Appeal’s decision upholding the lower court decision, granting the application for leave to appeal to the Supreme Court.

Officers and Directors: What is the “directing mind”?

The term “directing mind” in the context of Canadian corporations refers to a natural person who holds a high level of authority within theand can be considered the “alter ego or soul” of the corporation. The term “alter e organization go” or “soul” of a corporation refers to a person who holds significant authority within the organization. According to the web search results, this person can be considered the embodiment or representation of the corporation.

Federal legislation uses a more familiar expression for the directing mind “senior officer”. This includes individuals who have an important role in setting policy or making important decisions within the corporation. A “senior officer” is a person in a position of authority or seniority over others. They are responsible for leading and overseeing a group or organization.

officers and directors
officers and directors

The duties of Officers and Directors

Fiduciary Duty

In Canada, the phrase “directing mind” is used to refer to a top-tier individual, an officer or someone on the board of directors in a company who can be thought of as its “alter ego” or “soul”. This individual holds a great degree of influence and power within the corporation, making them its symbolic heart and soul.

Duty of Care

Officers and directors are expected to exercise the same degree of prudence, attention to detail, and knowledgeability that any reasonable individual would in similar scenarios. This means that they must stay abreast of the corporation’s financial well-being and make informed decisions using that information. Beyond the necessity of performing their fiduciary duty, they also have a duty of care to the company and its stakeholders.

Insolvency and the Obligations of Officers and Directors in Canadian Corporations

As a corporation’s liabilities come due and it finds itself unable to pay, insolvency looms large. This can be a stressful period for corporate officers and directors, as they are tasked with making crucial decisions that will affect the company and its stakeholders in the long run. It is paramount that they keep the corporation’s best interests in mind as they navigate these difficult waters.

Officers and directors of Canadian corporations have two significant legal obligations to fulfill: a fiduciary duty and a duty of care. Failure to uphold either of these duties could result in personal liability for them.

officers and directors
officers and directors

When an enterprise finds itself insolvent or close to it, the officers and directors of the company accept a nerve-wracking assignment. These decision-makers are required to make authoritative choices that will determine the fate of the corporation and of all those involved.

Officers and directors of an insolvent company must jump into action to protect as best as possible the corporation and its stakeholders from added losses. This could include negotiations with creditors, liquidating redundant assets, and reorganizing the firm’s procedures. It’s not a simple task, but it’s a necessary one.

It’s necessary to protect the corporation and its stakeholders by focusing on the company’s important resources and operations. Decisions must be made to stave the loss of assets needed to operate and make sure that all of its transactions are in the corporation’s best interests.

Aside from their approved responsibilities, officers and directors need to be alert to their obligations and the repercussions that may arise from negligence. They need to be very careful to ensure that their fiduciary responsibility and duty of care are not abandoned and must correct any missteps.

With this perfect segway, I now wish to describe a very important recent decision from the Court of Appeal for Ontario upholding the lower court decision on the duties and responsibilities of officers and directors of an insolvency company. This decision has been appealed to the Supreme Court of Canada. It is such an important decision for officers and directors, corporations and especially insolvent ones for the entire country, that the Supreme Court of Canada has agreed to hear the appeal.

Officers and directors: Ernst & Young Inc. v. Aquino, 2022 ONCA 202 (CanLII)

On March 10, 2022, the Court of Appeal made a landmark decision in Ernst & Young Inc. v. Aquino, which delved into the corporate attribution doctrine – the idea that the actions of a corporation’s controlling figure can be attributed to the firm itself. The ruling was especially pertinent in the bankruptcy and insolvency context.

John Aquino was the directing mind of Bondfield Construction Company Limited (“Bondfield”) and its affiliate Forma-Con Construction (“Forma-Con”). He and his associates carried out a false invoicing scheme over a number of years by which they siphoned off tens of millions of dollars from both companies.

The monitor and the trustee challenged the false invoicing scheme and sought to recover some of the money. The participants argue that they did not intend to defeat any actual creditors and that John Aquino’s intent cannot be imputed to either Bondfield or Forma-Con.

Bondfield was a full-service group of construction companies that operated in the Greater Toronto Area and Southern Ontario starting in the mid-1980s. Bondfield was in financial trouble in 2018 and started proceedings under the CCAA on April 3, 2019.

After a careful investigation, the monitor and the licensed insolvency trustee administering the bankruptcy (formerly called a trustee in bankruptcy) uncovered a shocking discovery: Bondfield and Forma-Con had deceitfully dispersed a staggering sum of money to or for the benefit of John Aquino and others via a fraudulent invoicing system!

In cross-examination, Mr. Aquino admitted that the suppliers who falsely invoiced Bondfield provided no value for the transfers, but denied intent to defraud, defeat, or delay Bondfield’s actual creditors.

officers and directors
officers and directors

Can section 96 of the Bankruptcy and Insolvency Act (“BIA”) be used by the monitor and the trustee to recover the money officers and directors took from Bondfield and Forma-Con?

Section 96 of the BIA allows trustees to seek a court order “voiding transfers at undervalue” which are a transfer by the debtor to another party at no or undervalued consideration, which is an improvident transaction from the debtor’s perspective. The policy of the BIA goes beyond the modest origin of the law, which prohibits insolvent debtors from giving away assets to third parties instead of using those assets to repay their debts.

This section of the BIA is a remedy to reverse an improvident transfer that strips value from the debtor’s estate, but the trustee must nevertheless meet the requirements of the specific words used.
The monitor and the trustee had to prove two elements to require John Aquino and the other beneficiaries of the false invoicing scheme to repay the money they took under s. 96(1)(b)(ii)(B) of the BIA. The application judge bridged the gap by imputing John Aquino’s fraudulent intention to the debtors, Bondfield and Forma-Con.

The legal analysis of the false invoicing scheme was no longer in active dispute. John Aquino and his associates dispute liability under s. 96 on the basis that their fraudulent acts were not carried out at a time when Bondfield and Forma-Con were financially precarious.

John Aquino and his associates asserted that Bondfield and Forma-Con were financially healthy, so they did not intend to defraud any actual creditors. When assessing the intention of a debtor, a court must look at the information known at the time of the transfer or transaction, and the reasonableness of the debtor’s belief in light of the circumstances then existing.

In order to require John Aquino and the other beneficiaries of the false invoicing scheme to repay the money they took under s. 96(1)(b)(ii)(B) of the BIA, the monitor and the trustee had to prove two elements: first, John Aquino and the other participants were not dealing with Bondfield and Forma-Con at arm’s length; and second, at the time they took the money (during the statutory review period), they “intended to defraud, defeat or delay a creditor” of Bondfield or Forma-Con. The first element is amply established by the evidence. This case turns on the second element.

The lower court judge’s reasons for the timing of the transfers

The Court of Appeal found that the lower court judge decided correctly based on the legal principles that were presented. John Aquino and his associates presented their case of Bondfield and Forma-Con’s solvency when they received the funds. However, the judge decided that the affirmation of fraud provided an abundant base for deciding that Bondfield and Forma-Con had the purpose of deceiving, obstructing, or delaying their creditors.

The judge concluded that the presence of badges of fraud creates a presumption of fraudulent intent and that John Aquino had not rebutted the presumption. The judge also concluded that the true financial condition of Bondfield and Forma-Con at the time of each impugned transaction cannot be determined on the record before the court.

Based on the totality of the evidence, documents and information, the judge held that at the time of the fraudulent transactions, Bondfield and Forma-Con were already experiencing mounting financial difficulties, and their creditors were imperilled by the transfers. John Aquino continued on nonetheless, and the court found that the transfers were intended to defeat those creditors. The application judge took a pragmatic view of the evidence, found that John Aquino carried on with the false invoicing scheme knowing that Bondfield and Forma-Con were experiencing increasing financial difficulties, and inferred that he did this with the intent to defeat creditors.

John Aquino didn’t care if his scheme had the potential to defraud, defeat or delay creditors according to section 96 of the BIA. His recklessness was enough to show the intent needed to make the fraudulent transfers stand. It’s clear that he wasn’t concerned about the interests of the companies’ creditors.

Forma-Con paid over $11 million to certain purported suppliers under the false invoicing scheme during the time period of review allowed under s.96 of the BIA. For the Bondfield 5-year review period, the court found that the total amount of $21,807,693, are transfers at undervalue. The court ordered Mr. Aquino and associates, to repay this amount on a joint and several basis.

officers and directors
officers and directors

Officers and Directors: Uncovering the Impact of Fraudulent Intent on Transfers and Undervalue in Bankrupt Corporations

The application judge was able to uncover John Aquino’s scam involving false invoicing by Bondfield and Forma-Con, giving the trustee the green light under the BIA to reclaim the funds stolen by the fraudsters.

The appellants argue that the lower court judge erred legally because John Aquino’s fraudulent intent cannot be imputed to Bondfield or Forma-Con as a matter of law, even though he was one of their directing minds. They assert that the binding principles of the common law doctrine of corporate attribution set out in Canadian Dredge & Dock Co. v. The Queen,[55] do not permit the imputation of his intention to either defrauded the company. Accordingly, s. 96(1)(b)(ii)(B) of the BIA cannot be used to require John Aquino, or his associates as “privies” to the impugned transactions, to repay the money they took.

This intriguing argument brings up a difficult issue concerning the relationship between the stipulations of the BIA and common law doctrine. When can a court use common law in interpreting and putting the BIA into effect? I will start by presenting the judge’s rationale for the application. After that, I will tackle this legal inquiry and then consider its effects regarding the implementation of the corporate attribution doctrine in this appeal.

The lower court judge reasoned that common law doctrine can be enlisted by a court to interpret and supplement the BIA where necessary to better achieve its purposes, one of which is to protect the interests of the bankrupt’s creditors. She believed that common law can add content to the terms of the bankruptcy law not otherwise defined. In particular, the common law doctrine known as the anti-deprivation rule and its purpose of preventing fraud on the bankruptcy is especially pertinent in this case. The use of common law doctrine must respect the policy of the BIA.

The BIA is no stranger to the use of common law doctrines- though it has yet to officially codify ‘good faith’, the Supreme Court has nonetheless held that Parliament is expected to remain true to the traditional understanding of the common law unless there is some explicit and unmistakable indication of deviation. Consequently, when it comes to interpreting the BIA, the concept of good faith unquestionably plays a role, but it is not codified.

The fraud on bankruptcy law principle exists to protect creditors from unscrupulous parties who might otherwise try to remove value from an insolvent debtor’s assets. Corporations, being distinct from natural persons, necessitate the corporate attribution doctrine, which provides a link between the entity and the individual whose “guiding hand” propelled the corporation into action.

This kind of insolvency officers and directors case was novel in Canada

The corporate attribution doctrine has been applied in the fields of criminal and civil liability. Before this case, courts in Canada had yet to consider the doctrine in the bankruptcy and insolvency context under s. 96 of the BIA. The court recognized that the attribution exercise is grounded in public policy. These principles provide a sufficient basis to find that the actions of a directing mind be attributed to a corporation, not a necessary one.

Accordingly, as a principle that is grounded in policy, and which only serves as a means to hold a corporation criminally responsible or to deny civil liability, courts retain the discretion to refrain from applying it where, in the circumstances of the case, it would not be in the public interest to do so.

After thorough deliberation, the Court of Appeal sided with the lower court to declare that this case had implications for the public interest. It was determined that the invoicing scheme had been used as a way to fraudulently, obstructively, and detrimentally transfer funds to avoid payment to Bondfield’s and Forma Con’s creditors. The Court seeks to reverse these transactions and recover a total of $11,366,890 on behalf of Forma-Con’s creditors. For Bondfield’s creditors, the amount of $21,807,693,

officers and directors
officers and directors

The bottom line of Ernst & Young Inc. v Aquino

The lower court found and the Court of Appeal affirmed that decision that under s. 96 of the BIA, the payments by Bondfield and Forma-Con made in respect of the false invoices during the 12-month review period totalling for Bondfield, $21,807,693, and for Forma-Con, CDN$13,985,743 CAD and US$35,030 Are transfers at undervalue. Those that received these funds were ordered to repay them on a joint and several basis.

The Court of Appeal delved into some critical legal matters in their ruling, exploring the responsibilities insolvency practitioners must uphold, how much creditors should be able to expect, as well as the rights of everyone involved in bankruptcy proceedings. They also delved into the interpretation of the BIA and the reality of its application.

The Court decided that the BIA has to be implemented in a way that meets the expectations of the Act, and that insolvency professionals are to be held to a high standard of both expertise and responsibility.

At the beginning of this Brandon’s Blog, I mentioned this monumental case will be heard in the Supreme Court of Canada. As you can imagine, it will be a highly anticipated event in the insolvency world. And it won’t disappoint!

The ruling so far has had major implications for the insolvency industry, including the rights of creditors, officers and directors and insolvency practitioners. All in all, it was a groundbreaking decision that will shape the industry for years to come – and will no doubt be further shaped once the Supreme Court of the land hears the case and issues its decision.

Obligations and Responsibilities of the Board of Directors and Officers: Conclusion

The Ernst & Young Inc. v Aquino case was an important one for the insolvency industry and had far-reaching implications for the obligations of insolvency practitioners and the rights of creditors and other stakeholders. The Court of Appeal’s decision in the case was a clear and definitive ruling on a number of key legal issues, and it will likely have a lasting impact on the insolvency industry for many years to come.

I hope you enjoyed this officers and directors Brandon’s Blog.

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officers and directors
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LICENSED INSOLVENCY TRUSTEE RECEIVER APPOINTED BY COURT ERRORS TO AVOID

Licensed insolvency trustee: Introduction

I want to chat with you today about the independence of the licensed insolvency trustee (LIT or trustee) (formerly called a bankruptcy trustee) acting as a court-appointed receiver. I have seen many times when a secured creditor needs to resort to a court appointment, and not privately appoint the receiver, yet feel they still can control every aspect of the court-appointed receiver’s actions and conduct.

The decision of the Court of Appeal of Alberta released on February 4, 2019, in Jaycap Financial Ltd v Snowdon Block Inc, 2019 ABCA 47 (Jaycap), highlights the issue.

Licensed insolvency trustee: Back to basics

To better understand the Jaycap decision, I want to talk about a few basic points. In a private receivership, the receiver’s primary duties are to act:

  1. On behalf of and have a duty of care primarily to the secured creditor who appointed the receiver.
  2. In a commercially reasonable way.
  3. Lawfully.

In a court appointment, the court-appointed receiver:

  1. Acts on behalf of the Court as a Court officer.
  2. Be and be seen to be independent of all stakeholders.
  3. Owes a duty of care to all stakeholders.
  4. Must act in a commercially reasonable and lawful way.

Various practices have evolved over time to indicate the independence of the court-appointed receiver. They aren’t necessarily rules or laws. However, they are indicators that the Court looks to in determining if its court-appointed receiver is seen to be independent and is actually independent of specific stakeholders, normally, secured creditors.

Examples of these indicators are:

  1. The court-appointed receiver has its own legal counsel and does not rely upon legal counsel for one of the secured creditors.
  2. The court’s receiver has obtained sufficient independent appraisals of the assets and has not taken the word of or earlier appraisals commissioned by a secured creditor.
  3. A sales process being recommended by the court-appointed receiver is fair to all parties and does not favour one or more stakeholders over others.
  4. The analysis performed by a court-appointed receiver in making its recommendations to the court is seen to be free from undue influence.
  5. The court-appointed receiver has not shared its appraisal or other information which could influence the outcome of the receivership administration with any of the stakeholders.
  6. The court-appointed receiver has not treated some stakeholders differently than others.
  7. Any information shared by the court-appointed receiver or meetings held to share information has been done with all secured creditors, not just a senior secured creditor or the secured creditor who made the court application to appoint the receiver.

Licensed insolvency trustee: The Jaycap situation

The receiver was appointed by the court as receiver and manager of Snowdon Block Inc. (Snowdon) in February 2016. The only material possession of Snowdon was land and building in Calgary. In July 2016 the receiver started a sales procedure to ask for deals for the property. In October 2016 the Receiver ultimately received 2 offers for the real estate. The receiver accepted a conditional offer from a third party.

After months of extensions, the potential buyer was incapable to remove its conditions and the sale did not continue.

Jaycap was the primary lender of Snowdon and was funding the
receivership. Jaycap became interested in capping the increasing costs and safeguarding its financial investment. The receiver advised Jaycap that a credit bid would be a possible option to get title to the real estate and bring the receivership to an end.

On July 5, 2017, Jaycap emailed the Receiver that it would credit bid its “current costs” as a specific amount. Jaycap scheduled a numbered company it managed to be the buyer. For simplicity, I will refer to Jaycap’s nominee company as the buyer.

Licensed insolvency trustee: The first Jaycap credit bid

An agreement of purchase and sale (APS) was prepared and entered into by Jaycap and the Receiver on August 2, 2017. The total debt was defined to be the amount included in the July 5, 2017 e-mail and that amount was likewise the acquisition cost.

On August 21, 2017, the Receiver obtained the approval and vesting order authorizing the APS. The guarantors of the Jaycap debt did not oppose this application as there would be no shortfall that they would be responsible for.

It is somewhat unclear as to the reasons for what happened next. The receiver states in its 3rd report that on August 28, 2017, legal counsel for Jaycap indicated that there was an error in the purchase price. The report after that states that the receiver’s legal counsel advised it that a common mistake occurred about the purchase price as set out in the APS. They further advised that court authorization was needed to fix this mistake.

The transaction subject to the APS was not completed at the end of August 2017.

Licensed insolvency trustee: The second Jaycap credit bid

On September 6, 2017, the receiver and Jaycap entered into a new agreement (the 2nd APS), which decreased the purchase price. On September 8, 2017, the receiver filed an application to abandon the first approval and vesting order and sought approval of the 2nd APS.

The guarantors were served with the new application. One of the guarantors, a Mr. Richardson, sent out a series of letters to the receiver’s legal counsel asking for information as well as papers to support that a mistake had actually occurred. The receiver’s lawyer answered some, however not all, of these demands.

The application was to be heard on September 19, 2017. It was adjourned to October 26, 2017. The chambers judge reserved to think about the submissions and to evaluate Mr. Richardson’s materials which had not made it into the court documents prior to the hearing.

She released her decision a week later approving the 2nd APS and providing the necessary vesting order. She discovered that she was not prevented from abandoning the first order and providing another.

The chambers judge considered the merits of the 2nd APS and whether it fulfilled the requirements established in Royal Bank of Canada v Soundair Corp (Soundair). She was satisfied the 2nd APS was sensible in the circumstances, whether the receiver had made sufficient efforts to get the best price and was not acting improvidently. She kept in mind the lack of offers, the lack of ability to complete an earlier conditional deal, the earlier order approving the sale, and the changed acquisition price, which was still higher than the property’s appraised value.

Licensed insolvency trustee: The guarantor’s appeal

Under the 1st APS, there was no shortfall and the guarantors had no liability. Under the 2nd APS, there was a shortfall in excess of $1 million that the guarantors would be responsible for.

The guarantors appealed the approval of the 2nd APS specifying that the court erred in finding there was a mutual mistake. Further, given the lack of information provided to Mr. Richardson to his reasonable request for information, the guarantors say that the receiver’s conduct casts doubt on the honesty of the process. They say that the Receiver did not discharge its independent obligation and was following guidelines and instructions from Jaycap, that had a change of mind about the transaction and wanted to decrease the price.

Their position was that the 2nd approval and vesting order needs to be vacated, the 1st APS ought to be reinstated, and the guarantors should be alleviated of their responsibility under the guarantee.

Licensed insolvency trustee: The Appeal Court’s analysis

The Court of Appeal of Alberta agreed with the guarantors that the evidence did not support a mutual mistake was made. They found that it was a mistake for the chambers court to conclude that the test was satisfied.

While the guarantors were successful on this ground, this does not finish the matter. The appeal cannot be successful unless the guarantors establish a reviewable error in the chambers court’s Soundair evaluation.

The guarantors raised two concerns sustaining their allegation that the integrity of the process was jeopardized. First, the receiver fell short in not disclosing all relevant records about what transpired after August 2, 2017. Second, the receiver did not seem to be acting independently of Jaycap.

The Appeal Court agreed that the receiver’s proof about what transpired after August 2, 2017, was not sufficient, also taking into consideration the evidence from the confidential supplement to the third report. The receiver’s lawyer’s conclusion that there was a mutual mistake was inappropriate. That was for the court to decide.

As far as the conduct of the receiver, the Appeal Court had this to say. While insolvency proceedings undergo special procedural rules and are not surprisingly time delicate in nature, these considerations do not relieve the receiver from its basic responsibilities to the stakeholders and the court. Also, it does not excuse the Receiver from supplying proof to fulfill its requirement to provide sufficient evidence to the requisite standard for each application that it brings.

The Appeal Court went on to say that:

  1. A court-appointed receiver is an officer of the Court appointed to
    discharge certain duties listed in the appointment order.
  2. When a court-appointed receiver is appointed, the receiver-manager is given exclusive control over the assets of the company and in this regard, the board of directors is displaced.
  3. The significance of a receiver’s power is to clear up liabilities and sell off assets.
  4. It is well developed that a court-appointed receiver owes a duty of care not just to the Court, but likewise to all parties who may have an interest in the debtor’s assets. This includes competing secured creditors, guarantors, unsecured creditors, contingent creditors, and shareholders.
  5. A receiver has the duty to work out such reasonable treatment, supervision, and control of the debtor’s property as a regular person would give to his or her very own.
  6. A receiver’s duty is to perform the receiver’s powers truthfully and in good faith.
  7. A receiver’s responsibility is that of a fiduciary to all interested stakeholders involved with the borrower’s assets, properties.

The Appeal Court was harsh in its criticism of both the receiver and Jaycap. The court found that the absence of details about what occurred and the method the receiver and Jaycap used to skirt around the issues in its application materials definitely did not assist in showing the receiver’s independence.

The optics of the circumstances most likely added to the guarantors’ uncertainty that what had taken place warranted even more inquiries and that the Receiver was following Jaycap’s instructions to hide from the guarantors the real state of affairs.

Jaycap and the receiver were jointly represented by the same legal counsel before the Alberta Court of Appeal, which was unhelpful and was in the court’s view, highly unusual. Jaycap could not address questions the Receiver would be anticipated to know. Throughout the hearing, the panel discovered that the guarantors’ arguments were convincing.

Licensed insolvency trustee: The Appeal Court’s decision

What was missing was transparency. The process should be transparent. It should enable the court and interested parties to make an informed decision as to whether the sale can be considered fair and reasonable in the circumstances. Given the significant questions left unanswered by the Receiver, the Appeal Court had serious concerns about the efficacy, fairness, and integrity of the process the Receiver followed between August 2, 2017, and the hearing of the application to approve the 2nd APS. As a result, the Alberta Court of Appeal disagreed with the chambers judge that the Receiver met the requirements of Soundair.

The appeal was allowed, and an order was made returning the matter to the lower court for a rehearing before a different judge.

Licensed insolvency trustee: Summary

This decision clearly states what a court expects from a court-appointed receiver.

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REDWATER ENERGY SUPREME COURT DECIDES

redwater energy supreme court

If you would prefer to listen to the audio version of this Redwater Energy Supreme Court Brandon’s Blog, please scroll to the bottom for the podcast.

Redwater Energy Supreme Court decision: Introduction

On January 31, 2019, the Redwater Energy Supreme Court decision was released. The 5-2 decision, in this case, Orphan Well Association v. Grant Thornton Ltd. overturned two Alberta lower Court decisions. It is now the law of the land that, before creditors receive any money, the receiver or trustee will have to spend the funds in its possession on reclamation or other environmental costs that provincial law may need.

The decision also made it clear that the receiver or trustee does not have to spend money it does not have. However, whatever money it recovers from the sale of assets, on a net basis, will first have to go to provincially mandated cleanup costs of the insolvent company’s property, before secured or unsecured creditors see a penny.

Redwater Energy Supreme Court decision: What the decision means

In my opinion, this is an important decision. Where provincial laws require companies to spend money to take certain steps when the business ceases, the assets of the company will be available to pay such costs.

Any company which is either a provincially regulated industry, or where provincial laws such as environmental laws have a real impact, will be affected. A Province will be able to insist that when a company ceases operating or is in receivership or bankruptcy, the company and its receiver or trustee, must use up to the full net realization from the sale of assets, to do what the provincial law requires, such as remediation of the real property.

This will no doubt affect how lenders view the value of their security and how much to lend to such companies. Property owners have now also been afforded some measure of protection against a commercial or industrial tenant’s activities and environmental transgressions.

Redwater Energy Supreme Court decision: Background

In my January 10, 2018 blog, REDWATER ENERGY CORP. – SUPREME COURT OF CANADA TO DECIDE WHO PAYS THE ENVIRONMENTAL CLEANUP COSTS OF THE BANKRUPTCY COMPANY, I described the 2-1 Alberta Court of Appeal decision upholding the Redwater ruling of the lower Court. The lower Court decision protected, in a bankruptcy, a lender’s secured priority over provincial ecological clean-up requirements.

Redwater Energy Supreme Court decision: The provincial environmental legislation

To work oil and gas sources in Alberta, a business requires a property interest in the oil or gas (commonly, a mineral lease with the Crown), rights and a licence issued by the Alberta Energy Regulator (Regulator). Under provincial regulation, the Regulator will certainly not provide a permit to remove, process or transport oil and gas in Alberta unless the licensee takes on end-of-life duties for plugging and capping oil wells to avoid leakages, taking apart surface area frameworks as well as restoring the surface area to its previous condition. These end-of-life responsibilities are called “abandonment” and “reclamation”.

The Licensee Liability Rating Program is one way the Regulator looks to guarantee the end-of-life commitments required of licensees. As a component of this program, the Regulator provides each business a Liability Management Rating (LMR), which is the proportion between the accumulated value assigned by the Regulator to a company’s assets under license and the accumulated liabilities determined by the Regulator to the last expense of abandoning and reclaiming those properties.

For determining the LMR, all the permits held by a business are dealt with as a bundle. A licensee’s LMR is determined monthly. Where it dips below the required ratio, the licensee is called upon to top up its LMR back up to the recommended level by paying a security deposit, executing the end-of-life responsibilities, or transferring permits with the Regulator’s authorization. If either the transferor or the transferee would have an LMR below 1.0 after such transfer, the Regulator will typically decline to authorize the permit transfer.

Redwater Energy Supreme Court decision: The insolvency of an oil and gas company

The insolvency of oil and gas firm licensed for operation in Alberta involves Alberta’s detailed licensing regime, which is binding on firms operating in the oil and gas market. The Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA), is the federal government’s statute that controls the management of an insolvent’s estate and the organized and fair dealing of the insolvent’s property for the benefit of the unsecured creditors.

Alberta’s Environmental Protection and Enhancement Act (EPEA) makes certain that a licensee’s regulatory responsibilities will remain to be satisfied when it goes through bankruptcy by including the trustee of a licensee in the interpretation of the term “operator” for the goals of the obligation to reclaim and by ensuring that an order to execute reclamation work can be provided to a trustee.

Nevertheless, it specifically restricts a trustee’s responsibility about such an order to the value of the assets in the insolvent estate, other than for gross negligence or willful misconduct.

The Oil and Gas Conservation Act (OGCA) and the Pipeline Act take a more common method: they merely include trustees in the meaning of “licensee”. Therefore, every power which these Acts offer the Regulator versus a licensee can in theory additionally be worked out versus a trustee.

The Regulator has entrusted the authority to reclaim and abandon “orphans”– oil and gas properties and their sites left in an incorrectly deserted or unreclaimed state by inoperative companies at the close of their insolvency process– to the Orphan Well Association (OWA), an independent non-profit entity. The OWA has no power to look for compensation of its costs, however, it might be compensated up to the amount of any security deposit held by the Regulator to the credit of the licensee of the orphans once it has actually finished its environmental cleanup.

Redwater Energy Supreme Court decision: The Redwater receivership

Redwater, a publicly traded oil and gas firm, was initially given licenses by the Regulator in 2009. Its major assets were 127 oil and gas properties — wells, pipelines and related facilities — and their equal permits. A few of its licensed wells were still producing, yet the bulk was tapped out and strained with reclamation and abandonment obligations that surpassed their worth.

In 2013, ATB Financial, which had complete knowledge of the end-of-life responsibilities connected with Redwater’s properties, advanced funds to Redwater and, in return, was given a security interest in Redwater’s existing and after-acquired property. In mid-2014, Redwater started to experience financial problems.

ATB appointed its receiver in 2015. Back then, Redwater owed ATB roughly $5.1 million and had 84 wells, 7 facilities and 36 pipelines. Seventy-two were non-active or spent, however, considering that Redwater’s LMR did not go down below the recommended proportion until after it entered receivership, it never paid any type of security deposit to the Regulator.

Upon being informed of Redwater’s receivership, the Regulator advised the receiver that it was legitimately bound to fulfill Redwater’s abandonment commitments for all licensed properties before dispersing any funds or completing any insolvency proceeding. The Regulator cautioned that it would not accept the transfer of any one of Redwater’s licenses unless it was satisfied that both the transferee and the transferor would have the ability to carry out all governing responsibilities and that the transfer would not create deterioration in Redwater’s LMR.

The receiver determined that it could not satisfy the Regulator’s demands since the cost of completion of the end-of-life responsibilities for the spent wells would likely surpass the realizable value for the producing wells. Based upon this evaluation, the receiver notified the Regulator that it was occupying and controlling just 17 of Redwater’s most productive wells, 3 related facilities and 12 pipelines (Retained Assets). The receiver also advised that it was not occupying or controlling of any of Redwater’s various other licensed properties (Renounced Assets).

The receiver’s position was that it had no requirement to do any regulatory requirements connected with the Renounced Assets.

Redwater Energy Supreme Court decision: The Regulator’s and the receiver’s positions

The Regulator responded by issuing orders under the OGCA and the Pipeline Act calling for Redwater to suspend and abandon the Renounced Assets (Abandonment Orders). The Regulator imposed short target dates, as it took into consideration the Renounced Assets an environmental and safety threat.

Alberta’s Regulator and the OWA applied for an affirmation that the receiver’s renunciation of the Renounced Assets was void and for orders needing it to follow the Abandonment Orders and to carry out the completion of the end-of-life responsibilities connected with Redwater’s licensed properties. The Regulator did not look to hold the receiver responsible for these responsibilities past the assets in the Redwater estate.

The receiver brought a cross-application looking for authorization to seek a sales procedure leaving out the Renounced Assets and an order directing that the Regulator cannot stop the transfer of the licenses connected with the Retained Assets based upon, inter alia:

  • the LMR requirements;
  • failure to abide by the Abandonment Orders;
  • refusal to take possession of the Renounced Assets; or
  • Redwater’s outstanding debts to the Regulator.

A bankruptcy order was made against Redwater and the receiver was appointed as trustee. The trustee invoked s.14.06(4)(a)(ii) of the BIA about the Renounced Assets. This section of the BIA allows for the abandonment of a property and to not hold the trustee personally liable for remediation costs.

Redwater Energy Supreme Court decision: The Alberta decisions

The Alberta lower Courts concurred with the receiver and held that the Regulator’s suggested use its legal powers to impose Redwater’s conformity with reclamation and abandonment commitments in bankruptcy contravened the BIA in 2 ways:

  1. It required the receiver the commitments of a licensee in connection with the Redwater properties disclaimed by the receiver/trustee, contrary to s. 14.06(4) of the BIA.
  2. It ignored the priority for the distribution of a bankrupt’s assets under the BIA by requiring the provable claims of the Regulator, an unsecured creditor, be paid in advance of the claims of Redwater’s secured creditors. The dissenting Judge in the Court of Appeal would have permitted the Regulator’s appeal on the basis that there was no conflict between Alberta’s environmental laws and the BIA.

Redwater Energy Supreme Court decision: The Redwater Energy SCC decision

The majority 5-2 Supreme Court of Canada (SCC or the Supreme Court) decision states that:

  • The Regulator’s use of its legal powers does not create a conflict with the BIA to trigger the doctrine of federal paramountcy.
  • Section 14.06(4) of the BIA deals with the personal liability of trustees and does not let a trustee to walk away from the environmental liabilities of the estate it is administering.
  • The Regulator is not asserting any claims provable in the bankruptcy.
  • The priority scheme in the BIA is not being interfered with.
  • No conflict is caused by the receiver’s status as a licensee under Alberta legislation. Alberta’s regulatory regime can coexist with and work with the BIA.

The Supreme Court decision goes on to say that bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must follow valid provincial laws during bankruptcy.

They must, as an example:

  • adhere to non-financial responsibilities that are binding on the insolvent estate, that are not provable claims; as well as
  • the impacts of which do not contravene the BIA, regardless of the effects this might have for the insolvent’s secured creditors.

The SCC held that given the procedural nature of the BIA, the bankruptcy regimen counts greatly on the ongoing rules of provincial regulations. However, where there is an authentic problem between provincial statutes about property and civil liberties and bankruptcy regulations, the BIA dominates.

The SCC went on to say that the BIA has two main functions: (i) the fair distribution of the insolvent’s property among its creditors; and (ii) the insolvent’s financial rehabilitation. As Redwater is a company that will never arise from bankruptcy, just the first function matters.

The Abandonment Orders and the LMR demands are based upon legitimate provincial regulations of basic application — specifically, the type of legitimate provincial laws whereupon the BIA is constructed.

The Supreme Court of Canada decision found that there is no conflict between the Alberta regulatory scheme and s. 14.06 of the BIA, because, under s. 14.06(4), a trustee’s disclaimer of real property when there is an order to remedy any environmental condition or damage affecting that property protects the trustee from personal liability. The Supreme Court of Canada decision makes it very clear that although the BIA protects the trustee or receiver from personal liability, the ongoing liability of the bankrupt estate is unaffected.

The Supreme Court of Canada said that the end‑of‑life obligations binding on the trustee and receiver are not claims provable in the Redwater bankruptcy. Not all environmental obligations enforced by a regulator will be claims provable in bankruptcy.

The test that must be applied to decide whether a particular regulatory obligation amounts to a claim provable in bankruptcy is: (1) there must be a debt, a liability or an obligation to a creditor; (2) the debt, liability or obligation must be incurred before the debtor becomes bankrupt; and (3) it must be possible to attach a monetary value to the debt, liability or obligation. Only the first and third parts of the test are at issue in the Redwater case.

Bottom line, a court must decide whether there are enough facts indicating the existence of an environmental duty that will ripen into a financial liability owed to a regulator. In determining whether a non‑monetary regulatory obligation of a bankrupt is too remote or too speculative to be included in the bankruptcy proceeding, the court must apply the general rules that apply to future or contingent claims.

It must be sufficiently certain that the contingency will come to pass — in other words, that the regulator will enforce the obligation by performing the environmental work and seeking reimbursement.

Redwater Energy Supreme Court decision: BIA contemplates environmental regulators will extract value

The Supreme Court of Canada also went on to say that in crafting the priority scheme of the BIA, Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage to fund remediation. Thus, the BIA explicitly contemplates that environmental regulators will extract value from the bankrupt’s real property if that property is affected by an environmental condition or damage.

Furthermore, Redwater’s only real assets were affected by environmental conditions or damage. Accordingly, the Abandonment Orders and LMR requirements did not seek to force Redwater to fulfill end‑of‑life obligations with assets unrelated to the environmental condition or damage. In other words, recognizing that the Abandonment Orders and LMR requirements are not provable claims and do not interfere with the aims of the BIA — rather, it facilitates them.

Redwater Energy Supreme Court decision: What about your company or client?

Is your company subject to significant costs under provincial law should it stop operating for any reason, including receivership or bankruptcy? Are you a secured creditor who loaned money to such a company and are now questioning the value of your security?

If so, you need the help of a licensed insolvency trustee (formerly called a bankruptcy trustee). Call the Ira Smith Team today. We have decades and generations of experience in the restructuring, turnaround, monitoring and liquidating insolvent companies.

Contact the Ira Smith Team today for your free consultation so that we can solve your financial problems and get you back on the right path, Starting Over Starting Now.

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BANKRUPTCY BLOG REVIEW: A LOOK AT MY TOP 2018 BANKRUPTCY BLOGS

Bankruptcy blog review: Introduction

I hope that you are all enjoying quality family time together over the holidays. As 2018 is nearly over, I thought that it would be interesting to do a bankruptcy blog review on my Brandon’s Blog. So here is a review of the 7 most viewed blogs over the past year.

Bankruptcy blog review: The 7 most viewed blogs in 2018

BANKRUPTCY AND INSOLVENCY ACT: COURT MAY NOT LISTEN TO BANKRUPTCY TRUSTEE

This blog was about a very interesting case decided in the Court of Appeal of British Columbia. The bankrupt’s creditors applied to have the transactions reviewed under section I00 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). One of the areas of contention was that the judge in the lower court found he could not rely on the bankruptcy trustee’s opinion of value in the circumstances.

MORTGAGE LENDING CRITERIA SELF EMPLOYED: BIGGEST MYTH MAY BE RIGHT

In this Brandon’s Blog, I wrote about mortgage lending criteria self-employed, I discussed a Court decision that shows when it comes to a self-employed person’s mortgage, if there is a deemed trust claim by Canada Revenue Agency (CRA), you cannot solely rely upon the registry system.


STALKING HORSE CREDIT BID: WE NEED COURT APPROVAL BEFORE STARTING A COURT SUPERVISED SALES PROCESS

This bankruptcy blog review post came from our corporate case files. I discussed the decision making process the Court goes through when being asked to approve a stalking horse sales process and the stalking horse credit bid being recommended by the licensed insolvency trustee (formerly called a bankruptcy trustee).


CREDIT KARMA CANADA REVIEW: IS IT REALLY FREE AND LEGITIMATE?

Since 2007, Credit Karma USA has attempted to simplify credit and finance for more than 60 million Credit Karma members. They advertise very heavily on US television to attract new members. Becoming a member is free, and it allows any member to get access to their free credit score and credit report, with the option to update every single week. Credit Karma also provides financial education to put credit into context.

Credit Karma Canada arrived this past year from the United States. Its website is creditkarma.ca. The purpose of this blog was to describe what Credit Karma Canada is and to let you decide if it would be helpful or not for you or someone you know.


IS GOODWILL A NON PROFIT ORGANIZATION? ARE YOU SCARED BECAUSE YOUR COMPANY HAS TURNED INTO ONE?

 

The Goodwill Toronto bankruptcy confused and astonished many people. After all, how can Goodwill, a non-profit organization, go bankrupt? Isn’t the very nature of a non-profit or not-for-profit that it doesn’t have to make a profit? This Brandon’s Blog discussed the issues.


FILING FOR BANKRUPTCY IN CANADA: MENTAL HEALTH & DISCHARGED BANKRUPTCY

 

This bankruptcy blogspot dealt with filing for bankruptcy in Canada and the bankruptcy discharge process when mental health issues are involved.


POOR CREDIT PERSONAL LOANS GUARANTEED APPROVAL CANADA: REDUCE AND DON’T INCREASE DEBT TO IMPROVE YOUR CREDIT SCORE

 

This Brandon’s Blog was a discussion about and a warning against being seduced by ads from companies for poor credit personal loans guaranteed approval. We pointed out the pitfalls of the products being offered. We also showed how people with poor credit can go about settling their debts and improving their credit score.

 

Bankruptcy blog review: Conclusion

 

These are my 7 top viewed Brandon’s Blogs in 2018. Four are about personal debt issues or personal bankruptcy blog items and three are about corporate insolvency issues. Three are about a review of a then-recent court case.

I hope that the year 2019 will be a happy, healthy and prosperous New Year for you and your families.

Have you taken on too much debt in 2018 or the years before? Is the pain and stress of too much debt now negatively affecting your health?

If so, contact the Ira Smith Team today. We have decades and generations of helping people and companies in need of financial restructuring and counselling. As a licensed insolvency trustee (formerly known as a bankruptcy trustee), we are the only professionals licensed and supervised by the Federal government to provide debt settlement and financial restructuring services.

We offer a free consultation to help you solve your problems. We understand your pain that debt causes. We can also eliminate it right away from your life. This will allow you to begin a fresh start, Starting Over Starting Now. Call the Ira Smith Team today so that we can begin helping you and get you back into a healthy, stress-free life.bankruptcy blog review

 

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TRANSFER OF PROPERTY UNDER S.160 OF THE INCOME TAX ACT: PROPERTY ISN’T PROPERTY

transfer of property under s.160 of the income tax actTransfer of property under s.160 of the Income Tax Act: Introduction

Last August, Rudy Giuliani said, “truth isn’t truth”. Today I want to explore an important issue we come across many times when dealing with income tax debt driven insolvency files. That is the transfer of property under s.160 of the Income Tax Act (Canada). The decision of The Honourable Justice David E. Graham of the Federal Tax Court of Canada released July 6, 2018, gives rise to a variation of Rudy Giuliani’s comment to say – property isn’t property.

The case was an appeal by Aitchison Professional Corporation (“APC”) of an income tax assessment issued by the Canada Revenue Agency (“CRA”). The case is Aitchison Professional Corporation v. The Queen, 2018 DTC 1101 (Tax Court of Canada).

Transfer of property under s.160 of the Income Tax Act: The participants

APC is a law firm operating under the name Aitchison Law Office. The creation of APC happened in December 2003 by 3 people: James Aitchison (“James”) and his two daughters, Kelly Aitchison (“Kelly) and Laurie Aitchison (“Laurie”). All three are Ontario lawyers.

In 2012, the Minister of National Revenue assessed APC for nearly $2.1 million pursuant to s. 160 of the Income Tax Act. The assessment stated that James had actually moved property worth even more than $3 million to APC for little or no value.

There was no disagreement that, at the time of the claimed transfers, James owed practically $2.1 million to the CRA. James had not paid any income tax since 1992. His tax obligation, along with interest and penalty, remains outstanding.

The main concern, in this case, was whether James moved property to APC. If he did, it would have to be valued. CRA claimed the property James transferred to APC is his right to invoice for legal services.

As indicated above, CRA’s position was that the right to invoice for legal services was the property transferred. It is interesting to note that they did not claim that either the work-in-process, the accounts receivable, or both, derived from James’ work, was the property transferred. In my view, this was a fatal error in their case.

The Court considered subsection 248( 1) of the Income Tax Act and in particular, His Honour considered the definition of the word property under the Income Tax Act is “a right of any kind whatever”. In his decision, His Honour stated the distinction that “property” has a wide meaning, but not every little thing of value is property.

Transfer of property under s.160 of the Income Tax Act: The Judge’s words


The Judge found that:

  1. CRA had problems verbalizing specifically how James’ “right to invoice for legal services” is property.
  2. He thought CRA was attempting to fit a square peg into a round hole.
  3. CRA was attempting to take something that is clearly a service and trying to make it fit into the definition of property.
  4. CRA’s position is faulty. They argued that James carried out work for APC neither as an independent contractor nor as an employee. CRA did not provide any evidence as to what they believed the actual arrangement was.
  5. Notwithstanding it is prudent for a company to have an employment agreement with all of its employees, none of James, Kelly or Laurie had an employment agreement with APC. However, CRA accepts that Kelly and Laurie are employees of APC but do not recognize James the same way.
  6. James was either an employee of APC with no salary or, an unpaid volunteer. The Judge held that it was not necessary for him to determine which one it was.
  7. It is an employee’s right to be paid. If the evidence was that James was entitled to a salary but he waived it, then he would have found that the waived salary was property transferred to APC. However, this was not the case.
  8. CRA, to their peril, did not argue that James was a sole practitioner, transferring his work-in-process and/or accounts receivable to APC.

Transfer of property under s.160 of the Income Tax Act: Saulnier v. Royal Bank of Canada

The intersection of insolvency and the issue of a transfer of property under s. 160 of the Income Tax Act is an important one. Although it did not help them, CRA referred to the Supreme Court of Canada decision in Saulnier v. Royal Bank of Canada, [2008] 3 SCR 166, 2008 SCC 58 (CanLII). That decision was in a bankruptcy case, dealing with the transfer of fishing licenses.

In that case, the Receiver and Trustee applied to the Court for the authorization to sell its interest in the fishing licenses. Due to an opposition, the Trustee went to Court seeking approval of the sale. The trial judge decided that the fishing licenses was a property that could be sold. The Court of Appeal agreed with the trial judge.

The Supreme Court of Canada dismissed the appeal of the Court of Appeal’s decision, upholding the trial judge’s finding, that the fishing licenses was property under s. 160 of the Income Tax Act. The interesting thing about that case is that the fishing licenses were considered as property mainly because of the wide sweeping definition of property contained in another federal statute, the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (“BIA”).

In the APC case, the Judge did not find the Saulnier case persuasive. The reason was the matter before him did not involve the BIA. In this case, it was only the Income Tax Act. Rather, the Judge relied upon a different case decided in the Federal Court of Appeal, Manrell v. Canada, [2003] 3 FC 727, 2003 FCA 128 (CanLII).

As explained by the Federal Court of Appeal in Manrell:

“[25] It is implicit in this notion of “property” that “property” must have or entail some exclusive right to make a claim against someone else. A general right to do something that anyone can do, or a right that belongs to everyone, is not the “property” of anyone . . . . . .

[50] The phrase . . . “a right of any kind whatever”, like the word “property”, has a very broad meaning. But it is not a word of infinite meaning. It cannot include every conceivable right. It cannot be given a meaning that would extend the reach of the Income Tax Act beyond what Parliament has conceived”.

Transfer of property under s.160 of the Income Tax Act: The verdict and the Judge’s conflict

Based on the evidence, His Honour found that James didn’t transfer property to APC by working for APC for free. The Judge also awarded costs to APC.

However, the Judge gave his personal view of his decision in the judgment. He felt that this was a horrible outcome. Furthermore, he commented that James had not paid a cent of income tax since being discharged from his bankruptcy in 1992. The Honourable Justice David E. Graham did not feel this was a just result, based on his interpretation of the law.

So that is why I paraphrase Rudy Giuliani to say – property isn’t property!

Transfer of property under s.160 of the Income Tax Act: Is CRA pursuing you?

Is CRA pursuing you because of transferred property to you? If so, you need an income tax lawyer. However, if you have received legal advice that you don’t really have a case, or you can’t afford to fight it out in Court and the debt renders you insolvent, then you need the help of a professional trustee.

The Ira Smith Team has years of experience of negotiating with CRA on behalf of tax debtors. If you are an individual person and owe CRA and your other creditors, other than for any loans secured by your home, less than $250,000, you can enter into a consumer proposal debt settlement plan. If you owe more or are a corporation, we can still negotiate with CRA and restructure you with a restructuring proposal debt settlement plan.

Our approach for each file is to create an end result where Starting Over, Starting Now takes place. This starts the minute you are at our door. You’re simply one phone call away from taking the necessary steps to get back to leading a healthy, balanced hassle-free life, recover your money and move on to the next investment opportunity.

In conclusion, call us today for your free consultation.

Special thanks to Ian MacInnis of Fogler Rubinoff for bringing this decision to my attention and inspiring me to write this blog.

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BUYING REAL ESTATE FROM A RECEIVER: READ, REMEMBER AND FOLLOW THE CONTRACT LAW FINE PRINT

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Buying real estate from a receiver: Introduction

Buying real estate from a receiver is a little different from a normal real estate transaction. In this Brandon’s Blog I describe a recent Court of Appeal Decision that shows it can even be tricky for the receiver.

Buying real estate from a receiver: Court appointed receiver+real estate

K was the court-appointed receiver (the “Receiver”) of the assets, properties and undertaking of a lakeside hotel in British Columbia, Carmel Cove Resort & Spa Inc. On October 25, 2013, the Receiver went into a contract in writing to sell the real property owned by the company in receivership to the participant, B.C. Ltd. (the “Purchaser”). The Contract of Purchase and Sale (the “Contract”) was in the form of the standard agreement of the British Columbia Real Estate Association and the Canadian Bar Association (B.C. Branch).

Buying real estate from a receiver: Contract fine print example

One of the conditions in the Contract was that the deal was subject to approval by the Supreme Court of British Columbia (the “Court”). It had to be obtained within twenty-one (21) days of acceptance of the Contract by both parties. Clause 3 in the Contract (“Clause 3”) stated that unless each condition was either waived or satisfied by written notice provided by the benefiting party to the other party on or before the date specified for every condition, the Contract would end.

On November 14, 2013, the twenty-first day after the Receiver’s approval of the deal, an application for court authorization was heard and approved. Five days later, on November 19, 2013, the Receiver gave the Purchaser written notice of the Receiver’s fulfillment of the condition for court approval.

Buying real estate from a receiver: Fine print matters

The Purchaser chose not to finish the transaction. The Purchaser refused to do so. The Purchaser claimed it was partly because it thought the Contract was terminated due to the Receiver’s failing to offer written notification on time. The Receiver ultimately sold the asset to another purchaser. It sold the property for $925,000 less than it would have obtained if the Receiver completed the sale to the Purchaser.

The Receiver expended $312,150.96 to run the resort and administer the receivership in between the collapse of the sale to the Purchaser and the sale to the succeeding buyer closing. Therefore, the Receiver began an action, suing the Purchaser for $1,237,150.96. It applied to Court for a summary trial.

Buying real estate from a receiver: Fine print can’t lie

At the trial, both sides set out their disagreements and arguments on the condition precedent issue:

  • the Purchaser recognized that the Receiver met the need for court authorization by the twenty-first day adhering to the Receiver’s acceptance of the agreement.
  • The Purchaser pointed out, nonetheless, that the Receiver did not conform with Clause 3 by offering the Purchaser written notice of satisfaction of the condition on or before the day specified for the condition; i.e.: on the twenty-first day.
  • The Receiver’s position was that Purchaser knew the outcome of the court application on the day that it was heard.
  • The Receiver stated therefore written notice was superfluous, unnecessary, and duplicative.3bestaward

Buying real estate from a receiver: Here comes the judge

The Court kept in mind that the trouble with the Receiver’s position right here was that it was, truly, an invitation to the court to reword the terms of the contract. The notification stipulation in Clause 3 was quickly parsed by any type of literate individual. It was not unclear. The clause did not need interpretation. There was no need to refer to evidence to figure out what it suggested.

By its clear language, the notification arrangement in Clause 3 needed the party benefiting from the condition– in this situation the Receiver– to give written notification– e.g.:

  • a letter.
  • an e-mail.
  • a written note in crayon on the back of an envelope.

The notification that the condition– court authorization–was obtained on or before the day defined for the condition– i.e.: not greater than twenty-one days’ after the Receiver’s acceptance.

Did the Receiver do just what Clause 3 required? It did not. Rather, it offered the Purchaser written notification 4 days later which was also 4 days too late.

The trial judge held that the failure to give written notice of fulfillment of the condition as specifically stated in Clause 3 ended the Contract. For that reason, the Court rejected the Receiver’s claim.

Buying real estate from a receiver: The appeal

The Receiver appealed the decision. The appellate court dismissed the Receiver’s application. The Court of Appeal noted that it is necessary to give effect to notice arrangements included in commercial agreements to offer assurance between the participants who contract with each other.

Buying real estate from a receiver: What if you have too much debt?

Do you or your company have too much debt due to a contract gone wrong, losing in litigation or for any other reason? If you’re trying to find a way to restructure your debt, contact Ira Smith Trustee & Receiver Inc.

Our philosophy for every person is to develop an outcome where Starting Over, Starting Now happens, beginning the minute you come in the door. You’re just one call away from taking the essential action steps to get back to leading a healthy and balanced stress and anxiety free life.

You may read the entire Court of Appeal decision by clicking here KPMG Inc. v. 0747825 B.C. Ltd., 2017 BCCA 277 (CanLII)BUYING REAL ESTATE FROM A RECEIVER 4

 

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CREDIT REPORT ONTARIO COMPANIES CAN REPORT EVEN IF YOU CAN’T BE SUED!

Credit report Ontario: Introduction

My Brandon’s Blog describes a Court decision that if you owe money, even if it is too late for you to be sued, it can still show up on your credit report Ontario. This is a very interesting case from the Court of Appeal for Ontario for consumers and consumer reporting.

The case was an attempt by Mr. Grant to have the credit reporting agencies Equifax and TransUnion remove from his credit report debts that were more than two years old on the basis that because he can’t be sued anymore, the most accurate reporting would be to cut those debts from his credit report. He argued that since the Ontario Limitations Act provided for a two-year limitation for when he could be sued on certain debts, therefore, any debts more than two years old for which you haven’t been sued should be removed from his credit report.

Limitations Act vs. Consumer Reporting Act

The credit reporting agencies successfully argued against that as the lower court ruled against Mr. Grant. He was now appealing to the Court of Appeal for Ontario. The Ontario Consumer Reporting Act states that debts up to seven years old can be reported and there lies the discrepancy. The Court of Appeal for Ontario agreed with the lower court and said that just because the Limitation Act says that you can’t be sued after two years that has no application to the Consumer Reporting Act that says all valid debts can be reported for up to seven years.

What the Court of Appeal said

The Court of Appeal went on to say just because a creditor misses the deadline or chooses not to sue within the two-year period it doesn’t mean that the debt still isn’t owed. The Court of Appeal also went on to say that under the Consumer Reporting Act people have the right to communicate with Equifax and TransUnion to have errors removed from their credit report. Unfortunately for Mr. Grant in his case, this was not an error.

What should you do if you have too much debt?

Do you have too many debts causing you discomfort on your credit report? Is your credit report creating a bigger hardship for yourself? For help with your debt issues contact Ira Smith Trustee & Receiver Inc. We’re your best defence against debt. Make an appointment for a free, no-obligation consultation and you can be well on your way to a debt free life Starting Over, Starting Now. Give us a call today.

credit report ontario

Credit Report Ontario: The decision of the Court of Appeal for Ontario

COURT OF APPEAL FOR ONTARIO

 

CITATION: Grant v. Equifax Canada Co., 2016 ONCA 500

DATE: 20160623

DOCKET: C61664

Rouleau, van Rensburg and Benotto JJ.A.

BETWEEN

Gary Grant

Applicant (Appellant)

and

Equifax Canada Co., Trans Union of Canada,

Ministry of Government Services and Consumer Services

Respondents (Respondents in Appeal)

Gary Grant, acting in person

Stephen Schwartz, for Equifax Canada Co.

Alan Melamud, for Trans Union of Canada

Domenico Polla, for the Ministry of Government Services and Consumer Services

Mahmud Jamal and Raphael Eghan, for the intervener Canadian Bankers Association

Heard: June 21, 2016

On appeal from the judgment of Justice Kofi N. Barnes of the Superior Court of Justice, dated November 2, 2015.

ENDORSEMENT

[1] The appellant brought an application in the Superior Court seeking an order that two consumer reporting agencies remove debts over two years old that were shown on his credit report, where no legal action had been commenced or judgment obtained in respect of the debts. He relied on the provisions of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, and in particular the basic limitation period of two years applicable to the commencement of a proceeding in respect of a claim.

[2] The appellant argued in the court below, and on appeal, that this two year limitation period should apply in interpreting the provisions of the Consumer Reporting Act, R.S.O. 1990, c. C.33 (the “CRA”). He asserts that, in requiring consumer reporting agencies to adopt all procedures reasonable for ensuring accuracy and fairness in the contents of their consumer reports (s. 9(1) of the CRA), the Act anticipates that debts will not be listed where a limitation period for their enforcement through legal action has expired. The most accurate record of a debt, he says, is one that has been or can be confirmed by an order or judgment of the court. When debts are included in consumer reports, where no legal action is possible, consumers are adversely impacted in their efforts to borrow money and to conduct other business.

[3] The respondents assert that the application judge did not err in his dismissal of the appellant’s application, on the basis that the basic limitation period has no application to the statutory framework for consumer credit reporting in Ontario, and that there was no violation by the consumer reporting agencies of the requirements of the CRA.

[4] We agree.

[5] The CRA provides for a regulatory scheme for the fair reporting of information regarding an individual’s history of credit activities. The CRA requires the registration of consumer reporting agencies, permits consumer reporting information to be provided only for certain prescribed purposes, and sets out standards for consumer reporting.

[6] The Limitations Act, 2002, by contrast, applies to bar “claims pursued in court proceedings” that are commenced outside the applicable limitation period. The Act does not apply to the CRA, whether expressly or by implication. Indeed, the CRA contains its own specific provisions prohibiting the inclusion of certain information in consumer reports, including debts or collections more than seven years old, unless confirmation that the debt or collection is not barred has been obtained. The CRA expressly contemplates that debts not reduced to judgment that are up to seven years old may be reported (see s. 9(3)(f)). This makes sense, as the passing of a limitation period does not extinguish a debt; it only precludes the commencement of a court proceeding for its enforcement. As such, the reporting of debts after a limitation period has passed, is not inconsistent with the purposes of the CRA, and is expressly contemplated by its terms.

[7] Under the Act, consumers, such as the appellant, have access to the information contained in their files, and a mechanism by which they can dispute information contained in a report to the consumer reporting agency, and to the Registrar of Consumer Reporting Agencies, with a right to apply to the Licence Appeal Tribunal for a hearing if they are aggrieved by a Registrar’s decision.

[8] The appellant availed himself of the right to dispute information, and was able to have certain stale information removed from his consumer reports. There was no basis, however, for requiring the removal of information concerning debts simply because they were more than two years old.

[9] For these reasons, the appeal is dismissed.

“Paul Rouleau J.A.”

“K. van Rensburg J.A.”

“M.L. Benotto J.A.”

CREDIT REPORT ONTARIO

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