Tag: deemed assignment in bankruptcy

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Brandon Blog Post

CREDITORS: ALARM BELLS RING WHEN FINANCIAL RESTRUCTURING HEADS SOUTH

Introduction

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

Personal bankruptcy and corporate bankruptcy in Canada

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

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

Creditors and a deemed assignment in bankruptcy

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

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

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

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

Financial restructuring under the BIA

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

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

Meeting of creditors to consider the proposal

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

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

The need for Court approval

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

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

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

How can a restructuring proposal fail or head south?

A financial restructuring plan under the BIA can fail if:

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

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

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

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

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

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

A Proposal default that does not automatically mean bankruptcy

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

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

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

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

Three types of bankruptcy in Canada

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

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

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

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Brandon Blog Post

RECEIVERSHIP BANKRUPTCY DIFFERENCE CANADA: WHAT A TRUSTEE SAYS ABOUT IT

Introduction

The purpose of this blog is to discuss the corporate receivership bankruptcy difference Canada. Every general security agreement defines exactly how the secured lender will certainly deal with obtaining his/her cash when it comes to default. One means to do this is by selecting a receiver.

A receiver or receiver/manager is an individual/company licensed by the Federal Government to act as a licensed insolvency trustee. The receiver can be appointed either by an instrument in writing or by a court order. A receivership administration falls under the Bankruptcy and Insolvency Act (Canada) (BIA), where the receiver takes possession and control over the assets to of the insolvent business.

The receiver or receiver/manager will certainly seize the properties covered under the lender’s security or covered by the court order. The receiver will also develop a plan to market the assets for sale. After paying any type of priority claims as well as the receivership administration costs, the net funds are paid to the first secured creditor.

receivership bankruptcy difference canada

Can you have both at the very same time?

Sometimes there is both a bankruptcy plus a receivership. Receivership is a treatment for secured creditors, such as financial institutions. Bankruptcy is a treatment for unsecured creditors.

Receivership bankruptcy difference Canada: Bankruptcy

A business could be placed right into bankruptcy by any one of the following methods:

  1. a creditor could apply for a bankruptcy order putting the business right into bankruptcy through the courts;
  2. the directors could assign the corporation right into bankruptcy;
  3. a restructuring proposal could be voted down at the meeting of creditors; or
  4. a restructuring proposal could be annulled by the trustee or creditor for non-compliance.

There are many reasons that a corporation could go into bankruptcy. These consist of the following:

  1. The firm has defaulted under its premises lease, the landlord distrains against the firm’s possessions. A bankruptcy or a notice to make a proposal filed before the property owner finishes the sale of assets defeats the lease distraint.
  2. The firm has unsecured assets (i.e., possessions without a lender’s security registered against it) that are available to be realized upon. Also, the firm cannot carry on business any longer.
  3. If a restructuring proposal is submitted, but the company could not get adequate funding to continue its business and complete the proposal.
  4. To reorganize the statutory priorities.
  5. To officially bring the business to an end as well as give a complete report to the creditors so they will not believe the principals engaged in any kind of misbehaviour.

Receivership bankruptcy difference Canada: Corporate Bankruptcy

In a company bankruptcy, the licensed insolvency trustee seizes all the business’s properties plus deals with all the creditors. The directors and management of the company accept the authority of the trustee; if requested by the trustee, they can as well as aid the trustee in his/her tasks. This eliminates them from all the stress of dealing with the creditors as well as running the cash-starved business.

Receivership bankruptcy difference Canada: Making the Application to Put a Debtor Into Bankruptcy

If a creditor is incapable of recovering the amount owed to it with any one of the readily available techniques which can be done, they may look to a bankruptcy application. This is especially so having actually acquired a judgment for the quantum owing which has not been satisfied. The BIA allows for the licensed insolvency trustee, once appointed, to take possession in an organized way, the assets of an insolvent debtor, to realize upon those assets and to then distribute the funds according to the scheme of priority in the BIA.

The BIA allows for the benefit of both bankrupts and their creditors. While the Act is not planned for usage as a device for the collection of private financial obligations, this may be the case in specific situations.

Receivership bankruptcy difference Canada: When is a Creditor Allowed making a Bankruptcy Application?

An unsecured creditor could apply for a bankruptcy order where:

  1. the lender is owed $1,000 or even more on an unsecured basis, and
  2. there has actually been an act of bankruptcy by the borrower within the 6 months that come before the filing of the application. Keep in mind that a secured lender can value its security at less than the overall amount owing to develop a partly unsecured debt.

The BIA states that acts of bankruptcy consist of the following:

  1. if in Canada or elsewhere he makes an assignment of his property to a trustee for the benefit of his creditors generally, whether it is an assignment authorized by this Act or not;
  2. if in Canada or elsewhere the debtor makes a fraudulent gift, delivery or transfer of the debtor’s property or of any part of it;
  3. if in Canada or elsewhere the debtor makes any transfer of the debtor’s property or any part of it, or creates any charge on it, that would under this Act be void or, in the Province of Quebec, null as a fraudulent preference;
  4. if, with intent to defeat or delay his creditors, he departs out of Canada, or, being out of Canada, remains out of Canada, or departs from his dwelling house or otherwise absents himself;
  5. if the debtor permits any execution or other process issued against the debtor under which any of the debtor’s property is seized, levied on or taken in execution to remain unsatisfied until within five days after the time fixed by the executing officer for the sale of the property or for fifteen days after the seizure, levy or taking in execution, or if any of the debtor’s property has been sold by the executing officer, or if the execution or other process has been held by the executing officer for a period of fifteen days after written demand for payment without seizure, levy or taking in execution or satisfaction by payment, or if it is returned endorsed to the effect that the executing officer can find no property on which to levy or to seize or take, but if interpleader or opposition proceedings have been instituted with respect to the property seized, the time elapsing between the date at which the proceedings were instituted and the date at which the proceedings are finally disposed of, settled or abandoned shall not be taken into account in calculating the period of fifteen days;
  6. if he exhibits to any meeting of his creditors any statement of his assets and liabilities that shows that he is insolvent, or presents or causes to be presented to any such meeting a written admission of his inability to pay his debts;
  7. if he assigns, removes, secretes or disposes of or attempts or is about to assign, remove, secrete or dispose of any of his property with the intent to defraud, defeat or delay his creditors or any of them;
  8. if he gives notice to any of his creditors that he has suspended or that he is about to suspend the payment of his debts;
  9. if he defaults in any proposal made under this Act; and if he ceases to meet his liabilities generally as they become due.
  10. if he ceases to meet his liabilities generally as they become due.

Keep in mind that in most of the situations above, the creditor does not need to show that the borrower cannot pay various other creditors. In the last situation, the creditor should show that more than just its own debt is not being paid. Unique situations would differentiate matters though.

Unique scenarios can consist of allegations of fraud, near-fraud or those other transactions which fall under the types that would seem to be attackable by a trustee. At least on a prima facie basis.

It should, nonetheless, be remembered that stringent evidence of both your unsecured debt and an act of bankruptcy is required to have an individual or business judged bankrupt.

 

Receivership bankruptcy difference Canada: Under What Circumstances Should a Creditor Make An Application For A Bankruptcy Order?

Making an application for a bankruptcy order to put a debtor into bankruptcy is no little job. Prior to choosing this option, consider the following:

  1. the presence and amounts of claims that could take priority over your unsecured creditor status;
  2. the dollar measure of unsecured debt ranking on the same level with your financial debt (i.e., each unsecured creditor is paid according to the calculated share based on the measure of his/her debt);
  3. the existence of questionable transactions or transfers undervalue within the three-month to five-year evaluation period before the declaration of bankruptcy;
  4. your very own history of repayments from the debtor/borrower in addition to the normal payment patterns in the 3 months before the date of bankruptcy; as well as
  5. the legitimacy of any kind of security you might hold.

Receivership bankruptcy difference Canada: The Bankruptcy Application Can Be Very Useful

Think about:

  1. has the debtor actually moved the residential property to a related party for inadequate or no consideration;
  2. where the debtor does not want to lose a specific part of its property (e.g. a private yacht, unique cars and truck or shares in a firm) or does not want its transactions and events to be inspected by a trustee and/or creditors;
  3. the debtor (being an individual) expects an inheritance;
  4. where the debtor (being an individual) needs to be an officer, director and/or shareholder of several businesses;
  5. the debtor (being an individual) might have his/her expert certification or licence from which he/she derives income compromised or lost as an outcome of being ruled a bankrupt;
  6. when the bankruptcy of the debtor would cause him/her to lose the ability to generally conduct business, such as required to use a trust account or employment requires the need to be bonded; or
  7. being a bankrupt would cause the company or individual to lose the advantage of a specific useful agreement, lease, or company.

Receivership bankruptcy difference Canada: How Does a Creditor Make The Application For A Bankruptcy Order?

The creditor desiring to file the application will certainly need a lawyer to prepare the needed documents to make the bankruptcy application. The lawyer will serve the motion material and attend for the bankruptcy order. For an uncontested motion, the lawyer appears before the Bankruptcy Registrar who is a Master of the Court. If opposed, the matter can only be heard by a Judge.

The creditor has to additionally make arrangements with a licensed insolvency trustee to act will need to guarantee the trustee’s fee and costs incurred by the trustee where there are not enough proceeds from the sale of assets. A lot of times it is likewise needed to give the trustee a cash retainer.

When the Bankruptcy Order is made, the licensed insolvency trustee starts the bankruptcy administration. All actions against the insolvent are stayed.

Receivership bankruptcy difference Canada: What If You’re Company Has Too Much Debt?

Is your company insolvent? Are you looking for solutions? The Ira Smith Team is here to offer alternatives to restructuring and turnaround services however, if required, we also act as a licensed insolvency trustee in bankruptcy matters. We offer help in Vaughan as well as throughout the GTA.

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Brandon Blog Post

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

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

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

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

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

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

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

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

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

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