Tag: Division I Proposal

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

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

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

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

small business in canada
small business in canada

Small business in Canada introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

small business in canada
small business in canada

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Small business in Canada summary

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

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

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

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

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

Call us now for a no-cost consultation.

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

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

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

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Brandon Blog Post

BANKRUPTCY FRAUD: QUICK GUIDE TO BANKRUPTCY FRAUD AND BANKRUPTCY EXAMINATIONS

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

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

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

bankruptcy fraud
bankruptcy fraud

Bankruptcy fraud introduction

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

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

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

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

What is bankruptcy fraud?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bankruptcy fraud: Examination of the bankrupt court case background

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

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

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

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

bankruptcy fraud
bankruptcy fraud

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

The creditor

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

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

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

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

The Trustee

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

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

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

The bankrupt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bankruptcy fraud and examination of the bankrupt: Other matters

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

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

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

Bankruptcy fraud summary

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

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

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

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

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

Call us now for a no-cost consultation.

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

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

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

Categories
Brandon Blog Post

CONSUMER PROPOSAL VS BANKRUPTCY ONTARIO: THE BEST INFO YOU REALLY NEED

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Consumer proposal vs bankruptcy Ontario introduction

What is the difference between a consumer proposal vs bankruptcy Ontario is a question people calling me up these days are asking. No doubt the looming end of the various COVID-19 government support programs is now sparking this interest. People and businesses were given a reprieve with Canada’s COVID-19 Economic Response Plan and the courts being closed. Now fear is creeping back into everyone’s minds about their debts that essentially were put on hold for the last 6 months.

So, since people are asking me the question, I want to answer the consumer proposal vs bankruptcy Ontario question in this Brandon’s Blog.

Consumer proposal vs bankruptcy Ontario: Who qualifies for and what is a consumer proposal?

A consumer proposal is different from bankruptcy. Consumer proposals are available to individuals only whose overall financial obligations do not exceed $250,000, not including debts secured by their principal residence.

Division 1 proposals are offered to both companies with any debt level and people whose debts go beyond $250,000 (omitting the mortgage or any other debts secured by their primary residence).

Consumer proposals are official methods regulated by the Bankruptcy and Insolvency Act (Canada) (BIA) readily available to individuals. Collaborating with a licensed insolvency trustee (Trustee) serving as the consumer proposal administrator, you make a proposal to:

  • Pay your creditors a percentage of what you owe them over a certain period not exceeding 60 months.
  • Expand the time you need to settle those debts.
  • Or a mix of both.

Payments are made via the Trustee, and the Trustee utilizes that cash to pay each of your creditors their pro-rata share. The consumer proposal must be completed within 5 years from the day of filing.

Consumer proposal vs bankruptcy Ontario: Who qualifies for bankruptcy?

You can declare bankruptcy if you:

  • Live in Canada.
  • Continue business or have assets in Canada.
  • Have financial debts totalling a minimum of $1,000.
  • Are insolvent.

There are different tests for insolvency laid out in the BIA. They are:

  • for any reason, you are unable to pay your financial debts as they generally come to be due;
  • you have ceased paying present debts in the regular course as they usually are due; or
  • the complete worth of your property is not, at a reasonable valuation, enough, or, if sold at a sale under legal process, would not be sufficient to make it possible for repayment of all your financial obligations.

Consumer proposal vs bankruptcy Ontario: What is bankruptcy?

A consumer proposal is an excellent option for you if you can afford to make payments towards your financial debts monthly. If you are entirely unable to make enough payments for a consumer proposal, then bankruptcy is probably your only other alternative.

By statute, the offer you make your creditors via a consumer proposal must be a much better option than what your creditors would certainly get in your bankruptcy. I help people make that analysis during our initial no-cost consultation prior to them selecting the ideal insolvency process for them. We discover the choices readily available, including a consumer proposal vs bankruptcy Ontario. Bankruptcy is an alternative when you cannot afford to fund a consumer proposal to your creditors.

If bankruptcy is the selected alternative, you work with me, as the Trustee, to complete the needed documents. I then submit them with the Office of the Superintendent of Bankruptcy Canada (OSB). When the OSB issues its Certificate, after that you are formally bankrupt.

From that point on, the Trustee will deal directly with your creditors in your place. As soon as you are bankrupt:

  • you will stop making payments to your unsecured creditors;
  • any type of garnishments against your wages or bank account will stop; and
  • any lawsuits for money against you from your creditors will also be stopped.

Consumer proposal vs bankruptcy Ontario: What are the advantages of a consumer proposal?

The benefits of a consumer proposal vs. bankruptcy Ontario are:

  • You maintain all of your assets.
  • Actions against you by creditors, such as wage garnishments will quit.
  • Unlike informal financial debt settlement, the consumer proposal is a legal forum where every one of your creditors has to deal with your restructuring.
  • You do not have to think any more about the “B” word.

Consumer proposal vs bankruptcy Ontario: What are the differences in credit score?

The person that files for bankruptcy will absolutely get an R9 rating. This is the lowest credit rating possible. It will continue to be on their record for at least 7 years. An individual that submits a consumer proposal will have an R7 credit score which is less extreme. It will certainly remain to be on their record for around 8 years overall, from the moment of filing.

You will absolutely pay less than the total you owe with a consumer proposal. Commonly as much as 70% less. All your unsecured financial obligations will be combined right into a simple regular month-to-month payment. This number will be based upon what you can afford.

Consumer proposal vs bankruptcy Ontario: What are the costs and fees of a consumer proposal versus filing for bankruptcy?

When doing a consumer proposal, the Trustee’s charges are paid for out of the repayment you bargain with your creditors. For example, if your consumer proposal has you paying a total amount of $20,000 over 5 years, the Trustee’s fee and disbursements are drawn from those funds. The cost of the consumer proposal is likewise regulated by the BIA. The expense does not go up or down based upon the amount you are required to pay in your consumer proposal.

However, if you were to file for bankruptcy, the cost is once again controlled by the BIA. The Trustee is paid out of the funds available in your bankruptcy. Examples of sources of funds in personal bankruptcy are any surplus income you might need to pay as well as any assets that are available to the Trustee to sell.

If there are not expected to be any type of funds in your bankruptcy, the regulated cost to be funded either by the debtor or a third party guarantor will be around $2,000. This is one more difference between a consumer proposal vs bankruptcy Ontario.

Consumer proposal vs bankruptcy Ontario: Are assets treated differently between a consumer proposal vs bankruptcy?

If you do a consumer proposal, you can keep your assets whereas in bankruptcy your assets in most cases are affected. This includes the equity in your home if greater than $10,000, an auto or other vehicle worth greater than $6,600 (without liens against it), investments, tax refunds, as well as any RRSP contributions made in the 12 months immediately before filing for bankruptcy.

This distinction between a consumer proposal vs bankruptcy Ontario is huge.

Consumer proposal vs bankruptcy Ontario: What if I default on my consumer proposal vs bankruptcy payments?

If you do not keep up your payments on a consumer proposal, and drop 3 months behind, you have defaulted and the consumer proposal is void. You additionally are unable to submit a brand-new consumer proposal. Collection activity by your creditors will begin again.

In bankruptcy, if you do not complete all your obligations, you will not have the ability to get your discharge from bankruptcy. As soon as the Trustee gets its discharge, your creditors will certainly return to collection activities too.

This is one more consumer proposal vs bankruptcy Ontario difference.

consumer proposal vs bankruptcy ontario
consumer proposal vs bankruptcy Ontario

Consumer proposal vs bankruptcy Ontario: When is a meeting of creditors held in a consumer proposal?

A meeting of creditors in a consumer proposal is held if one is requested by creditors that are owed at least one-quarter of the total amount of proven claims filed.

An ask for a meeting needs to be made by the creditors within 45 days of the declaring of the consumer proposal. The OSB can additionally ask for the Trustee to call a meeting any time within that same duration.

The meeting of creditors must be held within 21 days after being called. At the meeting of creditors, they vote to either accept or reject the proposal.

If no meeting of creditors is requested within 45 days of the declaring of the proposal, the proposal will be considered to have been approved by the creditors no matter any kind of objections made later.

How long does it take to complete a consumer proposal vs bankruptcy Ontario?

A consumer proposal is ended when the individual has made the call for payments over the amount of time stated in the proposal itself. In a bankruptcy, the discharge relies on a selection of different aspects, including whether it was the very first time the debtor filed for bankruptcy and if they need to make surplus income payments.

If the borrower has never proclaimed bankruptcy and they do not need to make surplus income payments, then they are entitled to be discharged 9 months. However, if the bankrupt has surplus income, then a first-time bankrupt will need to pay for 21 months before when they can be discharged

If this is not the person’s first bankruptcy, and they do not have surplus income, they cannot get a discharge before the expiry of 24 months. If that person has a surplus income requirement, then they must pay for 36 months before being able to be discharged.

This is another distinction between a consumer proposal vs bankruptcy Ontario.

Consumer proposal vs bankruptcy Ontario: What do consumer proposals and bankruptcy have in common?

Both a consumer proposal and bankruptcy are lawfully binding treatments that are administered by a Trustee. If you are thinking of a consumer proposal vs bankruptcy Ontario, it is vital that you consult with a Trustee to ensure that you completely understand what’s involved, and the costs. You can talk with friends or family that might have applied for one or the other before. It is also important that you get referrals from professionals you trust.

Declaring bankruptcy or doing a consumer proposal are both issues of public record. That means there will be a permanent public record concerning your insolvency that can be accessed by anyone. If your debts are joint or co-signed or guaranteed by someone else, the other person is liable for the debt. That is the case even if you file for either a consumer proposal or personal bankruptcy.

Even these similarities still point out differences between a consumer proposal vs bankruptcy Ontario.

How do I choose between a consumer proposal vs bankruptcy Ontario?

As you can see, when you consider a consumer proposal vs bankruptcy Ontario, there are most definitely differences between the two. But they are both formal insolvency processes to eliminate your debt. What’s essential, though, is that you discover the best method to get yourself back on the right track in such a way that will assist you to achieve your long-term goals.

Consumer proposal vs bankruptcy Ontario: How to file for bankruptcy?

In order to take advantage of either a consumer proposal vs bankruptcy Ontario, you must involve a Trustee. This is a person or company licensed by the OSB to provide the insolvency process. The 10 actions listed below are a guide to the bankruptcy procedure.

  • Call a qualified Trustee and go to a meeting with him or her to talk about your personal circumstance and your alternatives including if it is possible for you to prevent bankruptcy.
  • Deal with the Trustee to complete the needed forms. The Trustee will after that submit the bankruptcy with the OSB.
  • The Trustee notifies your creditors of the bankruptcy.
  • You participate in a meeting of creditors if one is called.
  • You participate in 2 counselling sessions.
  • Based on your personal exemptions, the Trustee markets your available assets; you may additionally need to make surplus income payments to the Trustee.
  • In certain circumstances, you might need to participate in an examination held by an OSB representative.
  • The Trustee prepares a report describing your actions throughout the bankruptcy.
  • You go to the discharge hearing if needed.
  • You obtain your discharge from your bankruptcy.

Afterward, the Trustee completes the administration, including paying a dividend to your creditors, if offered.

Consumer proposals and bankruptcy Ontario aren’t the only ways of obtaining debt relief and consolidating debt

There are additionally other ways of fixing debt problems that do not include a formal process or paying a fee. If you honestly wish to thoroughly and objectively take a look at all your options, contact a Trustee, and meet with him or her. They’ll pay attention to your scenario and concerns and advise you on what will work best for you even if you do not need to file for either a consumer proposal vs bankruptcy Ontario. Their assistance is normally cost-free and non-judgmental.

At my Firm, declaring bankruptcy is only encouraged until all other potential solutions have investigated. A consumer proposal is the only government-approved financial debt settlement strategy and is always the far better bankruptcy alternative.

Consumer proposal vs bankruptcy Ontario: Move on with your life

I hope you have enjoyed this consumer proposal vs bankruptcy Ontario Brandon’s Blog. Both a successfully completed consumer proposal or obtaining your discharge from bankruptcy lets you get back on the road to financial health, relieve the stress you face, and bring you:

  • Freedom from lawsuits and garnishments;
  • The ability to live better than just hanging on one payday to the next;
  • Improved credit scores; and
  • Better health and well-being.

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

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

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

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.
Call us now for a free consultation.

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

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

consumer proposal vs bankruptcy ontario
consumer proposal vs bankruptcy Ontario
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Brandon Blog Post

THE EASIEST WAY TO ACTUALLY LIKE WHAT IS A DIVISION i PROPOSAL ONTARIO

what is a division i proposal

If you would prefer to listen to an audio version of this what is a division i proposal Brandon’s Blog, please scroll to the bottom and click on the podcast

Introduction

Over recent times, I have been receiving increased inquiries as to what is a division i proposal. The purpose of this Brandon’s Blog is to explain what it is. No person or company actually likes to enter a restructuring process to avoid bankruptcy, so hopefully, this discussion will be helpful to those that really need it to appreciate why if necessary, it is actually easy to like it; especially a successful one!

What is a division i proposal?

Division I is one of the two divisions of Part III of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3). Division I is a restructuring provision. It is available to people who owe more than $250,000 and companies with any level of debt, in need of financial restructuring.

At the beginning of any consultation with an insolvent person or for an insolvent company, is to determine if a successful restructuring can be accomplished. If not, the only other realistic alternative is bankruptcy. A successful restructuring of a person will allow that person to keep the assets they wish to keep and can afford to hold onto.

A company that successfully restructures will continue to provide employment. The jobs that will be preserved are not only those of the company that restructures. Its continuing to do business with suppliers who continue to do business with the restructured company will also avoid layoffs or terminations of their own staff. The reason for this is that their own volumes will not decrease, or decrease as much as if its customers went bankrupt and could no longer buy from them.

How do I start a restructuring plan for a person?

The first thing the insolvent person or company needs to do is hire a licensed insolvency trustee (LIT) (formerly called a trustee in bankruptcy). The reason why is because a LIT is the only one in Canada authorized to administer a restructuring proposal.

The LIT will discuss with the insolvent person about the nature of his or her assets and liabilities. Which assets are financed and which are owned free and clear. There will also be a frank analysis and discussion of the person’s income and expenses. The reason for this is to do preliminary credit counselling to help the person recognize how their historical household budget (whether they actually knew it or not) needs to change. Is there room in a new solvent budget to pay for an expensive asset, or does it need to be replaced by a less expensive one? A leased or financed auto is a prime example.

I want to make that determination upfront because a financed asset given up before the debt is fully repaid will create an acceleration of the full amount of that liability claim. I will want to make sure that it is done the right way, so the new accelerated liability will be caught as a debt being compromised, not a post-filing debt not caught in the financial restructuring.

Once the issues have been identified and the realistic options identified, I will then want to work with the person to put together a realistic post-filing cash flow budget. There are three main reasons for this, being:

  1. I want to make sure that there is a budget that shows the person’s monthly expenses will be no more than, and hopefully less than, their monthly after-tax income.
  2. We must be sure that the monthly cash flow shows the person can afford the monthly payments to the LIT required to have a successful restructuring.
  3. One step needed to have a successful restructuring is to have such a monthly cash flow budget signed off by both the insolvent person and the LIT showing the person can survive through and afford a successful restructuring. Any creditor can request to see a copy of that signed off cash flow budget.

How do I start a corporate restructuring plan for a company?

The initial step in any corporate restructuring is for the board of directors to recognize and also resolve that the company is insolvent, that it needs to reorganize under this part of the BIA and to approve the hiring of a LIT.

I described the consultation process I first go through with a person to determine if they can successfully complete a restructuring proposal and then to start developing it. Similarly, I go through a consultation process with the senior management of the company.

I first want to determine if we have the basic requirement for a successful corporate restructuring. That basic requirement is, the company’s business, or one or more portions of the business, must be viable, notwithstanding that it is insolvent. There must be a true demand for the business and that it will be able to operate successfully once its financial position is right-sized. It may be the whole business, or it may be the case that we need to use the restructuring process to cut away the dead business units, in order to allow the viable one to survive and ultimately flourish.

By its nature, corporate restructuring is more complex than a personal one. There are many more moving parts to a company. However, the basic analysis is similar. What are the assets and liabilities of the company? Which business units are capable of being operated profitably? Which assets that are financed are essential to the future of the restructured company. Which are redundant and must be jettisoned. How will all the answers to these questions affect the company’s labour force? How many jobs will be lost and how many will be saved?

Ultimately, all these answers must be compiled into a cash flow statement. We must know does the company have sufficient financing or funds available to it so that it can properly operate during the restructuring process. There is no point in starting a restructuring if the company cannot survive the restructuring period. What will the company’s post-restructuring cash flow look like? We want to know that answer also to make sure that there is a real business that can operate profitably after coming out of the restructuring process. Just like in a personal financial restructuring, the company and the LIT must sign off on a realistic cash flow budget to show that the company can operate and survive the restructuring process.

What if the person or company needs immediate protection but is not ready to file the real proposal yet?

Just like in a bankruptcy, the filing of a Proposal brings in an immediate stay of proceedings. What this means is that no creditor can either begin or continue any action against the person or company for the enforcement or collection of a debt. Sometimes the insolvent debtor is under attack from a creditor.

Examples of proceedings against a person or company need protection from are numerous. The more standard ones are:

  • They need to defend a lawsuit but can’t afford the cost and therefore a default judgment is about to be issued.
  • Attendance is required at a judgment debtor examination to disclose the nature and whereabouts of their assets.
  • The Sheriff may be seizing an asset that if successful, it will stop the person or company from conducting business.

The BIA provides a way for an insolvent debtor under such an attack to invoke a stay of proceedings before they are ready to file their formal restructuring plan. That option is to first file what is called a Notice of Intention To Make A Proposal (NOI). This is a BIA filing that serves as a notification to the creditors that the debtor will certainly be making a restructuring proposal but it needs to have the stay of proceedings start right now.

How the concept of NOI evolved is very interesting. Before the 1992 amendments to the BIA, there was no such thing as an NOI. However, people and companies needed to invoke an immediate stay of proceedings, but the BIA did not contain such provisions. So, what was done, is that the LIT would prepare what was called a holding proposal. All the proposal said was that I promise to file a real restructuring proposal as soon as possible. That holding proposal was then filed which brought on a stay of proceedings.

Paperwork and procedures

The LIT needs to be satisfied that: (i) all the relevant details have been gotten; (ii) the person or company has a likelihood of a successful proposal restructuring; as well as (iii) the person’s or company’s cash flow is enough that it can pay its ongoing post-filing debts through the restructuring process.

The LIT then assists the insolvent debtor in completing the necessary paperwork. The LIT also prepares its own report. The LIT then does a mailing to all known creditors to advise them of the filing of the Proposal, a means by which they can file their claim with the LIT and a description of what the process is and what it all means. The documents are:

  • the Proposal
  • a statement of the person’s or company’s assets and liabilities
  • a listing of creditors
  • the form 31 proof of claim
  • the voting letter
  • LIT’s report on the insolvent debtor, the Proposal and the LIT’s recommendation for voting in favour of (or against) acceptance of the Proposal

The meeting of creditors is then held to allow the creditors to vote on the Proposal. If the Proposal is accepted by the required majority of the creditors, then the LIT applies to Court for approval of the Proposal. Once approved by the Court, it forms a contract between the debtor and the creditors is formed. The person or company then needs to perform the promises it made in the Proposal to its creditors. This, of course, includes paying the necessary funding to the LIT for distribution to the creditors.

Executing on the Proposal promise

The Proposal of a person will require that insolvent debtor to make monthly payments to the LIT. The payments are made out of the person’s monthly cash flow, as indicated in its budget. The person can take up to 60 months to fulfill the promise of payments to the LIT for distribution to the creditors.

A company carries out its Proposal as it continues its operations. It hopefully succeeds in operating profitably. The firm would be conserving a particular amount of its earnings in money and paying to the LIT what is needed under the company’s restructuring strategy to create the Proposal fund it promised. The LIT after that makes the distribution to the creditors called for in the restructuring plan. When all the payments have actually been made, the company has effectively reorganized and continues its business having successfully completed its restructuring.

What happens if a Proposal is unsuccessful?

This is a very simple question to answer. What is a division i proposal if not successful? It is called bankruptcy. If a restructuring plan does not get either acceptance by the necessary majority of creditors or approval by the Court, then the person or company is automatically bankrupt. If the person or company fails to make all the payments called for, that also creates an unsuccessful restructuring. In any of those cases, It is as if the insolvent debtor filed an assignment in bankruptcy.

In that case, the LIT administering the restructuring program becomes the LIT administering a bankruptcy.

What is a division 1 consumer proposal?

I have been asked this question several times. Firstly, there is no such thing as a division 1 consumer proposal, but there is such a thing as a consumer proposal. A consumer proposal is found in Part III Division II of the BIA. So, it is called either a division 2 proposal or a consumer proposal.

Is consumer proposal worth it?

Before being able to decide if a consumer proposal is worth it, we need to understand what a consumer proposal is. The same way I described what is a division i proposal, I need to describe a consumer proposal. The consumer proposal process is a streamlined version of the personal division i proposal already described. It is only for people and not companies. Further, the person cannot owe more than $250,000, not including any loans registered against the person’s home, such as a mortgage or home equity line of credit.

I have written many times about different issues concerning consumer proposals. Rather than repeating it in Brandon’s Blog, I recommend you read my earlier blogs on the consumer proposal topic. Some of the blogs I have written for ease of reference are:

Summary

I hope that I have adequately answered the question of what is a division i proposal and how you can like it. The honest answer is that no one really does. However, if it is necessary for you or your company’s survival, it becomes very easy to like it.

Do you or your company have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.

We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.

Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.

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BANKRUPTCY EXPERTS WEIGH IN ON US & CDN SMALL BIZ RESTRUCTURING

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Introduction

Small and medium-sized businesses play a vital role in all worldwide economies. Bankruptcy experts in the USA identified problems. The Chapter 11 bankruptcy protection process for these companies was not working. It is pricey, usually ineffective and impractical. So, many businesses in the USA in need of restructuring could not have access to the US insolvency system.

On July 23, 2019, the US Congress passed the Small Business Reorganization Act (SBRA). On August 1, 2019, the Senate passed the Bill. On August 23, 2019, President Donald Trump signed it to enact it.

The purpose of the SBRA is to make business bankruptcy protection much less troublesome for small and medium-size ventures. The result is Chapter 11, subchapter V of the US Bankruptcy Code (Titled: Small Business Debtor Reorganization). The aim is to make it more affordable and will serve to save otherwise viable owner-managed businesses.

The purpose of this Brandon’s Blog is to discuss the new US legislation. I will also comment on an approach for the Canadian insolvency system. Can we streamline restructuring under the Bankruptcy and Insolvency Act (Canada) (BIA) for small business?

Changes made by the SBRA

A small company is defined in the SBRA as a person or company whose non-contingent debts (leaving out financial obligations to affiliates or people not dealing at arms’-length) are $2,725,625 or less and which chooses to be dealt with under the SBRA. The Act includes a new subchapter V to Chapter 11 of the US Bankruptcy Code. The purpose of this new approach is to make it simpler and more economical for small companies to efficiently restructure.

The main thrust of the Act is:

  1. A creditor cannot lodge a Chapter 11 restructuring plan that it is prepared to support. Just the business can. The company’s plan must be filed within 90 days of the day it filed its bankruptcy protection application, other than in specific conditions.
  2. A trustee comparable to those selected in a personal restructuring (Chapter 13) situations will be selected to manage each case.
  3. A creditors committee will not be developed.
  4. The Chapter 11 plan can change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.
  5. The Court can approve a small business’ restructuring plan without the approval of any class of creditors. The Court must be satisfied that the restructuring plan treats all creditors fairly and does not prejudice any creditor class.
  6. To be fair and equitable, the restructuring plan must offer that all earnings received throughout the term of the restructuring plan will available to fund the restructuring for a duration of 3 to 5 years.

So the onus is on the creditors to carefully review all cases filed under the SBRA. Creditors will need to retain bankruptcy experts to advise them. Their role will be to make certain that Courts appropriately examine restructuring cases for fairness and that they treat all creditors equitably. This will be especially true for those that do not have the support of the creditors.

It will be very interesting to see if this new legislation accomplishes its goal of making it simpler and less costly for small businesses to restructure and continue.

The Canadian business restructuring landscape

There are two federal statutes that legislate business restructuring in Canada. They are the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) and the Part III Division I of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA).

To qualify for restructuring under the CCAA, the insolvent corporation must owe at least $5 million. The CCAA is only for insolvent companies or income trusts to restructure. It is not for:

  • proprietors or partnerships
  • banks
  • telegraph companies (do people still send telegrams?)
  • insurance companies
  • companies to which the Trust and Loan Companies Act applies

Proceedings under the CCAA are a very heavily Court-driven process.

Restructurings under the Part III Division I proposal provisions of the BIA are available to both companies, proprietors and partnerships. It is also available to people who owe $250,000 or more, not including any mortgages or loans secured by the person’s principal residence.

For people who owe less than $250,000, a more streamlined restructuring process is available under Part III Division II of the BIA. These are called consumer proposals.

Restructuring under the proposal provisions of the BIA is not a heavily Court-driven process like the CCAA. Under consumer proposals, if all goes smoothly there is never a Court application.

So we have a simpler and streamlined version for people who have a smaller debt level but are still in need of restructuring their financial affairs. The same is also true for people with fewer or no assets that need to start over through the bankruptcy process. However, there is no equivalent streamlined version in Canada for small to medium-size businesses.

Could such a streamlined business restructuring model be developed? Not only do I think it could be, as one of the bankruptcy experts in Canada holding the designation of licensed insolvency trustee, I think it must be.

The statute for a streamlined Canadian business restructuring model

The CCAA is designed for large corporations. As I already stated, it is a heavily Court-driven process. Therefore, I think this eliminates the CCAA from developing a more streamlined version. It is not the case that it could not be done. It is just that a new section designed for simpler and more cost-effective CCAA proceedings goes somewhat against the purpose of the CCAA.

Therefore, I propose that CCAA legislation should remain available only to larger companies. Especially because the BIA, another federal statute, already includes restructuring provisions. It already has a streamlined version for bankruptcy and restructuring to avoid bankruptcy. So, why not a streamlined business restructuring section?

What would BIA streamlined business restructuring look like?

You might ask, why is this even necessary? Many small and medium-sized businesses are family-owned. There are even very large family-owned businesses. The Financial Post reports that “Family businesses own a bigger chunk of Canada’s economy than you think — way bigger”. They report it is a significant business sector contributing 35 percent of Canada’s real gross domestic product.

So with such an important business sector, it would make sense to allow those businesses on the smaller scale to qualify to have a simpler and more cost-effective way to restructure when they hit a financial bump in the road. If the viable parts of the business can be saved, it will continue to employ people, allow families to have a good quality of life and contribute to Canada’s GDP. It does not make sense to essentially kill off these smaller businesses because the cost of the restructuring will use up all the resources necessary to run the business.

I am not talking about family-owned businesses Bombardier Inc. and Loblaw Cos. Ltd. Rather, I am talking about the majority of Canadian entrepreneurial companies in the mid to small size range.

So here is what I propose for a streamlined restructuring process for small and medium-sized businesses. I will call it a new Part III Division III of the BIA. I will call it the General Scheme for Small Business Proposals (SBP) section of the BIA.

Size matters

The new SBP should be available to corporations, proprietorships and partnerships that are set up to conduct business. Their total debt should not be more than $1.5 million. There is nothing scientific about this number.

Statistics Canada could do an analysis as to the average debt load of Canadian businesses and an appropriate debt level could be picked based on it. For purposes of this Brandon’s Blog, I will use the $1.5 million amount.

I would not exclude loans from affiliates or people not dealing at arms’-length such as in the US legislation. In Canada, it is normal for the first funding of a company to come from the owners. Our chartered banks want to see a commitment from the owners before they will lend. Owners have sacrificed their own money to get the company off the ground. Just because that is how they had to finance the company, I would not preclude that debt from counting in the calculation.

The Canadian business landscape is different from that in the USA. Our numbers are generally smaller. In order to exclude non-arms’-length debt, you would probably have to lower the debt threshold I have mentioned. So, let us keep that debt threshold for discussion purposes and include all debt; secured or unsecured, arms’-length or related parties and owners.

If a person is not conducting business in his or her name, then this new SBP would not be for them. They would fall under either Division I or Divison II restructuring proposals.

Administration of restructurings under the SBP

Currently, only a licensed insolvency trustee (formerly called a bankruptcy trustee) (LIT) can administer restructuring proposals. Under Division I Proposals, the LIT is called the Proposal Trustee. Under consumer proposals, Division II personal restructurings, the LIT is called the Administrator.

So, for the new SBP, I will call the LIT the Small Business Administrator. It makes it obvious that it is the restructuring of a business qualifying under the new Division III. The use of the word “administrator” ties nicely into the word chosen already by Parliament for consumer proposals. So again, it makes it obvious that the LIT is administering a small business streamlined restructuring.

Since we are not talking about personal restructuring that falls under the consumer proposal provisions in this Brandon’s Blog, my suggestions for a streamlined business restructuring applies only to Part III Division I of the BIA Proposal restructurings to avoid bankruptcy.

Time to restructure

Under a Division I Proposal restructuring, the company or person can begin the restructuring process by filing either a Notice of Intention To Make A Proposal (NOI) or the Proposal itself. Under either filing, the debtor then has 10 days to file its cash-flow statement reviewed and approved by both the company or person and the LIT. Under an NOI filing, the company or person then has an additional 20 days (30 days after the NOI filing date) to file a Proposal (unless the time is extended by Court Order).

Most times with small to medium-sized businesses, the debtor is not current in all of its filings with the Canada Revenue Agency (CRA). This includes payroll remittances, HST and perhaps even income tax returns. In any restructuring where CRA is a creditor, they need to have the most current information from the debtor’s business filings, to be able to know the full amount owing by the business. They will not be able to properly assess the Proposal until they know the proper amount owing to them.

Also in any Proposal restructuring, we want to have a provisional income tax return prepared by the external accountant for the business. The provisional return is to show if any further tax liability exists for the fiscal year up to and including the date of filing of the Proposal.

Books and records will first have to be brought up to date. Then the accountant will need time to prepare and file the income tax return. There is a reason for this. We want CRA to know if there is a further liability.

Although there is no statutory provision allowing for this, CRA so far on an administrative level will allow for a split tax year in a restructuring. The liability for the fiscal year up to and including the Proposal date will be included as a debt in the restructuring. This is to the company’s or person’s advantage in the business.

Once the Proposal is filed, the meeting of creditors has to take place within 21 days of the Proposal date. In my experience, there is never enough time for the business to do all the necessary filings for CRA that I just mentioned. So, CRA always requests an adjournment of the meeting until such time as all the filings are up to date.

So, in my proposed streamlined version, I would propose to extend the filing of a Proposal after the filing of an NOI from 30 days to 90 days, without the need for the expense of going to Court seeking an extension. This should give enough time for the business to get all of its filings up to date and hopefully avoid the need for an adjournment of the meeting of creditors.

Creditors

There really is nothing that needs to be changed on how creditors file their claims. The same is true for the rules of how the LIT must assess all claims. I do like the idea in the new Chapter 11 subchapter V. That is the ability to change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.

In Canada, it is very rare, if not unheard of, for an entrepreneurial business to get a bank loan without the owner giving a personal guarantee. Many times the personal guarantee has to be backed by a hard asset, such as a pledge of the personal residence. If the secured debt can be restructured, shouldn’t the pledge agreement on a personal asset also be part of that restructuring?

So, I propose that in the new SBP, there should be the ability to change the legal rights of a lender registered against an individual’s primary home if the funds were used for the business or if the pledge was in support of a personal guarantee for funds borrowed by the business.

The types of changes to the security pledge will be unique to the individual restructuring. It has to make business sense and common sense. It is always up to the secured lender to vote against the plan if they don’t like it. In that case, the restructuring will fail. There will be great pressure on the business to bring forward the best possible restructuring plan and not go crazy on what changes the owner wants to make to the pledge of security.

Deemed acceptance and approval

Without going into all the rules, under the current consumer proposal legislation, there is the concept of deemed creditor approval and deemed Court approval. Unless creditors holding 25% in value of the proven claims request it, there is no need to hold a meeting of creditors. Creditors are asked to vote by way of voting letters when they file their proof of claim. If no obligation to call a meeting arises, then the consumer proposal is deemed accepted.

If a consumer proposal is either accepted or deemed accepted by the creditors, then there is probably never going to be a need for the LIT administrator to formally seek approval by the Court. The BIA reads that after the acceptance or deemed acceptance, the consumer proposal is deemed accepted by the Court unless the Official Receiver or “other interest party” requests it within 15 days after the date of (deemed) acceptance.

Currently, under a Division I Part III restructuring Proposal there are no deeming provisions for either creditor acceptance or Court approval. I would like to see in the new SBP section, that similar deeming provisions for both creditor acceptance and Court approval be implemented. This will save time and cost thereby being much more efficient.

No deemed bankruptcy

In a Division I Proposal, if the creditors do not accept the restructuring, or the Court does not approve it, then the debtor is automatically deemed to have filed an assignment in bankruptcy. There is not a similar provision for consumer proposals.

If the creditors do not accept a consumer proposal, then it just dies then and there and the debtor goes back to their normal unprotected state.

My proposal for the new SBP is that if the creditors do not accept or the Court will not approve the restructuring plan, that does not produce a corporate or personal bankruptcy. Rather, the debtor just goes back to their normal unprotected insolvent state and they have to fend off their creditors as best as possible.

It may lead to bankruptcy, but that will not be automatic. In some corporate situations, the cost of a bankruptcy proceeding just does not make sense. This is especially true if a chartered bank has security over all of the assets and will be enforcing its security through a receivership.

Directors/Owners

Right now a corporate restructuring Proposal allows for Directors to be released from debts that arise prior to the date of filing the Proposal. The kinds of debts that a Director can be released from are those solely resulting from their role as a Director. In other words, generally statutory claims they would be legally liable for.

As I already mentioned, more often than not, the only way a small or medium-sized company can get a bank loan is if the entrepreneur personally guarantees the debt. There are times where a corporate restructuring can be done, but the secured debt arrangements will have to be amended. If the lender is not willing to amend the personal guarantee security arrangements in place, then, the corporate restructuring does not make sense.

So in my dream of the SBP, if a secured lender agrees to a restructuring of their debt, then the Director(s) who may be personally liable will now be responsible for the revised secured lending arrangement. This would also go hand in hand with my proposed change to the ability to change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.

Bankruptcy experts summary

So there you have it. The US government saw fit to add to its Chapter 11 bankruptcy protection statute to allow smaller companies to restructure. My vision for a Canadian version is the SBP section to form a new Part I Division III for the BIA.

To summarize, the changes to allow for a more efficient and less costly way to restructure smaller businesses would include:

  1. The brand-new SBP will be offered to companies, proprietorships and partnerships that are established to run a business. It will be available to businesses with any kind of debt not greater than $1.5 million.
  2. A LIT who will be called a Small Business Administrator, will oversee and be responsible for the business restructuring.
  3. The time for the filing of a Proposal after the filing of an NOI will be extended from the current 30 days to 90 days. This will be without the need and cost of a Court application.
  4. There ought to be the capability to transform the rights of a lending institution who has taken an entrepreneur’s home as security for a business loan or personal guarantee of such financing and the funds were put into the business.
  5. Deeming provisions for both creditor acceptance and Court approval be implemented. It is already done in consumer proposals, so why not in streamlined business proposals? This will result in more efficient and less costly restructuring.
  6. If the creditors’ decline or the Court will not approve the restructuring, that will not generate a corporate or personal bankruptcy. Instead, the debtor simply returns to their vulnerable financially troubled state and they will need to deal with their creditors as best as possible. In some cases it may lead to either bankruptcy or just a closing down of the business. Where there is a secured creditor, it will lead to the enforcement of their security. Either way, it won’t be an automatic bankruptcy.
  7. A Director of a corporation can be released not only from statutory obligations arising from their office of Director. That person, or any other person, can have their guarantee of a debt to a lender be amended if the related business debt is amended in the restructuring.

There no doubt will be other areas that would need amending once all the relevant sections of the BIA were looked at. These are my ideas of the major amendments that could be made to the BIA, to allow for a more streamlined and cost-efficient restructuring for small and mid-sized businesses.

What about your business?

The financial restructuring process for either a large or small business is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we dealt with this problem and devised a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

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BANKRUPTCY ACT CANADA: ARE YOU REALLY PREPARED FOR IT?

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Introduction

No person wishes to go make a filing under the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (Bankruptcy Act Canada), however occasionally it is inevitable. You might think that people who file are just those that are careless with their finances. However, with most of the people I see, it is usually an event outside of their control that pushes them over the edge.

In personal bankruptcy, things such as illness, divorce, job loss, unanticipated catastrophes, identity theft and fraud are many times the causes of insolvency. Of course, lack of proper budgeting, overspending and inappropriate uses of credit are also involved. In corporate insolvency, the #1 cause always seems to track back to management.

Insolvency filings happen every year. In 2018, a total amount of 128,846 insolvency filings were made with the Office of the Superintendent of Bankruptcy (OSB). This is 2.4% more from 2017. Consumer insolvency filings increased 2.5% (125,266 filings), while company filings dropped 0.8% to 3,580.

At the very same time, people choosing to avoid bankruptcy by filing a proposal continued increasing in 2018, bringing this number to a brand-new level. Proposals represented 52.6% of consumer filings in 2017. In 2018, they expanded by 6.6% to 56% of all personal filings.

Are you considering a Bankruptcy Act Canada filing, or at least speaking to a Licensed Insolvency Trustee (formerly called a trustee in bankruptcy) (Trustee)? In order to help you start your fact-finding, I want to tell you what will happen to your bank accounts, retirement accounts and your other important financial funds. Understanding what to anticipate can assist you to stay clear of some pricey blunders.

Bankruptcy or (consumer) proposal

Being insolvent is that you are not able to settle your financial debts. People with severe financial problems can make Bankruptcy Act Canada filing by filing either for bankruptcy, a consumer proposal or Division I proposal.

Proposals are official methods controlled by the Bankruptcy Act Canada for personal filings. Dealing with a Trustee you make a proposal to:

  • Pay your creditors a portion of what you owe them over a particular time period not going beyond 60 months
  • Extend the time you need to settle the debt
  • Or a mix of both

The Proposal is made via the Trustee, who uses the money in your proposal fund to pay the cost of administration and distribution to each of your creditors their pro-rata share. A consumer proposal needs to be finished within 5 years from the day of filing.

Proposal

People with severe financial problems can apply for bankruptcy. They can also try to avoid bankruptcy by using the Proposal provisions of the Bankruptcy Act Canada.

There are numerous advantages to avoiding bankruptcy. The main differences between proposals and bankruptcy are:

  • Unlike informal debt settlement, a Proposal produces a binding discussion forum where each of your unsecured creditors has to participate in for your debt restructuring.
  • You can keep your property, including your home, if you can afford to in your budget.
  • Lawsuits against you and enforcement proceedings, such as wage garnishments, cannot begin or continue.
  • In a successfully completed Proposal, you do not need to file for bankruptcy.

Keep in mind that financial institutions have “set-off” legal rights, implying that if you declare bankruptcy or file for bankruptcy when you’re behind in payments to them, they will take the funds in your accounts to try to cover all or some of what you owe them. This is notwithstanding that there is a stay of proceedings once a Bankruptcy Act Canada filing takes place and such an offset really should not take place.

So if you are thinking of filing either for bankruptcy or a proposal, I want you to be prepared for what might happen to your financial assets.

Your bank account

In a bankruptcy, the cash in your bank account is a property which must be paid over to the Trustee. Upon your filing, the Trustee will put all your banks on notice to provide the funds in any accounts maintained with them to the Trustee. As noted above, the bank may very well offset cash in your savings or chequing account against the money you may owe them, including credit card debt.

In a Proposal, you do not lose control of the money in your bank accounts. Rather, they are considered by the Trustee in formulating the type of Proposal you should offer your creditors. Remember, your Proposal must offer your creditors a better alternative than your bankruptcy would. However, even though there is a stay of proceedings invoked once you file your Proposal, it is not uncommon for a bank where you maintain an account and to whom you owe money, to take the money in your account and offset it against what you owe them.

So the moral of this story is that you are best to have bank accounts at financial institutions to whom you do not owe any money.

Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Deferred Profit Sharing Plan (DPSP)

In a bankruptcy, your RRSP, RRIF or DPSP are excluded from seizure. However, the Trustee is entitled under the Bankruptcy Act Canada to receive the equivalent to any amounts contributed to these accounts in the 12 months preceding your filing date. In a Proposal, this 12-month amount must be included by the Trustee in the calculation of what amount your Proposal should offer your creditors.

Canada Pension Plan (CPP) and Old Age Security income (OAS)

Canada Revenue Agency (CRA) is the only one permitted to garnish your CPP earnings if you have an unpaid personal income tax. By filing either for bankruptcy or a Proposal, the stay of proceedings will be invoked and CRA will have to stop the garnishment of your CPP and you will get the CPP payments you are qualified for.

However, the earnings obtained from CPP and OAS will certainly be taken into account by the Trustee in determining if you have any surplus income payment obligation in bankruptcy. In a Proposal, that amount also has to be considered in developing your Proposal.

Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and other non-registered account investments

In a bankruptcy, just like any other non-exempt property, the amount held in your TFSA and any other non-registered investment account must be paid to the Trustee. In a Proposal, these amounts need to be taken into account in determining what type of Proposal to make. It may very well be that these accounts are collapsed in order to help fund a Proposal.

Similarly, RESPs are not excluded in personal bankruptcy. In a Proposal, the amount must be considered as an asset in calculating how much must be offered in your Proposal to stand a chance for success.

The reason that an RESP is not excluded from seizure in bankruptcy is relatively straightforward. Your child does not acquire ownership or other entitlement to the RESP funds as parents can take possession of the funds prior to the child becoming a post-secondary school student. For that reason, it is the parents who have ownership of the funds.

Consequently, the Trustee of an insolvent mother or father that has an RESP can collapse it. If the parent in bankruptcy wants the RESP to not collapse, adequate arrangements need to be made with the Trustee for the equal amount of funds in the RESP at the filing date be paid to the Trustee for the bankruptcy estate and the bankrupt’s creditors.

Annuity revenue in bankruptcy

Annuities are agreements where you pay a company (normally an insurance company) a specific amount, in order to get regular monthly payments for a specific period of time or for the remainder of your life.

If an annuity contract is properly set up with an insurance company, it will be exempt from seizure in bankruptcy. However, the income stream it produces will be considered by the Trustee in determining whether the bankrupt person has a surplus income obligation.

Your RRIF can also be considered as an annuity as it provides a legislated stream of payments. The RRIF is exempt from seizure in a bankruptcy, other than for any contributions in the 12 months immediately prior to filing. Like an annuity, the entitlement to payments will be considered by the Trustee in doing the surplus income calculation.

In a Proposal, you don’t give up ownership of an annuity contract or RRIF, but the income must be considered in preparing a suitable Proposal.

Bankruptcy Act Canada summary

Do you have financial problems? Do you not have enough money to pay your bills in full when due?

As a Trustee, we are the only professionals licensed, authorized and supervised by the federal government to offer insolvency advice and to implement solutions under the Bankruptcy Act Canada. A consumer proposal is a federal government licensed debt settlement plan to eliminate your debt. We will help you to select what is best for you to free you from your debt issues.

Call the Ira Smith Team today so we can eliminate the anxiousness, tension, discomfort and pain from your life that your cash problems have caused. With the unique roadmap, we develop just for you, we will promptly return you right into a healthy and balanced problem-free life.

Call the Ira Smith Team today. We have generations and decades of experience helping people and companies looking for debt restructuring and a debt settlement plan to AVOID bankruptcy.

You can have a no-cost consultation so we can work with you to fix your money troubles. Call the Ira Smith Team today. This will certainly allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

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ONTARIO BANKRUPTCY DISCHARGE CERTIFICATE: CANADIAN BANKRUPTCY LAW

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Ontario bankruptcy discharge certificate: Introduction

I have written before on the more practical aspects of Ontario bankruptcy discharge certificate issues and process within Canadian bankruptcy and insolvency law. The most recent blogs are:

  1. BANKRUPTCY DISCHARGE: THE TOP 8 THINGS THE BANKRUPTCY COURT WILL CONSIDER ON ANYONE’S BANKRUPTCY DISCHARGE APPLICATION – September 13, 2017
  2. GAMBLING DEBT BANKRUPTCY: CAN GAMBLING DEBT BE DISCHARGED IN BANKRUPTCY? – January 31, 2018

I recently reviewed the Ontario Court of Appeal decision in Cole v. RBC Dominion Securities Inc., 2017 ONCA 1009. This case is very interesting as it highlights an issue that we often don’t talk enough about when advising a person on what they might expect at their hearing under Canadian bankruptcy and insolvency law.

The facts

Henry Cole, age 52, had a Bankruptcy Order made against him in 2011 upon motion by Royal Bank of Canada (“RBC”), after he misappropriated $5 million from clients while working as their investment advisor. While in bankruptcy, he had a net monthly income of $14,600, resulting in surplus monthly income of $12,500. He nevertheless failed to make any surplus income payments.

To understand what surplus income in a bankruptcy is, see my June 1, 2016 vlog titled WHY SURPLUS INCOME IS SO POPULAR UNTIL YOU ARE FORCED INTO BANKRUPTCY.

The Ontario Court of Appeal (“ONCA”) upheld the two lower Court decisions

As is the case in bankruptcy matters, Mr. Cole’s bankruptcy discharge hearing came before the Master in Bankruptcy Court who also sits as the registrar in bankruptcy. Mr. Cole appealed the Master’s decision (discussed below) unsuccessfully to a Judge of the Bankruptcy Court. The Judge dismissed Mr. Cole’s appeal, thereby upholding the Master’s decision. As indicated above, the ONCA agreed with the Judge (and the Master) in dismissing Mr. Cole’s appeal.

Now for the interesting stuff!

Now for the interesting stuff. The Master determined that there was enough evidence to show that Mr. Cole, as a bankrupt, committed various bankruptcy offenses. The Master determined facts for which discharge may be refused, suspended or granted conditionally, under Section 173(1) of the Canadian bankruptcy and insolvency law called the Bankruptcy and Insolvency Act (Canada) (“BIA”).

The Master determined that Mr. Cole had failed to provide information to enable the Licensed Insolvency Trustee to calculate surplus income. Mr. Cole also conceded to the following facts:

  1. his assets upon bankruptcy were not of a value equal to fifty cents on the dollar on the amount of his unsecured liabilities. Mr. Cole gave no evidence why he should not be held responsible;
  2. he failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet his liabilities; and
  3. he brought on, or contributed to, his bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of his business affairs

With these findings, the Master, under Section 172(2) of the BIA, had to not grant an absolute discharge and to:

  1. refuse the discharge of a bankrupt;
  2. suspend the discharge for such period as the court thinks proper; or
  3. make the bankrupt, as a condition of his discharge, to do such acts, pay such moneys, consent to such judgments or comply with such other terms as the court may direct.

I must point out that the options available to the Master are not mutually exclusive. So, just like in Mr. Cole’s case, you could have the Court come up with a mixture of a suspension and a condition to pay moneys.

What the Master decided

The Master made several decisions. First, the Master dealt with the surplus income issue. The Master ordered Mr. Cole to pay $284,346 to the Trustee as surplus income, payable at a rate of $5,000 per month.

The Master also considered Mr. Cole’s criminal behaviour and that he had real income while not working any longer as an investment advisor. Given the amount of Mr. Cole’s liabilities, and for the integrity of the Canadian bankruptcy system, the Master ordered as further conditions that:

  1. Mr. Cole pay an extra $5,000 per month to the Trustee for a further six years for a total more payment of $360,000; and that
  2. his discharge from bankruptcy be suspended for two years.

The dismissed appeals

Mr. Cole argued before first the Judge, and then the ONCA, primarily that the Master’s treatment of surplus and other income was in error. He also argued that the Judge’s finding in dismissing his appeal was an error. The ONCA disagreed and dismissed his appeal.

ontario bankruptcy

So what is the lesson to be learned?

It is important for the Trustee, when sitting down with the person contemplating an insolvency proceeding, to understand all the facts. By properly understanding all the facts, we can provide proper professional advice and guidance.

Someone who had a facts situation like Mr. Cole, we would have strongly advised him or her to avoid bankruptcy and to contemplate performing a Division I Proposal to compromise his debts. The reasons we would have advised this are:

  1. the debtor has real income to successfully do a Proposal;
  2. Mr. Cole never would have qualified for an absolute discharge from bankruptcy given his facts situation and any discharge conditions would be onerous;
  3. avoiding the ongoing calculation of surplus income up to the time of his bankruptcy discharge hearing; and
  4. with the support of his major creditors, it is possible that the Proposal amount could have been somewhat less than $644,000 (subject to knowing the value of his assets at the date of bankruptcy).

he person needs our advice in plain English before making any decisions

We also would have advised the debtor the type of the rough ride they were in for if they chose to go ahead with the bankruptcy option. We would have explained in detail how we believed the Canadian bankruptcy and insolvency law system would treat him, so at least there would be no surprises during the bankruptcy administration.

Many times people we speak with do not like to hear the truth, and begin “Trustee shopping” until they find a Trustee that does not tell them all the bad news up front. People like this believe that if they aren’t told it, it can’t happen. This is a mistake. We believe everyone deserves to know the truth about their situation, to help them make the best decision possible.

In Mr. Cole’s case, not only did he find out the hard truth from the Court, he then spent money on his lawyers appealing the Master’s and Judge’s decisions. That obviously was extra money spent with no benefit received.

FULL DISCLOSURE: Our firm has never met with Mr. Cole and was not considered to be his Trustee.

What to do if you have too much debt

Declaring personal bаnkruрtсу in Canada is a big deal. So is getting your Ontario bankruptcy discharge certificate. While it can be a way out for the honest but unfortunate debtor who is deep in debt and looking for a new start, there are rules, rеѕtrісtіоnѕ and fіnаnсіаl rаmіfісаtіоnѕ.

That is why the Ira Smith Team always looks first to see if one of the bankruptcy alternatives would be a better fit for you. The alternatives we look at with you include:

The Ira Smith Team has 50+ years of cumulative experience dealing with issues just like the ones that you’re facing. Give us a call today and let us give you back peace of mind Starting Over, Starting Now.

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GAMBLING DEBT BANKRUPTCY: CAN GAMBLING DEBT BE DISCHARGED IN BANKRUPTCY?

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Gambling debt bankruptcy: Introduction

Since there are various provincial run casinos, horse racing and lotteries, we are often asked if you can have a gambling debt bankruptcy. More importantly, what clients really want to know is, can gambling debt be discharged in bankruptcy?

Gambling debt bankruptcy: What is gambling debt in bankruptcy?

We first must go back to basics. There are two types of gambling debts:

  1. Debts for loans taken out, either direct loans or through credit cards; and
  2. Loans directly from a casino with “markers”.

In the first case, the loans or credit card debts could be direct – using the cash advance to gamble with, or indirect – used to make purchases for the necessities of life because the person gambles away their employment or other income. The use of markers at a casino is obviously a direct gambling debt.

In the context of this discussion, it does not matter if the gambling debts are direct or indirect. As discussed in this blog, the gambling debts are legally enforceable. As such, gambling debts in bankruptcy (or a proposal) are claims provable under the BIA.

Gambling debt bankruptcy: Gambling debt and bankruptcy

You can declare bankruptcy on a gambling debt. So is it really as simple as declaring bankruptcy? The answer is no. There are various issues that you must first consider with the licensed insolvency trustee during your first free consultation. The major issues are:

  1. Your assets
  2. What is your annual income
  3. Have you ever been bankrupt before
  4. The nature and amount of your other debts because you lost cash in gambling
  5. Have you not been paying your taxes because of gambling losses and Canada Revenue Agency is also a major creditor
  6. Getting gambling addiction advice
  7. Getting a discharge from bankruptcy
  8. Is there another option available to you in order for you to avoid bankruptcy

Gambling debt bankruptcy: There are many issues in addition to just getting gambling addiction debt help

If you are insolvent and you choose the bankruptcy route, you will face the following issues:

  1. If you have non-exempt assets or equity in non-exempt assets, your interest in those assets will be taken over by your trustee. For example, your interest in the matrimonial home would come to the trustee and now your spouse, or other friend or relative, would have to purchase your interest back to the cash could go to your creditors. Go explain that to your spouse!
  2. Earning more than essentially a poverty line amount will cause you to have to pay surplus income to the trustee for the benefit of your creditors. If you are a first time bankrupt, with surplus income, you will have to pay the surplus income for 21 months. You can’t seek a discharge from bankruptcy until then.
  3. If you have been bankrupt before, the 21 months becomes 36 months.
  4. Once you show that your debts are due to gambling losses, you can expect your lenders and credit card companies to oppose your discharge from bankruptcy.

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    gambling debt bankruptcy

Gambling debt bankruptcy: Including your discharge from bankruptcy and your gambling addiction

  1. If you owe a large amount of unpaid income tax to Canada Revenue Agency, you can expect them to vigorously oppose your discharge from bankruptcy.
  2. Your trustee must oppose your discharge from bankruptcy when your bankruptcy is a result of gambling debt. The reason is under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3(“BIA”), there are various facts, if proven, it is impossible to get an absolute discharge from bankruptcy.
  3. Section 172 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3(“BIA”) allows the Court to make an order of discharge which is either absolute, conditional or suspended. Where a fact under s. 173 of the BIA is proven, an absolute discharge is precluded.
  4. Gambling which brings on or contributes to bankruptcy is a recognized s. 173 fact. (BIA, s. 173(e)). That is why your trustee would have to oppose your discharge from bankruptcy.
  5. In reaching any decision on your discharge, the Court and the trustee need to maintain the integrity of the Canadian insolvency system. You can assume that your discharge will at least be conditional upon you paying a certain sum of money to your trustee for the benefit of your creditors. A bankruptcy discharge suspension for a certain time after you fulfill the payment condition is also possible. If your behaviour was especially egregious, your discharge from bankruptcy may be outright refused.
  6. The bankruptcy discharge hearing is a full Court hearing. You will be well advised to retain experienced insolvency legal counsel to come with you to Court. This is an expense you may not even be able to afford.
  7. If you want to have a chance in obtaining a discharge from bankruptcy, you will also have to show that you are taking concrete steps to deal with your gambling addiction by getting gambling addiction advice. That will include proving in Court that you enrolled, attended and completed at least one recognized rehabilitation program for gambling addicts.

Gambling debt bankruptcy: Going bankrupt doesn’t seem to be an easy fix

You are right about that. As if the above 11 issues weren’t enough, depending on your specific circumstances, there could be more. Therefore, I always recommend to debtors that if there is hope for the person to be able to successfully restructure through either a consumer proposal or Division I BIA Proposal, that must be seriously looked at and considered preferable to going bankrupt.

Gambling debt bankruptcy: What must you do if you have gambling debts and are considering personal bankruptcy?

Do you have unmanageable debts from gambling, other addictions or for any other reason? Be proactive; it’s time to rehabilitate yourself and deal with your debt while you still have alternatives.

The Ira Smith Team has years of experience assisting Canadians like you, getting you back on track to debt free living. Call Ira Smith Trustee & Receiver Inc. today so that we can help you regain control of your life and be stress-free, Starting Over, Starting Now.

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CANADIAN BANKRUPTCY AND INSOLVENCY LAW: WHAT TO THINK ABOUT BANKRUPTCY

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Introduction

The holiday gift buying season is over. Next month the credit card bills will be arriving. Maybe you overspent on holiday gifts this year. Maybe you had too much debt to start with, and you know this new spending will put you over the top. Perhaps you already have questions about Canadian bankruptcy and insolvency law.

Perhaps you spent wisely but modestly because you were acutely aware of your financial problems. Maybe you never were an uncontrollable spender. Perhaps a specific damaging event outside of your control caused you to wind up deep in the red. So far you have worked hard to overcome the financial challenges, but for the first time you are thinking that you should read up on Canadian bankruptcy and insolvency law.

Either one unfortunate life issue or one foolish monetary choice is all it could take. Despite how you arrived, there is no simple escape, except perhaps winning the lottery or an unexpected inheritance.

Bankruptcy is one alternative

If you’ve fallen under just what seems like impossible financial debt and you have no chance to get out of it, bankruptcy is one alternative. It’s not constantly an excellent one– and never ever one to be taken gently.

Below is exactly what you should understand prior to making any kind of choices about filing personal bankruptcy.

Long-term results

Almost 63,372 people declared bankruptcy in 2016, an action that will certainly have an effect on them for a long time to come. They have certainly started learning about the Canada bankruptcy and insolvency law regime.

While declaring bankruptcy relieves debt pressures caused by decisions and/or issues of the past, it could adversely influence your future. The record of your filing for bankruptcy will certainly stay on your record for up to 10 years.

Numerous companies run a credit check on job applicants. The record of your bankruptcy will come up. Potential employers have either their own bias or unique interpretation about this. Perhaps the job you are applying for requires you to be bonded. Faced with many qualified applicants, a potential employer may very well choose the person who does not have a bankruptcy on their record. As I have previously written, it can likewise have an influence on insurance coverage costs.

The Canadian bankruptcy and insolvency law system is designed to financially rehabilitate the honest but unfortunate debtor. As a licensed insolvency trustee, I certainly believe in our system. However, it is also my role to point out to anyone considering personal bankruptcy, there are many issues to consider before taking this choice.

Evaluating your alternatives

For some people bankruptcy many not be the only option. Just how do you recognize its the right one for you? What are the options under Canadian bankruptcy and insolvency law?

Prior to making any type of choice about filing for bankruptcy, you should first contact a licensed insolvency trustee (LIT) in your area for a free consultation. The LIT will review with you your current financial situation and ask you various questions. The purpose is for the LIT to gain an understanding of your current financial position and how you got there. Based on this information, the LIT will be able to give you a preliminary opinion about what your realistic options are.

In general, the options available to someone experiencing difficulty in paying their debts on time include: (i) credit counselling; (ii) debt consolidation; (iii) (consumer) proposal; and (iv) personal bankruptcy.

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canadian bankruptcy and insolvency law

The proposal option used for half of all personal insolvency filings in 2016

I am using brackets around the word “consumer” when talking about the proposal option. A consumer proposal is available to anyone who owes the amount of $250,000 or less, not including the amount you owe on loans registered against your home. If you owe more than this $250,000 threshold, a proposal may still be the most viable option for you. That proposal process just falls under a different section of the Bankruptcy and Insolvency Act (Canada) (BIA). It is not called a consumer proposal, but rather a Division I proposal. The BIA governs Canadian bankruptcy and insolvency law.

As I mentioned above, in 2016, 63,372 Canadians filed personal bankruptcy. However the total number of people who filed an insolvency proceeding in 2016 in Canada was 126,843. So what did the other 63,471 people do? They filed a proposal. So roughly half of the people who filed an insolvency proceeding in Canada in 2016 to solve their debt problems, were able to avoid bankruptcy.

In 2016, 63,471 individuals filed a (consumer) proposal. This bankruptcy alternative is an organized settlement of your financial debts for an amount less than the total you owe. You can take up to 60 months of regular monthly payments to complete your (consumer) proposal.

The proposal provisions of Canadian bankruptcy and insolvency law allow those people “in the red” to keep their assets they can afford to continue paying for, including their home. At the same time, they made a monthly payment to the LIT to be distributed to their creditors for their past debts that they could not afford to repay.

Canadian bankruptcy and insolvency law: Beginning the insolvency filing process

If you believe that bankruptcy may be for you, your first action is to speak with a LIT. Remember, you are not only looking to them for solutions. The LIT is not only interviewing you. You are also interviewing the LIT to decide if this is someone you feel you can work with.

If you don’t feel comfortable after speaking to that first LIT, there is nothing wrong with you getting a second opinion from a different LIT. Not only is that not anything wrong with that, I urge it. You are going to be working with your LIT for quite some time. Make sure that you believe it will be a comfortable relationship for you.

The bottom line is if you got in over your head with money, you do have alternatives. Get an expert viewpoint on just what your options might be under Canadian bankruptcy and insolvency law. If you can’t make your monthly payments, you need professional help; and you need it now. Contact a professional Toronto bankruptcy trustee.

The Ira Smith Team has a cumulative 50+ years of experience helping people who are facing a financial crisis and we deliver the highest quality of professional service. Make an appointment for a free, no obligation appointment today and Starting Over, Starting Now you’ll take your first steps towards financial freedom.

We wish all of our readers and subscribers a healthy, happy and prosperous New Year 2018.

canadian bankruptcy and insolvency law

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Brandon Blog Post

ONLINE BANKRUPTCY SEARCH: THIS CANADIAN INSOLVENCY RECORDS SEARCH RENEWAL (IRS) WON’T CHASE YOU FOR MONEY!

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Online bankruptcy search: Introduction

This blog is about the Canadian government’s plan to update its online bankruptcy search function. It is an update to our November 15, 2017 Brandon’s Blog titled: “BANKRUPTCY FILINGS FREE PUBLIC RECORDS: WILL FREE SEARCHES TURN YOU INTO A PERSONAL BANKRUPTCY RECORDS SLEUTH FOR THE TRUTH”.

As you can imagine, I have a schedule for creating Brandon’s Blog. I created the above-mentioned blog and related video on the Office of the Superintendent of Bankruptcy (OSB) insolvency records search renewal (IRS) program and posted it for publishing on November 15. After doing so, the OSB published an update on its IRS program. The purpose of this blog is to give you the updated information.

The OSB November 2017 update offers more information about the IRS post it published in August 2017.

Online bankruptcy search: Updating the technology

The OSB has stated that its updated IRS system will consist of modern-day safeguards. The new IRS will secure the private information of people or companies who have either filed or become bankrupt or who have filed a consumer proposal or Division I proposal.

Online bankruptcy search: The legislative need

Under the Bankruptcy and Insolvency Act (BIA), the Superintendent of Bankruptcy is required to keep and make available a public document of all personal and corporate bankruptcies and proposals. The public document, includes the names of the insolvent debtors given statutory stay of proceedings from the commitment to pay their financial debts.

This record consists of vital information needed to administer the bankruptcy system. It is also important for the running of an efficient and well-functioning Canadian marketplace.

Online bankruptcy search: The purpose of the current system

The current Bankruptcy and Insolvency Records Search data source offers Canadians with access to search the public database for specific people or companies that have submitted a (consumer) proposal or bankruptcy, as the case may be. It is also for creditors to see if any party applying for credit are in an insolvency proceeding.

Online bankruptcy search: Uses of the current system

The OSB’s database allows for searches for:

  • creditors to take necessary activity with respect to specific insolvency filings;
  • insolvent debtors, either an individual or Directors of a company, to acquire information about their bankruptcy or proposal;
  • Licensed Insolvency Trustees (LIT) to properly administer insolvency estates;
  • people and companies making informed credit choices on people or organizations applying for loans or trade credit.

Online bankruptcy search: How many times a year is the current system searched?

Each year the current database, (which has a cost of $8 each search for public users), is searched about 800,000 times by individual Canadians, including LITs (for whom there is no charge). Any member of the public who pays the charge could browse the government insolvency records. The present system does not limit access in any other way.

Online bankruptcy search: The proposed new IRS

The OSB will be changing the current system. It is outdated by today’s privacy standards. The OSB will create a new IRS. While still attending to the legislative needs to give access to a public document of bankruptcies, it will substantially make individual information of debtors more secure.

As compared to the old system, the IRS will consist of many steps developed to particularly restrict the disclosure and use of the individual’s details of the debtors who file for an insolvency proceeding.

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online bankruptcy search

Online bankruptcy search: New IRS protections

Examples of the brand-new protections which are not available in the current system, to shield disclosure of individual information, are:

  • Individual information entered will just be confirmed, not offered in a search result.
  • Searchers will need to recognize the first, last name, as well as date of birth of a debtor. This is required to get verification of an individual in bankruptcy or who has filed a (consumer) proposal.
  • The new system will no longer supply access to bankrupts’ documents that do not match the search requirements. The new IRS will be search specific, and not providing a complete list of names matching search criteria.
  • For every right search, a decreased measure of individual information will certainly be returned in the public search results page. Home addresses and complete postal codes will no longer be included in search results.
  • The public document search retention will be lower. The duration for the storage of details will be 10 years post-discharge.
  • The new system will consist of innovations designed to decrease the possibility for unexpected uses of the information. For example, machine-based searches.

Online bankruptcy search: Meeting the needs of LITs

The OSB has talked to the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) as part of developing the IRS. The OSB has dealt with comments received thus far. The IRS layout will certainly make best use of technology to protect personal information. The new system will fulfill the specific needs of LITs, in meeting their insolvency estate management and legal requirements.

It must be kept in mind that the OSB has no plan to remove the $8 charge from the current system before its being retired. The first introduction of the fee was designed exclusively to sustain the OSB’s operating expenses in developing and keeping the existing system.

The new IRS will consist of many measures to appropriately reduce disclosure and increase the defense of personal information of debtors. The OSB says that it has no proof that a service charge with the brand-new IRS would better safeguard debtor information against improper use.

Online bankruptcy search: This IRS won’t chase you for money!

As a result, the OSB says it will look at and suggest getting rid of the historic governing arrangement which permitted the charging of a cost to get access to the public record. The OSB states that this will align with Treasury Board Policy. That is why this IRS, is not planning to ever chase you for money!

Online bankruptcy search: What to do if you think you might need an insolvency process

Are you or your company insolvent and in need of restructuring? Are you scared to become another entry in an online bankruptcy search? If so, the worst thing you can do is procrastinate and not take positive steps to remedy your situation. Contact the Ira Smith Trustee & Receiver Team. If we meet with you early on, we can create a restructuring and turnaround strategy designed specifically for you.

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