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BANKRUPTCY MEANS: SERIOUSLY, CAN IT EVER MEAN BEGGING FOR A BANKRUPTCY ANNULMENT?

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Bankruptcy means introduction

From my perspective, bankruptcy means that a person or company has either filed an assignment in bankruptcy or the court has issued a bankruptcy order against the debtor. The debtor has taken the voluntary action to seek relief and the benefits obtained by doing so under the Bankruptcy and Insolvency Act (Canada) (BIA). Or a court, based on the application of one or more creditors, has ordered that the BIA applies and the debtor is adjudged bankrupt.

As I have written in the past, this is different from insolvency. Insolvency is the financial state where a company or person cannot meet their liabilities as they come due or whose assets, if sold at fair value, would not be enough to pay off all of the liabilities. Bankruptcy is a legal state.

I recently read an article about Mr. Stanley Frank Ostrowski aka Frank Ostrowski, who lives in Winnipeg, Manitoba. Mr. Ostrowski filed an assignment in bankruptcy on February 12, 2019. He listed his assets having a value of $250. He stated that his liabilities were $259,621. This is his second bankruptcy. His first was in 1983 and he received an absolute discharge in 1985.

The article states that Mr. Ostrowski has now made an application to the court to annul his bankruptcy. This Brandon’s Blog looks at: Is it possible to annul a bankruptcy and under what circumstances? Put another way, is it really the case that bankruptcy means you can file for bankruptcy and then say oops, I didn’t really want to file? I am not really sure that is how bankruptcies work.

The reasons why Mr. Ostrowski thinks bankruptcy means it can be annulled

In May 1987, a jury decided that Mr. Ostrowski was guilty of first-degree murder. In March 1992, he was found guilty of possession of cocaine for the purposes of trafficking. He was sentenced to 15 years in prison, concurrent with his life sentence for murder.

He served 23 years, 2 months and 24 days in prison. He got out of jail on December 18, 2009. In 2014, then federal justice minister Peter MacKay asked Manitoba’s Court of Appeal to review the case. Then justice minister MacKay believed that there was a miscarriage of justice with respect to the murder conviction.

In a November 2018 decision, the Court of Appeal set aside the conviction after it discovered a miscarriage of justice took place when two vital details were not revealed to the defence or the court. While the court set aside his conviction, it did not acquit him. In their decision, the three-judge panel said they thought there was enough proof against the accused, which the court could have found him guilty even if full disclosure had been made.

The court also held that it would be unfair to have another trial given that it had been 32 years since the shooting. The court also entered a judicial finding that the charge is stayed from further prosecution.

In June 2020, Mr. Ostrowski retained legal counsel to commence an action for damages because of his wrongful conviction. His lawyers have not yet launched the claim but they plan to. The article said that he will be seeking $16 million in compensation.

Now he wants to have his 2019 bankruptcy annulled. He believes he has a realistic chance of receiving sufficient compensation to be able to settle all his debts. So with all this background information, do I think his bankruptcy means that he can get his bankruptcy annulled?

Bankruptcy means: what happens if I declare bankruptcy?

I have written before about what happens when a person or company declares bankruptcy. There is a responsibility to make full disclosure to the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) all of your assets, liabilities, income and expenses. The debtor also must give to the Trustee all provincially non-exempt assets so that the Trustee can sell them for the benefit of the creditors.

In his bankruptcy filing documents, Mr. Ostrowski did not make mention of this potential lawsuit that had not yet been launched. He also did not indicate that he had the right to such an asset. If he had, there would be two realistic options.

He could have taken the position that the amount of recovery in a lawsuit not yet launched is unknown and speculative. So, the action should only be valued at $1 as a placeholder. By doing so, he would have made full disclosure to his creditors and to his Trustee as to the existence of this potential asset.

If Mr. Ostrowski had disclosed this asset and valued it at more than $259,371, then he would not have met the asset test for being insolvent and potentially would not have been able to file for bankruptcy. I say potentially because, in his affidavit, Mr. Ostrowski makes no mention of what his income and expenses were at the time of filing for bankruptcy or now. Mr. Ostrowski does not disclose in his affidavit whether or not he has to pay any surplus income to his Trustee for the benefit of his creditors.

Can bankruptcy be annulled?

Annulling a bankruptcy is more than just cancelling a bankruptcy. It is erasing it to the point as if it never happened. It is a complete elimination of the bankruptcy. If it was the person’s first bankruptcy, and it was annulled, they could honestly say they never were bankrupt.

To figure out what are the odds that Mr. Ostrowski will be successful in his application to annul his bankruptcy, we need to look at several factors. First, what reasons does Mr. Ostrowski say are the basis as to why his bankruptcy should be annulled?

In his affidavit sworn June 8, 2020, the reasons he gives are:

  1. “I have a realistic chance of receiving sufficient compensation to be able to settle my debts with my creditors in a manner that would be more advantageous to the creditors than if I pursue bankruptcy.”
  2. “I am advised by…” my lawyer “…that when he advised…” my Trustee, “… of my intention to seek an order annulling my assignment in bankruptcy…” my Trustee “…did not object to it.”.

That is it. No other reasons. To Mr. Ostrowski, his bankruptcy means that maybe perhaps he can do better for his creditors than they would get in his bankruptcy and his Trustee doesn’t object to his trying to annul his bankruptcy.

With all due respect to his legal counsel on this bankruptcy annulment application who only has what he has to work with, I rate those reasons somewhere between weak and lame! The bankruptcy annulment process was not designed for the convenience of the bankrupt.

Bankruptcy means when will a court annul a bankruptcy?

First, Section 181(1) of the BIA gives the court the authority to annul a bankruptcy. It says:

“181 (1) If, in the opinion of the court, a bankruptcy order ought not to have been made or an assignment ought not to have been filed, the court may by order annul the bankruptcy.”

This authority is discretionary. Generally, the court will only annul an assignment if it is shown that:

  • The debtor was not insolvent at the time of filing.
  • It was an abuse of process of the court
  • The debtor was trying to commit a fraud on his or her creditors.

If Mr. Ostrowski’s affidavit is the only evidence submitted in his application to annul his bankruptcy, he has not shown that the bankruptcy assignment “ought not to have been filed”.

Second, there have been cases where an assignment in bankruptcy has been annulled. The list of general reasons why the court found that a bankruptcy order ought not to have been made or an assignment ought not to have been filed are:

  1. An assignment in bankruptcy was completed and was to be held in escrow while the debtor negotiated with his creditors. The assignment was only to be filed if a resolution could not be worked out. A deal was reached but the assignment was filed in error. In other words, a verifiable mistake.
  2. The bankruptcy was of no benefit to the creditors. The creditors would receive a distribution but would bear all the costs of the bankruptcy administration.
  3. The debtor was restrained by court order from dealing with all of his assets without giving his estranged wife seven clear days’ notice and he filed an assignment in bankruptcy with no notice given.
  4. Joint assignment by a husband and wife where it was evident that a large amount of debt was from the husband’s unincorporated business and the wife was not in partnership with him.
  5. A bankruptcy assignment purportedly filed by an infant!
  6. The second assignment filed before the bankrupt received a discharge from the 1st bankruptcy.
  7. The husband filing an assignment in bankruptcy in an attempt to disgorge himself of his assets while embroiled in bitter family law proceedings.
  8. Directors of a company whose assets were already being administered under a court-appointed receiver having filed an assignment in bankruptcy for the company.

In all the above situations, the court DID annul the bankruptcy. The court did not agree that bankruptcy means it was the right choice in those situations.

Bankruptcy means when will a court NOT annul a bankruptcy?

Third, there have been cases where an assignment in bankruptcy was NOT annulled. The list of general reasons why the court found refusing the annulment request was appropriate are:

  1. The sole purpose of the bankruptcy was to rearrange the priorities of certain creditors.
  2. A bankruptcy to defeat the enforcement attempts of a judgment creditor.
  3. The sworn statement of affairs failed to show the name and amount of a creditor.
  4. The debtor had no assets.
  5. Debtor was insolvent and did not bring an application to annul the bankruptcy until 4 months after filing an assignment in bankruptcy. The court decided that an application to annul a bankruptcy only because the debtor did not wish to continue with the bankruptcy process should be brought immediately after the filing of the assignment in bankruptcy.

The last reason why the court did not annul a bankruptcy, is pretty much the reason Mr. Ostrowski says he wants his bankruptcy annulled. Only in his case, he is bringing the application some 18 months after becoming a bankrupt.

Interestingly enough, that last reason was a Manitoba case, Baker (Bankrupt), Re, 1997 CanLII 23100 (MB QB). In that case, the bankrupt contended that the Trustee filed the bankruptcy documents with the Office of the Superintendent of Bankruptcy in error. However, she waited for 4 months and the court was not persuaded that the filing was an error!

In Mr. Ostrowski’s case, his reasons boil down to it will be more convenient for him! As you can probably tell by now, I don’t place a high probability of his chances of success in persuading the court to annul his bankruptcy. But then I am not the judge.

Bankruptcy means what should Mr. Ostrowski do?

The answer as to what his bankruptcy means and what Frank Ostrowski should do lies within the BIA. Mr. Ostrowski has two choices and I believe it will be what the court decides.

First, the BIA allows for a bankrupt, with the permission of the inspectors in his bankruptcy, if any, to file a restructuring proposal. He could get that started right now without any court application.

If his debts are truly over $250,000, based on the claims filed to date, then he can file a proposal under part III division I proposal under the BIA. If the claims filed are a total under $250,000, then he could file a consumer proposal. Either way, the administration would continue under the BIA.

His proposal would be a very simple one. It would essentially say that he has a claim against several parties for what his lawyer believes is $16 million. He knows he will get at least enough to pay all of his creditors in full. So, if you vote in favour of my proposal, if I win, enough money will be paid to the Trustee to pay all the creditors in full. If I don’t win, or there isn’t enough money to pay everyone in full, all creditors will share in whatever is available.

Once the restructuring proposal is accepted by his creditors and approved by the court, his bankruptcy is annulled. He will get exactly what he is asking for. His creditors will get paid presumably in full. They will not just get the chance to have their debts settled as Mr. Ostrowski states in his affidavit.

Second, section 144 of the BIA says that the bankrupt is entitled to any surplus remaining after payment of all creditor claims in full, with interest, and the cost of the bankruptcy administration. So, if Mr. Ostrowski is successful and gets $16 million, that money would go to his Trustee, after the legal costs of winning that award. The Trustee would keep what is necessary to pay all the claims in full, with interest, and the costs of the bankruptcy administration. Mr. Ostrowski would keep the rest.

I recommend the first way, the restructuring proposal route because that could get Mr. Ostrowski’s bankruptcy annulled fairly quickly, which is what he is asking for.

It will be interesting to see what the court decides. I will let you know when I find out.

Bankruptcy means summary

I hope you found this bankruptcy means Brandon’s Blog informative and interesting.

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

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

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

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days. Some people think that bankruptcy means the end of their life. Bankruptcy should be a last resort for anyone. We strive to help people and companies avoid bankruptcy. But if bankruptcy is necessary, do not think of it as the end of life. It really is a fresh new beginning. That is what bankruptcy means.

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

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

bankruptcy means
bankruptcy means
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CANADIAN BANKRUPTCIES LAWS: OPPOSITION TO TRUSTEE DISCHARGE

canadian bankruptcies laws_0

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

Introduction

Believe it or not, people search online for “Canadian bankruptcies laws” almost 500 times every month. Although the spelling looks a bit off, the point is that people are interested in Canadian insolvency laws. People also search for “Canadian personal bankruptcies laws”.

I recently reviewed an interesting bankruptcy case from British Columbia. The issue is one that does not normally find its way into the courts. The issue deals with the Trustee’s discharge from a bankruptcy administration.

So combining these disassociated events, it gave me the idea for this Brandon’s Blog.

Two kinds of discharges in a personal bankruptcy

In every personal bankruptcy, there are two kinds of discharges. In the normal course, first the bankrupt gets his or her discharge from bankruptcy. Then, when all parts of the bankruptcy administration is finished, the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee), gets its discharge.

I have previously written several blogs on the discharge of a bankrupt, but for information purposes, I will briefly summarize the issues surrounding a bankrupt’s application for discharge. Then I will describe the issues in the BC case about the discharge of a Trustee.

The bankrupt’s application for discharge

A bankruptcy discharge is when the bankrupt person is released under Canadian bankruptcy legislation from his or her financial debts. Some people think that it is filing for bankruptcy that releases the bankrupt from responsibility. This is not the situation. It is the discharge process that “discharges” the debts.

The personal bankruptcy discharge is among the key advantages of the Canadian insolvency system. The discharge is crucial to the insolvency process. Debtors, after bankruptcy, can wipe the slate clean and begin again. This is a central concept under the “Canadian bankruptcies laws”.

A personal bankruptcy discharge provides the discharge of many unsecured financial debts. Certain debts will not be discharged. They are:

  • support payments to a previous spouse or to children;
  • fines or financial charges imposed by the Court;
  • debts emerging from fraudulent behaviour;
  • student loans if fewer than seven years have passed considering that the bankrupt quit being a full or part-time student.

Notice of opposition to discharge

A bankrupt’s bankruptcy discharge application might be opposed by one or more unsecured creditors or the Trustee. This occurs if the bankrupt has not met all of his/her obligations. It can likewise happen if the insolvent has committed a bankruptcy offense. Those are acts provided in Section 173 (1) of the Bankruptcy and Insolvency Act (Canada) (BIA). The Court will assess the overall conduct of the bankrupt and provide its decision.

How bankruptcies work

There are 4 kinds of discharges:

  • Absolute discharge – The bankrupt is released from the commitment to repay the financial liabilities that existed on the day of filing for personal bankruptcy, except for the types of financial obligations indicated above.
  • Conditional discharge – A bankrupt has to fulfill specific conditions to obtain an absolute discharge. As soon as all conditions have been met, an absolute discharge is given.
  • Suspended discharge – An absolute discharge that will be given at a future date identified by the Court.
  • Refused discharge – The Court has the right to decline a discharge.

What does trustee discharge mean?

A recent case decided by The Supreme Court of British Columbia in Kelowna, BC, dealt with the issue of the discharge of a Trustee. After concluding a bankruptcy administration, the Trustee applies for its discharge. The case is McKibbon (Re), 2019 BCSC 848 (CanLII).

William Edward McKibbon is a person who went through the bankruptcy discharge process. His bankrupt’s application for discharge ultimately ended with his getting an absolute order of discharge after fulfilling his discharge conditions on February 24, 2016. His Trustee then received its discharge. The Trustee discharge date was on November 5, 2016.

Mr. McKibbon made an application to the Court for the withdrawal of the Trustee’s discharge. Section 41 of the BIA deals with the discharge of the Trustee. The case was heard on April 25, 2019, in The Supreme Court of British Columbia in Kelowna, BC. The Court’s decision was released on May 30, 2019.

Section 41(1) of the BIA states:

“Application to court

41 (1) When a trustee has completed the duties required of him with respect to the administration of the property of a bankrupt, he shall apply to the court for a discharge.”

The Trustee went through all the steps required and obtained its discharge.

Section 41(5) of the BIA says:

“Objections to be filed with court and trustee

(5) Any interested person desiring to object to the discharge of a trustee shall, at least five days prior to the date of the hearing, file notice of objection with the registrar of the court setting out the reasons for the objection and serve a copy of the notice on the trustee.”

No person objected to the Trustee’s discharge, including Mr. McKibbon. Now in 2019, he was asking the Court to revoke the Trustee’s discharge as he had certain complaints about the Trustee’s conduct.

The allegations against the Trustee

Mr. McKibbon now alleges that the Trustee’s discharge was gotten because the Trustee did not disclose all pertinent facts.

Mr. McKibbon’s allegations were that: (i) the Trustee had experienced issues in the calculation of the surplus income payable by the bankrupt in that the Trustee had miscalculated the surplus income numbers; (ii) the method by which the Trustee calculated the surplus income; and (iii) the Trustee had not finalized the bankrupt’s pre- and post-bankruptcy income tax returns because it had made errors when submitting those tax returns to the Canada Revenue Agency (CRA).

These allegations were disputed by the Trustee. The Trustee claims that the surplus income calculations were appropriate. Concerning the income tax returns, the Trustee stated that the issues relating to the income tax returns were the result of the CRA, incorrectly, re-allocating income and expenses between the pre- and post-bankruptcy periods.

Can the discharge of the Trustee be revoked?

Section 41(8) of the BIA deals with the revocation of a Trustee discharge. It states:

“Effect of discharge of trustee

(8) The discharge of a trustee discharges him from all liability

(a) in respect of any act done or default made by him in the administration of the property of the bankrupt, and

(b) in relation to his conduct as trustee,

but any discharge may be revoked by the court on proof that it was obtained by fraud or by suppression or concealment of any material fact.”.

Mr. McKibbon, in his complaint, said that the Trustee suppressed and concealed material facts.

The Judge’s decision

The Judge in his decision stated that the analysis of BIA section 41(8) goes back to 1899. The case law requires that to revoke the discharge of the Trustee, there needs to be an aspect of fraud in the suppression or concealment.

The Judge also referred to a 2011 decision in the Superior Court of Québec which reached a similar conclusion. That case is Re Delorme, 2011 QCCS 236 (CanLII).

Mr. McGibbon’s position was that these authorities are mistaken and made the wrong decision. He did so with no authorities have actually been pointed out to bring into question those verdicts!

The Judge concluded that in order for there to be a “suppression or concealment of any material fact”, there has to be an element of fraud. He also concluded that Mr. McGibbon had the onus to provide evidence that the Trustee purposely did so with the intent to defraud the court, the creditors or the bankrupt. He found that as Mr. McGibbon failed to do so, he did not have to dig into the details of the allegations.

The Judge also noted that Mr. McGibbon had a bankruptcy discharge hearing, and the Court set the amount of surplus income he needed to pay as part of his conditional discharge from bankruptcy. Therefore, any issue surrounding the surplus income calculation by the Trustee was eliminated with this condition that Mr. McGibbon fulfilled.

Accordingly, the Judge found that there is no basis whereupon any kind of deceptive behaviour can be presumed for the Trustee in failing to reveal any material facts in its discharge application. Therefore, the application to revoke the Trustee’s discharge was rejected. Finally, the Judge allowed for the Trustee to make any submissions it wished to concerning costs to be paid by Mr. McGibbon.

Are you thinking about using “Canadian bankruptcies laws”?

Is your business in financial distress because you cannot collect your billings? Do you not have adequate funds to pay your creditors as their bills to you come due?

If so, call the Ira Smith Team today. We have decades and generations of experience assisting people looking for financial restructuring, a debt settlement plan and to AVOID bankruptcy.

A restructuring proposal is a government approved debt settlement plan to do that. We will help you decide on what is best for you between a restructuring proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

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

 

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HOW BANKRUPTCIES WORK FOR BUSINESSES IN TORONTO AND VAUGHAN ONTARIO CANADA

How bankruptcies work for businesses: Introduction

how bankruptcies work for businesses

How bankruptcies work for businesses: Introduction

Recently I have written several blogs focussing on insolvency and specifically the topics of consumer proposal and personal bankruptcy. To round out the discussion, this Brandon’s Blog discusses how bankruptcies work for businesses in Canada.

To be clear, the goal for either personal bankruptcy or corporate bankruptcy is to avoid bankruptcy. We have many tools in our toolbox to help people and companies avoid bankruptcy through restructuring. It is only when the person has stewed over their personal or business problems for too long that they come to us when it is too late. When it is too late, our hands are tied for creative problem-solving.

How bankruptcies work for businesses: Where we start

When a business owner comes to our office for a free consultation, we start with some basics. The first thing we do is ask certain questions that will allow us to get a financial snapshot of the business. We need to know about the assets and liabilities of the business.

We need to understand who all the creditors are and what the assets are. Which creditors may have a deemed trust claim or a secured claim against the assets. What is the total and nature of the unsecured debts?

That information tells us what choices we may have in helping the business recover: is an informal debt settlement restructuring possible;

what do we think about the likelihood of a formal restructuring under either the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) or the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA); or is the business too far gone and therefore bankruptcy or just shutting down are the only options remaining.

How bankruptcies work for businesses: The proprietorship

If the business is unincorporated, then the person is carrying on their business in the form of a proprietorship. They are conducting business in their personal name. They may use a business style, but the legal reality of a proprietorship is that the individual, in their personal capacity, is carrying on business. So, the assets and liabilities that are created in the business, is owned by and is the responsibility of the person.

So, in this situation, it will be a personal insolvency discussion. The available remedies will be:

  • an informal restructuring;
  • (consumer) proposal debt settlement plan; or
  • personal bankruptcy

If you wish to find out more about personal insolvency, or how bankruptcies work for individuals, you can read some of my previous blogs. Good examples are WHAT IS THE DIFFERENCE BETWEEN BANKRUPTCY AND INSOLVENCY CANADA or CANADIAN DEBT SOLUTIONS: AVOIDING THE BANKRUPTCY PROCESS MIGHT BE THE RIGHT THING.

How bankruptcies work for businesses: Incorporated businesses

So now we have gone through the starting point I just described and we have determined that we are dealing with an incorporated business. We first focus on many issues before even discussing how bankruptcies work for companies.

First, we want to know how well does management understand its own business problems. If management does not have a good handle on their business problems, then they first need to get that deep understanding. They may know that monthly when looking at the numbers, they see that losses are continuing. Management, especially in an entrepreneurial or family-owned company, may feel ashamed because they don’t feel like they’ve made good decisions. Or they are aggravated and embarrassed because family members have told you the company is finished.

If you know in your heart that if you do not do something today, you may be risking the entire business.

How bankruptcies work for businesses: Know your numbers

To restructure companies for a successful turnaround, you first need to know your numbers and what they mean. The goal is to have the company producing sufficient cash levels and for everyone in the business to be earning a fair market-based income.

Management must look at the entire business and ask:

  • Where’s the profit?.
  • Do we have the money to actually run and scale the business?
  • What is getting in the way for the business to charge the revenue its products or services are worth?
  • Do we have the necessary cash and people resources will we need for a turnaround?
  • Are there lines of business or locations that need to be shed to increase profitability?
  • What expenses can we cut without harming our core business?
  • Which contracts do we need to cut to return to profitability and growth?
  • Do we have the proper reporting systems to give us the information we need to get prompt and accurate information?
  • Can we properly analyze the business issues and take the necessary corrective action?
  • Do we have the right people to carry on the business while implementing the turnaround?
  • Are we experienced enough to carry out our own turnaround or do we need outside professionals to help us with it?
  • Do we know what the impediments are to having a successful informal restructuring or do we need to look at a formal restructuring process?

How bankruptcies work for businesses: Now that we have the information…

These are the main questions that first must be answered for any business experiencing financial difficulties and facing insolvency. This is especially true for more complex companies. New systems or techniques may need to be implemented. If management can answer these questions for themselves, we want to hear those answers. If not, then a financial advisor may need to be retained. My Firm has been regularly retained, either by a company or its lender, to answer these questions and provide our recommendations. This kind of assignment is called a Business Viability Review.

After we provide our recommendations, we then work with the company to help them decide if they can carry out the recommendations and strategies themselves, or if they need our help to do so. If management can do it on their own, many times the lender will want us to stay involved by monitoring the company’s progress and reporting back to both the company and the lender.

How bankruptcies work for businesses: What if informal restructuring isn’t possible

The aim is always to avoid bankruptcy but it’s practical to recognize what it is and when it could be suitable. Companies are complex organisms. There may be the need to shed unprofitable contracts or long-term agreements that are just too expensive to continue with. It may be that disposing of such onerous contracts, leases or agreements is crucial to have a viable ongoing business. Many times a formal restructuring process is necessary to legally end those types of agreements.

It is the largest of company restructurings that we hear about in the news. From the United States, we read about Chapter 11 bankruptcy protection filings. In Canada, we read about restructurings under the CCAA. The largest of companies do not represent the size of the majority of Canadian companies.

For the biggest of companies, they can get relief and press back on creditors. There is an old adage which says: “If you owe the bank a bit of money, they own you. If you owe the bank a huge amount of money, you own them.”. In that way, in the largest company restructurings, the business can get a long time to either sell particular assets where the cash will help them rebound. They will also get the time they need to “rightsize” their employee numbers and shed unprofitable contracts. Loan changes with their secured lender or banking syndicate is also on the table and accomplished, more often than not. Their sheer size demands it and they get it.

How bankruptcies work for businesses: The reality for the majority of Canadian companies

Canadian business is full of entrepreneur-owned companies. So, that is what I will focus on in this Brandon’s Blog. If the business owner(s) come to us early enough, then we can decide if an informal restructuring will work or if not, what needs to be done in a formal restructuring. For any business that owes less than $5 million, it will normally be a BIA restructuring debt settlement proposal. We have done many successful company restructuring proposals under the BIA.

The answers to all the questions I posted above, will tell us what the restructuring needs to look like, how long it will take, and what our projections show about the profitability and viability of the business after a successful implementation of the restructuring plan.

How bankruptcies work for businesses: Company bankruptcy

In a company bankruptcy, the Licensed Insolvency Trustee (formerly called a bankruptcy trustee) (Trustee) takes possession of the assets, properties, and undertakings of the company. This assumes that there are not secured creditors who have all the assets of the company tied up. If there are, then the company may not need to go into bankruptcy. Rather, a secured creditor will take enforcement action by making a demand on the insolvent company. However, if the loan is not repaid in time, then the secured lender will appoint a receiver to take possession of the assets covered by the lender’s security. In Canada, this is normally a Chartered Bank and all the assets are secured.

Sometimes a company in receivership needs to also file for bankruptcy. The main reason would be to aid in maximizing the recovery on the assets. For example, the company is a retail chain. The only way to maximize the recovery is to run the business and sell off the assets from one or more stores. One way to guarantee quiet enjoyment of the stores the receiver needs to stay in is to have a bankruptcy. That is because, under Provincial commercial tenancy law, a trustee in bankruptcy has a certain time to stay in the premises, undisturbed, as long as the current rent is paid.

How bankruptcies work for businesses: Receivership or bankruptcy

Whether there is a receivership or bankruptcy, there are many steps that a receiver or trustee have in common. These include:

  • Determining whether or not the recovery on assets will be maximized if the business is operated by the receiver or Trustee.
  • What impediments are there in running the business?
  • What is the best way to sell off the assets? As an entire group or parcels of assets that make sense to keep together, or one by one?
  • Are there any third party assets not owned by the company on the premises or other locations?
  • Are there assets owned by the company in any other locations?
  • Is there proper insurance and physical security over the assets?
  • Once the assets are sold and the cash received, what claims are there against the funds and what is the priority of all the potential claimants?

How bankruptcies work for businesses: The entrepreneurial company reality

Most mid-size and small companies when they’re in difficulty, do not submit a formal restructuring plan or file for bankruptcy at all. They just shut down by closing the doors. The owner will get the company’s final income tax and other information returns completed and filed. They will make sure that employee wages are paid current. Hopefully, source deductions and HST are fully paid up.

Wages, source deductions and/or HST that are not fully paid, are a personal liability of the Directors of the company. In the entrepreneurial companies, the owner(s) have probably personally guaranteed bank loans, premises and equipment leases or have raised funds to start and invest in the business by taking out at a mortgage against their home.

This brings us to the reality of most midsize and small businesses. The business failure leads to personal insolvency issues. Many times we advise entrepreneurs that their company filing an assignment in bankruptcy is not necessary. Rather, they should just shut down their business and then we will deal with their personal insolvency issues. This will allow the entrepreneur to get a fresh start.

Now what is required is getting a job in their field and earning a salary without the risk and challenges of running their own business. Once they get their fresh start, are back on their feet and saved up some money, they can decide if being an employee or starting a new business will be their future.

How bankruptcies work for businesses: Does your company have too much debt?

Is your company insolvent and needs to restructure? Is your business viable but can only continue if it can reorganize its debt? We know your pain and understand the stress you are living with. The Ira Smith Team has decades and generations of experience in company restructurings of all sizes.

Contact the Ira Smith Trustee & Receiver Team. If we can meet with you in our free first consultation early enough, we can create and help you start a restructuring and turnaround plan. This will allow your company to continue to do business, create jobs and be profitable for many years to come.

Call a Trustee Now!