insolvency definition Archives - Ira SmithTrustee & Receiver Inc.

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What is insolvency def?

The insolvency definition (insolvency def) is a state of financial distress in which a person or company is unable to pay its debts. The definition of insolvency can be displayed in an insolvent person or the insolvent debtor company which arises from:

poor cash management;
a reduction in cash inflow;
an increase in expenses;
inadequate accounting controls and reporting;
a lack of proper human resources management; or
all of the above.

The purpose of this insolvency def Brandon Blog is twofold. First I will give a simple primer on what insolvency def is. Next, I will explain how a person can analyze their situation to determine if an insolvency process is for them and if so, which one.

I will use a real-life example that appeared earlier this week in the Toronto Star.

Factors contributing to insolvency

The above reasons can lead to different types of insolvency. The insolvency def can be looked at in a few different ways when considering factors and symptoms.

Balance Sheet insolvency def –

Balance sheet insolvency is when a person or company does not have enough assets, if fully collected or liquidated to pay off all of their debts.

Cash flow insolvency def –

Cash-flow insolvency is when an individual or company has enough assets, if fully collected or liquidated, to pay what is owed. Nevertheless, they do not have enough cash to pay their creditors in full.

What is the difference between technical insolvency and actual insolvency def?

While insolvency def in the technical sense is a basic synonym for balance sheet insolvency, cash-flow insolvency is not the same as insolvency under the Bankruptcy and Insolvency Act (Canada) (BIA).

What Is an insolvent person according to the BIA?

“Insolvent person” according to the BIA insolvency def is a person or company that is not bankrupt and is resident, carries on business or has property in Canada, whose liabilities to creditors provable as claims under the BIA amount to $1,000 or more and which for any reason they are not able to pay those obligations as they typically come to be due.

Further, if the insolvent person or the insolvent company liquidated all of their assets, there would still not be enough money to pay off all of the amounts owing to creditors; both secured creditors and unsecured creditors.

What does the insolvent def mean financially?

Now that I have given you the textbook insolvency def, let us look at a real-life example. Every Monday in the Toronto Star there is a column called Millenial Money. This past Monday, Evelyn Kwong wrote about a 34-year-old named Chele. Chele earns $45,000 per year gross.

As I understand it, she borrowed $100,000 to pay for medical expenses back home in the Philippines for a family member. Also, her ex-husband racked up an amount of debt that she is also responsible for. It is unclear from the article if the two sets of debt obligations total $100,000 or something greater.

They presented Chele’s situation to a financial expert to give advice. After looking at Chele’s debt situation, he advised that she speak with a licensed insolvency trustee to determine if a consumer proposal or a bankruptcy proceeding would be best to alleviate Chele of her outstanding debts.

What If I Am Insolvent?

What is Chele’s situation? First, let us look at her monthly statement of income and expenses:

Monthly take-home pay	$2,200
Recurring monthly expenses:
Rent	700
Transportation	810
Food	250
Sports and hobbies	50
Cell and internet	100
Personal	300
Monthly total expenses	$2,210

So Chele is able to essentially balance her cash-flow budget. Her take-home pay is presumably after income tax and other deductions. We can assume that she either receives a small refund on her tax return or at least does not owe any income tax.

As she rents, she does not own a home. Her transportation costs are for her car which is financed. Let us assume that the equity she has in her car fits into her provincial exemption so that a licensed insolvency trustee would have no interest in her car.

So Chele has no assets other than her car and she owes at least $100,000. Now we can look at the consumer proposal as an alternative to bankruptcy vs her doing an assignment in bankruptcy filing.

Consumer proposal vs bankruptcy proceeding

As I have written before, a consumer proposal is an insolvency process under the BIA for any person who owes $250,000 or less, not including any debts secured by their personal residence. It is a debt settlement arrangement to pay your unsecured creditors less than the total you owe in order to relieve yourself of all of your debt obligations.

A person can take up to 5 years to make the regular monthly payments to the licensed insolvency trustee acting as the Administrator in the consumer proposal. The insolvency trustee then distributes the total amount agreed to by the creditors and paid by the insolvent debtor as a dividend distribution. Once the insolvent debtor fully completes the consumer proposal, they are relieved of all of their unsecured debt balances (other than a few minor exceptions laid out in the BIA).

Canadian bankruptcy law says that any offer to the creditors in a consumer proposal has to be a better alternative for the creditors than they would get from the person’s bankruptcy estate. So first we need to calculate what the creditors could expect from Chele’s bankruptcy.

Chele has no assets available to her creditors. Her equity in her only asset, her car, is protected by her personal exemption for a vehicle in Ontario. There are no other known assets. All bankruptcy trustees are required to perform a surplus income calculation. In Chele’s case, she earns $2,200 per month net of tax, and she is allowed to earn as a single person in 2021 $2,400 per month before she is subject to any surplus income. So she also does not need to contribute any surplus income.

Assuming Chele has never been bankrupt before if she performs all of her duties in bankruptcy, she is entitled to a discharge from bankruptcy 9 months after the date of bankruptcy, unless a creditor opposes it. All she will be required to pay is the fee to the licensed insolvency trustee to administer her bankruptcy.

In a consumer proposal, in this case, she could offer anything because that would meet the requirement of being a better alternative than her bankruptcy. However, creditors generally expect to receive no less than 20% to 25% on their outstanding debt. So if Chele owes $100,000, at the midpoint of 22.5%, she would have to offer to pay her creditors $22,500 payable in monthly payments over no more than 5 years or 60 months. That works out to a monthly payment of $375. Chele does not have room in her budget right now to afford that monthly payment.

So in her case, unless she can figure out how to reduce her spending so that she can afford a monthly payment for the next 60 months, my advice to her would be to choose the bankruptcy option and file an assignment in bankruptcy. If all goes well, she can start to rebuild her life, free from all her unsecured debt, in 9 months’ time.

Insolvency def summary

I hope that you found this insolvency def Brandon Blog interesting. 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. Our professional advice will create for you a personalized debt-free plan for you or your company during our no-cost initial consultation.

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

We understand that people 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 these seems familiar to you and you are serious about getting the solution you need to become debt-free, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

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

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

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

Introduction

On November 28, 2018, I published my Brandon’s Blog titled “INSOLVENT DEFINITION: A NEW FOCUS FOR TORONTO BANKRUPTCY TRUSTEE”. I wrote about a then recent decision of the Ontario Superior Court of Justice in Bankruptcy and Insolvency in Kormos v. Fast, 2018 ONSC 6044 (CanLII). In that decision, the Judge gave a new twist on deciding whether or not Mr. and Mrs. Fast was insolvent.

If they were found to not be insolvent, their respective consumer proposal and bankruptcy filings would be annulled. In that event, Mr. and Mrs. Kormos would be able to continue enforcing their judgement against Mr. and Mrs. Fast. If unsuccessful in annulling the filings, then their only remedy would be to file a proof of claim in each insolvency proceeding. That would result in a payment far less than what might otherwise be available.

The lower court ruling

Mr. and Mrs. Kormos submitted evidence that the Fast’s assets had a value greater than their total liabilities. They submitted that therefore, Mr. and Mrs. Fast was not insolvent and should not have been able to file under the Bankruptcy and Insolvency Act (Canada) (BIA).

The evidence submitted by Mr. and Mrs. Kormos was not challenged. However, the Judge seized upon the fact that the income and expense statement of each of Mr. and Mrs. Fast indicated that on a monthly basis, their income was much less than their expenses. The Judge, therefore, concluded that Mr. and Mrs. Fast was insolvent and their separate insolvency filings should not be annulled. Accordingly, he dismissed the application by Mr. and Mrs. Kormos.

The appeal

Mr. and Mrs. Kormos did not believe that this ruling was either fair or appropriate. Therefore, they appealed the Judge’s decision with respect to Mrs. Fast only to the Court of Appeal for Ontario. On May 23, 2019, the Court of Appeal for Ontario released its unanimous decision in Kormos v. Fast, 2019 ONCA 430.

The position of Mr. and Mrs. Kormos was that the Judge erred in dismissing their application by not annulling Mrs. Fast’s assignment in bankruptcy and not deciding that her filing was a misuse of the bankruptcy procedure. They further submitted that therefore, the Judge legitimized an unjustified technique to protect the equity in Mrs. Fast’s home.

The Court of Appeal agreed with Mr. and Mrs. Kormos. They stated that the lower court erred in failing to decide that Mrs. Fast was not an insolvent person. It is for that reason, it was not necessary for the Court of Appeal to decide if her filing was a misuse of the bankruptcy scheme and procedure.

The Court of Appeal Judges determined that on the day of her bankruptcy, Mrs. Fast was not an “insolvent person” as that term is specified under s. 2 of the BIA. Her assets substantially went beyond and were readily available to pay off all of her liabilities.

Apart from the unexplained regular monthly cash deficiency, there was no proof that she could not satisfy or had actually stopped paying her liabilities as they normally came due. Instead, the undisputed proof was that she could. The only single item submitted as proof of any kind of financial hardship was that Mrs. Fast had not paid the debt owed to Mr. and Mrs. Kormos under their judgement.

The Court’s power for bankruptcy annullment

Under s. 181(1) of the BIA, a court might annul a bankruptcy order if it feels that it ought not to have actually been made. An annulment will be approved where it is revealed either:

the bankrupt was not an insolvent individual when he or she made the assignment in bankruptcy, or
the bankrupt abused the procedure of the court or performed a fraud on his or her creditors.

What is an insolvent person?

Section 2 of the BIA specifies an “insolvent person” as:

“insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;”

Mrs. Fast plainly did not meet any of the requirements to be considered insolvent. The lower court erred by ignoring Mrs. Fast’s capacity to satisfy her liabilities and her accessibility to considerable assets.

On the day of her bankruptcy, Mrs. Fast’s real value of her assets over her liabilities, including her share in the value of the real estate, was $417,581.24. The debt owing to Mr. and Mrs. Kormos under their judgement was $25,565.64 plus interest. Therefore, she definitely was not insolvent.

Out and out lies

Mrs. Fast was motivated to take the actions she did because Mr. and Mrs. Kormos was beginning to execute on their judgement and there was real value in the real estate to eventually get paid from. So, Mrs. Fast lied on her sworn statement of affairs she completed with her licensed insolvency trustee (formerly called a bankruptcy trustee) (LIT). She also manufactured an income and expense statement to show that on a cash basis, she suffered a monthly loss.

It is obvious that first, her LIT did insufficient work to establish the bona fides of the values Mrs. Fast used in her bankruptcy filing. Second, the lower court Judge ignored what should have been obvious. Mrs. Fast should not have been allowed to file an assignment in bankruptcy. At least now we are back to the tried and true definition of an insolvent person with clarity from the Ontario appellate court.

The Court of Appeal ordered the annulment of Mrs. Fast’s bankruptcy. They also awarded costs to Mr. and Mrs. Kormos on a partial indemnity basis in the amount of $2,000, including disbursements and HST.

Are you insolvent?

Are you unable to pay your debts as they come due? Are your bills past due and you don’t know how you are going to pay them? Is the true value of your assets less than what you owe to your creditors? If so, then you are insolvent, and we can help end your pain and anxiety.

A LIT is the only insolvency expert accredited, licensed and supervised by the federal government to handle debt restructuring. As a LIT, our personalized strategy will assist you to know all your alternatives. The alternative you choose based on our recommendations will take away the stress and pain you are feeling because of your debt problems.

Nobody wants to visit a bankruptcy trustee. However, the Ira Smith Team has decades and generations of experience people and companies in financial trouble. We will treat you with the respect and dignity that you deserve. Whether it is a consumer proposal debt settlement plan, a larger personal or corporate restructuring proposal debt settlement plan, or as a last resort, bankruptcy, we have the experience.

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

Call us today for your free consultation, Starting Over, Starting Now.