Tag: licensed insolvency trustee

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HOW HERTZ TEACHES US MODERN AND RISKY RULES OF BUSINESS BANKRUPTCY IN CANADA AND THE USA

business bankruptcy in canada
business bankruptcy in canada

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Business bankruptcy in Canada Introduction

Late in the day on Friday, May 22, 2020, Hertz Global Holdings Inc. (Hertz) filed for Chapter 11 bankruptcy in Delaware. The filing gives Hertz some breathing room to operate its business. During this time, Hertz also needs to come up with a business turnaround plan and a debt restructuring plan that creditors can support. The movement of Hertz stock last week teaches us some modern and risky rules of business bankruptcy in Canada and the United States.

Corporate bankruptcies and the Hertz investors

Hertz stock closed on the NASDAQ exchange on May 22 at US$2.84. It dipped to a low of US$0.40 on May 26. Legendary investor Carl Icahn sold all of his Hertz shares at an average price of $0.72. He dumped his 39% stake in Hertz at a loss of nearly $2 billion. Last Friday Hertz shares closed at US$2.57 per share. This morning, the trading touched US$3.40 per share.

So Hertz is up handsomely since May 26. Hertz has filed for bankruptcy protection. It doesn’t make sense that investors should be pushing the stock up. Hertz is selling off its fleet and further depressing the used car market. So far there is no indication that a business plan and debt reduction plan has been developed, let alone accepted by the creditors.

As far as assets, they have locations and a database of customers. But every major rental car company also has locations and a database. Whenever business and leisure travel resumes to pre-COVID-19 levels, if you can’t rent a car from Hertz you will rent it from a different company. So what are the non-fleet assets worth?

So on the surface, the investor money finding a home in Hertz stock and pushing up the stock price doesn’t make sense. So, are there savvy investors getting into Hertz or are they all just following the herd and will all end up losers?

Why Hertz filed for Chapter 11 bankruptcy protection

Since 2014, Hertz has had four different CEOs. It is difficult to develop and implement a cohesive business strategy with such turmoil in the senior management ranks. As the coronavirus pandemic brought travelling to a sudden halt, Hertz suffered dramatically as a mass of its revenue depended on business travellers and vacationers renting vehicles when arriving at their destination airport. Nobody knows how long it will take until travel gets back to where it was and what Hertz needs it to be.

Hertz’s debt has been increasing as it invested heavily in its vehicle fleet. They may have also missed the mark in the mix of vehicles consumers want, requiring it to take on even more debt to make further fleet purchases. Hertz could no longer afford to make the interest payments on its debt load. At the time of its bankruptcy filing, Hertz had US$1 billion of cash and US$13 billion of debt.

The $13 billion in financing Hertz made use of to acquire its fleet of 500,000 automobiles. The financing was done via what is known as asset-backed securities. These are connected straight to the value of the vehicles. When the value of the cars drops, Hertz must make up the difference in cash within about three months, unless values rebound before that time.

However, with the coronavirus pounding the brakes on the economy and eliminating employment for so many, the drop in the value of used vehicles is expected to remain that way for a long time. Hertz knew that it could not make up the difference to its lenders when they made a demand, which was their right. Hence the bankruptcy filing.

The modern risky rules of investing in business bankruptcy in Canada and the USA

Normally, in a public company restructuring, it is not only the creditors that take a hit. Shareholders usually get a good drubbing. Share values fall and new shares are issued to raise capital. This further dilutes the holdings and value of those holdings for shareholders. But investors must believe that Hertz will come back. How else can you explain the surge in the share price?

Before this year, the company had ten consecutive quarters of positive growth. They were still losing money, just not as much. Investors must believe that Hertz will be able to survive. They must believe that the company although leaner and smaller, this is the time to jump on an opportunity to make money.

I am not a financial advisor, I am not saying whether this is a good or bad investment. It certainly is a very risky one. All I am saying is that as a licensed insolvency trustee (formerly called a trustee in bankruptcy) administering business bankruptcy in Canada, this does not make any sense to me.

I guess only time will tell if these investors pushing up the stock price are insightful risk-takers or losers. Carl Icahn doesn’t believe it.

Business bankruptcy in Canada and the USA summary

I hope you have found this business bankruptcy in Canada and the USA Brandon’s Blog helpful.

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 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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID, 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 Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Stay healthy, well balanced and safe and secure everyone.

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BANKRUPTCIES IN ONTARIO: OUR EXCLUSIVE 6 THINGS LIST CREDITORS MUST KNOW ABOUT CANADIAN BANKRUPTCY

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

Stay healthy, well balanced and safe and secure everyone.

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Bankruptcies in Ontario -Introduction

Much of the insolvency chatter developing from the COVID-19 pandemic world in which we find ourselves is now concentrating on the waterfall of brand-new bankruptcies in Ontario that are predicted to arrive. I have previously written about some of the big-name US retailers that have filed for Chapter 11 bankruptcy protection.

Businesses shut down, job losses, government funding for people and businesses to try to hang on through this coronavirus are all in the headlines. What our “new normal” will look like and which companies and jobs will survive, right now, is anybody’s guess.

In this Brandon’s Blog, I want to highlight things creditors must know about canadian bankruptcy and bankruptcies in Ontario. By being well-versed, creditors will hopefully be able to better understand what is in store for them and for the debtors.

1. Bankruptcies in Ontario – the automatic stay of proceedings

In Canadian insolvency matters, an automatic stay of proceedings happens when a company or person files under the Bankruptcy and Insolvency Act (Canada) (BIA) for either:

  1. Bankruptcy
  2. Consumer proposal
  3. Corporate or large personal restructuring

The stay of proceedings is automatic under the BIA. Other than in one specific situation which I will touch on in a minute, absent proof that some sort of fraud is being committed on the court, a judge will not interfere with the automatic stay provisions. So an unsecured creditor will not be able to start or continue any action for collecting on a debt.

The one exception is in a restructuring where the major secured creditor goes to court and provides evidence that no matter what the restructuring may look like, they will never support it. The secured creditor would at the same time be requesting the court to lift the stay of proceedings so that they can enforce on their security.

Absent a restructuring proposal that promises to pay out that secured creditor 100% PLUS proof that the company or person has a realistic chance of refinancing to take out that secured creditor. Even in that situation, the court could give the debtor some time to pull it off, but it will be a very short lease. Otherwise, the secured creditor will probably get their wish and the restructuring effort will end.

In the case of a privately appointed receiver, there is no automatic stay of proceedings. This is notwithstanding that the conduct of the receiver in a private receivership is also governed by the BIA. The reason there is no automatic stay of proceedings is that a private receivership is not a filing under the BIA.

In either a court-appointed receivership or a corporate restructuring under the Companies’ Creditors Arrangement Act (Canada) (CCAA), the stay of proceedings authority does not come from statute per se. The respective statutes allow for the judge to order a stay of proceedings. That language is then incorporated into the court order appointing the receiver or authorizing the bankruptcy protection CCAA filing. In these cases, the court is available for anyone to make an application to lift the stay if they can prove that they are being prejudiced. Again, normally only secured creditors will be able to show prejudice.

2. Bankruptcies in Ontario – Know whether, when, and where proof of claim needs to be submitted

For bankruptcies in Ontario and restructurings, it is important to know what kind of insolvency proceeding is taking place. The notice you receive from the licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) will tell you what kind of proceeding it is. It will also provide a proof of claim form to be completed. The notice will provide all the details.

It is important that you know:

  • The details.
  • How to complete a proof of claim form.
  • Where to send it into.
  • What timelines there may be.

Some creditors wish to file a proof of claim only so that if a dividend is declared they will get one. In that case, you can complete and file the proof of claim any time before the Trustee issues a final dividend. The Trustee must send a final notice to all named creditors who have not yet filed a proof of claim before issuing a final dividend.

Some creditors wish to actively participate in the insolvency process. They may wish to attend the meeting of creditors, vote on a restructuring proposal under the BIA. If creditors wish to actively participate in bankruptcies in Ontario, they should complete and file the proof of claim with the Trustee within the time-frame indicated in the notice accompanying the proof of claim form.

In a receivership, there will only be a need to file a proof of claim if the receiver has realized enough money from the sale of assets to pay out the trust claims and secured creditor claims in full and now has money for the unsecured creditors. This is very rare. In that situation, the receiver will conduct a claims bar process later on in the administration. That is when a notice with a blank proof of claim form will be sent out to the known creditors.

In a restructuring under the CCAA, first, the restructuring plan, called the Plan of Arrangement, is finalized. Then the Trustee will send out notices and blank proof of claim forms for creditors to complete and submit. Filling out the form at that stage will allow creditors to actively participate in the meeting and voting on the plan, as well as be in line to receive a payment.

3. Bankruptcies in Ontario – Obtaining a preference repayment from a future bankrupt debtor is not illegal or unethical, but you may have to give it back

If a customer of yours offers to pay you money, even if it turns out to be on the eve of an insolvency filing, take it! Always take the money; stress over any claim for it by a Trustee later.

The premise of the BIA is that all unsecured creditors will be treated equally. So, if certain unsecured creditors receive partial or full payment on the eve of filing, and then the debtor goes bankrupt, there is a presumption of a preference. The onus is on the creditor who received payment to rebut the presumption of a preference. If the Trustee is successful in attacking such a transaction, then the creditor must pay over the money to the Trustee. The creditor will also have spent money on its own legal fees. There will also probably be a cost award for all or a portion of the Trustee’s legal costs also.

Notwithstanding all this, it is better to have the money than not. Perhaps the Trustee will not knock on your door. Or, maybe you can avoid a lot of heartache by agreeing to and paying over a settlement amount that is less than 100% of what you received. Finally, there is a very limited number of defences to rebut the presumption of a preference. Perhaps your situation falls under one of them.

Taking the money is not immoral, unethical or illegal. You just may not be able to keep it if your customer files for bankruptcy after making the payment to you.

4. Bankruptcies in Ontario – review the Trustee’s Report very carefully and ask questions

The Trustee’s report outlines issues of importance regarding the conduct of the debtor both pre and post-filing. Sometimes, there may be an action that the Trustee could take to enhance the recovery of an asset, but lacks the funding to do so.

In those cases, a creditor or a group of creditors can choose to either:

  1. Fund the Trustee to take the action for the general benefit of all unsecured creditors.
  2. Get court approval to take the action in their own name under s.38 of the BIA.

It would be unusual for creditors to fund the Trustee. The simple reason is that they would be responsible for 100% of the costs but have to share any recovery with all the other unsecured creditors on a pro-rata basis. For this reason, it is not done.

Many times a creditor or group of creditors will choose to obtain court permission to take on the action in their own name. The court will insist that the creditor group make the opportunity to all creditors. However, a “buy-in” will be set. Most of the time other creditors won’t pony up to join in. Either they are not sophisticated enough to realize the potential benefit or they feel it is not worth their spending money in that way.

Under an s.38 action, if successful, the creditor can first pay back all its costs in doing the action. Next, they are entitled to keep up to the full amount of their claim. If any funds are left over, they must be paid over to the Trustee.

I am administering a bankruptcy file right now where there was foreign real estate. I did my investigation and determined that although saleable, the properties would take many years to sell and then to repatriate the money back to Canada. The major unsecured creditor wished to take control of the sales process. So, her lawyer got court approval for her to do so under s.38 of the BIA. No other creditor joined in with her. The properties are now sold, we have so far received a six-figure payment from the surplus sitting in her Canadian lawyer’s trust account after she was fully repaid all of her costs and the amount of her claim.

There is another six-figure amount sitting in a foreign country. We have retained legal counsel in that country now to get the rest of the funds repatriated into our trust account. Once received, we will finalize our vetting of all proofs of claim and make a distribution to the unsecured creditors.

5. A discharge from personal bankruptcies in Ontario ends the debtor’s liability for pretty well all debts

Unless the Trustee of a bankrupt corporation raises enough money for all of the creditors to be paid off in full, with interest, a corporation is never discharged from bankruptcy. In personal bankruptcy, the debtor is eventually entitled to an absolute discharge. The absolute discharge can be:

  • Received straight away when the debtor is able to be discharged.
  • Given once the bankrupt fulfills all of the conditions of discharge.

There are only a handful of claims that are not discharged upon the discharge of the bankrupt. Those are:

  1. Trust claims.
  2. Secured claims.
  3. Those claims which fall under s.178 of the BIA.

If a debtor wishes to get out of a liability where the creditor holds security, such as vehicle financing, the debtor needs to trigger a default prior to filing for bankruptcy. So continuing with the vehicle example, the debtor could tell the lender that it cannot afford to make any more payments. The debtor would then give the vehicle and the keys to the lender.

The debtor should then wait for notice from the lender that the vehicle has been sold, the lender has suffered a shortfall and demands payment for the shortfall. The shortfall is an unsecured claim. The debtor now files for bankruptcy after the shortfall claim has crystallized. There now is no longer a secured claim for this debt.

If the debtor does not wait for the shortfall notice from the lender, they run the risk that the shortfall occurs after the date of bankruptcy. In that case, the shortfall unsecured claim will not be a debt discharged by the bankrupt’s discharge.

I have previously written about the s.178 claims. You can read about them in my blog.

Lacking affirmative action by a debtor or Trustee, all secured claims go through the bankruptcy unaffected. It is incumbent on the Trustee to get a lawyer’s security opinion on the validity of any secured creditor’s security as against the Trustee. I have a corporate bankruptcy file now where the legal opinion was that the security was not valid. I advised the creditor who did not object. I guess they already knew!

6. Bankruptcies in Ontario – A fully completed restructuring also discharges most debts

The most essential element of reorganization situations under the BIA and CCAA that creditors need to know is about how debts get discharged in a restructuring. Similar to a personal bankruptcies in Ontario, in a successfully completed corporate restructuring, the debtor’s debts are discharged. Again, except for trust claims and secured creditor claims, the ordinary unsecured debts of a corporation are fully discharged when a restructuring plan that has been accepted by the creditors and approved by the court is fully completed. When the payout is made to the creditors and the company has successfully completed it, there are no pre-filing debts remaining.

So what is the significance to creditors? Well, if you are a director of the company, any debts that would have been a director liability, other than for a trust claim, vanishes. As there is no debt left, there is nothing left for the director to be responsible for.

Likewise, if someone personally guaranteed a premises lease to the landlord, if the lease is disclaimed as part of the restructuring, then the landlord has an unsecured claim. Once that claim is fully discharged in the restructuring, there is no debt left for the guarantor to be responsible for.

Creditors should also know that a company in a restructuring, may come to you to renegotiate your agreement with the company. If you refuse, the company could disclaim the agreement and any claim you have will be an unsecured claim in the restructuring.

7. Bankruptcies in Ontario bonus tip

It is better to get professional advice about extending credit to a customer and the best way to do it before you approve the credit. Getting professional advice after they have filed for bankruptcy limits your options.

Bankruptcies in Ontario – Summary

I hope you have found this bankruptcies in Ontario Brandon’s Blog helpful.

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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID, 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 Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Stay healthy, well balanced and safe and secure everyone.

bankruptcies in ontario
bankruptcies in ontario
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THE TORONTO CORONAVIRUS EXTRAORDINARY PLAN TO BUSINESS RECOVERY

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

Stay healthy, well balanced and safe and secure everyone.

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Introduction

For businesses having a hard time enduring the Toronto coronavirus pandemic, insolvency may very well be the outcome. General insolvency filings were down in April, this is mainly because everyone has a built-in stay of proceedings right now.

Banks, credit card companies and collection agencies are not making a name for themselves right now during the Toronto coronavirus lockdown by harassing people who cannot afford to pay their regular monthly payment. However, that will not last too long.

In this Brandon’s Blog, I discuss options available to the entrepreneur if the Toronto coronavirus lockdown and quarantine wreaks havoc on your business.

Telltale signs from the United States

We have already seen the variety of companies that submitted to Chapter 11 insolvency. They did so in order to attempt to reorganize their financial obligations while trying to stay in business. This has been especially true for the large retail business sector. Their business problems were not caused by COVID-19. However, the pandemic merely accelerated where they were heading anyway.

The American Bankruptcy Institute reported that Chapter 11 filings in April 2020 represent a 26% boost from April 2019.

I have previously written about Modell’s Sporting Goods and Pier 1. Now we can add Neiman Marcus, JCPenney and J.Crew. Outside of the retail sector, Hertz Car Rental, Gold’s Gym, Foodora and Virgin Australia are also recent restructuring filings. I also really believe that it won’t be long before the floodgates open up to subject an excess of small firms looking for relief from their financial problems, in North America and the rest of the world. That is probably obvious to you, it really can’t be called a Toronto coronavirus news update!

Entrepreneurs are doing whatever they can

I have definitely noticed an uptick in telephone calls from people scared about their personal situation and from worried business owners in the past 4 weeks. They aren’t all set to throw in the towel right now. They are attempting to do whatever they can through the shutdown to stabilize their company. So for now, they are trying to take advantage of various federal government programs to help them stay afloat. The programs include:

However, the people I am talking to are also realists. They all understand that if what they are doing now doesn’t work, they will either have to try to restructure the company or have it go bankrupt. So for now, there is somewhat of a pause in remedies such as distraints, repossessions, terminations of leases and financial institution collections.

The moratorium won’t last forever

Right now the Canadian federal government is taking the lead. They have extended timelines for filing income tax and HST returns and paying amounts owing. They have also extended certain relief programs from their original expiration date of June 30. Right now, subject to a further extension, of course, it looks like the feds are shooting for September 30 to end the COVID-19 assistance programs.

Ultimately, the patience for non-payment being shown right now by landlords and creditors won’t last permanently. I expect business bankruptcy protection and bankruptcy filings to climb after the “all clear” is sounded on this Toronto coronavirus state of emergency and the government assistance ends. The pent up collection activity will go into full flight.

The floodgates will open. I expect one of the worst offenders to be the Canada Revenue Agency (CRA). There will be so many companies in default of their tax payment obligations. The government is spending trillions of dollars to prop up the Canadian economy. Those programs will have to be paid for and all the IOU’s will be called in.

It seems that everybody I have spoken with is simply waiting until this Toronto coronavirus period quiets down. The pool of business problems is overflowing right now.

Corporate bankruptcy is not the only option for a company battling its financial demons. There are going to be three categories of insolvent companies:

  1. Those who are too small and it just does not make sense for them to do anything other than paying the employees their final salary, wages and vacation pay. Then file their final corporate and income tax files. Then, turn the key in the door and walk away.
  2. A company that has just a few creditors and all or some of the business operations remains viable. They can negotiate with their creditors for a reduction in each amount owing on a creditor by creditor basis. The reason this does not work if there is a large group of creditors is because of human nature. Everyone is worried that the next person is getting a better deal. By the time you get the last person to say yes, the first person may have changed their mind. There is no way to independently satisfy all the creditors that nobody is getting a better deal. In reality, some are getting a better arrangement than others. It will be based on the negotiation ability of the creditor and how essential maintaining the supply of their product or service from them is.
  3. Businesses where all or some of their operations remain viable. However, the company can only survive if it can chop off the sick parts and eliminate however much debt they need to so that the newly restructured company is solvent.
  4. Companies with complex issues needing to assign their assets to a licensed insolvency trustee through a bankruptcy or whose secured creditor will enforce on their security by appointing a receiver, either a private receiver or court-appointed receiver.

Toronto coronavirus induced restructuring

If you anticipate your entire business or certain business units will remain viable but require relief from its creditors and debts, the first look at restructuring. This route enables a company to stay functioning while renegotiating its financial obligations. This process includes looking critically at all business units and determining how operations can be made more efficient in order to improve profitability. Many hard decisions will have to be made.

Companies have two choices in Canada for restructuring. For the larger restructurings, the kind that you read in the newspaper, the restructuring statute is the Companies’ Creditors Arrangement Act (Canada) (CCAA). In order to qualify for restructuring under the CCAA, the company has to owe its creditors at least $5 million.

All other companies restructure under the Bankruptcy and Insolvency Act (Canada) (BIA) restructuring provisions. It is called Part III Division I of the BIA. Regular readers of Brandon’s Blog will know that I have written several blogs before on aspects of both the CCAA and restructuring under the BIA.

In my blog, BANKRUPTCY EXPERTS WEIGH IN ON US & CDN SMALL BIZ RESTRUCTURING, I lamented the fact that the Canadian insolvency system does not have a streamlined restructuring process for smaller companies. We have the consumer proposal restructuring under the BIA for smaller personal insolvent debtors trying to restructure.

The United States has the Small Company Reorganization Act (SBRA) of 2019, also known as “Subchapter 5”. The SBRA is aimed at simplifying restructuring procedures for small companies by boosting efficiency, lowering costs, and easing the restructuring plan confirmation process. I believe this would be a great addition to the Canadian insolvency system. It may very well move some companies from my #1 category listed above into #3.

There is no sense dwelling any longer on what we don’t have. The Toronto coronavirus news today has affected so many companies. Many will just not survive. Others will be able to come out of the other side of this Toronto coronavirus pandemic but will need major surgery to stay alive.

The first step for any entrepreneur is to get professional advice in order to strategize and make a decision on what plan to put into place. You should speak either to a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) or a lawyer who has experience in insolvency matters.

Most licensed insolvency trustees will provide a one-hour no-cost strategy session.

You need to understand whether or not you have a viable business and company. Then, you need to have a sensible plan to increase your chances of success based on the viability analysis.

Both Ira and I have been doing many such strategy sessions over the telephone and video meeting since the Toronto coronavirus self-quarantine lockdown came into effect. I know that we will be doing many more as the city and the province begin to open up.

The goals of the entrepreneur have to be the driving force. For example, if the entrepreneur is adamant about staying in business, then you have to hope that business viability can be proven so that the likelihood of a successful restructuring is enhanced. On the other hand, if you can prove business viability but the entrepreneur has had enough and wants out, then you look at the restructuring and sale of the viable business parts.

Once viability is established, then a restructuring plan can be developed. The restructuring will take place either under the BIA or CCAA. Depending on the circumstances and the goals of the entrepreneur, either a refinancing of the restructured company of a sale of the business is part of any restructuring plan.

Business not viable

If the business is not viable, then pure restructuring is not possible. However, that does not mean that the assets that form the business unit cannot be used by someone else to efficiently run the business. I am not just talking about hard assets. Things such as patents, trademarks, processes, experienced workforce and the customer base before they go off to find a new supplier are all valuable parts of a business.

Perhaps the tangible and intangible assets can be sold to someone that can bring them into their existing operation and run the business profitably. Jobs can be saved also if this were to happen.

When this is the case, then you are into some form of liquidation. A secured creditor will move for the appointment of a receiver. As I have written before on this topic, the appointment can either be by way of a private appointment or an application to the court for a court-appointed receiver.

If there are no secured creditors, the security taken is invalid, or there are other factors that make a bankruptcy necessary, then the company can assign itself to bankruptcy. It isn’t every day you find this, but in a recent corporate bankruptcy filing that I am administering, I found that the security of the purported secured creditor was invalid as against us as Trustee.

Then either the receiver or Trustee can take possession of the assets, run a well-advertised and managed sales process and hopefully find a buyer for the assets to comprise all or many parts of the operating business. If such a buyer does not exist, then it will be a straight liquidation of individual assets. Obviously, higher values can be achieved when selling what amounts to a business rather than just individual assets in a liquidation.

Personal guarantees and director liabilities

In any corporate or business insolvency, the exposure of the directors has to be taken into consideration. This is not Toronto coronavirus news. It is normal for entrepreneurs to have to give a personal guarantee to a lender in addition to the security taken. Such a guarantee can be backed up by specific personal assets as collateral, or be an unsecured guarantee. Or, an entrepreneur has to indemnify the landlord as part of the corporation leasing premises.

Directors also have certain liabilities under provincial or federal law. Generally, directors will have personal liability for:

The exposure of directors must be recognized and taken into account in any restructuring attempt.

Toronto Coronavirus Summary

Businesses all over will look different due to the Toronto coronavirus pandemic and lockdown. The current environment is unprecedented and is teaching all of us things we have never seen before.

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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. During this Toronto coronavirus state of emergency, we are doing telephone consultations and/or virtual conferences that are readily available for anyone feeling the need to discuss their personal or company situation.

 

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

Stay healthy, well balanced and safe and secure everyone.

toronto coronavirus

 

 

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Brandon Blog Post

OFFICE SUPERINTENDENT BANKRUPTCY CANADA – COVID-19 AND “THROWBACK THURSDAY”

office superintendent bankruptcy canadaThe Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

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

Introduction

As issues about COVID-19 in Canada grows, insolvency practitioners are doing their part by having determined it is needed to take steps to reduce in-person contact. The Office Superintendent Bankruptcy Canada has helped Licensed Insolvency Trustees (formerly called bankruptcy trustees) (Trustee) in these initiatives while keeping all aspects of Canada’s insolvency system running.

In my April 29 Brandon’s Blog, CONSUMER PROPOSALS IN ONTARIO TEST POSITIVE FOR COVID-19, I described how the Superintendent of Bankruptcy went to Court in Ontario. They made a motion to have the Court direct how certain procedures would change during the state of emergency lockdown. Part of that will be how the government wants to have Trustees resurrect an old methodology in personal debt settlement plans and corporate restructuring plans not really been used in the last 25 years.

Since then the government has come out with additional information and clarifications on how they see the bankruptcy Canada process continuing to work during the coronavirus shutdown. In Brandon’s Blog, I talk about these issues.

Office Superintendent Bankruptcy Canada approves social distancing

There are many ways that the Office Superintendent Bankruptcy Canada has approved social distancing for Trustees.

Initial free strategy session – Most if not all Trustees will provide a no-cost consultation for a personal or corporate insolvency discussion. In the pre-coronavirus era, most of these were done in a face to face meeting. Trustees can and do use methods aside from in-person assessments. These methods were always reserved for extraordinary circumstances. Boy, are we in one now!

So, the Office Superintendent Bankruptcy Canada has reminded Trustees that the COVID-19 pandemic is such a phenomenal circumstance and Trustees can conduct assessments making use of approaches other than face to face. Where video-conferencing is not viable, assessments may be done using a mix of telephone conversations and e-mail.

Credit counselling in personal debt settlement or bankruptcy cases – Trustees can offer counselling through telephone conversations or videoconference. The government is updating its software to allow for Trustees to file confirmation of credit counselling done this way as before it was not available. I am finding that our “customers” like this way of being able to deal with credit counselling. They don’t need to travel to our office and appreciate that we are still checking in with them.

Meetings of Creditors – The Office Superintendent Bankruptcy Canada is encouraging Trustees as the Chair of the creditors’ meeting to hold the meetings on time using either telephone conference call or video methods. Trustees can rely on the oral representation from everyone on the call as proof of attendance. The notice and legal ad calling the meeting of creditors looks a bit different than we are normally used to seeing because of this change. At the top of this Brandon’s Blog is an image of the legal notice I ran in a local newspaper.

Signatures/Oaths – I am now circulating papers that call for signature by means of e-mail. I then supply debtors the necessary support to explain the papers via videoconference. I then ask the debtor over the Zoom meeting if they swear or affirm that what is in the document is true. When they respond affirmatively, I then ask them to sign in the space provided. I then commission the document on my end, ask them to email me a copy of the signed document and put the original signed paper in the mail to me. So far it has been working smoothly.

Closure of non-essential businesses

The provinces have ordered the closure of non-essential businesses. So far, the businesses of lawyers and accountants have been deemed essential. The Office Superintendent Bankruptcy Canada has confirmed to Trustees that it wants the Canadian insolvency system to continue operating smoothly. So, the Trustee business is considered to fall under these same categories as being essential.

As you are aware, creditors right now seem to be choosing to either explicitly or implicitly forbear on amounts owing to them. They are trying to be supportive of people by recognizing that with reduced or no income, they need some breathing room. Although there are media reports to the contrary, as of now, debtors seem to be getting a break. Trustees are also encouraged to do the same if someone is having trouble making a surplus income payment in their bankruptcy right now. In fact, Trustees will probably be held to a very high standard when their conduct is reviewed by the Court.

In my April 29 Brandon’s Blog, I spoke about the whole issue of a debtor in a consumer proposal who misses three payments. If that happens, the consumer proposal is considered annulled. In this case, the Order the Ontario Court issued essentially gives debtors up to the end of 2020, and in some cases, beyond that date, to make up the missed payments.

COVID-19 insolvency frequently asked questions

There are some frequently asked questions that are coming up. So, I want to give the questions and answers to help people better understand what is going on right now in the Canadian insolvency system.

Q: Do consumer proposal debtors need to make up all missed payments by December 2020?

Response: This was not previously well explained. The answer is No. As much as an extra three monthly payments can be missed between March 13, 2020, and December 31, 2020, before a consumer proposal is considered annulled. Missed payments will need to be made up by the end of the proposal or a modified proposal will certainly need to be authorized by creditors. I am advising debtors to carefully think about whether it is necessary to miss making payments. There is no guarantee that later on, debtors will be able to make up the missed payments. So I am telling debtors that if they can still afford to make the payments, they should. Don’t choose to miss payments you otherwise can afford to. What if you can’t catch up? Do you really want your consumer proposal to be annulled later on after potentially you have paid everything except a few payments? That would be terrible..

Q: If a proposal was deemed annulled before April 27, 2020, when does it need to be revitalized to be covered by the order?

Response: A proposal that is revived by the steps taken under the Bankruptcy and Insolvency Act (BIA) on or prior to June 30, 2020, will certainly be covered by the order.

Q: If three payments were missed on or before April 27, 2020, but the Trustee did not send notices of deemed annulment, does anything require to be done to be covered by the order?

Response: Yes. When three payments prior to April 27, 2020, are missed out on the BIA states that a consumer proposal is regarded annulled despite administrative actions that may or might not have been taken. Thus, where the equivalent of three or even more payments has been missed out on, the consumer proposal will certainly need to be revived according to the BIA on or before June 30, 2020, in order to be active under the order.

Q: Is the duration under which a consumer proposal can be automatically revived likewise extended?

Response: No. The order allows the equivalent of as much as three extra payment defaults or an added three months time during the March 13 to December 31, 2020 timeline, prior to a deemed annulment of a consumer proposal. After this happens, a notice of revival has to still be filed within 30 days of the deemed annulment.

Q: Will the five-year restriction on consumer proposals be lengthened in order to offer debtors the time required to make up the missed out on payments?

Response: The BIA says that a consumer proposal needs to say that it will be completed within 5 years. Consequently, all payments, including missed repayments, have to be made during this same timeline. The only thing that will change that is if an amended proposal is filed and approved. After saying that, the BIA does not offer instant repercussions for defaults that lead to non-performance during this 5 year time period. If a consumer proposal has exceeded the five-year period but has actually not been annulled, it remains in force and therefore, in my view, can be completed.

This assumes no interested party goes to Court to ask for a court-ordered annulment. The Office Superintendent Bankruptcy Canada has formally stated that where hold-up in completion is due to COVID-19 reasons, they will not be seeking an annulment.

Everything old is new again or “Throwback Thursday”

There is one area that has not yet been covered off by the Order obtained by the Office Superintendent Bankruptcy Canada. When a person who does not fit under the $250,000 debt limit of consumer proposals, and for all companies, debt settlement restructuring plans under the BIA are done under Part III Division I Proposal section.

If a restructuring proposal cannot be filed straight away, the BIA allows for the filing of a Notice of Intention To Make A Proposal (NOI). The BIA statute says that unless extended by the Court, a Proposal needs to be filed within 30 days after the filing of the NOI. The Court can extend the timeline for a period not exceeding 45 days for any individual extension. In total, extensions cannot be more than 5 months. So in total, a debtor who has filed an NOI can be operating under the NOI for a maximum of 5 months and 30 days.

The Court has to order the extension prior to the expiry of the earlier time period trying to be extended. But the Courts are currently closed. They are only hearing emergency applications via telephone conference call or videoconference. Are a bunch of businesspeople fighting over money with the debtor asking for more time to file a Proposal an emergency? I can’t answer that right now. So if they can’t get into Court, what is the answer?

The Office Superintendent Bankruptcy Canada has recommended an old method. In the “old days”, before 1992, there was no NOI provision. So what did a person or company who needed more time to formulate and file a Part III Division I Proposal debt settlement plan, but needed to hold off creditors right now, do? They filed what was called a “holding proposal”. A holding proposal is no more than a proposal that says I promise to file a debt settlement plan that will clearly say how I plan to settle my debts either by a certain date or when a specific set of events happen.

The benefit was that the debtor got help from the immediate stay of proceedings. If the debtor could, he, she or it filed an amended proposal at the meeting of creditors which really said how the debts would be settled and then paid. If not, the creditors could consider the issues holding up the filing of the real proposal. If they felt it was in their best interests, they voted in favour to give the debtor the necessary time. If not, they voted it down and the debtor was immediately deemed to have filed an assignment in bankruptcy.

Where the creditors gave the debtor more time under the holding proposal, the Court approved them as long as the requirements the Court had to review were met. It was ultimately the creation of the NOI that was made to make it easier for debtors who were not ready to file a definitive proposal but needed relief from creditors to get it.

So now, the Office Superintendent Bankruptcy Canada is recommending for those cases where you just can’t get into Court, file a holding proposal. I am glad that Ira has kept a copy of a holding proposal in our document template file!!

Summary

I hope you found this case review helpful. It should be of particular interest to contractors, developers and builders in Ontario.

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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance, 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.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

The Ira Smith Team understands these concerns. More significantly, we know the requirements of the business owner or the individual that has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious.

It is not your fault you can’t fix this problem on your own. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, Starting Over, Starting Now.

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

[monkeytools msnip=”http://monkeyplayr.com/playr.php?u=5173&p=22219″]

 

Categories
Brandon Blog Post

CONSTRUCTION LIEN ACT: CAN YOU TRUST AN INSOLVENCY PROCEEDING?

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

Introduction

Matters involving the Construction Act, R.S.O. 1990, c. C.30 ( formerly known as the Construction Lien Act) is very complex. In this Brandon’s Blog, I will use the term that laypeople are most familiar with, being the former name of the provincial legislation.

Construction law is a specialty unto itself. It gets even more complex when a company involved in construction enters insolvency proceedings. There is normally a conflict in these kinds of files between:

In this Brandon’s Blog, I describe a recent 5 member panel decision of the Court of Appeal for Ontario who had to decide whether a trust created under section 9(1) of the provincial Construction Lien Act survives a sale by the Monitor in an insolvency proceeding under the federal Companies’ Creditors Arrangement Act (CCAA).

The case is Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197 (Urbancorp). The matter was heard on October 3, 2019. The unanimous decision was recently released on March 11, 2020.

Some background matters

Before getting into the actual case, there are two background matters that I should first explain. When I thought of these concepts and then the decision this way, it made it easier for me to understand.

The first issue is the types of insolvency proceedings. There are essentially four types of insolvency proceedings. Some are not mutually exclusive. Each one of them can be used for the assets of the insolvent debtor to be sold. I break down the insolvency proceedings list in this way:

  1. Using the restructuring provisions of either the Bankruptcy and Insolvency Act (Canada) (BIA) or CCAA.
  2. A bankruptcy administration under the BIA.
  3. A secured creditor taking enforcement proceedings on the assets subject to its security through the security itself by privately appointing a Receiver or Receiver and Manager.
  4. A secured creditor making an application to the Court that it is just or convenient for the Court to appoint a Receiver to act on behalf of all creditors in stabilizing an insolvent debtor situation and to come back to Court with recommendations on how to proceed, including the sale of assets.

The second issue has to do with trust claims under the Construction Lien Act. There are several sections in the legislation dealing with trust claims. As I stated above, it is a very complex topic. So, I am going to only focus on the one that is the subject matter of this case. That is section 9(1) of the Act. That section deals with a trust claim against the vendor of the construction assets. It states:

“9 (1) Where the owner’s interest in a premises is sold by the owner, an amount equal to,

(a) the value of the consideration received by the owner as a result of the sale,

less,

(b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises,

constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 9 (1); 2017, c. 24, s. 9, 70.

Obligations as trustee

(2) The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement. R.S.O. 1990, c. C.30, s. 9 (2).”

The distinction here that I want you to keep in mind is the words in the very first line “Where the owner’s interest in a premises is sold by the owner…”(emphasis added).

Now for the case.

The Urbancorp Construction Lien Act case

This case deals with Urbancorp and related companies that developed and was building a residential condominium project. Urbancorp was insolvent and filed first a Notice of Intention to Make A Proposal under the BIA. The proceedings were later converted by the Court into proceedings under the CCAA. The insolvency proceeding was in both cases under a Federal restructuring statue. The Court appointed a Monitor to oversee the insolvency administration. Through various Court applications and court orders, the Monitor was given the authority to market and sell the condominium assets. The Monitor did so.

Now the cash the Monitor received from the sale stood in place of the original condominium assets. Subcontractors brought an application before the lower Court claiming they had a valid trust claim under the Construction Lien Act. The lower court judge carefully reviewed the evidence and prior decided cases and came to the conclusion that the subcontractors did not have a valid trust claim against the assets. The subcontractors appealed the lower court’s decision.

In addition to appealing the lower court’s decision, they also raised with the Court of Appeal a constitutional question that comes up many times. The constitutional question is, does federal law always take priority, or trump (with a small “t”!!) provincial law. This is otherwise known as the concept of paramountcy. Stated slightly differently, the issue can be stated as does section 9 of the Construction Lien Act remain to have application after a bankruptcy or initial order under the CCAA? The Attorney General of Ontario also stepped in on that part of the case.

The Court of Appeal accepted this constitutional question to be decided so there were now two issues before the Court of Appeal; the issue of paramountcy and the trust claim issue.

The constitutional question

The Court of Appeal went through a very thoughtful and careful analysis. It confined the constitutional question to the facts of this case. The court concluded in this case:

  1. The trust created under section 9(1) of the Construction Lien Act is a valid trust under provincial law.
  2. The BIA excludes from property available to the creditors any property held in trust.
  3. Therefore, this provincial trust can be effective when there is an insolvency proceeding under the BIA.
  4. Similarly, with the CCAA legislation, it follows that a section 9(1) provincially created trust might be effective when the insolvency administration is subject to the CCAA.

Now for the actual appeal

The Appeal Court now turned to the lower court judge’s decision that a section 9(1) of the Construction Lien Act trust did not apply in this matter. The five-member panel again went through a careful analysis of the statute and the case law. They spent a lot of time reviewing an earlier Court of Appeal for Ontario decision which the lower court judge relied upon in his decision.

The Court of Appeal highlighted that in that decision the lower court relied upon, the owner, being the insolvent debtor, had no interest in the asset that the subcontractors were claiming a trust claim against. The reasons were:

  1. The asset was part of a package of assets sold.
  2. There was a secured creditor who had security over all of the assets of the developer.
  3. The proceeds less the expenses to produce the sale were less than what was owed to the secured creditor.
  4. The court allowed the cash from the sale to stand in place of the assets.

Using this framework, the Court of Appeal stated that a s.9( 1) trust only arises if the value of the consideration received by the owner from the sale of assets, which have actually been enhanced by the work or materials of the contractor, surpasses the amount of the mortgage debt. A trust will not occur if the value is zero, or if the mortgage debt is equal to or above any kind of sale proceeds.

Therefore, the decision that the lower court relied upon in disallowing the trust claim does not stand for the suggestion that control by a CCAA Monitor of a sales process, or the receipt by the Monitor of the proceeds of the sale by itself, avoids a s.9( 1) trust against the proceeds of the sale of the enhancement are shown to have a positive worth that surpasses the mortgage debt on the asset. That fact pattern was absent from the case relied upon.

The decision

Now, you remember at the beginning of this blog I went through the essentially four types of insolvency proceedings. The Court of Appeal also considered the various types. The court drew a distinction in them as it relates to section 9(1) of the Construction Lien Act. Also remember that from my quotation above of this section, it starts with “Where the owner’s interest in a premises is sold by the owner…”(emphasis added).

In a receivership or bankruptcy, the owner loses control of the assets. The vendor in a sale is either the receiver/receiver and manager or the trustee in bankruptcy, respectively. In those examples, it is not the owner selling its own assets. It is the licensed insolvency trustee (formerly known as a bankruptcy trustee) selling its right, title and interest, if any, in the assets of the debtor. So the vendor is the licensed insolvency trustee in its specific capacity.

The Urbancorp matter started out as a restructuring under the Proposal provisions of the BIA and was then converted by the Court and continued under a different restructuring statute, the CCAA. In an insolvency administration under the restructuring provisions/statue, the owner does not lose control of its assets. True that the Monitor is given court authority to make decisions, market and then sell the assets. However, one of the cornerstones of the appointment of a Monitor is that the owner does not lose control of the assets and the Monitor does not become the owner of the assets.

Rather, the Monitor gets its powers from the court. The Monitor is actually selling the insolvent company’s assets as the company’s representative or agent. So even though it is the Monitor doing the selling, it is doing so on behalf of the owner. This is very different than a sale by a receiver/receiver and manager or trustee in bankruptcy.

In the Urbancorp situation, the value of the consideration received by the owner from the sale of assets, which have actually been enhanced by the work or materials of the contractor, surpasses the amount of the mortgage debt.

Highlighting these distinctions, the Court of Appeal for Ontario overturned the lower court decision and upheld the subcontractors’ trust claim. It substituted the lower court decision with an order that a s.9( 1) trust under the Construction Lien Act applies for the sum of $3,864,429 held in the accounts of the Monitor on account of the Urbancorp companies, for the benefit of the subcontractors, pro-rata in accordance with the amount owing to each of them.

Summary

I hope you found this case review helpful. It should be of particular interest to contractors, developers and builders in Ontario.

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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance, 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.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

The Ira Smith Team understands these concerns. More significantly, we know the requirements of the business owner or the individual that has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious.

It is not your fault you can’t fix this problem on your own. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, Starting Over, Starting Now.

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.construction lien act

Categories
Brandon Blog Post

CONSUMER PROPOSALS IN ONTARIO UNFORTUNATELY TEST POSITIVE SADLY FOR COVID-19

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

Stay healthy and safe everybody.

<h2

Consumer proposal in Ontario: Introduction

The Superintendent of Bankruptcy (OSB) went to Court in Toronto on April 24, 2020, to see if consumer proposals in Ontario tested positive for the coronavirus. The Honourable Chief Justice Morawetz issued his decision on Monday, April 27. He put it to the test and it came out testing positive. The OSB is making similar applications in all the different provinces to obtain the same relief. In this Brandon’s Blog, I explain everything.

Consumer proposals in Ontario: The issue

In Ontario, an emergency was proclaimed on March 17, 2020, and the Courts were closed, except for proven emergency situations. This emergency status was extended from April 14 until May 12, 2020, subject to further review. The clock on any provincial limitation period for any proceeding in Ontario was stopped, retroactive to March 16, 2020 (Suspension Period). Ontario is not unique in this. All other provinces have taken similar action.

The closure of the Courts was to assist in slowing the spread of COVID-19. Emergency applications are being held only by conference calls either by telephone or online video. This unprecedented action has created delays in every Court hearing that is not an emergency. This included most insolvency or bankruptcy court cases.

All licensed insolvency trustees (formerly called bankruptcy trustees) (Trustee) started to review all of their cases to see which files were affected. It was not just what cases were scheduled for a court hearing. It actually had more to do with stipulated timelines in the Bankruptcy and Insolvency Act (Canada) (BIA). Various sections of the BIA layout time frames by which certain actions need to be taken.

The emergency situation created by COVID-19 and its containment procedures is impeding the ability of insolvency specialists, borrowers, financial institutions and other stakeholders to meet the timelines of the BIA. This is especially true of all the people in Ontario who chose to avoid bankruptcy by filing consumer proposals in Ontario.

The most important thing that allows someone to perform a successful personal debt restructuring plan is the fact that they are employed. They put their best foot forward and file for personal bankruptcy protection by making a personal debt settlement offer to their creditors. The creditors accept it and the person is making his or her monthly payments on time. Now because of COVID-19 they are laid off and don’t have their salary or wages they have been relying upon both to live and to fund their consumer proposal.

Although there are many timelines in the BIA, such as when a meeting of creditors needs to be held after bankruptcy or debt restructuring filing. However, the OSB helped alleviate certain of the impediments caused by the coronavirus pandemic by allowing Trustees to hold meetings by either telephone or online video meetings.

One timeline that could not be fixed by a telephone call or video chat is an insolvent debtor, either a person or company, making the debt restructuring payments on time. With no job, no income or not much corporate revenue for a business that had to shut down, those debtors were at serious risk of defaulting on its debt restructuring plan caused by these never before experienced issues facing all of us.

Trustees across Canada, both individually and through the two professional organizations, brought the issues forward to the OSB to seek clarification and a solution. That led to the OSB’s Court application. Of particular concern is the section of the BIA that states that a consumer proposal goes into default once three payments are missed.

consumer proposals in ontario
consumer proposals in ontario

Although the Court was asked to consider various issues, I am focussing on the necessity to keep up the monthly payments under a consumer proposal (or a Division I proposal).

Effect of COVID-19 on consumer proposals in Ontario

The OSB’s position was that COVID-19 associated interruptions have both increased economic pressures on consumer debtors and made adhering to legal demands for creditor protection more difficult. When consumer debtors fail to pay in accordance with their consumer proposal, it can be considered annulled under the BIA.

In that case, the consumer debtor then loses the bankruptcy protection from his or her creditors. Upon default and annullment, the legal rights of creditors get revived. While the Courts are closed, this may only result in harassing phone calls from collection agencies. However, when the Courts inevitably reopen, then the lawsuits can either continue or start flying. Remember, the Suspension Period halted the time clock, so, no one loses their rights because of the passage of time.

More importantly, because of the default, the consumer debtor is banned from filing another consumer proposal without court approval. If the person is bankrupt and is trying their best to annul their bankruptcy through a BIA debt settlement proposal, the default causing the debt restructuring plan to be eliminated as if it never happened, keeps the person in bankruptcy.

The OSB also submitted evidence to the Court that lots of people who filed consumer proposals in Ontario were already in arrears in their payments before COVID-19. It further stated that it expects that the defaults in payments are set to rise significantly because of this unique situation..

Consumer proposals in Ontario: The Court’s analysis and decision

Mr. Justice Morawetz went through a very detailed analysis of both the submissions and the law. He noted that what he was being asked to approve was “extraordinary”. He agreed with the OSB that these are unusual times.

The Court first defined two specific terms:

  1. The “Period of the Emergency” starts on March 13, 2020, and ends on June 30, 2020.
  2. The “Suspension Period” begins on the date of the Court’s Order, being April 27, 2020, and ends on June 30, 2020.

The Court then went on to say that its Order applies to:

  1. All active Division I Proposals are those filed with the OSB up to the end of the Period of the Emergency.
  2. All active consumer proposals in Ontario (Division II proposals) are the ones filed with the OSB or revived by the BIA up to the end of the Period of the Emergency. They exclude all those that were already deemed annulled, annulled or that were completely performed on or prior to April 27, 2020.
  3. All active bankruptcies are defined as all bankruptcies filed with the OSB up to the end of the Period of the Emergency. For further clarification, all bankruptcies where the bankrupt received his or her discharge before April 27, 2020, are not included. This makes sense because a discharged bankrupt is no longer subject to laws for undischarged bankrupts. The only party left to abide by timelines is the Trustee.

The Court then ordered the following concerning Commercial Proposals, consumer proposals and bankruptcies:

  • Division I or Commercial Proposals – the time for holding the meeting of creditors that is to take place during the Period of the Emergency, is expanded by the time of the Suspension Duration.
  • Consumer proposals in Ontario –
    • the time for holding the meeting of creditors that needs to be held during the Period of the Emergency is extended by the time of the Suspension Period.
    • an active consumer proposal will not be regarded as annulled unless the consumer debtor remains in default of:
      • When payments are to be made on a regular monthly basis or faster, the day on which the consumer debtor is equal to more than the amount of three payments and an extra amount equal to up to another three payments for defaults that occurred during the period of March 13, 2020, to December 31, 2020.
      • For payments are to be earned less often than on a regular monthly basis, the day that is 3 months after the day on which the consumer debtor is in default in regard of any type of payment except for those due between March 13, 2020, to December 31, 2020, will be the day that is 6 months after the day on which the consumer debtor defaulted.
  • Active bankruptcy matters –
    • The Trustee’s commitment to applying for a court hearing in the Period of the Emergency is to be extended by the time of the Suspension Period.
    • The time for the holding of the meeting of creditors scheduled to take place during the Period of the Emergency is expanded by the time of the Suspension Period.
    • The period fo time for setting up a mediation appointment that needs to happen during the Period of the Emergency is lengthened by the time of the Suspension Period.

      consumer proposals in ontario
      consumer proposals in ontario

Consumer proposals in Ontario: What about the major creditors in an insolvency filing?

In most personal insolvency filings, Canada Revenue Agency (CRA) is a creditor. In fact, it is quite normal for CRA to be the majority creditor. In order for consumer proposals in Ontario to be successful, the first step is to get the support of your major creditor.

Debtors have suffered a loss of employment or a reduction of earnings as a result of the COVID-19 outbreak. People are scared that they will default on their proposals. So the CRA is taking an approach consistent with the position of the OSB. It wishes to make sure that all Canadians are supported if they are experiencing economic challenges due to the COVID-19 pandemic.

So where the CRA is the majority creditor and the debtor is suffering financial hardship, CRA has advised that:

  • For Commercial Proposals, the CRA is providing a waiver of the default and providing a deferment of payments to September 1, 2020. The waiver and extension also apply to amounts owing to unremitted source deductions.
  • For consumer proposals in Ontario, the CRA supports the approval of an amended proposal that requires a deferment of settlements up to September 1, 2020.

Ideally, this will offer debtors the time to concentrate on other facets of their lives and wellbeing without having to go bankrupt. The September 1, 2020 date ties into other COVID-19 programs the government is running to help Canadian taxpayers during this crisis. For example, HST and income tax payments which would otherwise come due between March and July 2020 also have an extended payment program to this same September date.

Consumer proposals in Ontario: Summary

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.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses.

If anyone needs our assistance, 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.

Are you now worried just how you or your business are going to survive? Those concerns are obviously on your mind. This pandemic situation has made everyone scared.

The Ira Smith Team understands these concerns. More significantly, we know the requirements of the business owner or the individual that has way too much financial debt. You are trying to manage these difficult financial problems and you are understandably anxious.

It is not your fault you can’t fix this problem on your own. The pandemic has thrown everyone a curveball. We have not been trained to deal with this. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will listen to the unique issues facing you and provide you with practical and actionable ideas you can implement right away to end the pain points in your life, Starting Over, Starting Now.

The Ira Smith Team is absolutely operational and both Ira, as well as Brandon Smith, are right here for a telephone appointment, conference calls and also virtual meetings.

consumer proposals in ontario
consumer proposals in ontario

Stay healthy and safe everybody.

Categories
Brandon Blog Post

DO YOU INHERIT DEBT IN CANADA: CRA SAYS YES TO PROPERTY TRANSFERS

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Introduction

When conversations of financial obligations happen, people usually joke around and state they’ll finally be without debt upon their death. Many people who come to me for their no-cost consultation also ask, do you inherit debt in Canada? A recent decision of the Tax Court of Canada inspired me to write this Brandon’s Blog to discuss the issue.

What happens to debt when you die in Canada?

In general, what happens to debt when you die in Canada is that your Executor or Executrix (in Ontario it is called an Estate Trustee) needs to understand all of the deceased’s assets and liabilities. The Estate Trustee needs to make sure that all debts are paid off before making any distribution to the beneficiaries. Unless you have co-signed for or guaranteed someone else’s loan, you are not responsible for your spouse’s or parent’s debts upon their death. There at generally two exceptions.

The first is credit card debt where usually a spouse has a supplementary credit card on the same account. In that case, you need to look at the credit card agreement because the supplementary cardholder might be responsible for the debt. So if there are insufficient assets in the estate to pay off the credit card debt, the supplementary cardholder may have to.

Section 160(1) of the Income Tax Act (Canada)

Section 160(1) of the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (Income Tax Act), and its equivalent, S. 325 of the Excise Tax Act (Canada), can be utilized by the Canada Revenue Agency (CRA) to assess tax obligation liability to those who received a transfer of property from persons with tax obligations at the time of the transfer. This indicates if a person offers you something of value (virtually anything), while they have a tax debt, the CRA can and will certainly pursue you. CRA’s view is that the original tax obligation debtor ought to have sold whatever was transferred, and the funds used to pay off the tax debt.

This section of the Income Tax Act (or Excise Tax Act) especially comes into play during irathe administration of a deceased Estate or in an insolvency filing.

The Court decision, released on February 10, 2020, highlights this issue that death is no excuse when it comes time to pay the taxman!

The Court case facts

The CRA assessed the two daughters of the deceased father $96,640.96 each under section 160(1) of the Income Tax Act in respect of a transfer of property from their father prior to his death. Each daughter has appealed the assessments to the Tax Court of Canada. The two appeals were heard together as the evidence and facts were identical.

The agreed statement of facts was:

  1. The father was the annuitant of a Franklin Templeton Investments life income fund (the Income Fund) and prior to his death, he designated each of his daughters as his irrevocable beneficiaries under the Income Fund.
  2. In his last will and testament, he named his daughters as Estate trustees and beneficiaries of his estate.
  3. The father died on June 8, 2011.
  4. On or about July 26, 2011, $96,640.96 was transferred to each of the daughters.
  5. Each of the daughters received the $96,640.96 distribution on July 26, 2011, in satisfaction of their beneficial interest following the father’s death.
  6. The daughters provided no consideration in regard to the transfer of the $96,640.96.
  7. On July 3, 2015, the Minister of Revenue assessed each of the daughters $96,640.96 on the basis of subsection 160( 1) of the Income Tax Act.
  8. The father had an outstanding tax liability of not less than $96,640.96 with respect to his 2011 taxation year.

Tax liability re property transferred not at arms’ length

Section 160(1) of the Income Tax Act reads as follows:

“Tax liability re property transferred not at arm’s length

160 (1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) the person’s spouse or common-law partner or a person who has since become the person’s spouse or common-law partner,

(b) a person who was under 18 years of age, or

(c) a person with whom the person was not dealing at arm’s length,

the following rules apply:

(d) the transferee and transferor are jointly and severally, or solidarily, liable to pay a part of the transferor’s tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted for it, and

(e) the transferee and transferor are jointly and severally, or solidarily, liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act (including, for greater certainty, an amount that the transferor is liable to pay under this section, regardless of whether the Minister has made an assessment under subsection (2) for that amount) in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection limits the liability of the transferor under any other provision of this Act or of the transferee for the interest that the transferee is liable to pay under this Act on an assessment in respect of the amount that the transferee is liable to pay because of this subsection.”

When identifying the applicability of section 160, you need to also consider the interpretation of arm’s length in subsection 251(1) and the interpretation of related persons in subsection 251( 2 ). Subsection 251(1) defines related persons not dealing with each other at arm’s length.

It likewise considers a taxpayer and certain trusts not to deal at arm’s length. Finally, it offers that, in any other case, it is an inquiry of fact whether individuals not related to each other are, at a certain time, dealing with each other at arm’s length.

Paragraph 251(2)(a) of the Income Tax Act provides that, for the objectives of the Income Tax Act, related persons or persons related to each other are individuals linked by blood relation, marital relationship, common-law or adoption. Paragraph 251(6)(a) specifies that, for the purposes of the Income Tax Act, individuals are connected by blood relationship if one is the child or various other offspring of the other or one is the sibling of the other.

The Federal Court of Appeal

The Federal Court of Appeal had already determined that the following 4 standards must be used when taking into consideration subsection 160(1):

  1. The transferor needs to be liable to pay tax at the time of transfer;
  2. There need to be a transfer of property, either straight or indirectly, through a trust or any other method;
  3. The transferee must either be:
  • The transferor’s spouse or common-law relationship at the time of transfer or a person who has since come to be the person’s spouse or common-law partner;
  • A person who was under 18 years of age at the time of transfer; or
  • An individual with whom the transferor was not dealing at arm’s length.

4. The fair market value of the property transferred needs to be greater than the true value of the consideration given by the transferee.

The position of the parties

CRA’s position was that this was a transfer of property from the father to the daughters prior to his death at a time when he had an outstanding income tax liability.

The daughters stated that they accept that three of the four criteria set out by the Federal Court of Appeal have been satisfied. Particularly, the Appellants agree that their father indirectly transferred the property to each of them, that he owed income tax relating to the tax year in which the transfer took place or a previous tax year and that no consideration was paid by the daughters.

Accordingly, both CRA and the daughters agreed that the only issue before the Court to determine is whether the father and his daughters were dealing with each other at arms’ length.

The daughters’ position was that at the time of the actual cash transfer their father was dead. He did not exist, and for that reason, he was not a related individual within the meaning of Subsection 251(6), and therefore was not in blood relation with them.

CRA’s position was simple. First, the time of the transfer was not when the investment firm paid the cash to the daughters. Rather, it was when the father designated them as irrevocable beneficiaries. Second, the father and his daughters were related not by contract, but by blood. So, even death cannot take away that relationship.

The Court’s decision

The Court agreed totally with CRA’s position, upheld the assessments against each of the daughters and dismissed the appeals. They were found to have received the transfer of the property for no consideration at a time when the father owed income tax of a greater amount. The daughters were each liable to pay the amount of $96,640.96 to CRA. So in this case, if the daughters were asked do you inherit debt in Canada, they would have to answer a resounding YES.

Insolvent and alive

I also come across this issue when providing a no-cost consultation to an insolvent person wanting to know their options. Whenever they disclose that they have an income tax debt, I ask about transfers between the person and his or her spouse or children. I do this to see if there are may section 160(1) transfer of property issues.

If there are, an insolvency filing will merely highlight the transfer issue to CRA. When they get notice of the consumer proposal or the bankruptcy, they start their deep-dive investigation into the affairs of the bankrupt. As a licensed insolvency trustee (formerly called a bankruptcy trustee), I also have to advise the creditors of any issues like a transfer between related parties for no or little consideration. Once CRA determines a transfer took place between blood relations for little or no value being given or paid, they will assess the spouse or child under section 160(1) of the Income Tax Act. The outcome will be the same as in this Court case.

Do you inherit debt in Canada summary

So alive or dead, transfers of property between blood relatives for little or no value is always troublesome when it comes to income tax debt outstanding at the time, insolvency and death. I hope you enjoyed this do you inherit debt in Canada Brandon’s Blog and that you have a better understanding that it is possible.

I am finding that I am getting involved more often in deceased estate matters. My involvement is in advising people who are the Estate Trustee of an insolvent estate. I also have acted as the licensed insolvency trustee of a bankrupt deceased estate.

That work has now naturally led to obtaining assignments where my skill set as a licensed insolvency trustee comes in handy in a deceased estate. Two examples are having acted as the Estate Asset Manager in selling off assets in an estate and as acting as an Estate Trustee where there is no bankruptcy involved.

Because of that work, Ira Smith Trustee & Receiver Inc. has opened up a new business division called Smith Estate Trustee Ontario. In that business, as Estate Trustee, we offer options for the complicated estate concerns. We end the discomfort and irritations the stakeholders are experiencing. We use the experience and integrity that we have built up over the years, with compassion, to help the parties navigate the messy estate issues. We strive for a win for all beneficiaries, adding value by reaching the settlements and distributions they were unable to accomplish by themselves.

We provide a full range of services to provide solutions for the complex Estate issues to end the pain and frustration the stakeholders are experiencing. We apply our expertise and creative thinking to take care of all details to end your pain and achieve the goals of the beneficiaries and other stakeholders. Contact Smith Estate Trustee Ontario today for your free consultation.do you inherit debt in canada

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Brandon Blog Post

DIVORCE DEBT: NOT ALL EQUALIZATION ISSUES OR RULES ARE EQUAL IN BANKRUPTCY

divorce debt
divorce debt

If you would prefer to listen to an audio version of this divorce debt Brandon’s Blog, please scroll to the bottom of this page and click on the podcast.

Divorce debt and bankruptcy introduction

The topic of divorce debt and bankruptcy is always a tricky topic. There are 6 indisputable facts when it comes to this topic:

  1. The primary reason for marital failure and also separation is financial issues. Divorce.com
  2. Research shows that one out of every seven people who made an insolvency filing in Canada detailed separation, marital breakdown and/or divorce debt as a contributing variable to their economic troubles.
  3. One-third of all people facing bankruptcy issues are likewise experiencing a family breakdown and divorce.
  4. Bankruptcy won’t end all separation responsibilities. e. g. It does not end spousal support or child support.
  5. Personal bankruptcy of one of the spouses, where certain divorce debts are joint, the bankruptcy, notwithstanding the divorce, will negatively affect the non-bankrupt spouse.

With really only one exception, bankruptcy law in Canada has been purposely designed not to interfere with the administration of provincial family law proceedings.

The only exception to this in Ontario is that an equalization payment is an unsecured divorce debt from one spouse to the other. If the spouse who has to make the equalization payment goes bankrupt during or after the divorce proceedings, then that debt is a debt caught by the bankruptcy. The spouse entitled to receive the equalization payment will have a provable claim in the bankruptcy for at least that amount. This does not apply to support payments.

The purpose of this Brandon’s Blog is to review a recent Ontario court decision released on February 19, 2020, that determines the answer to the question: can a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) begin an equalization claim against the non-bankrupt spouse under the Ontario Family Law Act, R.S.O. 1990, c. F.3 (“FLA”).

Divorce debt: The facts

The facts of the case were not in dispute. They are:

  1. The husband and wife purchased a house in Toronto where they resided.
  2. The matrimonial home was bought solely in the wife’s name.
  3. The spouses separated in February 2015.
  4. He left the marital residence in October 2015 and has never returned.
  5. There is no disagreement that there the issues facing the husband and wife are irreconcilable, that the separation will be permanent and that the parties wish a divorce.
  6. Neither the husband nor the wife had commenced an application for an equalization of the net family property prior to the husband filing an assignment in bankruptcy. It was not a divorce debt claim that he made. The husband remains an undischarged bankrupt. His sworn statement of affairs shows liabilities totalling $282,700.
  7. The wife deposed that she paid the deposit and all other amounts to buy the marital residence. She also stated that in addition, she paid the mortgage, taxes, and all other expenses associated with the home.
  8. The separation and divorce proceedings began due to his gambling addiction and his financial infidelity and other forms of infidelity.
  9. Her affidavit sets out that there was never any intention that the husband would have any interest in the matrimonial house.

If the trustee is successful in asserting an equalization claim then she and her kids aged 12 and 15 would be forced to leave the home as it would have to be put up for sale in order to raise the necessary funds to pay the equalization claim.

divorce debt
divorce debt

Equalization in Ontario, divorce debt and bankruptcy

Trustees have various rights under the Bankruptcy and Insolvency Act (Canada) (BIA). One of those rights is to have the benefit of laws dealing with property in the BIA. There is no dispute that the marital home falls under the definition of property. There is also no dispute that if the husband had begun an equalization claim of divorce debt before his bankruptcy, the Trustee would have the right to continue that claim.

Under the FLA, where spouses are separated without any possibility of reconciliation, the FLA qualifies the partner with the lesser of the spouses’ two net family property to one-half of the difference between them. If the trustee is permitted to make a case for equalization and is successful, then his share of the marital residence assets (based on any applicable reductions or offsets) would be included as an asset in his bankruptcy estate.

There is no disagreement that equalization claim is a divorce debt chose in action that a Trustee inherits upon the bankruptcy of the spouse who started that action. The question is, can a Trustee, standing in the shoes of the bankrupt spouse who has not yet started that action, start it?

There are many cases dealing with valid scenarios in which an equalization claim had already been started. The applicant Trustee’s position is that the Trustee has the capability to begin a claim for equalization of the net family property where neither partner has made such a case. The Trustee is relying on the fact that an equalization claim is a chose in action which the Trustee inherits.

The Judge’s decision

The Judge disagreed with the Trustee’s position. The court held that while the decision to continue with the divorce debt equalization claim made by the spouse can be left to a stranger to the marriage, the decision itself to make the claim cannot. So the Trustee can continue the decision of the spouse to make a formerly begun equalization claim however the choice to make the claim may not be made by anyone other than the spouse. That decision continues to be personal as between the spouses.

The Judge dismissed the Trustee’s motion and ordered the Trustee to pay $20,000 in costs to the wife immediately.

divorce debt
divorce debt

Summary

I am not aware of that question ever having been asked and decided by the Court before. So for now, in Ontario, that is the answer to that kind of divorce debt question. Do you have too much debt because of marital breakdown or for some other reason? Does your company have excessive debt and in need of debt restructuring? Would it not be great if you could do a turn-around?

The Ira Smith team is available to help you at any time. We offer sound advice and a solid plan for Starting Over Starting Now so that you’ll be well on your way to a debt-free life in no time. For more information on a no-cost basis please call us.

The Ira Smith Team understands how to do a debt restructuring. More notably, we comprehend the requirements of the business owner or the person who has too much individual debt. Because you are dealing with these stressful financial issues, you are anxious.

It is not your fault you can’t fix this problem on your own. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will get you or your business back on the roadway to healthy and balanced worry-free operations and end the pain points in your life, Starting Over, Starting Now.

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Brandon Blog Post

CREDITORS: ALARM BELLS RING WHEN FINANCIAL RESTRUCTURING HEADS SOUTH

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Introduction

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

Personal bankruptcy and corporate bankruptcy in Canada

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

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

Creditors and a deemed assignment in bankruptcy

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

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

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

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

Financial restructuring under the BIA

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

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

Meeting of creditors to consider the proposal

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

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

The need for Court approval

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

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

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

How can a restructuring proposal fail or head south?

A financial restructuring plan under the BIA can fail if:

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

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

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

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

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

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

A Proposal default that does not automatically mean bankruptcy

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

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

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

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

Three types of bankruptcy in Canada

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

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

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

Do you have too much debt? Are you banking on some outside event that you have no control over, like an inheritance or gambling winnings to save you or your company?

If yes, then you need immediate help. The Ira Smith Team comprehends just how to do a debt restructuring. Much more notably, we know the demands of the business owner or the person who has too much debt. Due to the fact that you are managing these stressful financial problems, you are anxious.

It is not your fault you cannot fix this issue on your own. You have just been shown the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief now.

At Ira Smith Trustee & Receiver Inc., we take a look at your whole condition and layout a strategy that is as unique as you are. We take the load off of your shoulders as a part of the debt negotiation approach we will create just for you.

We understand that individuals facing financial troubles require a lifeline. That is why we can establish a restructuring procedure for you as well as end the pain you feel.

Call us now for a no-cost consultation. We will certainly get you or your business back on the road to a well balanced and healthy life and end the pain factors in your life, Starting Over, Starting Now.

creditors

Categories
Brandon Blog Post

3 TYPES OF BANKRUPTCIES: DO WE REALLY NEED IT?

3 Types of bankruptcies introduction

Two weeks ago I described the personal bankruptcy process Canada. Last week I described the Canadian corporate bankruptcy process. This week I want to start talking about the 3 types of bankruptcies in Canada.

3 types of bankruptcies: Voluntary and involuntary bankruptcy

In the last two weeks, I talked about both the personal and corporate bankruptcy processes. The way I described the bankruptcies it was all about the voluntary process of entering bankruptcy by filing an assignment in bankruptcy. That’s the 1st type of bankruptcy out of the 3 types of bankruptcies.

The second type which I will be speaking about today is the involuntary process of being pushed into bankruptcy. So how does one get placed into bankruptcy on an involuntary basis? It’s by a bankruptcy application.

3 types of bankruptcies: The bankruptcy application – the involuntary method

In order to file a bankruptcy application, one or more creditors must file the application to place the debtor, corporate or personal into bankruptcy. The creditor or group of creditors

must have unsecured debt of at least $1000 and the debtor must have committed at least 1 act of bankruptcy in the six months preceding the date of the bankruptcy application the acts of bankruptcy are laid out in the Bankruptcy and Insolvency Act (Canada).

3 types of bankruptcies: Acts of bankruptcy

So what are they? A debtor commits an act of bankruptcy in each of the following cases:

  • If in Canada or elsewhere the debtor makes an assignment of its property to a trustee for the benefit of its creditors.
  • A debtor makes a fraudulent gift delivery or transfer of all or part of its property.
  • The debtor makes any transfer of its property or any part of it that creates a charge on it that would be void as against a trustee and bankruptcy.
  • If with the intent to defeat or delay creditors the debtor departs out of Canada and absence itself.
  • If the debtor permits any execution or another process to be levied against it where it’s property is seized in order to be sold and the debtor does not redeem its property.
  • If the debtor exhibits to any meeting of creditors a statement of assets and liabilities that shows the debtor is insolvent if the debtor removes disposes of property or attempts to do so intending to defraud defeat or delay creditors.
  • If the debtor gives notice to any creditor that payments are being suspended or if the debtor ceases to meet its liabilities generally as they become do a bankruptcy application must be accompanied by an affidavit attesting to the debt and the alleged acts of bankruptcy3 types of bankruptcies

3 types of bankruptcies: What a bankruptcy application must look like

The affidavit must be deposed by a creditor or a representative of a creditor especially a corporate creditor and that representative must have personal knowledge of the facts. The bankruptcy application must be filed with the court having jurisdiction based on the location of the debtor. A bankruptcy application cannot be withdrawn without the permission of the court.

If there is a concern that the debtor’s assets might dissipate between the date of filing the bankruptcy application and the date of the court hearing the application the court can appoint the proposed licensed insolvency trustee to preserve and protect the assets but not too otherwise interfere in the running of the debtor’s business.

A notice of the time and place of the court hearing and all the motion material being used by the creditor or group of creditors must be served on the debtor.

3 types of bankruptcies: The bankruptcy order

A bankruptcy order could be issued 10 days after the service on the debtor of the bankruptcy application if it is not opposed or otherwise defended by the debtor. If it is defended then there will have to be a trial for the court to determine if a bankruptcy order should be issued and whatever the court decides. It is, of course, subject to the parties’ rights of appeal.

The debtor is bankrupt once the bankruptcy order is issued. The bankruptcy order puts on hold the enforcement rights of the creditors except for secured creditors holding valid security as soon as a bankruptcy order has been made the debtor’s property vests in the bankruptcy trustee and the bankruptcy administration begins.

To refresh yourself about personal bankruptcy administration check out my blog from two weeks ago. For a review again of the administration of a corporate bankruptcy check out my blog from last week.

Now the title of this blog is three types of bankruptcy. In the last two weeks, I have described voluntary bankruptcy for both an individual and a corporation by the filing of an assignment of bankruptcy. This week I talked about the involuntary bankruptcy process of the bankruptcy application for a bankruptcy order.

Next week I will discuss the third out of the 3 types of bankruptcies in Canada.

3 types of bankruptcies summary

I hope you enjoyed this 3 types of bankruptcies blog. The Ira Smith team is available to help you at any time.

We offer sound advice and a solid plan for Starting Over Starting Now so that you’ll be well on your way to a debt-free life in no time. For more information on a no-cost basis please visit our website or call us.

Do you or your company have excessive debt and looking for debt restructuring? Would not it be great if you could do a turn-around?

The Ira Smith Team understands how to do a debt restructuring. More notably, we comprehend the requirements of the business owner or the person who has too much individual debt. Because you are dealing with these stressful financial issues, you are anxious.

It is not your fault you can’t fix this problem on your own. You have only been taught the old ways. The old ways do not work anymore. The Ira Smith Team makes use of new contemporary ways to get you out of your debt problems while avoiding bankruptcy. We can get you debt relief now.

We look at your whole circumstance and design a strategy that is as distinct as you are. We take the load off of your shoulders as part of the debt settlement strategy we will draft just for you.

We understand that people facing money problems require a lifeline. That is why we can establish a restructuring procedure for you and end the discomfort you feel.

Call us now for a no-cost consultation. We will get you or your business back on the roadway to healthy and balanced worry-free operations and end the pain points in your life, Starting Over, Starting Now.3 types of bankruptcies

Call a Trustee Now!