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?
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.
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The purpose of this Brandon’s Blog is to describe the sad story of the Barrymore bankruptcy and what happens to severance pay Ontario (as well as other employee remuneration) when a company goes bankrupt. But first, a little primer.
Who is entitled to severance pay Ontario?
“Severance pay” is a settlement that is paid to a qualified employee who has their employment “severed.” When a long-term employee loses their job, it makes up an employee for losses (such as loss of standing) that happen.
Severance pay is not the same as termination pay. Termination pay is given instead of the called for notification of termination of work. Not everyone is entitled to severance pay.
A worker gets approved for severance pay if his/her employment is terminated and she or he:
has worked for the company for 5 or more years (whether continuous or not or active or otherwise) and
his/her employer:
has a payroll in Ontario of a minimum of $2.5 million; or
severed the employment of 50 or more workers in a six-month period because all or part of the company completely closed.
To determine the amount of severance pay Ontario a worker is entitled to receive, you multiply the employee’s normal wages for a normal week by the sum of:
the # of actual full years of employment; as well as
the # of completed months of employment divided by 12 for a year that is not finished.
The maximum amount of severance pay Ontario to be paid under the Employment Standards Act is 26 weeks.
The Barrymore bankruptcy
Barrymore was a Canadian producer, wholesaler and had a retail store of high-end furniture. It started in business in Toronto going back to 1919. On November 29, 2019, Barrymore tried a business restructuring by filing a Notice of Intention To Make A Proposal (NOI). On December 9, 2019, Barrymore sought and received, a Court Order enabling for an extension of time to submit a restructuring Proposal. Barrymore had until February 12, 2020, to submit its debt settlement plan and other necessary documents.
Barrymore filed its NOI to try to accomplish a few things:
Give it some breathing room from its creditors by invoking a stay of proceedings.
Allow it to operate during the crucial holiday shopping season.
Try to find a buyer for its business.
The post-NOI period
Once the NOI was filed, Barrymore began a sales process to try to find a buyer for the entire Barrymore business. Seventeen parties were identified as being potential purchasers. Only seven were interested in performing due diligence.
At the same time, the Proposal Trustee got proposals from two professional liquidators. They did that so in case no buyer closed a purchase of Barrymore, they could hit the ground running in liquidating the assets.
Unfortunately, nobody submitted an offer for Barrymore’s business. Hence, Barrymore’s bankruptcy.
Barrymore’s statement of affairs
The Barrymore sworn statement of affairs shows assets of $240,000. The assets are inventory ($200,000) and machinery and equipment ($40,000). Barrymore has 5 secured creditors for $4.3 million. The single largest secured creditor is its chartered bank with a claim of $3.7 million. Assuming the Bank’s security is good and in the first position, the estimated asset value of $240,000 won’t go very far!
The sworn statement of affairs also shows 118 unsecured creditors with claims of $3.2 million. So with total claims recorded in Barrymore’s books and records of $7.5 million and the books showing only $240,000 of assets, there is a huge imbalance. The family that owns the business is shown to be owed $1.7 million as an unsecured creditor. The former employees are also unsecured creditors.
With that financial imbalance, it is no wonder the licensed insolvency trustee (formerly called a bankruptcy trustee) in the Barrymore bankruptcy could not run the business. Instead, it received Court approval to enter into a liquidation agreement with one of the liquidators. The liquidation sale to the public has begun. Either the amount shown in the books for inventory value is too low, or, the liquidator has the authority to bring in new goods to put into the bankruptcy sale, or both. It is too much effort to go through for inventory worth so little compared to the Bank’s secured debt!
The employer went bankrupt did not pay employees
I don’t know what the real individual claims of each former employee might be, but it can include:
Wages or salary
Vacation pay
Termination pay
Severance pay
Benefits
The Barrymore employees are members of the United Steelworkers Union. The Steelworkers Toronto Area Council represents the former Barrymore employees. Both the Union and the former employees are naturally quite upset over the bankruptcy.
“Once again, working people are victims of a rigged system that disregards their interests while giving priority to wealthy investors,” said Carolyn Egan, President of the Steelworkers Toronto Area Council. Her comment is understandable. However, based on the sworn statement of affairs, it does not look like any “wealthy investors” are getting paid.
Protecting employees from the bankrupt employer
The United Steelworkers and the Canadian labour movement as a whole have been lobbying for reforms to Canada’s bankruptcy and insolvency legislation for numerous years to give greater top priority to workers and pensioners.
I have written many blogs on the topic of how various federal politicians have put forward Bills to give workers and retirees more rights. Several bills proposing such reforms were provided previously in Parliament, but none made it into legislation by the Liberal federal government.
Rather, only some warm words and minor amendments relating to Director responsibilities were included in the last federal budget and passed. To put it bluntly, the Liberal federal government has rejected enacting legislation to protect workers and retirees when an employer enters insolvency proceedings.
The Liberal majority government showed no interest in any meaningful reform in the area of employee rights in bankruptcy or insolvency. Perhaps for their next budget, the minority government will be forced to look seriously at it.
What happens if my employer owes me money & goes bankrupt?
The BIA created a device for workers of a company that entered either bankruptcy or receivership and are owed money. It does not cover employees of a company trying to right-size itself through a restructuring proposal. The Wage Earner Protection Program Act (WEPPA) provides for wages or benefits, including termination and severance pay, accumulated in the 6 months prior to the business becoming bankrupt or placed right into receivership.
The WEPPA ended up being law due to the federal government’s previous concern that when employees experienced “the company went bankrupt and didn’t pay me wages” there was seldom an opportunity for employees to obtain any of their income owed. As discussed, shortly, there are limits to or caps on what employees may receive.
WEPPA calculation: Who cannot submit?
However, you do not qualify for WEPPA if, throughout the time for which amounts owed to you are past due, if you:
were a Director or Officer of the business;
had a management placement in the company; or
were management whose tasks included making financial decisions on the negotiation or non-payment of amounts owing.
your previous employer has really gone into bankruptcy or receivership; as well as
you have overdue wages, salary, vacation pay or unreimbursed costs from the firm throughout the 6 months prior to the date of bankruptcy or receivership.
The WEPPA gives funds to Canadian employees owed money when their employer enters into either bankruptcy or receivership. The WEPPA provides a punctual settlement of qualifying employee earnings. The quantity of the qualifying employee earnings is an amount equivalent to 7 times maximum regular insurable profits under the Employment Insurance Act. As of January 1, 2020, the maximum yearly insurable earnings amount is $54,200. This means that the max amount a former employee can claim under WEPPA is $7,296.17 in 2020.
Receivers and bankruptcy trustees are required to tell employees of the WEPPA program and provide workers information regarding amounts owing. From the day of bankruptcy or receivership, trustees, as well as receivers, have 45 days to send out Trustee Information Forms revealing the amounts owing to each of the workers.
So payment under WEPPA is something, but may not fully compensate each former employee. Of the amount paid by Service Canada, who administers the employment insurance system, the amount of $2,000 per employee paid out is a super-priority against the current assets of the company. The balance of amounts paid to each employee, up to the maximum, are unsecured claims.
So, in Barrymore’s case, the total of all the individual first $2,000 amounts paid to each former employee will rank in first place against the inventory at the date of bankruptcy. This claim ranks ahead of all listed creditors, even the secured creditors.
Wrapup
Have you lost your job due to the fact that your employer entered into bankruptcy or receivership? Were you a Director of a company that went bankrupt or into receivership and now you are being chased for statutory personal liabilities? Is your company in financial trouble and you just don’t know how to save it? Is the pain, stress and anxiety of excessive debt currently negatively affecting your health?
We understand your pain. We will certainly ensure that no bill collectors call you. We will take all the migraines, stress and anxiety you are experiencing off of your shoulders and place it onto ours. We will repair things so that you can march forward in a healthy and balanced way, pain-free, debt-free and guilt-free.
It is not your fault that you remain in this scenario. You cannot fix it on your own since you have actually only been shown the old methods. The old ways do not work anymore. The Ira Smith Team makes use of brand-new ways which will return you promptly to a hassle-free life while getting rid of your debt.
Get in touch with the Ira Smith Team today. We have decades as well as generations of experience helping people and businesses seeking financial restructuring and debt relief. As a licensed insolvency trustee, we are the only specialists certified and overseen by the Federal government to provide debt settlement and financial restructuring services.
We provide a totally no cost appointment to help you solve your issues. We understand your discomfort that your debt creates. We can also end that painful feeling right away from your life. This will certainly allow you to start afresh again. Call the Ira Smith Team today to ensure that we can begin assisting you as well as get you back into a healthy and balanced, stress-free life Starting Over Starting Now.
The Federal government published in the Canada Gazette, Part II, Volume 153, Number 18, its intention to amend Canadian insolvency law for intellectual property rights (IP). On November 1, 2019, those changes came into effect. This change was part of the Canadian 2019 Budget. In Brandon’s Blog, I will discuss what the changes are and why they were made.
Insolvency law amendments for IP in Canada
Amendments relating to how IP is treated under Canadian insolvency law were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) and the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) was made. The BIA controls liquidations and restructurings for people and companies, and the CCAA covers large company restructurings.
The changes are meant to shield IP user rights in cases where the IP licensor becomes insolvent.
The BIA, as well as CCAA changes in the Budget Implementation Act, 2019, No. 1, are intended to improve retired life protection by making the insolvency procedure fairer and much more clear.
Previous Canadian IP insolvency law
Previously, Canadian insolvency law only explicitly dealt with IP in restructuring proceedings. Both the BIA and the CCAA allows for a debtor to disclaim or resiliate agreements. There are certain conditions that the debtor business must meet. This essentially boils down to being able to prove that the agreement in question is either so onerous and/or costly to the debtor business, that a successful restructuring is impossible if the debtor must continue honouring that agreement.
Specifically, as it relates to IP, the BIA, and CCAA if a debtor who is a licensor under an IP agreement disclaims the agreement, the licensee has rights. The licensee can continue to use the IP and gain all benefits it had bargained for, as long as the licensee continues to perform its responsibilities under the IP agreement concerning the use of that IP.
There was no such equivalent section for the receivership or bankruptcy of the debtor. So, if there was a liquidation, the licensee was not protected the same way they would be if the licensor debtor business disclaimed the agreement in financial restructuring.
Insolvency law reform
The amendments in Budget Implementation Act, 2018, No. 2 were done to protect copyright (IP) individual rights in situations where the IP licensor comes to be insolvent.
Effective for all filings beginning on November 1, 2019, or later, there are changes to the BIA and the CCAA, Canada’s main insolvency statutes. The November 1 amendments are done so that the rights of a licensee under an IP agreement where the licensor has disclaimed the agreement will be the same in a financial restructuring or a liquidation through either receivership or bankruptcy.
The following modifications accomplish the goal of safeguarding IP customer’s rights in instances where the IP licensor ends up being insolvent:
Many times as part of a corporate restructuring, the Court authorizes the company that filed a Notice of Intention To Make a Proposal, or a Proposal, to sell assets. The new amendments now make it so that if the corporation being restructured is the licensor under an IP agreement and sells it, the licensee retains its rights to use the IP, as long as they are and stay current under the agreement.
If a bankruptcy trustee (now called a licensed insolvency trustee) (Trustee) administering the bankruptcy (or receivership) of a licensor under an IP agreement sells the agreement, the licensee retains its rights under that agreement. Again, the licensee must be current in its obligations to continue enjoying the benefit of the IP agreement.
The Trustee disclaims the debtor licensor’s interest in an IP agreement as part of a bankruptcy (or receivership) administration. The licensee will continue to enjoy the rights and benefits of the IP agreement as long as it is current in all of its responsibilities under that same agreement.
If that IP is sold in a CCAA restructuring, the CCAA legislation has now been amended, for administrations that began after October 31, 2019, offers that an IP licensee in excellent standing can continue to utilize the IP.
Proposed BIA wording for IP insolvency proceedings
These are new amendments. There have not been any court decisions on these new amendments yet. The new legislation is not available yet as far as I know. However, my understanding is that the BIA will be amended, in part, to implement the changes concerning IP agreements as I have discussed, along the following lines:
“Intellectual property — sale or disposition
246.1 (1) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property that is included in a sale or disposition by the receiver, that sale or disposition does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.
Intellectual property — disclaimer or resiliation
(2) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property, the disclaimer or resiliation of that agreement by the receiver does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.”
Summary
I hope you enjoyed this Brandon’s Blog on the insolvency amendments effective November 1, 2019. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.
The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.
We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.
Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.
If you would prefer to listen to an audio version of this what is a division i proposal Brandon’s Blog, please scroll to the bottom and click on the podcast
Introduction
Over recent times, I have been receiving increased inquiries as to what is a division i proposal. The purpose of this Brandon’s Blog is to explain what it is. No person or company actually likes to enter a restructuring process to avoid bankruptcy, so hopefully, this discussion will be helpful to those that really need it to appreciate why if necessary, it is actually easy to like it; especially a successful one!
What is a division i proposal?
Division I is one of the two divisions of Part III of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3). Division I is a restructuring provision. It is available to people who owe more than $250,000 and companies with any level of debt, in need of financial restructuring.
At the beginning of any consultation with an insolvent person or for an insolvent company, is to determine if a successful restructuring can be accomplished. If not, the only other realistic alternative is bankruptcy. A successful restructuring of a person will allow that person to keep the assets they wish to keep and can afford to hold onto.
A company that successfully restructures will continue to provide employment. The jobs that will be preserved are not only those of the company that restructures. Its continuing to do business with suppliers who continue to do business with the restructured company will also avoid layoffs or terminations of their own staff. The reason for this is that their own volumes will not decrease, or decrease as much as if its customers went bankrupt and could no longer buy from them.
How do I start a restructuring plan for a person?
The first thing the insolvent person or company needs to do is hire a licensed insolvency trustee (LIT) (formerly called a trustee in bankruptcy). The reason why is because a LIT is the only one in Canada authorized to administer a restructuring proposal.
The LIT will discuss with the insolvent person about the nature of his or her assets and liabilities. Which assets are financed and which are owned free and clear. There will also be a frank analysis and discussion of the person’s income and expenses. The reason for this is to do preliminary credit counselling to help the person recognize how their historical household budget (whether they actually knew it or not) needs to change. Is there room in a new solvent budget to pay for an expensive asset, or does it need to be replaced by a less expensive one? A leased or financed auto is a prime example.
I want to make that determination upfront because a financed asset given up before the debt is fully repaid will create an acceleration of the full amount of that liability claim. I will want to make sure that it is done the right way, so the new accelerated liability will be caught as a debt being compromised, not a post-filing debt not caught in the financial restructuring.
Once the issues have been identified and the realistic options identified, I will then want to work with the person to put together a realistic post-filing cash flow budget. There are three main reasons for this, being:
I want to make sure that there is a budget that shows the person’s monthly expenses will be no more than, and hopefully less than, their monthly after-tax income.
We must be sure that the monthly cash flow shows the person can afford the monthly payments to the LIT required to have a successful restructuring.
One step needed to have a successful restructuring is to have such a monthly cash flow budget signed off by both the insolvent person and the LIT showing the person can survive through and afford a successful restructuring. Any creditor can request to see a copy of that signed off cash flow budget.
How do I start a corporate restructuring plan for a company?
The initial step in any corporate restructuring is for the board of directors to recognize and also resolve that the company is insolvent, that it needs to reorganize under this part of the BIA and to approve the hiring of a LIT.
I described the consultation process I first go through with a person to determine if they can successfully complete a restructuring proposal and then to start developing it. Similarly, I go through a consultation process with the senior management of the company.
I first want to determine if we have the basic requirement for a successful corporate restructuring. That basic requirement is, the company’s business, or one or more portions of the business, must be viable, notwithstanding that it is insolvent. There must be a true demand for the business and that it will be able to operate successfully once its financial position is right-sized. It may be the whole business, or it may be the case that we need to use the restructuring process to cut away the dead business units, in order to allow the viable one to survive and ultimately flourish.
By its nature, corporate restructuring is more complex than a personal one. There are many more moving parts to a company. However, the basic analysis is similar. What are the assets and liabilities of the company? Which business units are capable of being operated profitably? Which assets that are financed are essential to the future of the restructured company. Which are redundant and must be jettisoned. How will all the answers to these questions affect the company’s labour force? How many jobs will be lost and how many will be saved?
Ultimately, all these answers must be compiled into a cash flow statement. We must know does the company have sufficient financing or funds available to it so that it can properly operate during the restructuring process. There is no point in starting a restructuring if the company cannot survive the restructuring period. What will the company’s post-restructuring cash flow look like? We want to know that answer also to make sure that there is a real business that can operate profitably after coming out of the restructuring process. Just like in a personal financial restructuring, the company and the LIT must sign off on a realistic cash flow budget to show that the company can operate and survive the restructuring process.
What if the person or company needs immediate protection but is not ready to file the real proposal yet?
Just like in a bankruptcy, the filing of a Proposal brings in an immediate stay of proceedings. What this means is that no creditor can either begin or continue any action against the person or company for the enforcement or collection of a debt. Sometimes the insolvent debtor is under attack from a creditor.
Examples of proceedings against a person or company need protection from are numerous. The more standard ones are:
They need to defend a lawsuit but can’t afford the cost and therefore a default judgment is about to be issued.
Attendance is required at a judgment debtor examination to disclose the nature and whereabouts of their assets.
The Sheriff may be seizing an asset that if successful, it will stop the person or company from conducting business.
The BIA provides a way for an insolvent debtor under such an attack to invoke a stay of proceedings before they are ready to file their formal restructuring plan. That option is to first file what is called a Notice of Intention To Make A Proposal (NOI). This is a BIA filing that serves as a notification to the creditors that the debtor will certainly be making a restructuring proposal but it needs to have the stay of proceedings start right now.
How the concept of NOI evolved is very interesting. Before the 1992 amendments to the BIA, there was no such thing as an NOI. However, people and companies needed to invoke an immediate stay of proceedings, but the BIA did not contain such provisions. So, what was done, is that the LIT would prepare what was called a holding proposal. All the proposal said was that I promise to file a real restructuring proposal as soon as possible. That holding proposal was then filed which brought on a stay of proceedings.
Paperwork and procedures
The LIT needs to be satisfied that: (i) all the relevant details have been gotten; (ii) the person or company has a likelihood of a successful proposal restructuring; as well as (iii) the person’s or company’s cash flow is enough that it can pay its ongoing post-filing debts through the restructuring process.
The LIT then assists the insolvent debtor in completing the necessary paperwork. The LIT also prepares its own report. The LIT then does a mailing to all known creditors to advise them of the filing of the Proposal, a means by which they can file their claim with the LIT and a description of what the process is and what it all means. The documents are:
the Proposal
a statement of the person’s or company’s assets and liabilities
LIT’s report on the insolvent debtor, the Proposal and the LIT’s recommendation for voting in favour of (or against) acceptance of the Proposal
The meeting of creditors is then held to allow the creditors to vote on the Proposal. If the Proposal is accepted by the required majority of the creditors, then the LIT applies to Court for approval of the Proposal. Once approved by the Court, it forms a contract between the debtor and the creditors is formed. The person or company then needs to perform the promises it made in the Proposal to its creditors. This, of course, includes paying the necessary funding to the LIT for distribution to the creditors.
Executing on the Proposal promise
The Proposal of a person will require that insolvent debtor to make monthly payments to the LIT. The payments are made out of the person’s monthly cash flow, as indicated in its budget. The person can take up to 60 months to fulfill the promise of payments to the LIT for distribution to the creditors.
A company carries out its Proposal as it continues its operations. It hopefully succeeds in operating profitably. The firm would be conserving a particular amount of its earnings in money and paying to the LIT what is needed under the company’s restructuring strategy to create the Proposal fund it promised. The LIT after that makes the distribution to the creditors called for in the restructuring plan. When all the payments have actually been made, the company has effectively reorganized and continues its business having successfully completed its restructuring.
What happens if a Proposal is unsuccessful?
This is a very simple question to answer. What is a division i proposal if not successful? It is called bankruptcy. If a restructuring plan does not get either acceptance by the necessary majority of creditors or approval by the Court, then the person or company is automatically bankrupt. If the person or company fails to make all the payments called for, that also creates an unsuccessful restructuring. In any of those cases, It is as if the insolvent debtor filed an assignment in bankruptcy.
In that case, the LIT administering the restructuring program becomes the LIT administering a bankruptcy.
What is a division 1 consumer proposal?
I have been asked this question several times. Firstly, there is no such thing as a division 1 consumer proposal, but there is such a thing as a consumer proposal. A consumer proposal is found in Part III Division II of the BIA. So, it is called either a division 2 proposal or a consumer proposal.
Is consumer proposal worth it?
Before being able to decide if a consumer proposal is worth it, we need to understand what a consumer proposal is. The same way I described what is a division i proposal, I need to describe a consumer proposal. The consumer proposal process is a streamlined version of the personal division i proposal already described. It is only for people and not companies. Further, the person cannot owe more than $250,000, not including any loans registered against the person’s home, such as a mortgage or home equity line of credit.
I have written many times about different issues concerning consumer proposals. Rather than repeating it in Brandon’s Blog, I recommend you read my earlier blogs on the consumer proposal topic. Some of the blogs I have written for ease of reference are:
I hope that I have adequately answered the question of what is a division i proposal and how you can like it. The honest answer is that no one really does. However, if it is necessary for you or your company’s survival, it becomes very easy to like it.
Do you or your company have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.
We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.
Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.
Small and medium-sized businesses play a vital role in all worldwide economies. Bankruptcy experts in the USA identified problems. The Chapter 11 bankruptcy protection process for these companies was not working. It is pricey, usually ineffective and impractical. So, many businesses in the USA in need of restructuring could not have access to the US insolvency system.
On July 23, 2019, the US Congress passed the Small Business Reorganization Act (SBRA). On August 1, 2019, the Senate passed the Bill. On August 23, 2019, President Donald Trump signed it to enact it.
The purpose of the SBRA is to make business bankruptcy protection much less troublesome for small and medium-size ventures. The result is Chapter 11, subchapter V of the US Bankruptcy Code (Titled: Small Business Debtor Reorganization). The aim is to make it more affordable and will serve to save otherwise viable owner-managed businesses.
The purpose of this Brandon’s Blog is to discuss the new US legislation. I will also comment on an approach for the Canadian insolvency system. Can we streamline restructuring under the Bankruptcy and Insolvency Act (Canada) (BIA) for small business?
Changes made by the SBRA
A small company is defined in the SBRA as a person or company whose non-contingent debts (leaving out financial obligations to affiliates or people not dealing at arms’-length) are $2,725,625 or less and which chooses to be dealt with under the SBRA. The Act includes a new subchapter V to Chapter 11 of the US Bankruptcy Code. The purpose of this new approach is to make it simpler and more economical for small companies to efficiently restructure.
The main thrust of the Act is:
A creditor cannot lodge a Chapter 11 restructuring plan that it is prepared to support. Just the business can. The company’s plan must be filed within 90 days of the day it filed its bankruptcy protection application, other than in specific conditions.
A trustee comparable to those selected in a personal restructuring (Chapter 13) situations will be selected to manage each case.
A creditors committee will not be developed.
The Chapter 11 plan can change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.
The Court can approve a small business’ restructuring plan without the approval of any class of creditors. The Court must be satisfied that the restructuring plan treats all creditors fairly and does not prejudice any creditor class.
To be fair and equitable, the restructuring plan must offer that all earnings received throughout the term of the restructuring plan will available to fund the restructuring for a duration of 3 to 5 years.
So the onus is on the creditors to carefully review all cases filed under the SBRA. Creditors will need to retain bankruptcy experts to advise them. Their role will be to make certain that Courts appropriately examine restructuring cases for fairness and that they treat all creditors equitably. This will be especially true for those that do not have the support of the creditors.
It will be very interesting to see if this new legislation accomplishes its goal of making it simpler and less costly for small businesses to restructure and continue.
To qualify for restructuring under the CCAA, the insolvent corporation must owe at least $5 million. The CCAA is only for insolvent companies or income trusts to restructure. It is not for:
proprietors or partnerships
banks
telegraph companies (do people still send telegrams?)
insurance companies
companies to which the Trust and Loan Companies Act applies
Proceedings under the CCAA are a very heavily Court-driven process.
Restructurings under the Part III Division I proposal provisions of the BIA are available to both companies, proprietors and partnerships. It is also available to people who owe $250,000 or more, not including any mortgages or loans secured by the person’s principal residence.
For people who owe less than $250,000, a more streamlined restructuring process is available under Part III Division II of the BIA. These are called consumer proposals.
Restructuring under the proposal provisions of the BIA is not a heavily Court-driven process like the CCAA. Under consumer proposals, if all goes smoothly there is never a Court application.
So we have a simpler and streamlined version for people who have a smaller debt level but are still in need of restructuring their financial affairs. The same is also true for people with fewer or no assets that need to start over through the bankruptcy process. However, there is no equivalent streamlined version in Canada for small to medium-size businesses.
Could such a streamlined business restructuring model be developed? Not only do I think it could be, as one of the bankruptcy experts in Canada holding the designation of licensed insolvency trustee, I think it must be.
The statute for a streamlined Canadian business restructuring model
The CCAA is designed for large corporations. As I already stated, it is a heavily Court-driven process. Therefore, I think this eliminates the CCAA from developing a more streamlined version. It is not the case that it could not be done. It is just that a new section designed for simpler and more cost-effective CCAA proceedings goes somewhat against the purpose of the CCAA.
Therefore, I propose that CCAA legislation should remain available only to larger companies. Especially because the BIA, another federal statute, already includes restructuring provisions. It already has a streamlined version for bankruptcy and restructuring to avoid bankruptcy. So, why not a streamlined business restructuring section?
What would BIA streamlined business restructuring look like?
You might ask, why is this even necessary? Many small and medium-sized businesses are family-owned. There are even very large family-owned businesses. The Financial Post reports that “Family businesses own a bigger chunk of Canada’s economy than you think — way bigger”. They report it is a significant business sector contributing 35 percent of Canada’s real gross domestic product.
So with such an important business sector, it would make sense to allow those businesses on the smaller scale to qualify to have a simpler and more cost-effective way to restructure when they hit a financial bump in the road. If the viable parts of the business can be saved, it will continue to employ people, allow families to have a good quality of life and contribute to Canada’s GDP. It does not make sense to essentially kill off these smaller businesses because the cost of the restructuring will use up all the resources necessary to run the business.
I am not talking about family-owned businesses Bombardier Inc. and Loblaw Cos. Ltd. Rather, I am talking about the majority of Canadian entrepreneurial companies in the mid to small size range.
So here is what I propose for a streamlined restructuring process for small and medium-sized businesses. I will call it a new Part III Division III of the BIA. I will call it the General Scheme for Small Business Proposals (SBP) section of the BIA.
Size matters
The new SBP should be available to corporations, proprietorships and partnerships that are set up to conduct business. Their total debt should not be more than $1.5 million. There is nothing scientific about this number.
Statistics Canada could do an analysis as to the average debt load of Canadian businesses and an appropriate debt level could be picked based on it. For purposes of this Brandon’s Blog, I will use the $1.5 million amount.
I would not exclude loans from affiliates or people not dealing at arms’-length such as in the US legislation. In Canada, it is normal for the first funding of a company to come from the owners. Our chartered banks want to see a commitment from the owners before they will lend. Owners have sacrificed their own money to get the company off the ground. Just because that is how they had to finance the company, I would not preclude that debt from counting in the calculation.
The Canadian business landscape is different from that in the USA. Our numbers are generally smaller. In order to exclude non-arms’-length debt, you would probably have to lower the debt threshold I have mentioned. So, let us keep that debt threshold for discussion purposes and include all debt; secured or unsecured, arms’-length or related parties and owners.
If a person is not conducting business in his or her name, then this new SBP would not be for them. They would fall under either Division I or Divison II restructuring proposals.
Administration of restructurings under the SBP
Currently, only a licensed insolvency trustee (formerly called a bankruptcy trustee) (LIT) can administer restructuring proposals. Under Division I Proposals, the LIT is called the Proposal Trustee. Under consumer proposals, Division II personal restructurings, the LIT is called the Administrator.
So, for the new SBP, I will call the LIT the Small Business Administrator. It makes it obvious that it is the restructuring of a business qualifying under the new Division III. The use of the word “administrator” ties nicely into the word chosen already by Parliament for consumer proposals. So again, it makes it obvious that the LIT is administering a small business streamlined restructuring.
Since we are not talking about personal restructuring that falls under the consumer proposal provisions in this Brandon’s Blog, my suggestions for a streamlined business restructuring applies only to Part III Division I of the BIA Proposal restructurings to avoid bankruptcy.
Time to restructure
Under a Division I Proposal restructuring, the company or person can begin the restructuring process by filing either a Notice of Intention To Make A Proposal (NOI) or the Proposal itself. Under either filing, the debtor then has 10 days to file its cash-flow statement reviewed and approved by both the company or person and the LIT. Under an NOI filing, the company or person then has an additional 20 days (30 days after the NOI filing date) to file a Proposal (unless the time is extended by Court Order).
Most times with small to medium-sized businesses, the debtor is not current in all of its filings with the Canada Revenue Agency (CRA). This includes payroll remittances, HST and perhaps even income tax returns. In any restructuring where CRA is a creditor, they need to have the most current information from the debtor’s business filings, to be able to know the full amount owing by the business. They will not be able to properly assess the Proposal until they know the proper amount owing to them.
Also in any Proposal restructuring, we want to have a provisional income tax return prepared by the external accountant for the business. The provisional return is to show if any further tax liability exists for the fiscal year up to and including the date of filing of the Proposal.
Books and records will first have to be brought up to date. Then the accountant will need time to prepare and file the income tax return. There is a reason for this. We want CRA to know if there is a further liability.
Although there is no statutory provision allowing for this, CRA so far on an administrative level will allow for a split tax year in a restructuring. The liability for the fiscal year up to and including the Proposal date will be included as a debt in the restructuring. This is to the company’s or person’s advantage in the business.
Once the Proposal is filed, the meeting of creditors has to take place within 21 days of the Proposal date. In my experience, there is never enough time for the business to do all the necessary filings for CRA that I just mentioned. So, CRA always requests an adjournment of the meeting until such time as all the filings are up to date.
So, in my proposed streamlined version, I would propose to extend the filing of a Proposal after the filing of an NOI from 30 days to 90 days, without the need for the expense of going to Court seeking an extension. This should give enough time for the business to get all of its filings up to date and hopefully avoid the need for an adjournment of the meeting of creditors.
Creditors
There really is nothing that needs to be changed on how creditors file their claims. The same is true for the rules of how the LIT must assess all claims. I do like the idea in the new Chapter 11 subchapter V. That is the ability to change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.
In Canada, it is very rare, if not unheard of, for an entrepreneurial business to get a bank loan without the owner giving a personal guarantee. Many times the personal guarantee has to be backed by a hard asset, such as a pledge of the personal residence. If the secured debt can be restructured, shouldn’t the pledge agreement on a personal asset also be part of that restructuring?
So, I propose that in the new SBP, there should be the ability to change the legal rights of a lender registered against an individual’s primary home if the funds were used for the business or if the pledge was in support of a personal guarantee for funds borrowed by the business.
The types of changes to the security pledge will be unique to the individual restructuring. It has to make business sense and common sense. It is always up to the secured lender to vote against the plan if they don’t like it. In that case, the restructuring will fail. There will be great pressure on the business to bring forward the best possible restructuring plan and not go crazy on what changes the owner wants to make to the pledge of security.
Deemed acceptance and approval
Without going into all the rules, under the current consumer proposal legislation, there is the concept of deemed creditor approval and deemed Court approval. Unless creditors holding 25% in value of the proven claims request it, there is no need to hold a meeting of creditors. Creditors are asked to vote by way of voting letters when they file their proof of claim. If no obligation to call a meeting arises, then the consumer proposal is deemed accepted.
If a consumer proposal is either accepted or deemed accepted by the creditors, then there is probably never going to be a need for the LIT administrator to formally seek approval by the Court. The BIA reads that after the acceptance or deemed acceptance, the consumer proposal is deemed accepted by the Court unless the Official Receiver or “other interest party” requests it within 15 days after the date of (deemed) acceptance.
Currently, under a Division I Part III restructuring Proposal there are no deeming provisions for either creditor acceptance or Court approval. I would like to see in the new SBP section, that similar deeming provisions for both creditor acceptance and Court approval be implemented. This will save time and cost thereby being much more efficient.
No deemed bankruptcy
In a Division I Proposal, if the creditors do not accept the restructuring, or the Court does not approve it, then the debtor is automatically deemed to have filed an assignment in bankruptcy. There is not a similar provision for consumer proposals.
If the creditors do not accept a consumer proposal, then it just dies then and there and the debtor goes back to their normal unprotected state.
My proposal for the new SBP is that if the creditors do not accept or the Court will not approve the restructuring plan, that does not produce a corporate or personal bankruptcy. Rather, the debtor just goes back to their normal unprotected insolvent state and they have to fend off their creditors as best as possible.
It may lead to bankruptcy, but that will not be automatic. In some corporate situations, the cost of a bankruptcy proceeding just does not make sense. This is especially true if a chartered bank has security over all of the assets and will be enforcing its security through a receivership.
Directors/Owners
Right now a corporate restructuring Proposal allows for Directors to be released from debts that arise prior to the date of filing the Proposal. The kinds of debts that a Director can be released from are those solely resulting from their role as a Director. In other words, generally statutory claims they would be legally liable for.
As I already mentioned, more often than not, the only way a small or medium-sized company can get a bank loan is if the entrepreneur personally guarantees the debt. There are times where a corporate restructuring can be done, but the secured debt arrangements will have to be amended. If the lender is not willing to amend the personal guarantee security arrangements in place, then, the corporate restructuring does not make sense.
So in my dream of the SBP, if a secured lender agrees to a restructuring of their debt, then the Director(s) who may be personally liable will now be responsible for the revised secured lending arrangement. This would also go hand in hand with my proposed change to the ability to change the legal rights of a lender registered against an individual’s primary home if the mortgage/funding secured by the home was used in the person’s business and was not financing used to purchase the property.
Bankruptcy experts summary
So there you have it. The US government saw fit to add to its Chapter 11 bankruptcy protection statute to allow smaller companies to restructure. My vision for a Canadian version is the SBP section to form a new Part I Division III for the BIA.
To summarize, the changes to allow for a more efficient and less costly way to restructure smaller businesses would include:
The brand-new SBP will be offered to companies, proprietorships and partnerships that are established to run a business. It will be available to businesses with any kind of debt not greater than $1.5 million.
A LIT who will be called a Small Business Administrator, will oversee and be responsible for the business restructuring.
The time for the filing of a Proposal after the filing of an NOI will be extended from the current 30 days to 90 days. This will be without the need and cost of a Court application.
There ought to be the capability to transform the rights of a lending institution who has taken an entrepreneur’s home as security for a business loan or personal guarantee of such financing and the funds were put into the business.
Deeming provisions for both creditor acceptance and Court approval be implemented. It is already done in consumer proposals, so why not in streamlined business proposals? This will result in more efficient and less costly restructuring.
If the creditors’ decline or the Court will not approve the restructuring, that will not generate a corporate or personal bankruptcy. Instead, the debtor simply returns to their vulnerable financially troubled state and they will need to deal with their creditors as best as possible. In some cases it may lead to either bankruptcy or just a closing down of the business. Where there is a secured creditor, it will lead to the enforcement of their security. Either way, it won’t be an automatic bankruptcy.
A Director of a corporation can be released not only from statutory obligations arising from their office of Director. That person, or any other person, can have their guarantee of a debt to a lender be amended if the related business debt is amended in the restructuring.
There no doubt will be other areas that would need amending once all the relevant sections of the BIA were looked at. These are my ideas of the major amendments that could be made to the BIA, to allow for a more streamlined and cost-efficient restructuring for small and mid-sized businesses.
What about your business?
The financial restructuring process for either a large or small business is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.
The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we dealt with this problem and devised a corporate restructuring plan, we know that we can help you and your company too.
We know that companies facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.
Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.
Over the last two weeks, we have provided you with real case studies from our files. This week’s case study is about our involvement with acompany restructuring process so its business could continue to serve its clients and maintain most of the jobs.
Two weeks ago we described a personal insolvency case study,CLAIMBANKRUPTCYIN ONTARIO CASE STUDY: SHE REALLY WANTED TO BUT WE STOPPED HER AND SOLVED HER PROBLEMS, was about the surgeon who became insolvent because of a failed business venture and a divorce. The events leading up to the doctor’s insolvency convinced her that she had to go bankrupt. We then described the steps we took to restructure her affairs so she could avoid bankruptcy. She completed a successful Proposal under theBankruptcy and Insolvency Act (Canada). More importantly, she regained her confidence, we eliminated her pain points and she is once again thriving emotionally, physically and financially.
Last week, we described a situation where we used our skill set in a different way. In our case study,COURT APPOINTED ESTATE TRUSTEE CASE STUDY: IF IT WAS EASY YOU WOULDN’T NEED US, we described how we ended a war between the two beneficiaries under a Will and monetized the assets for their benefit. In that situation, the Court appointed us as the court appointed estate trustee.
Company restructuring process: The social media agency
The company was a social media agency. Their clients were some of the largest household names in North America. The company made sure that their clients’ websites were eye-catching, technologically advanced using leading search engine optimization (SEO) and search engine marketing (SEM) techniques. In short, their clients had to show up on page 1 of an online search and that their websites were eye-popping and functional. The company was a Canadian and North American leader.
Company restructuring process: Life got in the way
The sole shareholder and Director experienced some health issues with a family member; that required her attention. She was tending to that emergency and it took her away from the business for lengthy periods of time. Experienced senior staff ran the business in her absence. The entrepreneur felt she could deal with business matters by telephone. They established a process where she signed documents and cheques prepared by staff members using couriers.
Company restructuring process: Senior staff were not trustworthy
WRONG!! Although she trusted the senior staff, they turned out not to be trustworthy. They made mistakes and assured the owner that the documents and cheques they prepared were correct.
They also provided her status reports assuring her that all client activities and projects were all on schedule. The reality was that certain senior staff were plotting to establish their own agency, to steal clients. The sole Director felt something was not right, but she could not pinpoint from afar what the issues were. She returned to the office and discovered that her worst fears were her new reality.
Company restructuring process: How bad was it?
Things were very bad. Billings were way behind. Cash flow had dried up. As a result of the lack of cash flow, the company was now behind in rent and had collected but did not remit source deductions totalling over $300,000. Theunremitted source deductions formed a trust claim over all the company’s assets, ahead of the company’s bank. Learning all this information made the bank very uneasy and unwilling to lend any more money.
Company restructuring process: The short-term steps in financial restructuring
The sole Director and shareholder of the company contacted us. She was operating in panic mode. We assessed the situation. Our preliminary assessment was that catching up on the billings and the clients paying them in the normal course, good cash flow would return. There was also a good book of projects to start on; just not as many as normal. Thankfully, no clients had left yet.
The short-term plan we developed had 7 steps:
Fire the staff involved in the attempt to start-up their own firm and steal clients. Pay their normal wages and vacation pay, but not pay in lieu of notice.
File immediately a Notice of Intention To Make a Proposal (NOI) to invoke the stay of proceedings (Stay Period) so that no creditor could take action against the company.
Immediately bill all unbilled projects and begin collection efforts on any outstanding invoices.
Reach out to all major clients to reassure them that the entrepreneur was in control after returning from the family emergency and that she would personally be supervising all work performed.
Prepare a crisis cash flow model that thankfully showed that the company could cash flow itself since the amounts owing to the unsecured creditors was not caught in the restructuring.
The company required fresh capital. Luckily, the entrepreneur had enough funds to inject.
Meet with the company’s banker to explain the situation and share the emergency cash flow to show that the company did not need any new funds from the bank and that the principal was going to inject the temporary funds necessary. This gave the banker the assurance that the bank line would not be pressed any further, and that the entrepreneur was willing to put her money where her mouth was.
company restructuring process
Company restructuring process: The long-term plan
Now that the situation was stabilized, we worked with the company to look at longer term restructuring needs. It needed a business debt restructuring process. We determined that the company had too much space. As it did not need to immediately replace the terminated staff, it now did not need as much space. Certain space could be given up without affecting the main space and the business.
The landlord of course was not happy about this, but was willing to work with the company. If the landlord was not cooperative, the backup plan was to repudiate the unnecessary space through the formal restructuring plan.
The terminated employees retained legal counsel, who made himself known. Various issues arose from this. Were they going to seek leave of the bankruptcy court to launch litigation for damages against the company? What counterclaim could the company prove? Should we agree to attempt to value what claims they may have without litigation and include them in the restructuring plan?
Company restructuring process: The need for more time
Upon the filing of the NOI, the company obtained a first 30 day stay where its creditors could not pursue it and to file the real restructuring proposal. The company had to run for at least a few weeks to assess if the real performance was similar to the cash flow forecast developed on day 1.
Therefore, the company’s lawyers went to bankruptcy court to seek a 45 day extension for the company to file its bankruptcy protection restructuring plan. As Trustee, we had to prepare and file our report with the court to attest to the fact that:
an extension of the Stay Period is required to enable the company to continue to run in the ordinary course and complete its restructuring proposal;
the company continues to act in good faith and with due diligence; and
no creditor would be materially prejudiced by the extension of the Stay Period.
The Court granted the extension for this company restructuring process.
Company restructuring process: The corporate debt restructuring process
We could now finish the real corporate restructuring proposal through thisbankruptcy protection process. Given the unknown of the final valuation of the terminated employees’ claims, if any, we had to build in further protection for the company. We decided that the company’s bankruptcy protection plan would be what is known as a “basket proposal”. The amount of funds available for the unsecured creditors would be a fixed amount. So, whatever the claims ended up being, the size of the pot never changed.
Under thebankruptcy laws in Canada for a corporation undergoing a corporate restructuring, we had to ensure that there were sufficient funds for the unsecured creditors to share in “the pot”. The amount had to be realistic, to get the required majority of unsecured creditors voting in favour of the corporate restructuring plan. We also had to ensure that the bank was not being compromised in the proposal and that we communicated that clearly to the bank.
Company restructuring process: The government trust claim
As stated above, theunremitted source deductions were a trust claim. The restructuring bankruptcy laws in Canada state that such a claim has to be repaid in full within 6 months of Court approval of the restructuring proposal. We revisited the company’s cash flow. Although the company was on track, over the next year, money was needed to reinvest in the business.
The entrepreneur had no more money from her own resources. Therefore, after allowing for operations and the payment of the past unremitted source deduction amount of about $300,000, we could only offer the unsecured creditors roughly 5 cents on the dollar of the proven claims from future operations. The company promised to pay that amount within 6 months of retiring the government trust claim amount. So, within 1 year of Court approval, the unsecured creditors would get their money from the corporate restructuring plan.
Company restructuring process: Solving the terminated employee claims
Seeing this, theterminated employee group did not wish to spend funds on litigation, only to receive 5% of whatever claim they may have from the restructuring plan. We ended up agreeing to a very modest amount to represent their claims in the proposal.
The meeting of creditors was held and we obtained the required majority of creditors voting in favour of the business restructuring proposal. The creditors realized it was a better outcome than if they voted the company into bankruptcy. They voted in favour of the company restructuring process. We then obtained the necessary Court approval.
Company restructuring process: The result
The company turned its operations around. It survived the coup by the terminated employees. The company produced enough cash profits to retire the government trust claim debt within 6 months of court approval. It also paid the proposal fund amount to us as Trustee on time, to be distributed to the unsecured creditors.
The company successfully restructured and operated profitably afterwards. The entrepreneur was able to sell her company several years later and retire.
Company restructuring process: The financial restructuring process
Thefinancial restructuring process is complex. TheIra Smith Team understands how to do a complexcorporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.
The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we dealt with this problem and devised a corporate restructuring plan, we know that we can help you and your company too.
We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with theIra Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact theIra Smith Trustee & Receiver Inc. team today.
Call us now for a free consultation. We will get yourcompany back on the road to healthy stress free operations and recover from the pain points in your life, Starting Over, Starting Now.
One of our current insolvency assignments teaches creditors a valuable lesson if they wish to take part in a debtor’s restructuring proposal. Every licensed insolvency trustee maintains a website listing their current insolvency assignments that are noteworthy or of public interest. Today I want to tell you about a recent case of ours. It is not of public interest, but it is noteworthy, especially for trustees and lawyers practicing in the insolvency area. Notwithstanding the large volume of receivership and bankruptcy case-law, the issue we came across was novel and never decided in Court before.
Mr. R was the sole shareholder of a company that serviced the construction industry. Both Mr. and Mrs. R were both Officers and Directors of the company. The company became insolvent, could not continue and ceased operating. Mr. and Mrs. R., in addition to their personal debts, which were significant, were now also faced with extensive claims against them in their capacity as Directors.
Mr. and Mrs. R’s litigation lawyer referred them to us. We advised them that they should not declare bankruptcy, but rather attempt to avoid bankruptcy and restructure by filing a joint proposal under Part III Division I of the Bankruptcy and Insolvency Act (Canada) (BIA). Their had a complicated situation and they required an immediate stay of proceedings to deal with all the lawsuits against them.
Therefore, we first filed a joint Notice of Intention to Make a Proposal (NOI) on June 8, 2016. This first step provided Mr. and Mrs. R with a first 30-day grace period, where no creditor could begin or continue legal proceedings or enforcement against them while we were working with them to finish developing their restructuring proposal.
As Trustee, we served the NOI on all known creditors by ordinary mail, as we are required to under the BIA. We served one creditor, Royal Bank of Canada (RBC) at two addresses: i) legal counsel for RBC; and ii) BH, an agent for RBC that we regularly deal with. At the time of mailing out the NOI, we did not know if this agent would be on the file, but we provided them with notice out of to be extra cautious. We mailed the NOI on June 9, 2016.
The NOI sent to the creditors, including RBC, did not contain any proposal whatsoever, because it had not been written yet! This is standard for the filing of an NOI before the proposal.
In response to the NOI, by letter dated June 20, 2016, we received, from another agent for RBC that we had never dealt with before and who was not on our original mailing list, two proofs of claim, each in the amount of $438,434.31; one proof for each of Mr. and Mrs. R, individually.
This agent also sent a voting letter. It asked the Trustee to count RBC’s vote “with respect to the proposal” of Mr. and Mrs. R “against acceptance of the proposal made as of the 08th day of June, 2016.”
On June 22, we wrote to the agent advising that the Trustee’s position was that because no proposal was yet in existence, the RBC “vote” was invalid and that RBC would have to offer a proper voting letter once it received the proposal. This was also sent to RBC’s counsel. The Trustee received no response to this communication.
The debtors, Mr. and Mrs. R, filed a proposal July 7. We served the proposal on all creditors. The Trustee served RBC three ways to: i) RBC’s counsel; ii) RBC’s agent BH; and iii) the agent who wrote us the June 22 letter with enclosures. Our package included not only the proposal but notice of the first meeting of creditors and forms for proof of claim and a voting letter.
We received nothing further from RBC. The meeting proceeded on July 27. RBC did not attend. One creditor, with a claim of $278,561.29, attended and voted for the joint proposal. The joint proposal was deemed to have been accepted. Consistent with our position, as Trustee, we did not count the RBC June 22 “vote”.
After the acceptance of a proposal by the requisite majority of the creditors, a licensed insolvency trustee must make application to Court, for approval of the proposal. The proposal is not binding until there is a valid and subsisting approval order of the Court.
Our motion for approval of the joint restructuring proposal of the debtors, Mr. and Mrs. R, was heard on August 9, 2016. RBC opposed. RBC opposed on the basis that its vote against the joint proposal was not counted. RBC’s vote, if counted, would have defeated the proposal and Mr. and Mrs. R would be bankrupt.
Our lawyer made various submissions, including, that the “vote” of RBC:
was not valid;
that RBC was advised of this and did nothing to file a valid vote; and
RBC failed to attend the meeting of creditors.
As indicated above, only one creditor voted; it voted in favour of the joint proposal.
RBC claimed its vote was valid and ought to have been counted. The Court did not go so far as to say a creditor could never lodge a valid vote against a proposal before receiving it. In this case, the Court agreed with us and found the vote was not valid. The Court went on to say that the Trustee was correct in not counting it.
The threshold question was whether the Trustee was right to reject RBC’s purported “vote.” Section 53 of the BIA permits a creditor to assent or dissent “from a proposal” before a meeting. Section 54 says the creditors may accept or refuse “the proposal” at the meeting. However, the statutory scheme for creditor voting assumes there is a proposal.
The Court found that:
the agent’s purported “vote” was on its face defective;
there was no proposal of June 8;
RBC or its agent had never seen the joint proposal when it voted;
the Trustee was right to reject an obviously defective “vote”;
the Trustee made its position abundantly clear to RBC’s agents; and
RBC had every opportunity to cure the defect and it failed to do so.
What this means is very simple. Make sure that in anything you do, you understand what the rules are, don’t take your eye off the ball and never fall asleep at the switch. If this creditor’s agent and legal counsel had merely reacted to the mailing of the joint proposal and cast a proper vote, we never would have ended up in this situation.
There was nothing wrong with the proof of claim (although it was filed unnecessarily in duplicate). All RBC’s agent or lawyer had to do when it received the joint proposal mailing, was take 2 minutes to complete a new voting letter and send it in to the Trustee. If they had done this simple step, assuming they voted against the joint proposal, Mr. and Mrs. R would now be bankrupts. Instead, they are making their proposal payments to the Trustee to restructure themselves and avoided bankruptcy.
Mr. and Mrs. R have each secured full-time employment, and are making more money than in the last few years of running their company.
Being a Director of a corporation can be risky business. If the corporation is insolvent and continues to carry on business, and you continue to act as a Director, it can land you in a personal financial mess.
Are you experiencing financial distress because of acting as a Director or otherwise? Is your business struggling and you can’t seem to find a way out?
Do you believe you wages are owing to by your employer? People ask us what if my employer owes me money & goes into either receivership or bankruptcy.
We answer if wages are owed by your employer and the company is either in receivership or is bankrupt don’t despair; there is hope for you to recuperate monies owed to you. The Wage Earner Protection Program (“WEPP”) Act – WEPPA – in conjunction with an amendment to the Bankruptcy and Insolvency Act (Canada) – BIA – created a mechanism for employees to be compensated for claims of unpaid wages, commissions and vacation pay accrued in the six months preceding the employer files for bankruptcy or being placed in receivership and wages are owed to you along with claims for unpaid termination and/or severance pay.
Are there any exceptions to this? What are the rules?
There are a few exceptions. You are generally not eligible if, during the period for which you wages are owed to you by your employer, you:
were an officer or a director of your former employer
had a controlling interest in the business of your former employer
were a manager whose responsibilities included making binding financial decisions impacting the business of your former employer, and/or making binding decisions on the payment or non-payment of wages by your former employer
Who is eligible for the WEPP? You may apply if wages are owed to you by your employer and:
your former employer has filed for bankruptcy or is subject to a receivership
wages are owed to you by your employer, vacation pay, termination or severance pay from your former employer
amounts earned during the eligibility period or, in the case of termination or severance pay, your employment was terminated during the eligibility period ending on the date of bankruptcy or receivership
One more very important exception – it only applies if wages are owed to you by your employer and your employer is in either receivership or bankruptcy and owes you wages. If your employer is attempting a corporate restructuring under a Notice of Intention to Make a Proposal, a Division I Proposal or the Companies’ Creditors Arrangement Act, then WEPPA and its provisions do not come into play.
Claim limits
Regardless of the total amount owing to you, the maximum any employee can receive under WEPPA is the greater of $3,200 or four times the maximum weekly insurable earnings under the Employment Insurance Act (which is now greater than $3,200). Once employees file claims with both the Trustee and Service Canada, Service Canada pays their claims for owed wages by employer and Service Canada becomes the creditor. The amendment to the BIA has recognized WEPPA and created a priority charge that supersedes all secured charges except CRA’s deemed trust claim (and the reclaiming rights of farmers and suppliers) to a max of $2,000 per employee, secured against current assets.
Documentation
While no one wants – or expects – to be part of a receivership or bankruptcy, you should always keep detailed records of hours worked for any pay period. On any occasion when you discover there will be no paycheque, record the loss that you will suffer, such as not being able to pay bills or buy groceries. Ask for a formal explanation from your employer and keep detailed notes on your efforts. It’s important to prove that when owed wages by employer; you still expect to be paid, even if it’s late.
If your employer is in receivership or bankruptcy proceedings, and you believe you have a claim for owed wages by employer, find the trustee and get in touch with Service Canada. Have your records ready and make sure you get your Proof of Claim.
