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CANADIAN INSOLVENCY CASES: DECODING THE DETAILED TAXATION PROCESS FOR SUCCESSFUL COURT OFFICER FEES APPROVAL

canadian insolvency
canadian insolvency

Canadian insolvency: Introduction

As Canadian insolvency laws progress, so do the regulations surrounding the taxation of court officer fees. These fees often make up a considerable proportion of the expenses incurred during insolvency proceedings. It is absolutely essential for insolvency practitioners, legal professionals, and other parties involved in such cases to comprehend the critical factors that affect the taxation of court officer fees.

Knowing the taxation procedure for court officer fees in Canadian insolvency cases that are supervised by the court is significant for various reasons. The following points highlight some of the crucial aspects to consider:

  1. Promoting Transparency and Accountability: The taxation procedure guarantees transparency and accountability in the assessment of court officer fees. It encompasses an autonomous evaluation of the charges imposed by court-appointed officials, such as trustees, receivers, monitors, or liquidators. By comprehending this procedure, interested parties can ascertain that the fees are reasonable and justified.
  2. Safeguarding Stakeholder Interests: Insolvency proceedings encompass multiple stakeholders, including lenders, borrowers, and stockholders. The taxation process aids in safeguarding their interests by scrutinizing the fees imposed by court officers. It ensures that the charges align with the services rendered and prevents exorbitant or unwarranted levies.
  3. Fostering Confidence in the System: By establishing a robust taxation process, the court-supervised insolvency system in Canadian proceedings instills confidence among stakeholders. They can place their trust in the fact that the fees imposed by court officers undergo independent scrutiny and are not arbitrary. This bolsters the overall credibility and integrity of the Canadian insolvency process.
  4. Alleviating Financial Burdens: Insolvency proceedings can present financial hardships for both debtors and creditors alike. Familiarizing oneself with the taxation process enables stakeholders to identify any potential excessive fees and seek recourse if necessary. This helps mitigate additional financial burdens on parties already grappling with financial difficulties.
  5. Facilitating Efficient Resolution: The taxation of costs process fosters efficiency in resolving disputes pertaining to court officer fees. In the event of a disagreement over the charges imposed, a taxation hearing is conducted to settle the dispute. By grasping the intricacies of the process, stakeholders can navigate it adeptly, leading to a prompt resolution and averting unnecessary delays.

To provide a comprehensive overview, it is of utmost importance to grasp the intricacies of the taxation procedure pertaining to the fees charged by court officers in Canadian insolvency proceedings under court supervision. Such understanding not only ensures transparency but also safeguards stakeholder interests, fosters confidence in the system, mitigates financial burdens, and facilitates the efficient resolution of disputes related to fees.

In this Brandon’s Blog, I delve into the multifaceted aspects that shape the taxation of costs. Through this exploration, my aim is to offer valuable insights that will assist you in navigating this intricate domain. Come join us as we embark on an exploration of the nuanced intricacies of Canadian insolvency law and the myriad factors influencing the taxation of court officer fees.

Understanding The Role of Court Officers in Canadian Insolvency Cases

Definition and Role of Court Officers

Within the framework of a Canadian insolvency proceeding supervised by the court, a crucial role is fulfilled by the Licensed Insolvency Trustee (LIT). Acting as a court-designated official, the LIT plays an integral part in facilitating the management of the case and ensuring a fair and efficient process.

Endowed with accreditation from the Office of the Superintendent of Bankruptcy (OSB), LITs as insolvency professionals are highly skilled experts possessing extensive expertise and experience in the realm of bankruptcy and insolvency. They act as unbiased and autonomous professionals, tasked with overseeing the insolvency proceedings in compliance with legal norms and regulations.

As a court-appointed officer, the LIT’s responsibilities are multifaceted and encompass a wide array of duties. These may encompass:

  • When confronted with the financial circumstances of a debtor, it becomes imperative to adopt a comprehensive methodology. Licensed Insolvency Trustees (LITs) excel at appraising the debtor’s assets and ascertaining the optimal strategy for disbursing them among creditors. Through meticulous evaluation of the debtor’s fiscal position, LITs can contribute to guaranteeing a just and impartial allocation of assets to all relevant parties. With their proficiencies in debt and asset administration, LITs serve as invaluable for individuals confronted with financial problems.
  • Facilitating meetings of creditors: LITs organize and conduct meetings where creditors can voice their concerns, vote on important matters, and provide their consent or objections regarding the insolvency process.
  • Developing a proposal or managing bankruptcy proceedings: Depending on the type of insolvency proceeding (such as a consumer proposal or bankruptcy), LITs may assist debtors in developing a proposal to settle their debts or administer the bankruptcy process if the proposal is not viable.
  • Investigating the affairs of the debtor: LITs have the authority to investigate the debtor’s financial affairs, including examining their records, transactions, and conduct, to identify any fraudulent activities or preferences that may impact the distribution of assets.

The above is the case regardless of whether it is a personal insolvency administration or a corporate insolvency one.

canadian insolvency
canadian insolvency

Types of Court Officers in Canadian insolvency cases

In the course of Canadian insolvency proceedings, the court possesses the authority to carry out diverse designations involving a LIT to supervise and manage the operation. These designations hinge upon the nature of the insolvency instance and the particular circumstances. Here, I present the normal kinds of designations that a court could enact:

Bankruptcy Trustee

In scenarios of personal or corporate bankruptcy, the LIT acting as the trustee of the bankrupt estate is automatically an officer of the court. The trustee assumes the responsibility of administering the bankruptcy, handling the assets, and disbursing the proceeds to creditors in accordance with the Bankruptcy and Insolvency Act (Canada) (BIA).

Interim Receiver

In certain Canadian insolvency cases, the court may opt to appoint an interim receiver under the BIA, who will serve as a temporary custodian. The primary goal of an interim receiver is to safeguard and preserve the debtor’s assets during the insolvency process.

They are authorized to take control of the debtor’s property and make necessary arrangements to ensure its proper management and security. Typically, an interim receiver is appointed when:

  1. there is a risk of asset dissipation before the court hears an Application for Bankruptcy Order; or
  2. when the debtor intends to sell some or all of its operating assets during a Division I Proposal administration and requires court approval for the sale, with the LIT who is acting as Proposal Trustee also assisting in the sale.

Proposal Trustee

In cases where an insolvent debtor files a consumer proposal or a corporate proposal under the BIA, the LIT acting as the proposal trustee of the insolvent debtor is automatically an officer of the court. The proposal trustee is accountable for evaluating the proposal, conducting meetings with creditors, supervising the restructuring process and the implementation of the approved proposal and making the necessary distribution to the unsecured creditors.

Monitor

In larger corporate insolvencies under the Companies’ Creditors Arrangement Act (CCAA), the court designates a LIT to act as a monitor. The monitor acts as an independent third party and oversees the affairs of the debtor, ensures adherence to the CCAA procedure, and reports to the court and creditors. The monitor also oversees the restructuring process and the implementation of the restructuring plan.

Receiver

In the course of a Canadian insolvency proceeding, a receiver appointed by the court assumes control and oversees the management of a debtor’s assets. The receiver’s principal purpose revolves around the preservation of creditors’ interests and the facilitation of an organized administration process.

The appointment through a court-ordered receivership commonly occurs in situations where the debtor has defaulted and has no capacity to fulfill its financial obligations or when the need arises to safeguard and conserve the value of the debtor’s assets.

The receiver possesses extensive authority granted by the court to competently execute their responsibilities. These authorities encompass aspects such as assuming possession and control of the debtor’s assets, managing and liquidating assets, collecting outstanding debts, investigating the debtor’s financial matters, and disbursing proceeds to creditors in alignment with the court’s directives.

Liquidator

The court can appoint a liquidator in the case where the debtor company is solvent but the business is no longer viable. The company, with the assistance of the LIT who is the court-appointed liquidator, can collect on and sell its assets and there will be sufficient funds to pay off all the creditors and have money left over to distribute to the shareholders.

What do all of these court officers have in common?

All of the above various court officer appointments have one thing in common. To ensure an impartial and equitable process, the LIT appointed as the court officer assumes the role of an autonomous entity separate from the debtor and the creditors. They remain accountable to the court and bear a fiduciary duty toward the stakeholders involved.

The appointment of a court officer aims to facilitate the systematic resolution of the Canadian insolvency case (or in the case of a liquidation, the liquidation administration) while safeguarding the interests of the stakeholders involved, by entrusting the responsibilities to the LIT acting as an independent party possessing the requisite expertise in asset management and the resolution of financial disagreements and predicaments.

The appointments will differ depending on the specific circumstances of each case. The court possesses the discretion to enact appropriate designations with relevant powers granted to the LIT as the court officer to ensure the efficient administration and safeguarding of the rights of the debtor and creditors.

canadian insolvency
canadian insolvency

Understanding court officer fees in Canadian insolvency cases

In the realm of Canadian insolvency procedures, the proficiency of court-appointed officers is paramount and unswerving, as they assume a pivotal and irreplaceable function in the management and safeguarding of assets to benefit creditors. LITs bear the weighty responsibility of overseeing the course of insolvency proceedings, ensuring an impartial allocation of assets, and facilitating intricate financial resolutions.

As a testament to their outstanding contributions, court-designated officers are rightfully entitled to specific remunerations, acknowledging their unwavering commitment and specialized expertise. This section of the article aims to embark upon a comprehensive exploration of the diverse fee structures associated with court-appointed officers within the Canadian insolvency administration framework.

Initial retainer fee

Prior to their appointment and as a condition of consenting to act, court-appointed officers may necessitate an initial retainer fee. This fee acts as an upfront payment for their services and covers the preliminary expenses associated with commencing the insolvency administration process. The determination of the retainer fee typically hinges on the intricacy of the case and the complexity of the estate. The retainer amount is credited against the total fees earned as approved by the court.

Fee for administrative purposes

The administration fee constitutes an additional classification of court officer fees. Its objective is to cover the continuous administrative expenses accrued during the process of insolvency administration. This is the professional fee of the court officer, calculated by the hours worked by each level of staff of the court officer, at their standard hourly rates. This is the most common type of court officer fee.

Asset Realization or performance-based fee

It is possible in unique situations where the sale of assets will be very complex, the court officer earns an asset realization fee. It is earned only if the LIT is successful in disposing of the assets belonging to the insolvent estate or obtains a value above some pre-determined threshold amount. The court officer’s hard work in assessing, marketing, and selling assets is crucial to ensuring that creditors receive the best possible returns. Generally, the asset realization fee is calculated as a percentage of the total value of the realized assets or as a percentage of the revenue generated above the pre-determined threshold from the sale of assets.

Disbursements

In addition to the aforementioned fees, court-appointed officers are entitled to charge for their reasonable disbursements incurred during the course of their duties. Disbursements may encompass expenses relating to travel, professional services, legal fees incurred by the court officer, court filings, third-party valuations or appraisals, and other essential costs directly associated with the administration of the insolvency proceedings. The court officer is obligated to maintain meticulous records and furnish comprehensive accounts of the disbursements (and fees) for scrutiny and approval.

Significance of the checks and balances in the court taxation process for court officer fees

In all of the above cases, it is crucial to underscore those court-appointed officer fees and disbursements are subject to judicial oversight and scrutiny to ascertain their reasonableness and justifiability in light of the services rendered. The court possesses the authority to review and endorse these fees, factoring in elements such as the complexity of the case, the qualifications of the court officer, the scope of work performed, and the benefits conferred upon the stakeholders involved.

Court-appointed officers engaged in Canadian insolvency administrations are entitled to a potentially diverse array of fees, commensurate with their indispensable role in the management and preservation of assets. These fees encompass the initial retainer fee, administration fee, asset realization fee, performance-based fee, and reasonable disbursements. By duly compensating court-appointed officers for their unrivalled expertise and unwavering commitment, the insolvency administration process can proceed seamlessly, instilling confidence among creditors regarding the equitable and effective management of the insolvent estate.

canadian insolvency
canadian insolvency

Taxation process for court officer fees

The intricate procedure of taxing court officer charges in Canadian insolvency cases is a multifaceted framework that is influenced by numerous pivotal elements. Grasping these elements is of utmost importance for court officers and stakeholders alike, as it directly affects the amount of remuneration received by court officers for their labour and what is accessible to be allocated to the creditors in the priority of their ranking.

By conducting comprehensive evaluations of numerous Canadian insolvency cases, the court has established a series of benchmarks for the taxing process in scrutinizing and endorsing the fee and disbursements of a court officer. The taxing process is impelled by a variety of distinctive elements that necessitate meticulous attention to detail.

In essence, by acquiring a lucid comprehension of the taxing process and its implications, court officers can ensure that they obtain equitable compensation for their labour, while concurrently providing clients with a valuable service. Here are the elements that a court scrutinizes when determining the appropriateness of the fee and disbursements levied by its court officer.

Canadian insolvency cases: What are the factors that the court considers in the taxation of costs process for court officer fees

Preparation and submission of taxation of costs materials

The court officer’s application for the approval of its fee and disbursements is like any other court application. There needs to be the proper legal documents and evidence. The evidence is normally the court officer’s report to the court accompanied by invoices and detailed time dockets, sufficient to show what steps were taken in the administration for the specific date range, by who and at what professional hourly rate. This would be the case not only for the court officer but also for legal counsel providing legal services to the court officer.

This evidence would be accompanied by a sworn affidavit from an official from the court officer’s firm and the legal firm providing legal advice to the court officer, attesting to the accuracy of the time kept and that the hourly rates charged were the standard hourly rates. This would be for the administrative fee described above. If the court officer or its legal counsel feels they are entitled to any other type of fee, that evidence would also have to be put forward. An example would be a signed and accepted engagement letter between the court officer and the applicant in the original litigation that resulted in the appointment of the court officer.

The remaining procedures and documents are the ones that the lawyer acting on behalf of and providing legal advice to the court officer normally does such as obtaining a court date and preparing the notice of motion, factum and draft order, filing it with the court, effecting service on all interested parties and providing proof of service.

canadian insolvency
canadian insolvency

The Ontario court pays close attention to and follows several significant legal cases regarding the taxation of court officer fees when assessing the amounts in issue. These cases are:

Bank of Nova Scotia v. Diemer, 2014 ONSC 365 at paragraph 3, citing Re Bakemates International Inc., [2002] O.J. NO. 3659 (Ont. C.A.) – These cases establishes the essential principle that court officers must provide evidence to support the fairness and reasonableness of their requested compensation when seeking approval from the court. The court acknowledges its power to modify the fees and charges imposed by court officers, ensuring a just outcome is achieved.

Re Nortel Networks Corporation et al, 2017 ONSC 673 at paragraph 15, quoting Bank of Nova Scotia v. Diemer, 2014 ONSC 365 at para. 19, aff’d 2014 ONCA 851 – The court is not obligated to scrutinize the intricate details of dockets, hours, explanations, or disbursements. Instead, it has the authority to take into account all pertinent factors and make a more comprehensive assessment when awarding costs or fees. The Court of Appeal has emphasized that the primary focus should be on the achieved results, rather than the amount of time expended in achieving them.

Jethwani v. Damji, 2017 ONSC 3524 at paragraph 49 quoting HSBC Bank Canada v. Mahvash Lechcier-Kimel, 2014 ONSC 1690; aff’d 2014 ONCA 721.- In the context of a court-supervised Canadian insolvency case, if the actions of the court officer are considered imprudent and/or unreasonable, the fees and disbursements for the amounts in issue resulting from such conduct may be deemed unfair and unreasonable. This means that the court officer may not be entitled to receive full compensation for their services if their actions during the administration are deemed inappropriate or unreasonable.

Analyzing the prudence and reasonableness of the court officer’s conduct entails subjective interpretation, usually falling within the purview of the supervising court in Canadian insolvency proceedings. The court will consider an array of factors, including the accomplishments of the court officer, the encountered challenges, and the alignment of actions with the court’s directives and the best interests of all parties involved.

Should the court determine that the court officer’s actions were imprudent or unreasonable, they possess the authority to make appropriate adjustments to the fees and expenses. This adjustment is rooted in the notion that compensation ought to correspond to the level of performance and reasonableness demonstrated throughout the entire Canadian insolvency case.

What will the court specifically consider during the taxation process?

Based on the above cases, the Canadian courts will consider a non-exhaustive list of factors in determining whether a Court officer’s fees are fair and reasonable, including the:

  • nature, extent and value of the assets handled;
  • complications and difficulties encountered;
  • degree of assistance provided by the company, its officers or employees;
  • time spent;
  • court officer’s knowledge, experience and skill;
  • diligence and thoroughness displayed;
  • responsibilities assumed;
  • results of the court officer’s efforts; and
  • cost of comparable services and service providers in the jurisdiction when performed in a prudent and economical manner.

    canadian insolvency
    canadian insolvency

Canadian insolvency court officer best practices: Enhancing performance and safeguarding interests

In my view, court officers should adopt a set of best practices that can greatly contribute to their effectiveness. These practices should include the implementation of a signed engagement letter in Canadian insolvency court proceedings.

The Importance of a signed engagement letter

The signed engagement letter holds immense significance as it meticulously outlines the extent, nature, and expenses associated with the tasks to be undertaken by a court officer in Canadian insolvency court proceedings. By formalizing the agreement between the court officer and the Applicant, this document sets clear expectations and offers a wide array of benefits to both parties involved.

1. Ensuring clarity and defining the scope of work

With a signed engagement letter, the responsibilities and duties of the court officer become unambiguously clear. It provides a precise delineation of the work’s scope, encompassing specific tasks, deadlines, and deliverables. Such lucidity fosters a mutual understanding between the court officer and the Applicant, effectively minimizing potential misunderstandings or future disputes.

The possession of a signed engagement letter serves as concrete legal protection for both the court officer and the Applicant. It acts as tangible evidence of the agreed-upon terms, substantially reducing the likelihood of contractual conflicts. In instances of disagreements or misunderstandings, this engagement letter stands as a binding agreement, effectively safeguarding the interests of both parties.

3. Transparent cost structure

The engagement letter offers a transparent overview of the expenses associated with the court officer’s services. It explicitly outlines the fee structure, payment terms, and any additional costs that may arise throughout the court proceedings. This transparency enables the Applicant to aptly plan their budget, effectively averting any unforeseen financial surprises.

4. Aligning expectations

By explicitly defining the nature of the work to be performed, an engagement letter ensures a shared understanding between the court officer and the Applicant. It empowers the Applicant to comprehend the services they will receive and the level of assistance they can expect from the court officer. Simultaneously, it grants the court officer the opportunity to clarify their role and set realistic expectations for the Applicant, thus fostering a productive and harmonious working relationship.

5. Professionalism and credibility enhancement

When a court officer provides a signed engagement letter, it showcases their professionalism and credibility. This letter is proof that the officer is dedicated to upholding ethical standards and providing high-quality services. It also reassures the client that they are working with a skilled and responsible court officer. Overall, a signed engagement letter is a crucial element that enhances the court officer’s reputation and builds trust with their clients.

6. Documentation for effective record-keeping

The engagement letter assumes a pivotal role as an indispensable document for meticulous record-keeping purposes. It ensures that all pertinent details regarding the court officer’s engagement and the scope of work are meticulously documented in writing. This comprehensive documentation becomes invaluable when the need for future clarifications or reviews of the work arises.

In summary, incorporating a signed engagement letter into court proceedings is an indispensable best practice for court officers. It fosters clarity, safeguards legal interests, establishes transparent cost structures, aligns expectations, enhances professionalism and credibility, and facilitates effective record-keeping. By adhering to these practices, court officers can significantly enhance their performance and effectively safeguard the interests of all parties involved.

Advantages of meticulous record-keeping for fee statements in court-supervised Canadian insolvency proceedings

Within court-supervised Canadian insolvency proceedings, the court officer assumes a pivotal role in managing the intricate financial aspects of the process. The presence of comprehensive and precise documentation of fee statements yields substantial advantages for both the court officer and the stakeholders involved. Let’s delve into these benefits in greater depth:

1. Transparency and accountability

Thoroughly documented fee statements establish transparency and accountability concerning the financial transactions carried out by a court officer. They empower stakeholders to obtain a lucid comprehension of the imposed fees and the corresponding services rendered. By upholding meticulous records, the court officer can manifest their unwavering dedication to impartiality and ethical conduct, fostering trust among the stakeholders.

2. Justification of fees

Court officers are entitled to receive fair compensation for the provision of their services. By diligently documenting fee statements, court officers can substantiate the fees they levy. These records delineate the precise tasks undertaken, the invested time, and the intricacy of the involved work. Such comprehensive details enable stakeholders to grasp the value that the court officer brings forth and diminish the likelihood of fee-related disputes.

By ensuring the scrupulous documentation of fee statements, court officers can mitigate the risk of legal issues and the need for additional legal services stemming from erroneous or incomplete records. Given the exacting financial reporting requirements within court-supervised Canadian insolvency proceedings, precise and comprehensive fee statements contribute to adherence to regulatory standards, thereby minimizing the potential for legal entanglements.

4. Augmented stakeholder confidence

Stakeholders, encompassing creditors, the debtor being the insolvent company, and the court itself, repose profound trust in court officers’ ability to navigate the intricacies of insolvency proceedings. Meticulously documented fee statements act as tangible evidence of the court officer’s professionalism and dependability. This documentation instills stakeholders with the assurance that the court officer conducts their duties transparently and diligently, cultivating confidence in the overall process.

5. Efficient resolution of disputes

In situations where fee disputes or disagreements arise, the presence of thorough documentation becomes invaluable. Detailed records provide a foundation for resolving conflicts through negotiation or formal channels. They serve to facilitate discussions, clarify any misinterpretations, and reach mutually agreeable solutions. This expedites the resolution of disputes and upholds positive relationships between the court officer and stakeholders.

6. Adherence to reporting requirements

Court-supervised Canadian insolvency proceedings necessitate compliance with various reporting obligations, including financial disclosures. Meticulous documentation of fee statements ensures adherence to these reporting requirements. Accurate and well-documented fee statements streamline the preparation of essential reports, facilitate the maintenance of audit trails, and fulfill regulatory obligations. This enables court officers to fulfill their responsibilities effectively and ensures the smooth progression of proceedings.

7. Cultivation of professional reputation

Maintaining meticulous documentation of fee statements contributes to the cultivation of a court officer’s professional reputation. Accurate and organized records serve as a testament to the court officer’s unwavering commitment to professionalism and attention to detail. This meticulousness resonates positively within the legal and insolvency communities, potentially opening doors to future opportunities and referrals.

canadian insolvency
canadian insolvency

Advantages of timely and effective communication for court officers and stakeholders

Timely and effective communication plays a vital role in the court officers’ quest to maintain transparency and foster positive relationships with stakeholders. By giving due importance to clear and consistent communication concerning their actions, activities, and fees charged, court officers bring forth numerous benefits for themselves and the stakeholders involved. Let’s delve into these advantages in detail:

1. Improved comprehension and trust

Timely and effective communication empower court officers to articulate their actions and activities in a manner that stakeholders can readily grasp. By providing regular updates and reports, court officers ensure that stakeholders possess a comprehensive understanding of the progress and status of the proceedings. This level of transparency nurtures trust and instills confidence in the court officers’ capabilities, thereby fostering a productive and harmonious working relationship.

2. Heightened collaboration and cooperation

Maintaining open channels of communication enable court officers and stakeholders to exchange relevant information and actively engage in the proceedings. Effective communication facilitates seamless collaboration, leading to improved decision-making and problem-solving. This collaborative approach streamlines the legal process and paves the way for a more efficient resolution.

3. Timely resolution of issues

Timely communication empowers stakeholders to promptly address any concerns or issues that may arise. By promptly sharing information and seeking feedback, court officers can identify and resolve potential challenges or conflicts in a timely manner. This proactive approach minimizes disruptions, reduces delays, and ensures that the proceedings stay on track.

4. Transparent cost structure and budget management

Effective communication regarding fees charged equip stakeholders with a clear understanding of the costs involved in the legal process. Court officers can provide detailed explanations of the fees charged, including any additional expenses. This transparency empowers stakeholders to effectively manage their budgets, enabling them to anticipate and plan for the financial aspects of the proceedings.

5. Mitigation of misunderstandings and disputes

Clear and timely communication acts as a safeguard against misunderstandings and potential disputes. By providing comprehensive explanations of their actions and activities, court officers can address any questions or concerns that stakeholders may have. This proactive approach reduces the likelihood of conflicts and ensures a smoother legal process.

6. Stakeholder satisfaction and retention

When court officers prioritize effective communication, stakeholders feel valued and actively involved in the proceedings. Regular updates, timely responses, and clear explanations contribute to stakeholder satisfaction. Satisfied stakeholders are more likely to continue working with the court officers in the future and may even provide valuable referrals, thus enhancing the court officers’ reputation and expanding their professional network.

Timely and effective communication ensures that court officers adhere to legal and ethical standards. By providing regular updates and accurate information, court officers demonstrate their commitment to transparency and accountability. This adherence to standards upholds the integrity of the legal process and instills confidence among stakeholders.

Canadian insolvency: Conclusion

I hope you enjoyed this Canadian insolvency Brandon’s Blog on the issue of the taxation of a court officer’s fee and disbursements. Managing your personal or business financial affairs in today’s ever-challenging and changing business landscape is no small feat, but with the right plan in place, it’s possible to stay or get back on track.

Revenue and cash flow shortages are critical issues facing people, entrepreneurs and their companies and businesses that are in financial distress. Are you now worried about just how you or your business are going to survive? Are you worried about what your fiduciary obligations are and not sure if the decisions you are about to make are the correct ones to avoid personal liability? Those concerns are obviously on your mind.

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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 uses innovative and cutting-edge methodologies, to adeptly navigate you through the intricacies of your financial challenges, ensuring a resolution to your debt-related predicaments without resorting to the rigours of the bankruptcy process. We can get you debt relief now!

We have helped many entrepreneurs and their insolvent companies who thought that consulting with a Trustee and receiver meant their company would go bankrupt. On the contrary. We helped turn their companies around through financial restructuring.

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.

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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.

canadian insolvency
canadian insolvency
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Brandon Blog Post

RESTRUCTURING OF COMPANY: SOMETIMES AN UNPOPULAR CORPORATE BANKRUPTCY IS NEEDED TO RESTRUCTURE YOUR COMPANY TO IMPROVE PROFITS

restructuring of company

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Restructuring of company introduction

Following its bankruptcy, Canadian retailer Le Château announced that it would relaunch online under new ownership. Although extreme, in certain unique circumstances, corporate bankruptcy could be used to restructure a company’s debt and operations.

Often, companies realize they need to restructure too late when fewer options remain and saving the company is more challenging. A restructuring process started on a voluntary basis can generate greater value than a company restructuring done under the imminent threat of bankruptcy.

A restructuring plan is more likely to succeed when managers understand the fundamental business/strategic challenges their company faces. In a corporate restructuring, creditors are often required to make significant concessions, which have significant implications for them as well as for the company.

Using the Le Château case as an example, this Brandon Blog discusses certain aspects of the restructuring of company debt, assets, and operations.

restructuring of company
restructuring of company

Restructuring of company: Le Château relaunches online following bankruptcy

Following its filing for bankruptcy protection last year, Le Château, now run by Suzy’s Inc., announced its comeback from bankruptcy by launching an eveningwear collection online before the holidays. YM Inc., which owns many brands including Suzy Shier, acquired the intellectual property assets and certain merchandise and other assets.

Herschel Segal founded Le Château Inc. in 1959 as “Le Chateau Men’s Wear”, a menswear store in downtown Montreal’s Victoria Square. Le Château began selling imported clothes from Europe when it added women’s clothing in 1962. As time passed, Le Château sold more fashionable imports to young people instead of its original traditional clothing style. Since then, Le Château has designed, imported, and retailed apparel, accessories, and footwear for women and men.

Its 240 locations at its peak made the Canadian retailer a staple of nearly every mall and shopping district in the country. Le Château Inc. (and its US subsidiary Château Stores Inc.) filed for bankruptcy protection in October 2020 under the Companies’ Creditors Arrangement Act (“CCAA”). It also announced it would close all 123 stores in Canada. The Court granted the companies permission to run a liquidation process in November 2020. It used the CCAA to liquidate its assets rather than for the restructuring of company operations and finances.

To adapt to new retail industry trends, the company implemented efforts to right-sized its brick-and-mortar locations. 122 of its 243 stores were closed during the eight years prior to filing for bankruptcy. The Company’s right-sizing efforts and its important investment in its e-commerce platform helped mitigate the decline in brick-and-mortar revenue, but not enough to compensate. During the three fiscal years prior to its insolvency filing, the Company lost about $130 million in net income. As COVID-19 arrived in March 2020, the end of Le Château was sealed. Proms, weddings, galas, and parties were cancelled, decimating the retailer’s dress sales.

Le Château began liquidating its 121 stores in November 2020, as well as its transactional website. In December 2020, the licensed insolvency trustee acting as CCAA Monitor was also appointed Receiver because all assets were secured by loans to various financial institutions. A court granted the Company’s request to approve a sale transaction with Suzy’s Inc. in June 2021. Le Château’s intellectual property, merchandise, furniture, fixtures, equipment, and signage were purchased by Suzy’s. At that point, the inventory liquidation was completed. Before the Canadian company filed for bankruptcy, the companies changed their names to plain numbered companies as part of the sale of the intellectual property.

A bankruptcy filing was made by the company formerly known as Le Château Inc. on September 2, 2021. Le Château, now run by Suzy’s Inc., has announced its comeback from bankruptcy with the launch of an eveningwear collection ahead of the holidays.

restructuring of company
restructuring of company

Restructuring of company: Reasons for corporate restructuring

If the company is both insolvent and not viable in its existing form, the normal insolvency process would be receivership, bankruptcy or both. Instead of using the provisions of the CCAA to liquidate a major retailer, a Court-appointed receiver appointed under Quebec law as well as the Bankruptcy and Insolvency Act (Canada) would have accomplished the same thing as the CCAA process used.

In the example of Le Château, selling assets out of a financially sick corporation to a new owner who will operate the assets in a similar business is actually a form of restructuring of company operations. Because the old corporation has too much debt and too many operational problems, it cannot continue. However, as Suzy Shier has shown, there was a good business reason for them to buy certain assets, and they now plan to run a new Le Château business. A new owner was responsible for the restructuring of company operations and finances.

As a result of a financial crisis, a company may undergo restructuring to change the financial or operational aspects of its business. Restructuring can occur for several reasons, including:

  • deteriorating financial fundamentals;
  • a lack of profitability;
  • disappointing sales revenue;
  • debt that is too high; and
  • an industry with too much competition or the company is no longer competitive.

Under financial duress, a company engages in restructuring when it makes significant changes to its financial or operational structure. In reorganizing internally, a company’s operations, processes, departments, or ownership may change, enabling it to be more integrated and profitable. If shareholders and creditors reach an agreement on a reorganization of assets, issuance of equity to reduce debt, or bankruptcy as long as the business maintains operations, the company may sell its assets.

Restructuring a company usually involves cutting costs, such as payroll, or shrinking the company through asset sales. After restructuring is completed, the business operations should become smoother and more economically sound.

restructuring of company
restructuring of company

Restructuring of Company: The company restructuring process

Restructuring a company has many benefits, as well as many reasons for a company to restructure. The benefits of corporate reorganization can be summarized in two words: survival and success. The right financial advisory firm can help business owners deal with these challenging issues, whether they are reorganizing for survival or strategic repositioning for the future.

Your company should select restructuring professionals who are experienced in your specific industry as well. As soon as major problems are discovered, the company should begin restructuring its operations and finances. Early diagnosis allows a company to fully evaluate its options and avoid being cornered.

Corporate business restructuring can be divided into several stages:

  • assessing the organizational restructuring needed;
  • implementing the organizational restructuring;
  • identification of weaknesses;
  • developing detailed plans to correct these weaknesses through restructuring;
  • calculating and securing funding;
  • raising private equity to help improve operations and balance sheet;
  • evaluating the impact of implemented strategies and amending them as necessary;
  • comparing actual financial results to the budget to ensure the restructuring remains on track; and
  • making necessary corrections.

Companies often do not allow enough time to plan and implement restructurings. A successful restructuring of a company’s finances and operations depends on how much upfront assessment work was done, how detailed the plan is, and how well the restructuring strategy is implemented.

Reorganizations can take a long time depending on whether they are reactive or proactive. An example of a reactionary restructuring is when bankruptcy proceedings force a company to make changes within a specified period. A corporate executive officer who recognizes a change in consumer preferences and positions their company to be a leader in tomorrow’s market is an example of being proactive.

In today’s economy, companies face many challenges, and company restructuring can be a short- and long-term answer to maintaining company viability. Company restructuring concerns vendors and consumers, stockholders and financial relationships, employees and inventory, quality control and environmental impact, equipment and technology, and management and marketing.

In addition to the reasons for restructuring, every major restructuring has some of these common elements:

  • an improved balance sheet;
  • reduced tax obligations;
  • divesting underproductive assets;
  • Outsourcing some functions that can be more cost-effectively done by outside suppliers rather than by company employees;
  • reducing debt loads;
  • relocating operations;
  • restructuring marketing, sales, and distribution;
  • renegotiating employment contracts;
  • refinancing debts; and
  • changing the company’s public image.

Restructuring company operations and finances are expected to result in long-term survival, profitability, and viability, regardless of the reasons and the specific steps taken.

restructuring of company
restructuring of company

Restructuring of company summary

I hope this restructuring of company Brandon Blog post was helpful for you. Are you worried about your financial situation because you are dealing with substantial debt challenges as a business owner or as an individual? Call me if you have too much debt. It is not your fault. To deal with financial problems, you have actually only been shown the old ways. These old methods no longer work.

The Ira Smith Team employs new modern methods to get you out of debt while avoiding bankruptcy. Let us help you obtain the relief you deserve.

You are under a lot of pressure. We understand your discomfort. A new approach will be designed for you that is as unique as you and your issues, both financial and emotional. Your burden will be lifted and the dark cloud hanging over you will be blown away. We will design a debt settlement strategy for you. We are confident that we can assist you right away.

People and businesses facing financial troubles need a realistic lifeline. There is no one-size-fits-all approach with the Ira Smith Team. Even though we are licensed insolvency trustees, we have found that not everyone has to declare bankruptcy in Canada. Most of our clients never declare bankruptcy. We help people and companies avoid bankruptcy.

This is why we can create a new restructuring process for paying off debt that will be custom-built for you. You’ll have a unique experience, just like the economic difficulties and discomfort you are experiencing. If any of these describe you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation. Let us get you or your business back on track, driving to healthy and balanced trouble-free operations and eliminating the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

restructuring of company
restructuring of company
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BANKRUPTCY PROCESS: RIDICULOUS BUT TRUE BANKRUPTCY CHAPTER 11 CASE AND ONTARIO RESTITUTION LAW DEBT

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

Bankruptcy process introduction

This week two totally unrelated items caught my attention when thinking about the bankruptcy process. The first is about Hertz Global Holdings Inc. (Hertz) bankruptcy Chapter 11 case in the United States. An update to my recent blog about Hertz titled HOW HERTZ TEACHES US MODERN AND RISKY RULES OF BUSINESS BANKRUPTCY IN CANADA AND THE USA.

The second item that caught my eye is a decision of the Court of Appeal for Ontario. The decision really didn’t have anything to do with bankruptcy. However, the Court of Appeal did reference the Bankruptcy and Insolvency Act (Canada) (BIA) in its decision. It really is about restitution law and the resultant debt.

The zany twist to the Hertz bankruptcy Chapter 11 case

In my June 8 blog about the bankruptcy process used by Hertz, I wrote about the irrational behaviour of investors in trading Hertz stock. Legendary investor Carl Icahn sold his entire Hertz holdings at $0.72 per share. The stock had touched a low of $0.40. For some reason, investors bid the stock up to $5.53. The stock at the time of writing this blog is just under $2.

This made no sense at all. The only thing I can attribute it to is that investors saw an opportunity to buy in during upward momentum, sell-off with a profit, and leave someone else holding the bag. Hertz debentures are selling for pennies on the dollar. The assumption being that those creditors will largely get wiped out as part of the bankruptcy chapter 11 case. If creditors get next to nothing, then for sure shareholders are going to get wiped out. That is what happens in these bankruptcy process cases.

This activity did not escape Hertz’s attention. Now the restructuring team got an idea. What if we could sell more stock, given the interest in our shares. If we sold $1 billion worth, while telling everyone it was worthless, then we would have the necessary cash to fund our restructuring. Better yet, Hertz would not have to borrow money with high rate debtor-in-possession financing. All they needed was to convince the court to approve it. It sounds like a Mel Brooks comedy script!

The Hertz bankruptcy process application for share sale approval motion

June 19, 2020 UPDATE: Late yesterday, Hertz announced that it has determined to end a questionable stock sale of as much as $500 million since the Securities and Exchange Commission questioned and put a hold on the insolvent company’s plans. Hertz is currently in talks for a debtor-in-possession bankruptcy loan of up to $1 billion to fund its business reorg.

On June 11, 2020, Hertz filed its motion for court approval to issue more of its common stock. Since the common shares are being actively traded, Hertz filed its emergency motion to seek emergency relief from the court to allow the Debtor to try to capture value for the unissued Hertz shares for the benefit of the bankruptcy process Estate.

The approval sought from the court was approval to participate in a sale arrangement with Jefferies LLC (Jefferies), to act as the sales representative. Under the sale contract, Hertz might offer and sell common shares of Hertz having an aggregate offering value not to surpass $1 billion. Hertz has 246,775,008 unissued common stock shares. Jefferies will use its best efforts to market, as the sales representative the unissued shares of common stock.

In support of their motion, Hertz advised the court that:

  1. The recent market prices of the trading quantities in Hertz’s ordinary shares creates a special possibility for Hertz to raise funding on terms that are much superior to any kind of debtor-in-possession funding.
  2. If successful, Hertz might possibly offer up to and an aggregate of $1.0 billion of ordinary shares.
  3. Unlike regular debtor-in-possession funding, the issuance of the ordinary shares would certainly not enforce restrictions on Hertz or its bankruptcy process restructuring efforts and would certainly not hinder any of the creditors.
  4. Additionally, the stock issuance would bring no repayment obligations to Hertz.
  5. Other than the Jeffries fee, there would be no other significant costs to obtain the funding through the sale of shares.
  6. Hertz would include disclosure in any prospectus for the sale of the unissued common shares highlighting that a financial investment in these Hertz’s shares involves substantial dangers. This includes the danger that the common stock can inevitably be worthless (emphasis added).

What the court said

After deliberating on the issue, on June 12, 2020, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware granted Hertz’s motion. She ordered that:

  1. Hertz is allowed, but not required, to enter into the Sale Arrangement with Jeffries and perform all obligations called for in the agreement.
  2. Hertz may, but again is not required to, market the unissued common shares.
  3. Jeffries may earn its fee in accordance with the Sale Agreement.

This is truly novel, yet whacky. Anyone who would buy these shares must be gambling on the fact that market activity will remain hot and that they will be able to sell the shares for a profit.

As I mentioned above, creditors are going to be given a haircut. So how can shareholders expect a return on their investment? Any savvy creditor being asked to agree to a bankruptcy process restructuring plan certainly will insist that creditors must receive payments on account of what they are agreeing to give up, should funds become available, before shareholders see one penny.

Lots of people are going to be left without a chair when the music stops. It will be fascinating to see how this all works out.

Restitution law

This matter is totally unrelated to the Hertz bankruptcy process. It is in Ontario and I found the Court of Appeal for Ontario’s decision very interesting. Especially so because it really didn’t have anything to do with insolvency or bankruptcy either.

On June 11, 2020, the appellate court issued its decision in a matter dealing with restitution law. The case involved a 32-year-old man with high school education. In between September 30 and November 6, 2018, he went on a drug-fuelled rampage, that included the robbery of 10 businesses. He was sentenced to 4.5 years in jail and subject to a restitution order in the amount of $15,000. It was the restitution payment that was appealed.

His lawyer argued that the sentencing judge erred by not taking into consideration whether he had the ability to make restitution before imposing the restitution. They also argued that it will likely hinder his possibilities of rehabilitation. They said that the restitution order ought to be vacated.

The appeal court agreed. In allowing the appeal, the appeal court stated that the purpose of a restitution order is not intended to undermine the culprit’s chance for rehabilitation. The appeal court then went on to equate the rehabilitative aspects of restitution law with the rehabilitation intention of Canadian bankruptcies laws in the Bankruptcy and Insolvency Act (Canada). The Court of Appeal for Ontario also correctly stated that a restitution order made by a sentencing judge will survive through any type of bankruptcy of the criminal. This suggests it is there for life and restitution is not meant to be a life sentence.

That is what caught my attention. I never would have equated restitution with bankruptcy or rehabilitation.

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.

I hope you have found this bankruptcy process Brandon’s Blog interesting. I will eagerly watch what happens in the Hertz common share sale and the subsequent trading in the shares. I also never thought of criminal restitution as part of rehabilitation. I also for sure never thought of it in the area of bankruptcy and insolvency.

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

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

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

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.

bankruptcy process
bankruptcy process
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Brandon Blog Post

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

what is a division i proposal

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

Introduction

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

What is a division i proposal?

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

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

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

How do I start a restructuring plan for a person?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paperwork and procedures

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

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

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

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

Executing on the Proposal promise

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

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

What happens if a Proposal is unsuccessful?

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

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

What is a division 1 consumer proposal?

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

Is consumer proposal worth it?

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

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

Summary

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

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

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

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

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COMPANY RESTRUCTURING PROCESS CASE STUDY: HOW WE USED BUSINESS RESTRUCTURING IN CANADA TO SAVE THE BUSINESS AND JOBS

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Company restructuring process: Introduction

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 a company 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, CLAIM BANKRUPTCY IN 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 the Bankruptcy 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. The unremitted 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:

  1. 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.
  2. 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.
  3. Immediately bill all unbilled projects and begin collection efforts on any outstanding invoices.
  4. 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.
  5. 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.
  6. The company required fresh capital. Luckily, the entrepreneur had enough funds to inject.
  7. 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.

    ISI 4
    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:

  1. 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;
  2. the company continues to act in good faith and with due diligence; and
  3. 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 this bankruptcy 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 the bankruptcy 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, the unremitted 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, the terminated 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

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 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 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.

COMPANY RESTRUCTURING PROCESS 11
company restructuring process
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