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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.

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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.

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CAN YOU FILE PERSONAL AND CORPORATE BANKRUPTCY? SMALL BUSINESS OPTIONS

Can you file personal and corporate bankruptcy: Introduction

Can you file personal and corporate bankruptcy is a question all small business owners ask us when they come to our office for a free consultation. We discuss local business bankruptcy with entrepreneurs in our office. Their personal and business lives are intertwined. There’s very little distinction between the individual their small business.

This is especially true if their business in unincorporated and is being operated as a proprietorship. Our role is to first understand them as a person and as a business separately. This way we can give the best possible advice. If the business is a proprietorship, then we are only talking personal bankruptcy, or alternatives to avoid bankruptcy, such as a consumer proposal or restructuring proposal.

If their business legal form is that of a corporation, then we look at both the corporate and personal issues separately. The reason for this is because in the eyes of the law, the corporation and the individual are separate people. Many times it is not necessary for both the corporation and the individual to each file an insolvency process. Maybe only one has to.

Separating your business and personal assets and liabilities is a great reason for incorporating your business. When discussing bankrupting an incorporated company, we also need to consider if there are any Director liabilities. We must also consider the owner’s personal situation. This is so we can make sure they do not do themselves more personal harm than good. We also first look to see if there is a way to restructure and save the corporation.

Can you file personal and corporate bankruptcy: What is bankruptcy

Bankruptcy is a lawful method for the honest but unfortunate company or person to get a remedy from the burden of the financial debts that cannot be repaid. When an assignment in bankruptcy is submitted a “stay of proceedings” is invoked.

What the stay of proceedings means

The stay of proceedings results in stopping creditors from beginning or continuing with litigation against the company or person. The stay of proceedings also stops an unsecured creditor who has obtained a judgement. It stops them from garnishing funds from a bank account or part of the person’s wages.

For unsecured creditors, the stay of proceedings also calls a timeout to make sure that one unsecured creditor does not get a benefit over others in regards to the settlement of financial obligations. Keep in mind that the bankruptcy process could also be started by one or more unsecured creditors. They must be owed at least $1,000 in total.

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Can creditors push you into bankruptcy?

The unsecured creditor(s) could file a motion with the Court requesting that a Bankruptcy Order be issued against the company or person. The method of bankrupting a corporation in Canada is the same as that of a person. In addition to being able to prove that the company or person owes this unsecured creditor or group at least $1,000, they also need to prove that at least one act of bankruptcy has been committed in the 6 months prior to the filing of the motion.

The Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) identifies the various acts of bankruptcy. The most common one is “ceases to meet his liabilities generally as they become due”.

Secured creditors are generally not impacted by bankruptcy. They can realize upon the assets of the company or person covered by the security. In return for the original loan, the lender required that the borrower put up the security as a condition of the loan. The reason for this was so that if insolvency happens, the lender could sell the assets to try to repay the loan, interest and costs.

The secured creditor only really takes part in the bankruptcy process if after they have sold all the assets covered by their security, they are still owed money. The balance they are still owed is an unsecured debt.

Personal bankruptcy

If an individual’s business is a single proprietorship or a partnership, but not a corporation, legally, the person or people are also the business. So when they deal with the possibility of bankruptcy, all their assets are included, subject to provincial exemptions. Simply put, the assets of the business are not held different from their individual assets, so a small business bankruptcy of this kind is personal bankruptcy.

Where does Canada Revenue Agency fit in?

There are generally 3 types of claims that Canada Revenue Agency (CRA) has against a business. It does not matter if the business is incorporated or is a sole proprietorship.

The 3 kinds of CRA claims generally are:

  1. Unremitted source deductions from employee payroll
  2. Net HST owing
  3. Unpaid income tax from profitable years

Both the HST liability and income tax, in a bankruptcy, is an unsecured claim. However, the HST liability is also a personal claim against the Director(s) of a corporation. Unremitted source deductions are both a deemed trust claim against the bankrupt’s assets and in the case of a corporation, a personal claim against the Director(s) of the company.

When we do our first consultation with a business owner, when the business is run in a corporation, whenever unremitted source deductions or HST is involved, this always leads to a talk about the person’s situation in the event CRA would make a claim against the Director.

Some bankruptcy statistics

According to the Office of the Superintendent of Bankruptcy Canada, for the 12 months ending September 30, 2017, there were 125,912 insolvencies in Canada. This is a decrease of 3% over the same time period a year earlier. Consumer insolvency filings were 122,296 or 97.1% of total filings. The consumer filings were split into 59,192 bankruptcies and 63,104 consumer proposals – roughly half and half.

Business insolvency filings for the same time period in all of Canada totalled 3,616, a decrease of 8.1% from the 12 month period one year earlier. Business insolvency filings were split into 2,719 bankruptcies and 897 proposals. These statistics do not include filings by very large corporations under the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36).

As you can see, for a country the size of Canada, there were not a lot of business insolvencies during the first 9 months of 2017. The consumer filings were split roughly even between bankruptcy and a consumer proposal, the best consumer bankruptcy alternative.

Alternatives to Declaring Bankruptcy

A consumer proposal entails paying back a part of your financial debts in return for your unsecured creditors forgiving the remaining balance owing. A consumer proposal provides a significant benefit for a proprietor or partner in an unincorporated business. Unlike in a bankruptcy, your assets are not available for seizure by the licensed insolvency trustee (LIT).

You can take up to 60 months to pay off your consumer proposal. How much you will have to offer your creditors depends on what the unsecured creditors could expect in your bankruptcy. Working with a LIT, you work out that amount through discussion and analysis. A LIT can explain the entire process to you.

From a financial viewpoint, a consumer proposal is better than your bankruptcy because it permits the unsecured creditors to recoup a larger part of the debt than they would receive in your bankruptcy.

What is best for you and your business?

If you find you or your business is in a financial danger zone, contact Ira Smith Trustee & Receiver Inc. We’re full-service insolvency and financial restructuring practice serving companies and people throughout the Greater Toronto Area (GTA) facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now.

Your financial problems can be solved with immediate action and the right plan. Give us a call today.

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SEARS CANADA NEWS: HOW EDDIE LAMPERT WILL EVENTUALLY DRIVE SEARS HOLDINGS INTO BANKRUPTCY

Sears Canada news: Introduction

The news for Sears Holdings out of the United States is not better than the Sears Canada news. Customers at Sears can’t discover Whirlpool appliances or ladies’ Levi Strauss denim and currently the Wall Street Journal reports they are short on one of the holiday’s hottest toys– the L.O.L. Surprise– because its maker is questioning Sears’ financial wellness.

Sears Canada news: The sad, slow demise of Sears Holdings

Why it matters: Sales at Sears accounted for about 1% of U.S. GDP in the 1960s, however years of competition with big-box stores and online merchants, incorporated with current (mis)management by CEO Eddie Lampert, has whittled down Sears’ financial position extensively.

Sears Canada news: (Mis) management

I put “mis” in brackets because, I am not convinced that Mr. Lampert’s plan was to make Sears a successful retailer. He may have just seen assets with value that he could liquidate to reap financial rewards from until Sears can no longer function as a viable retailer. So what we see today with Sears, may very well have been his management plan all along. (See more on this hypothesis below).

Sears Canada news: The Wall Street Journal article

Currently distributors are minimizing deliveries, tightening funding terms, or declining to work with the merchant completely from concern of being stiffed if Sears is forced into bankruptcy. This is all according to a Wall Street Journal (WSJ) article on October 31, 2017 titled: “Inside the Decline of Sears, the Amazon of the 20th Century”.

Sears Canada news: What the analysts say about Sears Holdings

Bill Dreher covers Sears Holdings for Susquehanna Financial Group. WSJ states that “We see no viable path for Sears to succeed as a retailer,”. He worries that the suppliers are starting to lose confidence in Sears. He also suggests that this is what put Sears subsidiary Kmart into bankruptcy in 2002, when it was an independent company. Lampert took control of Kmart after its bankruptcy and then leveraged its stock to acquire Sears in 2005.

The fraying patience of vendors is clear as reported by the WSJ:

  • LG Electronics and Samsung are demanding money in advance to supply certain products.
  • Sears sued two long time manufacturers of its Craftsman tools brand before this year to keep them shipping product to stores. This is despite the Craftsman brand name was sold by Sears months earlier.
  • Clorox is imposing harder payment terms for its well-known products.

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Sears Canada news: Sears Holdings CEO

Mr. Lampert’s management style is partly responsible for Sears’ current battles, according to the article. The WSJ reports that Lampert took on a strategy of skimping on investment and upgrades and instead used that cash to buy back Sears shares from certain shareholders.

This approach maintained Sears stock price, until the financial crisis hit. It is no secret that Americans’ preference for online shopping grew significantly, which has negatively affected all brick and mortar retailers. Sears is no exception.

The WSJ articles states that Eddie Lampert doesn’t visit Sears headquarters greater than a pair of times annually. He likewise hardly ever visits stores and favours that top Sears executives do the same. He argues that it is more affordable and more efficient to connect with store managers over videoconference.

Sears Canada news: Sears Holdings continues to cannibalize itself

Sears Holdings has closed unprofitable stores and spun off lines of business. The merchant’s shop footprint has been more than cut in half. Since 2010, the number of Sears locations has dropped from 4,000 stores to 1,250 currently. Sears’ current strategy is to shut a lot more. From 2010 to 2016, its sales have dropped by almost half, from $43.3 billion to $22.1 billion last year.

Sears Canada news: The financials tell the story

Sears had just one quarter of favorable same-store sales growth between 2008 to the 1st quarter of 2017, according information from retail study company Retail Metrics. During that very same time, Sears’ operating income was negative in all but 8 of 37 quarters.

Sears is a laggard in a lagging field. The business has suffered EBIDTA losses, and requires cash for operating expenditures such as:

Sears Canada news: Sears Holdings has fended off bankruptcy; for now!

Sears has been able to fend off default for many years mostly with store closures, staff lay offs, asset sales and loans from Lampert’s hedge fund ESL Investments. In trying to revive sales, Sears has partnered with Amazon to market Kenmore items, tested new store styles and revived its holiday catalogue.

Few traditional stores have actually thrived in this period of online shopping. But Sears, which was at one time one of the most innovative retailers in America, has been left more than most retailers partly due to Lampert’s decisions.

For these reasons, one day I fear that there will be a big Sears clearance. Sears Holdings news out of the United States will be the same one day as what we already know about the Sears Canada news. It is only a matter of time, IMO anyway.

Sears Canada news: It doesn’t need to be your company’s news

If you’re attempting to discover a way to reorganize your firm’s debt, to ensure that you could avoid a Sears situation, call Ira Smith Trustee & Receiver Inc. If we consult with you early, we could develop a restructuring and turnaround strategy. By doing this your business will once again thrive.

Our approach for every person is to develop an outcome where Starting Over, Starting Now takes place. You’re just one telephone call away from taking the important actions to return to leading a healthy, balanced, and stress free life.

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FILING FOR BANKRUPTCY PROTECTION: THE WEINSTEIN COMPANY RETAINS ATTORNEYS

Filing for bankruptcy protection: Introduction

As claims against Harvey Weinstein transform from a few into an avalanche, several of the loan providers backing his named firm have actually started speaking to bankruptcy advisors about filing for bankruptcy protection, say sources knowledgeable about the issue. They are concerned that The Weinstein Company (TWC) may be filing for bankruptcy protection. Why do you ask? I will explain below.

Everyone is lawyering up

A team of The Weinstein Company’s financial institution loan providers have involved restructuring lawyers from Sidley Austin to work as advisors in case of a filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. They have actually likewise held pitches to work with an economic consultant to give calculated restructuring guidance.

TWC has retained the law office of O’Melveny & Myers, while Moelis & Company is acting as an economic consultant to the board. The firm has involved FTI Consulting, a financial advisory and restructuring firm.

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Can The Weinstein Company borrow any more?

TWC has actually been attempting to raise money. It has also tried to offer itself totally to a brand-new financier. Talks have not yet produced a deal. Also if it locates a purchaser, a sale might have to be applied in the context of a bankruptcy, to “clean” the assets from the mounting claims against TWC.

What are its chances of a successful restructuring?

The Weinstein Company has long shot of restructuring, however, filing for bankruptcy protection would certainly provide possible purchasers with the chance to buy its movie collection and other assets free from the claims against both Harvey Weinstein and TWC.

TWC might use bankruptcy court-approved public auctions to discover purchasers and after that make use of those sale proceeds to establish a fund against which claims can be made and sorted out by the bankruptcy trustee. TWC is certainly going to meet claims over its failure to stop Harvey’s transgressions.

Is The Weinstein Company brand too toxic for it to survive?

TWC has borrowed millions of dollars in the last few years. It now faces the real possibility that its now-toxic brand name will materially influence future company chances of survival in the longer term. The cases associated with Weinstein’s alleged sex-related criminal offences will probably result in adverse annual report reporting obligations. This will further worry TWC’s lenders.

Filing for bankruptcy protection: Watch for all the lawsuits – even the ones not involving sex!

Harvey Weinstein has actually currently filed a claim against the business, looking for accessibility to his earlier company e-mail account to strengthen his defence against the sexual harassment claims against him. A bankruptcy would likely leave behind just a shadow of the firm that might really well have no choice but to file a claim against Harvey Weinstein for sinking the company. In other words, what we have here is The Weinstein Company horror movie.

Filing for bankruptcy protection: Does your company have too much debt?

Is your company insolvent and needs to restructure? Is your business viable but can only employ people and carry on business if it can restructure its debt? Contact the Ira Smith Trustee & Receiver Team. If we meet with you early on, we can create a restructuring and turnaround strategy. That way your company won’t have to be like The Weinstein Company.

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SEARS CANADA DEFINED BENEFIT PENSION PLAN SHORTFALL: MP SCOTT DUVALL COMES THROUGH ON HIS PROMISE IN CANADIAN PARLIAMENT

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Sears Canada defined benefit pension plan shortfall: Introduction

On November 6, 2017, Hamilton Mountain NDP MP Scott Duvall rose in the House of Commons for leave to introduce Bill C-384. It is titled “An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (pension plans and group insurance programs)”. Mr. Duvall’s motivation was the Sears Canada defined benefit pension plan shortfall.

Sears Canada defined benefit pension plan shortfall: Hamilton Mountain MP Scott Duvall introduces Private Member’s Bill C-384

Here is what Mr. Duvall said:

“Mr. Speaker, I would like to take this time to thank my seconder, my colleague who has done great work and works very hard in this House, and who has also helped me a lot on this bill.

I rise today to introduce a private member’s bill titled, an act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. This bill will amend the Bankruptcy and Insolvency Act and the CCAA so that companies will have to bring any pension plan fund to 100% before paying any other secured creditors. It also makes amendments to require companies to pay any termination or severance pay owing before paying any secured creditors.

Other amendments will prevent a company from stopping the payment of any post-retirement benefits during any proceedings under the BIA or CCAA. These amendments will inject some fairness into a process that often sees the interests of workers, retirees, and their families placed behind all others.

We must fix the imbalances in current legislation and provide Canadian workers, retirees, and their families with the protection they expect and deserve. I am hopeful that all my colleagues in Parliament will put aside their partisan differences and support this bill. Canadian workers, retirees, and their families deserve no less.”

Although he did not mention it specifically by name in the House of Commons, Mr. Duvall has said that he would introduce such a Bill as a result of the Sears Canada defined benefit pension plan shortfall.

Sears Canada defined benefit pension plan shortfall: Hamilton Mountain MP Scott Duvall walks the walk

In our September 27, 2017 blog, TORONTO BUSINESS BANKRUPTCY PROTECTION: NDP WANTS FEDERAL INSOLVENCY LAWS CHANGED SO THERE IS PENSION PLAN SECURITY WHEN FINANCIALLY TROUBLED BUSINESSES FAIL, we told you that Hamilton Mountain MP Scott Duvall, the NDP pension plan critic, informed a group at the United Steelworkers’ Hall that he will present a private member’s bill to secure employees’ pension plans and benefits, and pressure business to offer termination or severance pay, prior to paying secured lenders.

With his Bill C-384, Mr. Duvall has lived up to his promise.

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Sears Canada defined benefit pension plan shortfall: This is actually the second Bill attempting deal with this problem

In our November 1, 2017 blog, SEARS CANADA CLOSING: POLITICIANS WANT NEW LAWS TO PROTECT PENSIONERS DUE TO SEARS CANADA CLOSING, we reported that Bloc Québécois MP Marilène Gill’s Private Member’s Bill C-372, passed First Reading. That Bill is titled “An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (pension plans and group insurance plans)”. In that blog, we described the provisions included in that Bill.

Like Mr. Duvall, Ms. Gill is trying to pass legislation to avoid another Sears Canada defined benefit pension plan shortfall insolvency situation.

Sears Canada defined benefit pension plan shortfall: What does Bill C-384 actually say

The purpose of this blog, is to describe the terms of Mr. Duvall’s Bill.

Mr. Duvall’s Private Member’s Bill C-384 passed First Reading. It is very similar to Ms. Gill’s BIll C-372. He wishes to amend the Bankruptcy and Insolvency Act (BIA) as follows:

  • In order to be approved by the Court, a corporate restructuring proposal under the BIA, for a company with a prescribed pension plan, the Proposal must include payment in full of any unfunded pension liability or solvency deficiency. The amount is calculated at the time of the filing of the Notice of Intention To Make A Proposal (NOI) or the Proposal if there is no NOI filed.
  • New section 69. 7 be added to the BIA that in the restructuring proposal of an employer, upon filing, until the discharge of the Licensed Insolvency Trustee (LIT), or the insolvent employer becomes bankrupt, all amounts that the employer must contribute under any arrangement for the benefit of the employees, must continue throughout the restructuring period. This would cover any pension plan, health, injury or accident plans and group insurance coverage.
  • The unfunded pension liability or solvency deficiency calculation is called “special payments” in Bill C-384. The calculation is by section 9 of the Pension Benefits Standards Regulations, 1985.
  • In a receivership, the receiver is personally liable for paying any unfunded pension liability or solvency deficiency. However, the receiver’s liability is only from the proceeds of the sale of current assets.
  • In either a receivership or corporate bankruptcy, the charge for any unfunded pension liability or solvency deficiency would rank ahead of the charge of any other secured creditor. It is interesting to note that the Bill does not attempt to provide such a security ranking to anything other than the pension liability or solvency deficiency.
  • The Officers and Directors of the company are not entitled to the benefit of this secured charge. Even if they are participants in the pension plan that has the unfunded pension liability or solvency deficiency.
  • New subsection 136(1) (d. 001) to the BIA, creating an extra class of preferred creditor. A preferred creditor is an unsecured creditor who ranks ahead of the ordinary unsecured creditors and ranks after the secured creditors. The Bill states that it would say that the amount of any termination or severance pay owed to an employee by a bankrupt employer, less any amount previously paid by the LIT, would rank in priority right after the wages owed to the employee.
  • There are also proposed amendments to the Companies’ Creditors Arrangement Act (CCAA) in Bill C-384. It is to bring the same changes in that statute as those to the BIA described above. The intent is that the treatment under both statutes is the same.

Sears Canada defined benefit pension plan shortfall: Now it is up to Justin Trudeau and his Liberal Party

We will now have to wait and see what happens to both Ms. Gill’s and Mr. Duvall’s Private Member’s Bills. As we previously reported, it is unusual that a Private Member’s Bill becomes real legislation. As the Liberals hold a majority in Parliament, if they don’t want it, or a revised Bill for the same purpose, to pass, it won’t.

Sears Canada defined benefit pension plan shortfall: Does your company need a restructuring and turnaround plan?

Is your company insolvent and needs to restructure? Is your business viable but can only employ people and carry on business if it can restructure its debt? Contact the Ira Smith Trustee & Receiver Team. If we meet with you early on, we can create a restructuring and turnaround strategy. That way your company won’t have to be like Sears Canada closing.

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TORONTO BUSINESS BANKRUPTCY: NDP WANTS PENSION PROTECTION

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Toronto business bankruptcy protection: Introduction

The federal NDP party recently met in Hamilton, just outside of the Greater Toronto Area. There was a rally to argue for federal government regulation changes to safeguard pensioners in business bankruptcy and restructuring administrations.

Toronto business bankruptcy protection: Proposed NDP private member’s bill

Hamilton Mountain MP Scott Duvall, the New Democrats’ pension plan critic, informed a group at the United Steelworkers’ Hall that he will certainly present a private member’s bill to secure employees’ pension plans and benefits, and pressure business to offer termination or severance pay, prior to paying secured lenders.

Toronto business bankruptcy protection: The U.S. Steel Canada saga

The concern has actually been a lengthy simmering one with unions and created significant debate throughout the almost three-year, court-supervised restructuring of U.S. Steel Canada. The company exited from its business bankruptcy protection proceedings with a brand-new owner– Bedrock Industries– as well as an old name, Stelco.

Pensioners were smarting. The court permitted the firm to put on hold health benefit repayments for a year and a half while the business was under bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA).

Generally, these advantages have been maintained by the reorganized business. Pensioners are fretting that a financing system to maintain the pension plan solvent will ultimately fail. It calls for, inter alia, extra Stelco land to be cleaned up, marketed and sold for the net sales proceeds to cover future pension plan commitments.

Toronto business bankruptcy protection: Sears Canada too

Duvall, with NDP leader Tom Mulcair, claimed one more instance of exactly how the regulations are unfair to employees. They cited the Sears Canada situation. Sears Canada remains in business bankruptcy protection. Its employees are encountering a potential decrease in their pension plan benefits.

Toronto business bankruptcy protection: Fairness for employees

They say this should have to do with justness for employees. The NDP wants to see a Canada that benefits every person as well as seeing to it that companies, including multinationals, cannot take the pension plans their employees have earned.

They state that the existing regulation permits funds that ought to go to employees’ pension plans to be given to the secured creditors instead. The NDP is especially concerned when the secured lender is the financially troubled or creditor-protected company’s parent company.

Stelco’s biggest secured lender was U.S. Steel in the United States. The $500 million restructuring saw the American firm get $130 million.

Toronto business bankruptcy protection: Pension plan funding should have first priority

The Duvall proposed private member’s bill would call for pension plans to be 100 percent funded prior to secured lenders being paid. Firms would certainly not be permitted to put on hold retirement benefits in court-supervised restructurings, which occurred with U.S. Steel Canada.

The NDP is calling their proposal “End Pension Theft”. It focuses on altering CCCA legislation as well as the Bankruptcy and Insolvency Act (BIA) to stop companies from placing investors, financial institutions and other lenders ahead of their staff members when they go into bankruptcy protection.

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Toronto business bankruptcy protection: Is there a comparable precedent for such an amendment

Yes there is – the enactment of the Wage Earner Protection Program Act (WEPPA). From 1975, proposals were proactively taken into consideration for the facility of a wage protection plan for when the bankruptcy, liquidation or receivership of a company. The many choices gone over for just how this could be attained consisted of:

  1. very top priority for wages;
  2. acknowledgment of existing provincial/territorial concerns within the BIA structure;
  3. a waiver of the waiting time for EI benefits; and
  4. a wage earner protection fund financed either from basic tax revenue or as a part of the EI coverage regimen.

In November 2003, the Senate Committee on Banking, Trade and Commerce examined the background of these conversations and chose

the alternative for a super priority be taken on. Although the BIA was amended in 2005, these changes did not quickly come into force, as many technical amendments were required to be passed in 2007. The WEPPA came into force on July 7, 2008.

The reason for the timing of creating the WEPPA was a result of NDP pressure put on the minority Liberal government of Prime Minister Paul Martin. The Liberals agreed to the NDP proposal as part of obtaining continued NDP support for the minority government.

So there is precedent for a significant amendment to Canadian insolvency legislation.

Toronto business bankruptcy protection: How likely is such a pension reform in restructuring proceedings to succeed?

At this time, I believe there are certain obstacles from seeing such a significant overhaul being successful. The reasons I say this include:

  1. Today there is a Liberal majority government in power, so the support of the NDP party is not required for the government to pass the legislation it wishes to.
  2. Providing a super priority for all pension shortfalls would dramatically alter the way lending is done in Canada. Banks would be required to include pension plan actuarial shortfall calculations into their borrowing base calculations. It may end up that when there is a pension plan shortfall, there is no borrowing room available at all for a business. This would increase the number of insolvencies.
  3. If the number of business insolvencies increased, that could lead to an increase in job losses. That would hurt employees which would hurt the same group the private member’s bill would be trying the protect.

However, the Liberal government of Prime Minister Justin Trudeau has shown that it does try to play to whichever group the government feels it can gain votes from. So, it is not out of the realm of possibilities that the government would try to enact some legislation to give a limited super priority to a part of an underfunded pension plan liability. Time will tell whether such a proposal has any chance of success at this time.

Toronto business bankruptcy protection: Does your Toronto area business require restructuring proceedings to survive?

If you’re company is struggling with too much debt, give the Ira Smith Team a call. We can help with refinancing and restructuring so that your business can get back on track Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

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COMPANY WENT BANKRUPT AND DIDN’T PAY ME WAGES: IT DOESN’T HAVE TO BE HARD

Previous blogs for the company went bankrupt

The issue of the company went bankrupt and didn’t pay me wages is not a new one. We previously wrote two blogs on this topic:

We have noticed a surge of renewed interest in this topic based on recent activity from readers of our Brandon’s Blog, so, we thought it would be a good idea to put together a short video on this topic.

People ask us what if the company didn’t pay me wages?

We answer if wages are owed by your employer because the employer went bankrupt with unpaid employees or is in receivership 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? What are the rules?

There are a few exceptions to the company went bankrupt and didn’t pay me wages. You are generally not eligible if, during the period for which your 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 when the company went bankrupt and didn’t pay me wages

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 around $3,900).

Once employees file claims with both the Trustee/Receiver and Service Canada, Service Canada pays their claims for owed wages by the 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 needed if the company went bankrupt and didn’t pay me wages

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 an 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 the employer, find the trustee and get in touch with Service Canada. Have your records ready and make sure you get your Proof of Claim.

What should I do if I have too much debt and the company went bankrupt and didn’t pay me wages?

This is an important issue. If you are experiencing financial problems, contact Ira Smith Trustee & Receiver Inc. We’re here to find what your bankruptcy options are, put your financial house back in order and set you on a path to debt free-living. You’ll be amazed at the difference one phone call to Ira Smith Trustee & Receiver Inc. can make.

Contact us today. We are a licensed trustee and will listen to your issues and offer compassionate, professional assistance to aid you to avoid bankruptcy, so that you can regain control of your life, Starting Over, Starting Now.

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THIS VLOG WAS INSPIRED IN PART BY OUR eBOOK – PERSONAL BANKRUPTCY CANADA: Not because you are a dummy, because you need to get your life back on track

 

 

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PERSONAL BANKRUPTCY BLOG – TRUSTEE EXPLAINS BANKRUPTCY OPTIONS

Introduction

Our Brandon’s Blog certainly is a personal bankruptcy blog, but it is more than that. Brandon writes on various finance and insolvency-related topics including corporate restructuring, corporate bankruptcy, alternatives to bankruptcy, credit counselling, restructuring through a consumer proposal or a Division I Proposal or the Companies’ Creditors Arrangement Act (CCAA).

Every Monday and Wednesday night Brandon posts to Brandon’s Blog. Monday night is a blog and Wednesday night is a vlog. Just to remind you what this means, here are dictionary definitions:

blog Pronunciation: /blɒɡ/noun

A regularly updated website or web page, typically one run by a person or small group, written in an informal or conversational style: you can add personal bankruptcy blog to the growing list of insolvency-related material popping up on the Web

vlog Pronunciation: /vlɒɡ/ noun

A blog in which the postings are primarily in video form: you can add personal bankruptcy vlog to the growing list of insolvency-related material popping up on the Web

Differences between US and Canadian insolvency statutes

In the United States, people filing for bankruptcy have many “chapters” from which to choose. Similarly, Canada has one chief insolvency law, the Bankruptcy and Insolvency Act, or BIA, and several supporting pieces of legislation. In perusing a personal bankruptcy blog, the potential filer can find the information he or she seeks.

In the United States, Chapter 11 bankruptcy is the most complex because it applies to large businesses and usually involves gigantic sums of money. In Canada, the equivalent is the Division I proposal. In such a proposal, the debtor’s business can keep assets necessary for its role so that it can generate streams of income from other places to repay its debts. Management also stays in control of the company and business operations.

What are the Choices in Canada?

The BIA sets out the ground rules, and several smaller pieces of legislation fill in the details. Although we Canadians don’t call them various chapters, our legislation is like that of the U.S. Here are the options for filing bankruptcy in Canada:

Personal bankruptcy in Canada is most similar to Chapter 7 in the U.S. By filing bankruptcy, the debtor seeks to deal with his or her entire debt load at once. The debtor does not believe that he or she has the means to attempt a restructuring. There are certain assets that are exempt for any one of a number of reasons, so anyone filing bankruptcy should consult a Trustee to find out more.

If a debtor decides to file a consumer proposal (because his or her debt load is $250,000 or less, not including any mortgages against the principal residence) or a Division I Proposal (for unsecured debts $250,000 or greater) instead, he or she is seeking a restructuring of debt so for repayment over a five years or less. Many times, debtors can negotiate with their creditors for part of the amount owed and work out deals on monthly payments, rates of interest, and other such considerations. A proposal is most similar to Chapter 13 in the U.S. and used by people who wish to AVOID bankruptcy.

Basically, the business operates as usual while making an offer to its creditors of payments over time, totalling an amount greater than the creditors would receive if everything was sold off in liquidation in bankruptcy. The largest businesses might even have several layers of debt that would need restructuring as part of a Division I proposal, and each layer might have different guidelines and restrictions based on the proposal.

For companies with greater than $5 million in debt, they could also make use of a different Federal restructuring statute called the Companies’ Creditors Arrangement Act (CCAA). Both the Proposal under the BIA and restructuring under the CCAA are for large complex corporate reorganizations.

Is a Lawyer Required?

Unlike citizens of the United States, Canadians don’t need a lawyer to file for bankruptcy. A Licensed Insolvency Trustee acts as the “referee” between debtor and creditors. In this way, people file and handle bankruptcy proceedings on their own in Canada. If the debtor has various complex issues or is a defendant in litigation where the plaintiff wishes to continue the litigation perhaps to attempt to prove that their claim is one not released by the person’s discharge from bankruptcy, then they may very well need a lawyer for those issues.

What to do if you have too much debt and want to read a personal bankruptcy blog?

To find out more, check out our Brandon’s Blog entries for the topic of personal bankruptcy blog. If you’re dealing with serious financial issues, contact a trustee, who is the Canadian bankruptcy expert. For the reasons already given, you should do this whether or not you’re contemplating bankruptcy. The reason is very simple: the licensed insolvency trustee will assess your situation, offer you all of your available options and will do this for you for free! You can’t find a better deal anywhere.

We’re not only bankruptcy experts; we’re experts in dealing with debt. Contact Ira Smith Trustee & Receiver Inc. today for a free consultation and you will be well on your way to regaining your former quality of life Starting Over, Starting Now.

THIS VLOG WAS INSPIRED IN PART BY OUR eBOOK – PERSONAL BANKRUPTCY CANADA: Not because you are a dummy, because you need to get your life back on track

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#VIDEO – IS SURPLUS INCOME IN BANKRUPTCY POPULAR? #

This is one of the most popular questions about bankruptcy we are always asked. The concept of surplus income in bankruptcy doesn’t seem to make much sense. After all, if you are bankrupt, how can you have surplus income? So let’s start at the beginning and clear up all the confusion. That way we can explain the answer to the question “What is surplus income in bankruptcy?”.

The answer

Heading into bankruptcy, your licensed insolvency trustee (LIT) must make an assessment. The more you earn, the more you must contribute. A definition is:

The amount of a debtor’s total income that exceeds what is necessary to maintain a reasonable standard of living. A reasonable standard of living is according to the standards set by the Office of the Superintendent of Bankruptcy. This is also sometimes called the OSB surplus.

The actual Superintendent’s standards are right at the poverty line so don’t get happy when you see words like “reasonable standard of living”. The bankrupt must make payments out of this surplus income to the LIT for distribution among the creditors.

The Office of the Superintendent of Bankruptcy sets limits for what a family can earn. The larger your family, the more you can keep. The thresholds increase each year. The government has established a list of earnings levels for households of different sizes.

If the household’s revenue exceeds the level set by the government then you have surplus income. Payments are made to your LIT. The government’s instructions about surplus income are in the Superintendent’s Directive 11R2.

What can I deduct for surplus income in bankruptcy?

There are some allowable deductions this calculation in bankruptcy:

  1. child support payments
  2. spousal support payments
  3. child care expenses
  4. expenses associated with a medical condition
  5. Court-imposed fines or penalties that are in the process of being paid
  6. expenses permitted by the Income Tax Act (or similar provincial legislation) that are a condition of employment
  7. any other debt where a stay of proceedings has been lifted by the Court and a recourse authorized
  8. interest paid on debts that are not dischargeable in bankruptcy under paragraph 178(1)(g) of the Act

If my salary changes, does my calculation change?

During your bankruptcy, you will have to report your monthly income and expenses to your LIT. The LIT must perform the surplus income calculation every time your income changes while you are in bankruptcy. You must make up any extra amount required if your income rises while you are in bankruptcy.

In a debt settlement restructuring, the amount you and your creditors have agreed upon is the same amount you pay. There is no monthly reporting of your income to your LIT and no recalibration to an increased amount if your income rises. Therefore, in a consumer proposal, surplus income in bankruptcy must be considered. This is to make sure that your consumer proposal is a better alternative than bankruptcy.

What now if I have too much debt?

If you’re considering bankruptcy you need the services of a LIT. Contact Ira Smith Trustee & Receiver Inc. We provide the depth of expertise found in a large company, delivered in an informal setting. We ensure you will receive a high quality and cost-effective service.

With a joint 50+ years of experience dealing with diverse issues and complex files, the Ira Smith team delivers the highest quality of professional service. Take the first step to Starting Over, Starting Now.

THIS VLOG WAS INSPIRED IN PART BY OUR eBOOK – PERSONAL BANKRUPTCY CANADA: Not because you are a dummy, because you need to get your life back on track

 

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#VIDEO – HOUSEHOLD DEBT IN CANADA CRISIS#

Household debt in Canada can lead us into crisis

On January 16, 2016, the Office of the Parliamentary Budget Officer (PBO) released its report titled: “Household Indebtedness and Financial Vulnerability“. A summary of the PBO’s findings are:

In the third quarter of 2015, total household debt in Canada reached 171 per cent of disposable income. In other words, for every $100 of disposable income, households had debt obligations of $171. This is the highest level recorded since 1990 and the highest level. The report also found that:

  • Among G7 countries, Canada has experienced the largest increase in household debt relative to income since 2000. Households in Canada have become more indebted than any other G7 country over recent history.
  • The Bank of Canada conducted its analysis. It suggests that low-interest rates, higher house prices and financial innovation have contributed to the increase in household indebtedness.
  • A financially vulnerable household is required to devote a real part of its income to service its debt. It faces greater exposure to negative income and interest rate shocks, and is more likely to be delinquent in its debt payments.
  • The PBO does not see the trend correcting itself until 2020.

We discussed the issue of rising household debt in Canada in the past

The PBO report produced a graph on household debt ratios

Household Indebtedness and Financial Vulnerability,household debt in canada,canadian household debt,canadian household debt statistics,average canadian household debt,canadian household debt to income ratio,statistics canada,canadian household debt by province,canadian household debt to income ratio graph,canadian household debt ratio calculator,canadian household debt 2015,ira smith trustee,household debt in canada
Graph courtesy of the Report of the PBO “Household
Indebtedness and
Financial
Vulnerability” dated January 19, 2016

The PBO’s point in this graphical analysis is that the projected increase in the total household debt service ratio (DSR) to 15.9 per cent would be 3.1 percentage points above the long-term historical average of 12.8 per cent (from 1990Q1 to 2015Q3). It would also be almost one full percentage point above its highest level over the past 25 years, 14.9 per cent , which was reached in 2007Q4.

There is apparently no end in sight for Canadians’ appetite to take on more debt, and it takes more income to service the higher debt. Unfortunately, the only thing that will seem to break this cycle is some shock to the Canadian economic system, and this will not be good news for many who will find themselves strung out on debt and not able to service it when the shock comes.

What to do if you or your company can no longer service your debt?

Is your household debt in Canada out of control? Have those spending habits creeped into your company’s spending? If so, you need to contact us now to get a solution, before bankruptcy is your only alternative.

We help people and companies throughout the Greater Toronto Area (GTA) facing financial crisis in need of restructuring and turnaround, receivership or bankruptcy that need a plan for Starting Over, Starting Now. The Ira Smith Team brings a cumulative 50+ years of experience dealing with diverse issues and complex files, and we deliver the highest quality of professional service. Don’t worry about debt; instead take immediate action.

Call us today. If you or your company is trapped in high debt, you need a professional trustee to help you manage the situation before it reaches a critical stage where bankruptcy or receivership is your only option. We have been able to help many people and companies carry out a successful debt settlement programs or corporate restructuring and turnarounds.

It all began with a first consultation. The first step is a realistic cash-flow budget. Successful completion of restructuring, will free you or your company from the burden of your financial challenges to go on to live a productive, stress-free, financially sound life.

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