Tag: secured creditors

COMPANY IS BANKRUPT: A COMPLETE GUIDE TO BANKRUPTCY SALES FOR BUYERS

Post author By Brandon Smith
Post date May 27, 2024

company is bankrupt

An Introduction to Company Is Bankrupt Asset Sales

On May 13 of this year, I published Brandon’s Blog titled: NAVIGATING THE STALKING HORSE OFFER LEGAL MAZE: THE TOOL SHED BREWING BANKRUPTCY PROTECTION EXPERIENCE. This week I am expanding on that specific Brandon’s Blog to comment on bankruptcy asset sales in general.

For anyone interested in strategic acquisitions and investment opportunities, exploring bankruptcy sales can offer a unique avenue to acquire assets at distressed pricing. In this Brandon’s Blog, I delve into the intricacies of bankruptcy sales, particularly focusing on buying assets when a company is bankrupt in Ontario, to provide you with a comprehensive understanding of the process and considerations involved.

Types of Bankruptcy

Let’s embark on this journey together to unlock the potential of acquiring assets through bankruptcy sales. When I use the term “bankruptcy sale”, I mean all the various types of bankruptcy or insolvency processes. It could be in the context of a sale of assets by a court-appointed receiver or even the company that has filed for restructuring under bankruptcy protection and is looking to sell assets out of the ordinary course of business.

For this Brandon’s Blog, you can consider it to mean any court-supervised insolvency process, be it out of a sale of assets when the company is bankrupt or in receivership under the Bankruptcy and Insolvency Act (Canada) (BIA). The issues are the same be it a bankruptcy or receivership.

When delving into the realm of bankruptcy sales, one encounters a landscape that offers both challenges and opportunities. The allure of acquiring distressed assets at potentially discounted prices is undeniable. Picture this: a sales process setting where bidders, including yourself, have the chance to engage in a fair competition, armed with the ability to conduct due diligence and submit bids for coveted assets. Such is the essence of a bankruptcy sale.

A bankruptcy sale isn’t just a run-of-the-mill transaction; it is a meticulously structured process governed by legal frameworks and case law. The principles applied from the leading case law act as a guiding light, laying down the procedures for sales that occur outside the typical course of business. It sets the stage for a structured process where the highest or best bid, subject to stakeholder approval, court approval, or both, emerges victorious.

The pivotal role of court approval in sale transactions cannot be overstated. It serves as the ultimate checkpoint, ensuring that the sale is conducted by the law and safeguarding the interests of all parties involved. Court approval is not merely a stamp of approval. The Court will only add its layer of legitimacy and finality to the transaction after it is satisfied that all legal standards have been met, assuring buyers of the validity of their acquisitions and unsuccessful buyers that the process was fair and transparent.

In the realm of bankruptcy sales, one must navigate the terrain with caution. While the prospect of purchasing assets free and clear of all creditor claims and liens is enticing, there are caveats to consider. Assets are typically sold in an “as-is, where-is” condition, with limited assurances from the licensed insolvency trustee who is the seller. The pace of proceedings is expedited, leaving little room for post-closing recourse or exhaustive due diligence.

Balancing these nuances is crucial for bidders eyeing strategic acquisitions in the bankruptcy sales arena. It requires a blend of foresight, adaptability, and a keen understanding of the intricacies of the process. Join me as we unravel the layers of bankruptcy sales and explore the dynamic landscape governing these kinds of transactions in Canada.

Benefits and Downsides of Court-Supervised Sales When a Company is Bankrupt

As someone deeply involved in the field, I often find myself exploring the nuances of court-supervised sales, delving into their advantages and potential pitfalls. Let’s take a closer look at the intricacies of this unique opportunity.

Advantages of Purchasing Assets through Court-Supervised Sales

When I consider the benefits of acquiring assets from court-supervised insolvency process sales, one key advantage stands out – the opportunity to acquire assets at potentially distressed pricing. This presents a unique chance to make strategic acquisitions at potentially lower costs, providing a competitive edge in the market.

Moreover, the level playing field offered by court-supervised sales allows bidders to engage in fair competition, conduct thorough due diligence albeit in an environment where as much information as you would like may not be available, and submit bids directly to the licensed insolvency trustee. The ability to purchase assets free and clear of the company’s financial obligations and the secured debts and unsecured debts, with the transaction receiving court approval, provides a sense of finality and security that is highly valuable in such transactions.

Limitations and Challenges in Court-Supervised Sales

However, in the realm of Court-supervised sales, you need to be acutely aware of the limitations that come with this process. Assets in bankruptcy sales are always sold “as-is, where-is,” with such limited representations and warranties from the licensed insolvency trustee seller, there are essentially none. This, coupled with the fact that the licensed insolvency trustee was not the operator of the business utilizing those assets where the company was bankrupt. This makes due diligence both critical and yet challenging. The expedited timeline and lack of post-closing recourse further adds complexity to the transaction.

Additionally, since the company is bankrupt the buyer needs to bid without the safety net of due diligence and financing contingencies, which can be a daunting prospect. Balancing these limitations against the potential benefits requires a keen eye for detail and a strategic mindset.

Balancing Pros and Cons for Strategic Bidders

For strategic bidders, finding the equilibrium between the pros and cons of court-supervised sales is crucial. Evaluating the cost-benefit ratio, understanding the bidding process, and complying with the court-approved terms and conditions of sale are all essential steps in the process.

Navigating this complex landscape requires a strategic approach. By weighing these factors thoughtfully, the buyer must aim to make informed decisions that lead to successful and accretive acquisitions through the court-supervised sales process.

Company is Bankrupt: Tactical Considerations for Potential Bidders

If you are someone considering participating in a bankruptcy sale, understand the unique opportunity it presents to potentially acquire assets at favourable pricing. This process allows you to compete on a level playing field with other bidders, conducting due diligence and submitting bids directly to the licensed insolvency trustee.

One significant advantage of a bankruptcy sale is the ability to purchase assets free and clear of all creditor claims and liens, as finalized through court approval. The money you pay as the winning bidder stands in place of the assets. However, there are essential aspects to consider before diving into this opportunity.

Cost-Benefit Analysis of Participating in the Sale Process: Before getting involved, you need to evaluate the cost versus benefit of participating in the sale process. Understanding the potential risks and rewards is crucial for making informed decisions.

Key Elements of the Bidding Procedures: To make a successful bid, you must ensure that it meets all the necessary criteria and complies with the bidding procedures governing the bankruptcy sale. This requires attention to detail and a clear understanding of the requirements.

Strategies for Successful Participation in Bankruptcy Sales: To navigate the bankruptcy sale process effectively, you need to develop strategies that can help you stand out among other bidders. This involves setting clear goals, assessing the competition, and being prepared to act decisively.

By considering these tactical aspects carefully, you can position yourself for a successful experience in a bankruptcy sale. It’s about weighing the pros and cons, understanding the process, and strategizing effectively to make the most out of this unique opportunity.

Company is Bankrupt: What the Court Requires

Being involved as a bidder in bankruptcy sales can be both exciting and daunting, laden with unique challenges and opportunities. Let’s delve into the intricacies of what the Court requires for the legal process to approve a particular sales process and sale of assets when the company is bankrupt or in receivership.

The Soundair principles

The Soundair principles are a collection of lawful standards developed by the Court of Appeal for Ontario in 1991 in the case of Royal Bank of Canada v. Soundair Corp., 1991 CanLII 2727 (ON CA). These principles are followed by all Canadian courts.

The Soundair principles are aimed at creating fairness and transparency in the sale of assets throughout bankruptcy or receivership cases. Thirty-one years later, it is still the leading case in Canadian insolvency asset sales rules and regulations. These concepts guide courts in evaluating whether the sale procedure carried out by a receiver (or a trustee in bankruptcy) has been fair and suitable.

Here are the Soundair principles in detail:

Diligent Efforts to Secure the Best Price: The receiver/trustee is obliged to exert sensible efforts to secure the highest possible price for the assets for the general benefit of creditors. This entails thoroughly advertising the assets for sale, soliciting competing bids, and ensuring that prospective purchasers are provided with sufficient information to submit proper offers to purchase. The goal is to get the highest sales price possible under the circumstances, to maximize the return for the benefit of creditors.

Fairness and Integrity in the Sale Process: It is essential to give all interested parties an equivalent opportunity to join the sales process and to avoid any potential purchaser from obtaining an unreasonable edge. Transparency and impartiality are vital, and conflicts of interest cannot be tolerated.

All Stakeholders’ Interests: The receiver/trustee must look out for the interests of all parties, secured creditors and unsecured creditors, shareholders, and any other appropriate stakeholders. It is very important for the licensed insolvency trustee to avoid preference for any party and to strive for a fair equilibrium of the interests among everybody affected because the company is bankrupt.

Input from significant creditors: This is a crucial consideration for the licensed insolvency trustee. While the trustee retains the ultimate decision-making authority, it is essential to carefully weigh and consider the recommendations and preferences of major creditors. Given that these creditors will bear financial implications based on the sale outcomes, their input carries substantial significance in the decision-making process.

Application of the Soundair principles

In practice, when a sale of assets is held because the company is bankrupt or in receivership, there are two stages of court review. First, the licensed insolvency trustee needs to get approval for the actual sales process itself. Then, the Court will review the process as implemented by the licensed insolvency trustee.

The Court’s reviews are to ensure conformity with these Soundair principles. This is the case if this is not a sale at arm’s length purchaser. The court will take into consideration the following elements:

Marketing Efforts: How the assets were advertised and marketed, including the period and reach of the advertising and marketing initiatives.

Number and Quality of Offers: The variety of offers obtained and whether they reflect reasonable market price. To assist the Court in determining the reasonableness of the offers received, the Trustee must provide evidence to the Court. An independent appraisal of the assets and other market data is the normal kind of evidence usedwhat a fair valuation of the assets is.

Transparency: Whether the sale process was conducted fairly and transparently, with appropriate details provided to all possible purchasers.

Stakeholder Consultation: Whether the licensed insolvency trustee has spoken with and taken into consideration the views of significant creditors and other stakeholders.

Authorization of Sale: Whether the proposed sale is supported by the significant creditors or as a minimum, is not being opposed.

The Soundair principles assist when a company is bankrupt or in receivership, in guaranteeing that the sale of assets in an insolvency context is carried out in a fashion that maximizes value, keeps fairness, and appreciates the interests of all the major stakeholders. By adhering to these concepts, the court aims to supply confidence in the integrity and fairness of the process and protect the rights of all stakeholders.

Company is Bankrupt: Navigating Contracts and Leases

When it comes to Court-approved sales in bankruptcy proceedings, sometimes some contractual commitments or leases are in place. Even though the company is bankrupt or in receivership, a purchaser of the assets may need some or all of those contracts or leases to make the purchasing of those assets make sense. Expressed another way, having the assets may not be enough.

Having the rights and responsibilities that come with those contracts and leases may be required. Navigating contracts and leases is a crucial aspect that requires careful consideration and strategic decision-making. Let’s delve into some key points related to this intricate process.

Options Regarding Contracts and Leases

There are 2 primary options regarding contractual commitments and leases: rejection or assignment and assumption. Each option comes with its own set of implications and considerations that need to be weighed meticulously. Making the right choice can significantly impact the outcome of the sale process and the overall success of the bankruptcy proceedings.

Practical Challenges Regarding Contracts and Leases

There are some practical challenges regarding contracts and leases as follows:

Rejection: If there are contracts or leases that a purchaser does not require, this is the simplest. The purchaser will not purchase the licensed insolvency trustee’s right, title and interest, if any, in those obligations. By not purchasing those rights, the purchaser will simply not deal with them. The licensed insolvency trustee, acting as the receiver or bankruptcy trustee, will either ignore them or will formally reject them. Any rejection or repudiation will occur as part of the sales process.

Any claims by the party that contracted with the debtor company will be an unsecured claim caught in the court-supervised insolvency process as against the company and therefore, as against the pool of money obtained through the sales process. The Court will ultimately approve the distribution of funds by the Trustee, so the lessor/contracting party will be out of the money if the secured creditors suffer a shortfall.

Assumption and Assignment: One major challenge is determining whether contracts and leases can be assigned to the purchaser. In many cases, contracts contain anti-assignment clauses that prohibit transfer without consent from the other party.

Termination Rights: Contracts and leases might have termination clauses that can be triggered by the insolvency or the sale itself, complicating the continuity of these agreements.

Negotiating Consents: Obtaining necessary consents from counterparties to contracts and leases can be time-consuming and uncertain. Counterparties may demand changes to terms or additional payments as a condition for their consent. These negotiations normally are in addition to the process of purchasing the assets and do not involve the licensed insolvency trustee administering the sales process because the company is bankrupt or in receivership.

Legal Challenges: Even if a Trustee can theoretically assign a contract or lease, the counterparties might contest this in court, leading to potential delays and additional legal costs.

Successfully navigating contracts and leases in Canadian insolvency court-supervised sales requires a comprehensive understanding of the legal framework, meticulous attention to detail, and strategic decision-making. By carefully evaluating the options available, addressing challenges proactively, and adhering to legal requirements, potential purchasers can enhance the efficiency and efficacy of the sale process, ultimately maximizing the value of assets and securing a successful outcome in the proceedings.

Company is Bankrupt: Considerations for Governmental Approvals and Regulatory Reviews

Certain industries are regulated under provincial or federal government licenses or approvals. Purchasing the assets when a company is bankrupt or receivership is not enough to operate the business itself. The business operations require government approval. It is of paramount importance to navigate governmental approvals and regulatory reviews. These considerations are not mere formalities but critical steps that can significantly impact the success of the sale process.

Importance of Regulatory Approvals in Bankruptcy Sales: In the realm of bankruptcy sales, regulatory approvals play a pivotal role in ensuring that the transaction complies with all necessary laws and regulations. These approvals act as safeguards to protect the public. A prudent purchaser will make such regulatory approvals a buyer’s condition to purchase the assets.

Sometimes, such as my receivership file I referenced in my stalking horse Brandon’s Blog, we purposely made it a condition that the buyer is solely responsible for obtaining the necessary regulatory approval and not obtaining it is not a reason the purchaser can rely upon to not complete the transaction. The reason we did this is because we did not want the sale of assets to be conditional on obtaining regulatory approval. In such a circumstance, the purchaser must understand this and have a high expectation that they will be approved.

Transition Services Agreements for Regulated Industries: Operating in regulated industries adds another layer of complexity to bankruptcy sales. A sophisticated purchaser will recognize that they may need a transition services agreement as a crucial mechanism to facilitate the seamless transfer of assets while adhering to industry-specific regulations and requirements. These agreements outline the terms under which services will be provided post-sale, ensuring continuity and compliance.

Navigating Foreign Purchasers and Regulatory Requirements: Dealing with foreign purchasers introduces a host of additional challenges, particularly in terms of regulatory compliance. Understanding and adhering to the specific requirements imposed by different jurisdictions is vital to the sale’s success. Navigating these regulatory landscapes demands meticulous attention to detail and a comprehensive understanding of international laws. As the licensed insolvency trustee seller, it would be my preference to not sell to a foreign purchaser and have the sale hung up for a lengthy time pending the outcome of the regulator’s review of the suitability of the foreign purchaser.

Being mindful of these aspects is not just a matter of legal obligation but a strategic imperative. Failing to secure necessary approvals or overlooking regulatory nuances can derail the entire sale process, leading to potential legal repercussions and financial setbacks.

As someone immersed in the complex world of bankruptcy sales, I recognize the delicate balancing act required to maneuver through governmental approvals and regulatory reviews successfully. A purchaser needs to be informed, proactive, and meticulous in its approach, aiming to navigate these intricate processes with precision and expertise. If I must recommend a foreign purchaser in the sale of assets used in a regulated industry, I must have confidence in the purchaser’s ability to navigate the governmental approval process.

Company is Bankrupt: Addressing Liabilities Affecting Bankruptcy Sales

It’s important to recognize the significance of addressing potential liabilities throughout the process. One key aspect that stands out is the need for thorough identification and mitigation of these liabilities, ensuring a smooth and successful acquisition. As stated above, most liabilities of the company are caught in the bankruptcy estate or receivership process.

The sales of assets vests them out of the company to the purchaser and the money obtained from the sale stands in its place. The licensed insolvency trustee must then make its recommendation to the Court for the distribution of the money as the priorities require.

However, sometimes some liabilities may on a practical level make it difficult to use the assets as an operating business, without addressing certain liabilities. Here are some essential talking points to consider:

Identification and Mitigation of Potential Liabilities: Before diving headfirst into a bankruptcy sale, it’s crucial to conduct a comprehensive review of potential liabilities associated with the assets up for acquisition. Identifying any existing or potential risks early on allows for strategic planning to mitigate these liabilities effectively.

Thorough Due Diligence and Legal Counsel Consultation: Engaging in thorough due diligence, possibly with the support of legal counsel, can provide valuable insights into the liabilities that may not be immediately apparent. Legal experts can offer guidance on navigating complex legal frameworks and ensuring compliance with regulatory requirements.

Understanding Exceptions to ‘Free and Clear’ Asset Sales: While the concept of purchasing assets ‘free and clear’ in a bankruptcy sale may seem straightforward, it’s essential to be aware of exceptions that could impact the transaction. Certain liabilities, such as environmental issues, may not be absolved despite the ‘free and clear’ nature of the sale. Also, the business may be reliant on one or two essential suppliers and without their cooperation, it will be impossible to operate a business utilizing those assets.

The concerns and interests of such creditors who cannot be replaced going forward in the business operations and their respective unsecured creditors’ claims must be addressed before completing the purchase of the assets.

By paying close attention to these critical aspects, potential buyers can approach bankruptcy sales with a well-rounded strategy, safeguarding their interests and minimizing potential risks. Collaborating with legal experts and conducting in-depth due diligence are pillars of success in navigating the complexities of bankruptcy sales.

Company is Bankrupt: The Insolvency Process and Sale Order Approval

When diving into the world of bankruptcy sales, there is a mix of thrill and caution that comes with the territory. It’s a realm where opportunities to acquire assets at distressed pricing collide with the need for strategic decision-making and quick actions. You see, a bankruptcy sale isn’t your run-of-the-mill transaction – it’s a structured process overseen by the Bankruptcy Court, designed to ensure fairness and transparency for all parties involved.

As I take you through the stages where the company is bankrupt, the bankruptcy process, the role of the Bankruptcy Court in sale order approval, and the key milestones in bankruptcy asset sales, you’ll start to see the intricate dance that occurs in the world of distressed asset acquisitions.

Stages of the Bankruptcy Process

Filing for Bankruptcy: It all begins with the company filing for bankruptcy (or being placed into a court-supervised receivership) overseen by the Bankruptcy Court.

Approval for the Sales Process Including the Bidding Procedures: Once the company is bankrupt or in a court-supervised receivership, the licensed insolvency trustee will seek approval for the sales process including the bidding procedures from the court, setting the stage for the asset sale process.

Marketing Assets: With the court’s approval, the licensed insolvency trustee starts marketing the assets to potential buyers, generating interest and gathering bids for the distressed assets.

Receiving Bids: Prospective buyers submit their bids, each vying for the opportunity to acquire the assets through the bankruptcy sale process.

Application to Court: The licensed insolvency trustee administering the bankruptcy or receivership process, will make its application to the Court, filing its evidence, which includes a Report to the Court explaining how the Court-approved sales process was conducted, the results of the process and the bids received, showing how the Soundair principles were adhered to and recommending a specific offer to be approved,.

Finalizing Sale with Court Approval: The sale approval order, once issued by the Bankruptcy Court, finalizes the transaction, paving the way for the transfer of assets to the successful bidder.

Each stage in the insolvency process plays a crucial role in the successful sale of distressed assets, ensuring that the interests of all stakeholders are protected and that the process remains transparent and fair.

Role of Court Resulting in the Sale Approval Order

The Court acts as the guardian of the bankruptcy or receivership process, overseeing the sale approval order and ensuring that all legal requirements and considerations are met. Its role is pivotal in maintaining the integrity of the asset sale process, providing a level playing field for prospective buyers and all stakeholders.

When a sale order is presented to the Court for approval, the court scrutinizes the terms of the transaction, ensuring that it aligns with the laws and the best interests of the parties involved. By granting the sale approval order, the court adds a layer of legitimacy and finality to the asset sale, safeguarding the rights of the buyer and seller.

Key Milestones and Deadlines in Bankruptcy Asset Sales

Deadlines are a crucial aspect of any bankruptcy or receivership asset sale, dictating the pace and efficiency of the process. Key milestones and deadlines serve as guideposts throughout the sale process, ensuring that each step is taken within the specified timeframe to maintain the momentum and integrity of the transaction.

From the initial filing for bankruptcy or receivership to the finalization of the sale order, adhering to these milestones and deadlines is essential for a smooth and successful asset sale. These markers not only provide clarity and structure to the process but also instill confidence in all parties involved, signalling a well-managed and efficient transaction.

Company is Bankrupt Conclusion: Key Takeaways for Successful Asset Acquisitions

As we wrap up our discussion on successful asset acquisitions in bankruptcy sales, let’s reflect on the pivotal points that can guide us toward making informed and strategic decisions in this unique process:

Firstly, navigating bankruptcy proceeding sales requires a nuanced understanding of the key considerations that come into play. Assets are sold “as-is, where-is,” with limited warranties and protections for buyers. This necessitates a careful evaluation of the risks and rewards before participating.
Secondly, being well-informed is crucial when participating. The competitive nature of these sales demands swift decision-making and strategic bidding strategies. Having a clear grasp of the process and a thorough assessment of the assets can give bidders a competitive edge.
Lastly, the guiding principles for acquiring distressed assets successfully revolve around finding the balance between opportunity and risk. Whether you are a strategic investor or a financial bidder, understanding the intricacies of bankruptcy sales and aligning your acquisition strategy with your overall goals is key to driving value from these transactions.

I hope you have enjoyed this company is bankrupt Brandon’s Blog. Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a plan, we know that we can help you.

We know that people 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 restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.

Tags asset sale, bankruptcy estate, bankruptcy proceeding. types of bankruptcy, bankruptcy process, bankruptcy trustee, benefit of creditors, company is bankrupt, contractual commitments, fair valuation, financial obligations, insolvency trustee, legal process, sale at arm, secured creditors, secured debts, unsecured claim, unsecured creditors

Brandon Blog Post

DEMYSTIFYING COMPANY LIQUIDATION: MASSIVE INSIGHTS FROM ONTARIO’S LEGAL JOURNEY

Post author By Brandon Smith
Post date February 19, 2024

company liquidation

company liquidation

Company Liquidation: Introduction

Company liquidation involves navigating a myriad of legal and financial obligations, particularly when a company is deemed insolvent. This process requires a thorough understanding of the duties and responsibilities of company directors, legal obligations in insolvency proceedings, and the roles of licensed insolvency trustees and the Court. Identifying insolvent companies and differentiating between secured and unsecured creditors are also fundamental aspects of the liquidation process.

In the fast-paced and competitive world of business, trust and collaboration are often the key ingredients for success. The recent legal case of Srivastava v. DLT Global Inc. 2023 ONSC 7103 (CanLII) serves as a powerful reminder of just how crucial these elements are in maintaining a thriving business. By delving into the details of the case, I explore the consequences of a breakdown in trust and collaboration and highlight the lessons that can be learned from this real-life scenario.

Join in this Brandon’s Blog Post as I explore the decision-making process in company liquidation, from understanding the options to implementing the liquidation strategy. We will also discuss the personal and legal ramifications, covering topics such as personal liability for business owners and directors, voluntary versus compulsory liquidations, and the voluntary liquidation process.

Whether you’re a business owner facing insolvency or a professional seeking insights into company liquidation, this article will provide valuable information to navigate the complex landscape of liquidation proceedings in Ontario.

Company Liquidation: Understanding the Basics

Company liquidation is a critical process for closing a limited company that either can no longer meet its financial obligations or if solvent, cannot continue due to other reasons. When a business undergoes liquidation, its assets are sold off, and the proceeds are used to pay back outstanding creditors.

There are two predominant types of company liquidation: voluntary and compulsory. Voluntary liquidation, which may be initiated by the shareholders or a court order, is often chosen when a company is solvent but burdened by debts. Compulsory liquidations happen through a court order when a company can either no longer pay its debts or, management is dysfunctional and can no longer work together to properly wind up the corporation and its business.

Liquidation proceedings are typically overseen by a licensed insolvency trustee. Company directors must comply with legal obligations during this process to avoid personal liability, particularly if they have given a personal guarantee for business debts.

A common cause for company liquidation is a significant drop in business, such as the loss of a major contract. Although liquidation can entail substantial costs, options exist even for companies without assets. Business owners must seek expert advice to ensure a smooth transition during the liquidation process. Here’s a simplified overview of the liquidation process:

Decision to liquidate (voluntary or court-ordered)
Appointment of a licensed insolvency practitioner
Asset liquidation
Settlement of debts with creditors
Redemption of shares to the extent there is cash to do so
Dissolution of the company

company liquidation

Company Liquidation: Understanding Insolvency in Canada

In Canada, insolvency is a legal term indicating a company’s financial distress, where a business is unable to meet its obligations as they come due, or ceases to pay current liabilities during normal operations. This situation often leads to company liquidation or other forms of bankruptcy proceedings governed by various statutes, including the Bankruptcy and Insolvency Act (BIA), the Winding-up and Restructuring Act, and the Companies Creditors Arrangement Act (CCAA).

Conversely, insolvent companies are subject to the aforementioned insolvency laws, which set out the protective legal framework allowing for a fair and orderly process of winding up a company’s affairs and distributing its assets. Insolvency laws in Canada are designed not only to adjudicate the distribution of company assets but also to provide possible recovery pathways for financially distressed businesses.

Identifying Insolvent Companies

Insolvent companies are characterized by their inability to discharge their financial liabilities as they become due. A more comprehensive view of insolvency includes the scenario where the total liabilities of a company exceed the fair valuation of its assets, suggesting that even the sale of all its assets would not cover the outstanding debts.

It is therefore essential for business owners and company directors to recognize the early signs of insolvency and to understand the consequences it may have for the future of their ventures. Identifying an insolvent company promptly is critical as it enables directors to take necessary action to either revive the company or initiate an appropriate exit strategy.

Duties and Responsibilities of Company Directors in Insolvency

When a company is facing insolvency, directors hold increased responsibilities and must pivot their focus to prioritize the interests of their creditors. This can involve refraining from incurring additional debt, avoiding transactions that undervalue company assets, and ensuring that no further detriment is caused to the financial standing of the creditors. Failure to act responsibly in the face of insolvency can result in allegations of wrongful or even fraudulent trading, potentially leading to personal liability for the directors. Timely, responsible action by directors is essential for limiting potential damages and preserving the trust and rights of creditors involved.

Legal Obligations in Insolvency Proceedings

The liquidation process for insolvent companies in Canada involves stringent legal obligations and is closely monitored by the courts. Directors must comply with laws set forth by the Bankruptcy and Insolvency Act or engage in processes like Company Creditors Arrangement Act proceedings, which offer an alternative to outright liquidation. In practice, the process is administered by a court-approved licensed insolvency practitioner (IP) who oversees the liquidation of assets, repayment of creditors, and an investigation into the reasons for the company’s failure, including examining the conduct of its directors.

Commencing company liquidation does not automatically cancel existing contracts; however, the entity in liquidation has statutory provisions under the Bankruptcy and Insolvency Act to terminate agreements that are no longer viable or beneficial.

Directors must understand their legal obligations and the procedural steps involved to ensure that they comply with the law and mitigate any risk of personal liability. The role of IP is pivotal in managing the process to achieve an equitable outcome for all parties and to facilitate a lawful and orderly conclusion to the company’s affairs.

Company Liquidation: The Role of Insolvency Practitioners

A Licensed Insolvency Trustee (LIT) are professionals licensed, authorized and supervised by the Federal Government to act concerning an insolvent individual, partnership, or company. These specialists take control of businesses that face financial difficulties to achieve the best possible outcome for shareholders, board of directors, employees, and – most significantly – creditors. Their expertise is essential in navigating the complex process of business liquidation including the sale of assets.

LITs meticulously itemize business expenses and assess the value of remaining assets when a business is ending. This is a vital step in determining how best to distribute assets among creditors. They are also responsible for conducting thorough investigations into why a company failed, examining the conduct of its directors, and sometimes reviewing the actions of third parties, like creditors.

The process they oversee – whether it’s a voluntary company liquidation or an involuntary liquidation – adheres to a strict legal hierarchy for repaying creditors. This ensures a clear and equitable distribution of assets, even though unsecured creditors may receive little to no return. The ultimate aim of an insolvent liquidation, guided by the LIT, is to provide a dividend to all classes of creditors to the extent that the company’s assets allow.

The Official Receiver and their Role in Liquidation Proceedings

The Official Receiver is a local public official within the Federal Office of the Superintendent of Bankruptcy. They play a pivotal role in managing the insolvency process in Canada. This includes setting standards, providing directives to LITs on how to proceed in certain situations and overall supervisory responsibility of LITs.

Secured Creditors vs Unsecured Creditors: What You Need to Know

In the hierarchy of repayments during a company liquidation, understanding the distinction between secured and unsecured creditors is crucial. Secured creditors are those with a legal claim on assets, often due to a lien or a security interest that guarantees their investment. Should a company dissolve, these creditors are prioritized to receive payment from the sale of the secured assets. Examples include lenders who financed company property or equipment.

On the other hand, unsecured creditors do not have this collateral backing. They include entities like credit card companies or suppliers with outstanding invoices. Once the secured creditors are paid, unsecured creditors fall next in line for any remaining funds, though often recovery rates are low or nonexistent.

Employees, as stakeholders, are also categorized as unsecured creditors, but may be prioritized differently depending on the jurisdiction and specific liquidation laws. In bankruptcy, secured creditors may take control of pledged assets to offset their losses, while unsecured creditors must wait to see if there are any funds left after the liquidation of unpledged assets.

Understanding these classifications is paramount for anyone involved in a company liquidation, as they dictate the order of payments and potential recovery. This knowledge can influence decisions made prior to and throughout the liquidation process, impacting all parties involved, from the business owner to the smallest creditor.

Creditor Type	Description	Recovery Source	Priority in Company Liquidation
Secured	Creditors with a legal claim on assets (e.g., banks have taken a security interest for their loan, property liens)	Sale of specific collateral	High
Unsecured	Creditors without a claim on assets (e.g., suppliers, credit card companies)	Remaining business assets after secured debts are paid	Lower

By managing secured and unsecured creditors efficiently, Insolvency Practitioners can ensure a fair and lawful distribution of a company’s remaining assets, while acknowledging the varying levels of risk each creditor assumed.

company liquidation

The Company Liquidation Process: From Decision-Making to Implementation

The journey of company liquidation begins with a crucial decision-making phase, a stage where the future of a business and its stakeholders hangs in the balance. Whether a company opts for voluntary liquidation as part of a strategic exit strategy or faces the harsh reality of insolvency, the liquidation process demands a careful, planned approach to implement.

A solvent company considering voluntary company liquidation might be doing so for reasons such as the directors’ retirement or a strategic decision that the business has run its course. On the contrary, a liquidation of the assets of an insolvent company is triggered when a company cannot meet its financial obligations and must cease operations. In both cases, engaging professional advisers, being a LIT and a lawyer early in the process, can offer guidance through each phase, from the planning stages to the final dissolution of the company.

When the voluntary liquidation process is chosen, a company can prepare in advance, making for a more orderly and manageable closure. This method is less intrusive compared to a court-imposed compulsory liquidation following a creditor’s application. Throughout the process, the appointed insolvency practitioner works to sell off assets and settle debts, culminating in the formal winding up of the company.

In the event of an involuntary company liquidation, the proceedings begin following a winding-up petition from creditors. Legal mandates spell out the steps to be taken, from appointment of a liquidator to notifying and paying out creditors. The process may differ slightly from province to province where specific local laws affect the liquidation process.

In either scenario, the overarching goal is to handle assets and debts in conformity with legal and ethical obligations, and ultimately, to provide clarity and closure to all parties involved.

Making the Decision to Liquidate: Understanding the Options

When the decision looms to liquidate a company, it’s paramount for business owners to understand their options. A company’s status—solvent or insolvent—plays a pivotal role in determining the path taken in liquidation. Solvent companies generally have the luxury of choice, where directors may opt for a company liquidation as an exit strategy when the business has fulfilled its purpose or due to retirement.

Alternatively, for insolvent companies, the decision is less voluntary and often more urgent. Directors may initiate a liquidation to preempt spiralling debts and legal actions by creditors, or they may find themselves in the throes of a bankruptcy protection filing, where a court determines what will happen with the business.

The voluntary initiation of a company liquidation before reaching a crisis point can be less traumatic for a company and its personnel, allowing the liquidator to manage a planned and orderly process.

Company Assets and Outstanding Debts: Navigating the Financial Obligations

Once a company enters the liquidation phase, addressing the financial aspects follows swiftly. This involves a comprehensive accounting of company assets and a thorough evaluation of outstanding debts. The liquidator’s role here is integral. They’re tasked with the identification and valuation of all company assets, assessing business assets like inventory, property, and machinery. Following the liquidation sale, they oversee the distribution of proceeds to creditors, prioritizing secured over unsecured creditors, with any excess then directed to shareholders or the owner.

The focus shifts to the company’s debts, with secured creditors receiving payment first due to their collateral backing. Unsecured creditors, such as trade creditors, are then considered. Insolvency practitioners navigate these waters, ensuring a fair and legal conclusion is reached, even as unsecured creditors may recover only a fraction of what is owed if anything at all.

The Sale of Business Assets and the Exit Strategy

The culmination of a liquidation process lies in the sale of business assets—an exercise aimed at converting the company’s holdings into liquid capital to settle its liabilities. Whether the liquidation is voluntary or a compulsory measure, the end goal remains the same: to conclude the business’s affairs in an orderly and effective manner. For company stakeholders, this can often mean selling off all components of a business—stock, fixtures, equipment, and even intellectual property.

Business owners may mark the liquidation of assets as a significant part of their exit strategy. Especially in a voluntary company liquidation, it allows them to retire, recalibrate, or move on from the company in a structured and anticipated way. Conversely, in an insolvency scenario, liquidation acts as a critical means to mitigate the impact on creditors, shareholders, and the business reputation.

By converting assets into cash, liquidation can fulfill outstanding financial obligations and, in some fortunate cases, result in a surplus for the company’s shareholders. Regardless of the circumstances, the conclusive act of selling off assets and settling the company’s affairs offers a clear yet often bittersweet period of transition for those involved. Whether it will be a long or shorter period of transition depends on the complexities of the business in company liquidation.

company liquidation

The Personal and Legal Ramifications of Company Liquidation

Company liquidation, whether voluntary or involuntary carries significant personal and legal ramifications that extend beyond the immediate dissolution of business operations. Directors and business owners need to be cognizant of the implications of liquidating their company, as the consequences of failing to adhere to legal requirements can be severe.

Understanding Personal Liability: The Impact on Business Owners and Directors

In the event of a company’s insolvency and subsequent liquidation, the directors’ conduct leading up to this point comes under scrutiny. Directors of insolvent companies must adhere to high standards of corporate governance, and failing to do so may result in personal liability. This scrutiny is aimed at uncovering any wrongful or fraudulent trading activities. If discovered, directors can be compelled to contribute to the company’s outstanding debts, significantly impacting their finances.

Moreover, if directors have provided personal guarantees for company borrowing, they can also be held accountable for these debts. This risk heightens the importance of seeking professional legal advice before initiating any company liquidation proceedings. A proactive approach, including ensuring that all debts and obligations are satisfied, protects business owners from the pitfalls of personal liability.

Finally, directors are liable for any unpaid salary or wages and any statutory withholdings not remitted to the government.

Voluntary vs Compulsory Liquidations: Factors to Consider

Understanding the difference between voluntary and compulsory liquidation is paramount for any business owner or director contemplating the end of their company’s operations. In voluntary liquidation, which requires a special resolution and the consent of shareholders, the business can be wound down in an orderly fashion, assets sold off, and creditors paid in an agreed-upon order. This option puts the business in control of its exit strategy.

Compulsory company liquidation, on the other hand, is not within the company’s control and occurs when economic conditions, company regulations, and financial distress lead to a court order forcing liquidation. Such unfavourable circumstances often stem from insolvency and more often than not, failure to fulfill legal obligations. Compulsory liquidation subjects the company to a court-appointed liquidator’s oversight, who will distribute assets to satisfy creditors without the company’s input in the order of repayment.

Navigating the Voluntary Liquidation Process: From Special Resolution to Finalization

The voluntary liquidation process is initiated by a company’s shareholders via a special resolution and is a methodical path toward winding down company affairs. It begins with a formal decision to cease operations, involves reaching out to a licensed insolvency practitioner, and requires calculated steps to manage the cessation of business affairs.

After shareholders’ approval, company assets are assessed and sold to pay debts. Secured creditors are prioritized, followed by unsecured creditors. Any remaining funds are then distributed among stakeholders or redirected towards the business owner’s subsequent ventures. Once all financial obligations have been met, the company is formally dissolved, marking the completion of the company liquidation process and providing a clear endpoint to the company’s existence.

company liquidation

Company Liquidation: The Importance of Trust and Collaboration in Business – Lessons from the Srivastava v. DLT Global Inc. Case

I won’t go into all the details of the case, but rather, provide an overview of the important points to be taken away from this legal battle. You can read the entire judge’s decision by clicking on this link. The case revolves around Neeraj Srivastava, a co-founder and former director of DLT Global Inc., and his application to wind up the company. The court ultimately dismissed the application, but the underlying issues uncovered shed light on the critical role of trust and collaboration in business relationships.

Background

Mr. Srivastava’s application was based on the argument that DLT Global could not continue its business due to significant liabilities. He claimed that they faced financial difficulties, had an unsustainable burn rate, and engaged in extensive litigation. These issues, according to Mr. Srivastava, justified the winding up of the company.

Trust and Collaboration

A breakdown in trust and collaboration between Mr. Srivastava and his co-founder, Loudon Owen, emerged as a central issue in the case. Mr. Srivastava alleged that his reasonable expectations as a co-founder and shareholder were not met and that he was unfairly treated by DLT Global. On the other hand, DLT Global argued that Mr. Srivastava engaged in misconduct and threatened to harm the business.

Lessons Learned

1. Clear Communication and Expectations: The Srivastava v. DLT Global Inc. case underscores the importance of clear communication and setting realistic expectations from the outset of a business venture. It is crucial for all parties involved to have a shared understanding of their roles, responsibilities, and the direction of the company.

2. Building and Maintaining Trust: Trust is the foundation of any successful business relationship. It requires open and honest communication, transparency, and a mutual understanding of values and objectives. Without trust, collaboration becomes challenging, and the business may suffer as a result.

3. Resolving Conflicts Effectively: Conflicts are inevitable in any business relationship. However, it is how these conflicts are resolved that can make or break a partnership. By adopting a collaborative and problem-solving approach, parties can find mutually beneficial solutions and prevent the escalation of disputes.

4. Seeking Alternative Remedies: The Srivastava v. DLT Global Inc. case highlights the importance of exploring alternative remedies before considering the drastic step of winding up a company. Parties should consider mediation, negotiation, or other dispute resolution mechanisms to address their grievances and protect their interests.

Company Liquidation: Closing Thoughts

The Srivastava v. DLT Global Inc. case serves as a cautionary tale for businesses about the criticality of trust and collaboration. It emphasizes the need for clear communication, building and maintaining trust, effective conflict resolution, and exploring alternative remedies before resorting to extreme measures. By prioritizing these aspects, businesses can foster a healthy and productive environment that enables growth and success.

In conclusion, the lessons learned from this case remind us that trust and collaboration are not just buzzwords but essential components of any thriving business. By embracing these values, entrepreneurs and business leaders can create a solid foundation for long-term success, even in the face of challenges. Let us take these lessons to heart and build businesses that prioritize trust, collaboration, and mutual respect.

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company liquidation

Brandon Blog Post

RECEIVERS AND RECEIVERSHIPS: CAN A FINANCIALLY TROUBLED CANADIAN LAW FIRM BE PLACED IN AN EMBARRASSING RECEIVERSHIP?

Post author By Brandon Smith
Post date September 11, 2023

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receivers and receiverships

Receivers and receiverships: Introduction

Imagine a prestigious Canadian law firm, typically the epitome of stability and justice, suddenly hit by a financial storm. The once robust balance sheets now shake, and partners are left to navigate a legal and financial labyrinth they never expected. This Brandon’s Blog takes you on a journey through the intersection of law and finance, revealing the truth behind what happens when even the legal giants fall on hard times.

Financial turbulence is a universal challenge affecting any business, including law firms. In the context of Canadian law firms, the concept of receivers and receiverships is unique, and the Court of King’s Bench of Alberta grappled with this issue in a recent case. Join us as we explore the legal strategies, regulations, and complexities of a financially challenged Canadian law firm placed in receivership.

Definition of receivers and receiverships

What Is Receivership?

Receivers and receiverships are a legal process that includes the retention of a 3rd party, referred to as a receiver, to take control of a company’s assets, finances and operations in an effort to resolve the underlying economic problems. Receivership is a lawful remedy used when a company, sole proprietorship, partnership or person, even including a law office, encounters impossible monetary issues. Receivers and receiverships can be used either to restructure a business by separating the good assets from the horrific financial problems or for a straight liquidation.

Receivership is a legal system where a secured creditor either independently designates or petitions the court to appoint a 3rd party, described as a receiver, to manage the properties and affairs of a business or person. Receivers and receiverships become a multifaceted process imbued with complexity. This option regularly serves as an avenue for the reconfiguration of a faltering business or the resolution of financial disagreements among diverse parties.

Navigating receivership involves a formidable blend of legal acumen and also the capability to make wise financial judgments. It is incumbent upon companies and people alike to realize the far-reaching ramifications of receivers and receiverships as well as the prospective scenarios that might ensue from its invocation. Among these considerations lies the essential issue of its repercussions on stakeholders, including employees, unsecured creditors, as well as lenders.

Within Canadian territory, the mantle of a receiver can solely be born by an appropriately qualified licensed insolvency trustee to manage this intricate legal process.

When Is Receivership Considered?

Receivership ends up being a factor to consider when a business experiences severe financial distress, such as mounting financial debts, operational inadequacies, or the inability to satisfy financial commitments. It works as a last resource to salvage what continues to be of the firm’s assets.

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receivers and receiverships

Receivers and receiverships laws in Canadian provinces: Overview of the legal framework for receivership in Canada

Canada’s legal landscape is complicated, with federal and provincial laws and guidelines controlling the process of receivership. Let us explore this further.

Federal Laws

In Canada, the procedure of receivership is regulated mostly by federal government regulation, the Bankruptcy and Insolvency Act. The receiver must act lawfully. In a court appointment, the receiver must act in the very best interests of all parties involved. In this type of appointment, receivers as well as receiverships go through oversight by the court. The procedure of receivership can be complicated as well as calls for well-informed legal and financial recommendations to guarantee an effective outcome.

Provincial Regulations

Provinces in Canada also have their own laws which intersect with receivers and receiverships. Examples of provincial regulations that could affect receivers and receiverships are:

the actual statute under which a court supervises receivers and receiverships;
food and beverage service;
landlord and tenant.issues;
real property laws;
employment laws; and
environmental regulations.

Receivers and receiverships: Signs of financial troubles in Canadian law firms

Early signs of law firm financial distress may manifest discreetly initially; however, they possess the potential to swiftly burgeon into more significant predicaments if they remain unaddressed. These initial cues often comprise a diminution in earnings or profits, the gradual accumulation of aged or unrecoverable accounts receivable, protracted deferrals in settling obligations with suppliers, elevated turnover ratios among the workforce, and a conspicuous dearth of financial commitment to technological advancements or educational initiatives.

Furthermore, additional red flags might encompass extravagant expenditures on non-essential items, an absence of transparency in financial disclosures, and an excessive reliance upon a select few pivotal clientele for the lion’s share of the generated income. It is of paramount importance for legal practitioners to diligently oversee their fiscal well-being and to adopt assertive measures for rectification as soon as such issues come to the fore. These remedial actions may encompass the implementation of cost-saving measures, the pursuit of novel revenue streams, and judicious investments in pivotal facets of their enterprise to maintain a competitive edge within the industry.

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receivers and receiverships

Receivers and receiverships: Initiating receivership proceedings

Secured creditors and their loans

In the intricate tapestry of the Canadian receivership process, secured creditors assume a pivotal role, being the foremost lenders vested with a security interest in the debtor company assets. This security interest, the secured loan being a legal tether of paramount significance, empowers them to wield their influence with precision, invoking either the private appointment of a receiver or the judicial machinery to issue an order for a court-appointed receiver.

In the realm of receivers and receiverships, this designated receiver takes upon themselves the onerous task of seizing the reins and stewarding the debtor company’s possessions.

Empowered by their position, secured creditors hold sway over the inception of the receivership process, their voices resonating in the selection of the receiver, a decision of paramount consequence. This influence is not merely titular; it is wielded to safeguard their interests and optimize the potential for recovery.

Types of receivers and receiverships: Role of receivers in legal proceedings

There are two types of receivers and receiverships:

Privately-appointed receiver

In privately appointed receiverships, the receiver bears the weighty mantle of responsibility, owing a fiduciary duty to the secured lender, a commitment to act in their utmost interest. Secured creditors, in turn, possess the authority to interpose their veto, casting judgment upon select decisions proposed by the receiver.

Court-appointed receiverships

However, when the path leads to court-appointed receivership, a different dynamic emerges, for here, the receiver is an independent arbiter, an officer of the court, rendering decisions with impartiality. No doubt secured creditors will attempt to wield their influence, but the court-appointed receiver must be seen to be even-handed.

In the grand scheme of the Canadian receivership process, secured creditors emerge as the linchpin upon which rests the beginning of efficient oversight and resolution of a debtor’s financial quagmire.

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receivers and receiverships

Receivers and receiverships case study: A recent instance of a Canadian law firm receivership process

The recent decision of the Court of King’s Bench of Alberta is in the case of Law Society of Alberta v Higgerty, 2023 ABKB 499. This case involves an application to put a law firm into receivership. Notwithstanding that it is not one of the larger firms, it is, in my view, having been involved in both the receiverships and bankruptcies of law firms, a complete analysis of all the important considerations that insolvency practitioners and non-insolvency lawyers must be aware of in either advising or dealing with an insolvent law firm.

Law firm receivers and receiverships: Background

The Law Society of Alberta (“LSA”) and Mr. Richard E. Harrison are the applicants on this matter (collectively, the “Applicants”). The Applicants seek an order appointing a receiver or a receiver and manager over certain undertakings, personal property, real property and assets of the law practices of Patrick B. Higgerty and Patrick B. Higgerty Professional Corporation (collectively, “Higgerty Law”).

The receivership order sought by the Applicants is unique because of the circumstances underlying this application (the “Application”). The tension in this Application concerns: (i) the desire of a secured lender to enforce its rights and entitlements under the security it holds over the assets held by Higgerty Law; and (ii) the desire of the LSA to ensure the parties are acting in the public interest and to protect solicitor-client privilege that is a component of the files of Higgerty Law.

Easy Legal Finance Inc (“ELFCo”) is a secured lender to Higgerty Law. It seeks the right to enforce its security which is part of the loan agreement. It proposes a process that it alleges will ensure confidentiality and solicitor-client privilege are maintained for stakeholders, and not strip ELFCo of substantially all of its contractual, legal and beneficial rights.

Law firm receivers and receiverships: Facts

During its years of operation, Higgerty Law focused on personal injury law and class action litigation. Compensation for those files was often based on contingency fee agreements, payable when the matter concluded. On March 10, 2023, Higgerty Law was placed under custodianship pursuant to an Order of this Court (the “Custodianship Order”). Mr. Harrison was named the custodian (the “Custodian”).

On the date the Custodianship Order was issued, Higgerty Law had a substantial number of creditors. ELFCo asserted it held security over all present and after-acquired personal property of Higgerty Law. ELFCo claims that its security gives it priority over the proceeds of the class action lawsuits.

Higgerty Law has a debt of around $1.4 million to ELFCo. The interest rate charged on the ELFCo Loan is a whopping 18% per year! Last April, ELFCo served a demand for payment and a notice to enforce security under section 244(1) of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (“BIA”).

The President of ELFCo swore in an affidavit that he believed there was no reasonable prospect of Higgerty Law repaying the ELFCo Loan.

Law firm receivers and receiverships: What the Court needed to address

Initially, several issues were to be addressed in the Application, including: (i) whether a receiver and manager should be appointed; (ii) whether the interest payable on the ELFCo Loan should be stayed; and (iii) the scope of the ELFCo Loan security. The parties agreed to restrict the hearing to the issue of whether a receiver and manager should be appointed. The other issues were deferred to a subsequent hearing.

ELFCo challenges the proposal to appoint a receiver and manager. It asserts there is no business of Higgerty Law to manage and no material estate to administer. ELFCo also asserted that a receiver and manager in these circumstances would be limited to the negotiation of the transfer of a limited number of legal files to new lawyers. It submits that this is not an appropriate mandate for a receiver and manager and that it would not be commercially reasonable in view of the needless cost and redundancy a receivership would create.

As an alternative, ELFCo made an application for approval of a basic process to enforce its security. It asserts that this alternative process would ensure that confidentiality and solicitor-client privilege are maintained for stakeholders. Further, ELFCo asserted that this alternative process would not strip it of substantially all its rights and entitlements under its security, which would occur under the Custodian’s proposal. The one thing that the ELFCo proposal failed to recognize is that under section 244(4) of the BIA, only a licensed insolvency trustee can act as a receiver.

The unique circumstances of this case presented a challenge for the Court because there are various stakeholders with different rights that must be balanced, including:

the rights of the Higgerty Law clients to have their solicitor-client privileged communications protected;
the entitlement of a secured creditor to enforce its legal and beneficial rights;
the rights of Higgerty Law clients whose funds appear to have been misappropriated;
the rights of Higgerty Law clients to access their file material; and
the rights of unsecured creditors, including clients of Higgerty Law.

A wide array of factors should be taken into consideration when considering receivers and receiverships

The Court considered a list of important factors in considering a receivership appointment:

whether irreparable harm might be caused if no order were made, although it is not essential for a creditor to establish irreparable harm if a receiver is not appointed, particularly where the appointment of a receiver is authorized by the security documentation;
the risk to the security holder, taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of the assets while litigation takes place;
the nature of the property;
the apprehended or actual waste of the debtor’s assets;
the preservation and protection of the property pending judicial resolution;
the balance of convenience to the parties;
the fact that the creditor has the right to appoint a receiver under the documentation provided for the loan;
the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulty with the debtor and others;
the principle that the appointment of a receiver is extraordinary relief, which should be granted cautiously and sparingly;
the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties more efficiently;
the effect of the order upon the parties;
the conduct of the parties;
the length of time that a receiver may be in place;
the cost to the parties;
the likelihood of maximizing return to the parties;
the goal of facilitating the duties of the receiver.

Ultimately, the Court has to decide if, under provincial law, on the balance of the evidence, is it just and convenient to appoint a receiver.

Receivers and receiverships: The evidence and the Court’s analysis

The evidence, in this case, is that:

there are trust account improprieties in the range of $419,000; and
there is no reasonable prospect of the Applicants or Higgerty Law repaying the ELFCo Loan or continuing to make loan payments.

By virtue of being members of the LSA, custodians can maintain solicitor-client privilege over files and information within their custody. Both the LSA and the Custodian are stakeholders in ensuring the maintenance of solicitor-client privileged information.

There is an important distinction between secured creditors, who are interested in protecting themselves and usually do so through a receiver that they appoint, and a custodian who is typically interested in protecting the clients of the financially troubled law firm and their respective rights and entitlements, including their respective rights to solicitor-client privilege.

From the perspective of the secured creditors, the results which flow from the appointment of a custodian are no happier. A custodian is obliged by the to protect the interests of clients of the firm, including confidentiality, and is consequently unable to collect accounts receivable either efficiently or economically. The task of the custodian is significantly dissimilar from that of the receiver in that the primary objective of the custodian is the protection of clients’ interests. Receivers, by contrast, act in accordance with the interests of creditors. Any benefit enjoyed by creditors which results from the appointment of the custodian is merely incidental to the primary function of the custodian, which is the protection of the clients.

Solicitor-client privilege is a fundamental underpinning of the legal profession in Canada. It is near absolute and merits protection.

Solicitor-client privilege cannot be breached by the interests and entitlement of a secured creditor. Any risks in that regard must be carefully considered. To illustrate this point, the Supreme Court of Canada has held that Anton Piller orders must ensure the protection of the solicitor-client communications of the party being searched. There is no right to disclosure of such communications in discovery because they are protected by privilege.

The Judge determined that the higher duty in the circumstances of this case is to protect the public interest, which includes the protection of privilege associated with the files of Higgerty Law. Given the inherent concerns associated with the issues touching on the “Property” as that term is defined in the Draft Receiver Order, it is inevitable that matters concerning the solicitor-client privilege over the Higgerty Law files will be engaged. As a regulator, the LSA has an obligation to ensure the parties are acting in the public interest and to protect privilege over the Higgerty Law files.

The Judge’s view was that protecting solicitor-client privilege is an essential element of this custodianship. The unique circumstances of this case presented a challenge for the Court because there are various stakeholders with different rights that must be balanced, including:

the rights of the Higgerty Law clients to have their solicitor-client privileged communications protected;
the entitlement of a secured creditor to enforce its legal and beneficial rights;
the rights of Higgerty Law clients whose funds appear to have been misappropriated;
the rights of Higgerty Law clients to access their file material; and
the rights of unsecured creditors, including clients of Higgerty Law.

Receivers and receiverships: The Court’s decision

Based on the Judge’s review of the evidence and analysis of the law, the Judge found that it was just or convenient to appoint a receiver and manager of Higgerty Law. The unique circumstance, in this case, calls for a receiver and manager to be appointed in order to best ensure the protection of the solicitor-client privilege associated with the files of Higgerty Law.

The Judge also directed that the Draft Receiver Order obligate the receiver and manager to come back to the Court for an order whenever a Higgerty Law file is proposed to be transferred to a third party. The Draft Receiver Order must stipulate the notice that is to be given to the stakeholders whenever there is a proposed file transfer.

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Receivers and receiverships: Impact of receivership on law firm clients

Client confidences

Maintaining client confidence is a paramount concern during receivership. The receiver must uphold ethical standards and protect sensitive information.

Continuing legal obligations

Receivership does not absolve a law firm from its ongoing legal obligations, including representing existing clients and fulfilling contractual commitments.

Receivers and receiverships: Pros and cons of legal firm receivership

Advantages

Receivership can offer advantages such as a structured approach to resolving financial issues and protecting creditor interests.

Disadvantages

However, it also comes with disadvantages, including the potential loss of control for the firm’s owners and uncertainty for employees.

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receivers and receiverships

Alternatives to receivership for law firms: Restructuring options available to a law firm

Restructuring

When confronted with financial difficulties, a Canadian law practice has a range of alternatives to think about prior to being put in receivership. Bankruptcy, restructuring either by merging with another firm or financial help in the form of additional partner capital contributions could be potential options that must be explored. Restructuring permits firms to rearrange their operations and debt structure to bring back financial security.

Bankruptcy

Receivership or bankruptcy, on the other hand, ought to be taken into consideration when the company’s financial situation is irreparable. It is necessary for an insolvent law practice to carefully evaluate and take into consideration these choices in order to determine the very best strategy to resolve their financial difficulties.

Receivers and receiverships: Frequently asked questions

1. What triggers the need for receivership in a law firm?

Receivership may be triggered in a law firm when the organization is no longer able to meet its financial obligations. This can be due to several factors, including a significant decrease in client demand, mismanagement of funds, or overwhelming debt. The need for receivership can also arise from legal action, such as a lawsuit against the firm.

When the organization is unable to pay its debts, receivership becomes necessary to protect the interests of clients, creditors and stakeholders. In such cases, a court-appointed receiver takes control of the firm’s assets and operations to manage the liquidation process and ensure the equitable distribution of funds from the sale of assets.

2. Can a law firm continue to operate during receivership?

Being in receivership can be a roller coaster ride for a law practice! The future of the firm lies in the hands of the receiver and their assessment of the scenario. If the receiver believes that the law office has the prospective to create revenue by continuing business operations, then the firm might be allowed to continue operating in some fashion in continuing legal services and moving the clients’ legal proceedings forward, while a realization strategy is being developed. But, if the receiver thinks that the firm cannot operate profitably and therefore it’s better for the firm’s assets should be sold, the receiver will seek court approval for that strategy.

3. How does receivership impact the firm’s clients?

The influence of receivership on a law firm’s clients can be significant. Clients may experience hold-ups in obtaining legal services, provided the sanctity of solicitor-client privilege. Furthermore, clients may be worried about the stability and dependability of the firm during the receivership process, which can impact their self-confidence in the firm’s capability to continue to supply essential legal solutions. It is important for both the receiver as well as the law firm in receivership to interact transparently with the clients during the receivership to maintain their confidence as well as minimize the impact of the process.

4. What alternatives exist to receivership for struggling law firms?

5. Are there differences in receivership laws across Canadian provinces?

As indicated above, receivership is governed first by the BIA, a federal statute. Although there may be differences in provincial law in the areas described above that have an effect on receivership proceedings, the base laws governing receivers and receiverships are the same across all provinces.

Receivers and Receiverships: Conclusion

In conclusion, receivers and receiverships are a complex but vital legal process that can be initiated when a Canadian law firm faces insurmountable financial challenges. It involves the appointment of a receiver to manage the firm’s assets and affairs, with the ultimate goal of protecting stakeholder interests. While receivership is a significant step, it is essential to understand its pros and cons and explore alternative solutions before proceeding.

Individuals and business owners must take proactive measures to address financial difficulties and promptly seek assistance when necessary. It is crucial to recognize that financial stress is a prevalent concern and seeking help is a demonstration of fortitude, rather than vulnerability. Should you encounter challenges in managing your finances and find yourself burdened by stress, do not delay in pursuing aid.

It is not your fault you can’t fix this problem on your own and it does not mean that you are a bad person. 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 Trustee & Receiver Inc. 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 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.

an image of a financiallt\y troubled company that is havnig to go into either receivership or bankruptcy — *receivers and receiverships*

Tags alternatives to receivership for law firms, canadian law firm receivership process, court-appointed receivers, financial distress, financial troubles in canadian law firms, Ira Smith Trustee & Receiver Inc., legal framework for receivership in canada, Privately-appointed receivers, receivers and receiverships, receivership laws in canadian provinces, receivership process, restructuring options, role of receivers in legal proceedings, sale of assets, secured creditors, secured lenders, secured loan, unsecured creditors

Brandon Blog Post

BILL C-228: WILL HUGE PENSION PRIORITY IN CANADIAN INSOLVENCY BE REAL FINALLY?

Post author By Brandon Smith
Post date December 5, 2022

Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228: Are pensions protected in Canadian insolvency proceedings?

The long-awaited Bill C-228, an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985 proposes to give priority and therefore some financial security to pensions of workers in the event of a Canadian insolvency of their employer, may finally soon become law. This is a significant victory for pensioners and unions across the country who have been advocating for this change for many years.

This new law will provide much-needed protection for pensioners in case of the insolvency of pension plan sponsors. It is a major step forward in ensuring that pensioners are able to retire with dignity, security and frankly, what they bargained for.

Bill C-228: Right now pensions in bankruptcy can be taken away

The Canadian insolvency system has come under heavy analysis and criticism for years for its treatment of pensioners when the employer goes bankrupt or files for bankruptcy creditor protection. Bill C-228 comes from a long line of private members’ bills presented in the House of Commons of Canada that never went anywhere – until now. It makes every effort to make previous employees getting a pension, and those who someday expect to get payments from their pension plan, a priority in the insolvency process.

In this Brandon’s Blog, I discuss the current status of Bill C-228 and its implications in making pensioners a priority in bankruptcy if it becomes law as presently composed.

Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228: What can cause you to lose your pension?

Underfunding is a major concern for traditional, defined-benefit pension plans (DB Pension Plans). In other words, do they have enough pension assets and therefore enough money to meet their projected future pension obligations of insolvent pension funds? Inadequate actuarial assumptions, poor investment returns, and mismanagement can lead to pension plan underfunding. In the case of corporate insolvency of a large employer with a DB Pension Plan, this issue always arises. Underfunded pensions in bankruptcy wind up hurting retirees.

The Sears Canada court-supervised liquidation forced us to again focus on the treatment of pensioners in corporate bankruptcies under the Bankruptcy and Insolvency Act (Canada) (BIA) or restructurings and liquidations under the Companies’ Creditors Arrangement Act (CCAA). It was widely reported that representative for 17,000 Sears Canada retirees says insolvency laws are unjust when it comes to underfunded pensions.

When a company is insolvent and its DB Pension Plan is underfunded, pensioners suffer pension losses and ultimately income losses. In practice, pensioners’ rights are weak and highly inadequate, especially when pension plans are underfunded.

Although pension legislation at the provincial and federal level purports to offer some protection for amounts owing to an underfunded pension plan, insolvency legislation does not preserve that protection for the majority of those amounts. The insolvency protection of pensioners and pensions in bankruptcy proceedings is therefore limited.

Dr. Janis Sarra is the founder and director of the National Centre for Business Law and a professor at the Peter A. Allard School of Law. In her opinion, Canadian pensioners and employees are among the worst-protected pensions in bankruptcy and/or insolvency among 60 countries.

The history leading to Bill C-228

Let’s look at some history of attempts to protect pensions in bankruptcy. The Canadian Association for Retired Persons (CARP), a nationwide advocacy organization for Canadian seniors and retirees, lobbied politicians on Parliament Hill about legislation changes. According to CARP, the unfunded pension liability should be given priority so that it is handled first.

There is no priority for retirees when it comes to dividing up assets in bankruptcy, and CARP wanted to protect underfunded DB Pension Plans when the employer company goes through restructuring or bankruptcy.

CARP estimated that roughly 1.3 million Canadians, aside from the retired Sears employees, may be at risk due to underfunded DB Pension Plans. The closure of Sears Canada stores made the plight of retirees a top priority for CARP.

Marilène Gill, Bloc Québécois MP, introduced a member’s BILL C-372, on Oct. 17, 2017. It was intended to change the BIA and the CCAA. The change sought to correct the injustice faced by retired workers whose pension and health insurance policy benefits are not secured when their company declares bankruptcy or undergoes restructuring.

On October 17, 2017, Bill C-372 passed its first reading. The House rarely passes private member’s bills like this one. The Liberal Party did not support taking it further and allowed it to die.

Hamilton Mountain NDP MP Scott Duvall asked for leave to introduce Bill C-384 in the House of Commons on November 6, 2017. He proposed amending Canada’s insolvency laws so that companies must bring any pension fund to 100% before paying any other secured creditors. Additionally, it required companies to pay termination or severance pay owing before paying secured creditors. Similarly, this bill passed the first reading and then died.

Then, Senator Art Eggleton, P.C., proposed BILL S-253 shortly before his retirement to amend the insolvency legislation to deal with a pension deficit in Canada. After the first reading passed on September 18, 2018, the second reading followed on September 25. By introducing this bill, the BIA and CCAA would be amended. The plan proposed to give priority to claims for unfunded obligations or solvency deficiencies of pensions. This was applicable to both solvent companies as well as companies that might become insolvent if certain shareholder payments were made. That bill never went any further.

Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

The current Bill C-228: Pension Protection Act

Then, Conservative MP Marilyn Gladu put forward her pension reform private member Bill C-228: An Act to amend the BIA, the CCAA and the Pension Benefits Standards Act, 1985. It passed 2nd reading on June 22, 2022.

According to the Hansard transcripts, she noted that the proposed legislation would ensure that pension funds would be paid before secured and unsecured claims. Unremitted source deductions for the Canada Pension Plan, Quebec Pension Plan, Employment insurance, and taxes would be taken first. Suppliers who take back goods delivered within a month of bankruptcy or receivership and unpaid wages or salaries would be paid next. Then payment for insolvent pensions would come next before the claims of secured and unsecured creditors.

It then got a referral to committee, the Standing Committee on Finance. Once the referral to the Finance Committee happened, it did not take long to get through the committee. The committee held three meetings between October 17 and 31. It passed through the committee and on November 23, 2022, it passed 3rd reading and Bill C-228 was adopted.

A cross-party collaboration of New Democrat, Bloc and Conservative MPs was now finally achieved in order to move forward with key legislation to protect workers’ pensions in commercial bankruptcy or insolvency proceedings. The Liberal government which previously did not have this on its radar also voted in favour. In fact, PM Trudeau has tried to take some credit for this private member’s bill in the House of Commons.

The bill has now moved on to the Senate of Canada for review and amendment before returning to the House for final approval. It passed its first reading in the Senate on November 24. It now seems to have sufficient support and momentum to ultimately become law.

The current Bill C-228: What will the Pension Protection Act do?

The purpose of the private member’s Bill C-228, which will be known as the Pension Protection Act. is to deal with the insolvency of an employer where there is an unfunded liability or solvency deficiency in an employee pension plan or the employer ceases to fund a group insurance plan. It will prioritize the pension payments for such pensioners and employee claims for pension entitlements.

The proposed legislation would also amend the Pension Benefits Standards Act, 1985 to require the annual tabling of a report on the solvency of pension plans.

The current wording of the proposed legislation proposes to accomplish pension security for retirees by amending existing legislation to deal with deficiencies of pension plans as follows:

BIA section 60(1.‍5)‍(a)‍, is the section that deals with employers trying to restructure through a BIA restructuring proposal. It already states that any pension amounts deducted from employees that were not paid into the pension fund must be in order for the court to consider approving the proposal.
It will be amended such that the court cannot approve any employer restructuring proposal unless it stipulates that any amount required to make all special payments, as determined by section 9 of the Pension Benefits Standards Regulations, 1985, that should have been paid to correct any unfunded liability or solvency deficiency will be funded by the employer.
It will also be amended so that any amount required to liquidate any other unfunded liability or solvency deficiency of the fund as determined at the time of the filing of the notice of intention or of the proposal if no notice of intention was filed, will be included.
BIA sections 81.5 and 81.6, are the sections that deal with the event of bankruptcy proceedings and receivership proceedings. They will similarly be amended.
CCAA section 5, which deals with the employer company with a pension plan, will be amended the same as the proposed amendments to the BIA. This will state that if the company participates in a prescribed pension plan for the benefit of its employees, the court may not sanction a compromise or arrangement unless there are the same provisions stated above to protect the interests of the employees.
The Pension Benefits Standards Act, 1985 will be amended to require greater annual report requirements on the solvency of pension funds and their success in meeting funding requirements, and the corrective measures taken or directed to be taken by the Superintendent of Financial Institutions to deal with any pension plan not meeting the funding requirements.

As indicated above, there appears to be enough momentum for Bill C-228 to get through the Senate and ultimately receive Royal Assent to become an Act of Parliament. This will no doubt be a major change to bankruptcy protection insolvency proceedings in Canada relating to benefit plans if it becomes the new law dealing with pension plan deficits.

We will have to see if this Bill becomes law, once implemented and if there will be any unintended consequences. Time will tell if these changes will not have negative consequences on corporate restructuring and advisory, preventing what previously would have been successful restructurings of Canadian businesses, albeit on the backs of hard-working Canadians being the employees and retirees.

No doubt the insolvency community and the lending community will have to adjust to the new business environment. I will provide you with updates as they occur.

Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985

Bill C-228 transition period

The Bill, if passed, would introduce a four-year transition period between its implementation and the implementation of the proposed amendments. My guess is that such a long transition period has been established for two main reasons:

to allow companies who currently are behind in their defined pension benefit payments to catch up; and
to allow the lending community to try to figure out how they are going to adjust their commercial lending practices in this new reality.

Bill C-228: Pension reform to insolvency

I hope you enjoyed this Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, Brandon’s Blog.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. Are you now worried about just how you or your business are going to survive? Those concerns are obviously on your mind. Coming out of the pandemic, we are now worried about its economic effects of inflation and a potential recession.

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

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

We 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.

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

*Bill C-228 An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985*

Brandon Blog Post

RECEIVERSHIP IN CANADA: THE COMPLETE STORY OF WHOSE HAPPY RECEIVER IS IT ANYWAY?

Post author By Brandon Smith
Post date November 21, 2022

receivership in canada

Receivership in Canada: What does receivership mean?

I have just read a decision of the Ontario Superior Court of Justice Commerical List dealing with an important aspect of receivership in Canada. The case is concerned with what happens when two equally applicable provincial laws appear to be working at cross purposes in the context of the receivership in Canada process.

I will explain the case and the process of company receivership in Canada. By understanding the process, the case will make more sense.

Secured lenders may enforce their security to recover loans from borrowers who have defaulted. This remedy available to secured creditors when a borrower, usually a company defaults, is known as receivership.

What does going into receivership in Canada mean?

A receivership is a legal process available to secured creditors, whereby a company’s affairs, business and property are entrusted to a receiver to manage and eventually sell the assets. Secured lenders may enforce their security to recover loans from borrowers who have defaulted. This remedy available to secured creditors is known as receivership.

If a business debtor does not make payments or otherwise defaults on a secured loan, the secured creditor would have the right to appoint a receiver to collect the money owed. Before appointing a receiver, a secured creditor must first issue a “Section 244” notice of intention to enforce security. This is a notification that secured creditors must send to defaulting debtors before appointing a receiver. Section 244 refers to that section number in the Bankruptcy and Insolvency Act (Canada) (BIA).

The notice states that the security covers certain assets, that the company in default owes a specified amount to the secured creditor, and that the creditor may enforce the security after 10 days. The company in default may waive the notice period and consent to the appointment of the receiver.

Under the BIA, only a licensed insolvency trustee (formerly called a trustee in bankruptcy) can be a receiver. No other party is licensed to administer a receivership in Canada.

receivership in canada

Receivership in Canada: What is the difference between a court-appointed receiver and a privately appointed receiver?

A privately-appointed receiver is a licensed trustee who is appointed by a contract between the insolvency trustee and the secured creditor. A private receiver is typically used when there is no dispute to ranking among secured creditors or various claims to ownership of the company’s assets. The powers of a receiver listed in the security document give the privately appointed receiver more limited powers than a court-appointed receiver gets under a court order.

A receiver is court-appointed when the secured creditor makes an application to the court for the appointment of a receiver with more expanded powers. Like a privately-appointed receiver, a court-appointed receiver takes control of a company’s property because of financial distress and when there is a dispute among secured creditors and others as to the ranking of secured claims and ownership of property.

Both kinds of receivers are tasked with protecting and preserving the value of the company or property and are certainly given broader powers by the court to do so.

How is receivership in Canada different from bankruptcy proceedings?

Many people mistakenly use the terms “receivership” and “bankruptcy” interchangeably. However, bankruptcy and receivership are two distinct legal proceedings with different implications.

Bankruptcy vs. receivership can be confusing, but once you understand the key differences between the two, it is fairly straightforward. Whether it is a private appointment or a court-appointed receiver, the differences between bankruptcy and receivership in Canada are the same.

A receivership is a legal remedy available to secured creditors to enforce their security rights against a defaulting debtor. A receiver is appointed to manage the debtor’s property and assets and sell them under a properly run and fair sales process.

The Canadian bankruptcy process is a distinct legal process. An insolvency trustee does not represent secured creditors in bankruptcy proceedings. Instead, under the bankruptcy regime, they represent the unsecured creditors of the bankrupt estate. A corporate debtor may be subject to both bankruptcy and receivership proceedings simultaneously.

One of the major differences has to do with the creditors. In a bankruptcy administration, the bankruptcy trustee must call a meeting of creditors. This is where the insolvency trustee provides its report on the affairs and conduct of the bankrupt debtor and unsecured creditors get to vote on any matters of importance. In receivership, there is no such requirement to hold a meeting of creditors.

receivership in canada

What are the key distinctions between receivership in Canada and liquidation?

So you know what receivership is by now. The federal BIA doesn’t govern liquidation, that’s done under the provincial Business Corporations Act or Wind-Up Act.

A liquidation is for a solvent company where the shareholders, Officers and directors decide to cease business operations. The company puts up its assets for sale and uses the proceeds to pay off its creditors with cash. Any funds left over are then distributed to the shareholders.

A liquidator can be appointed either privately by the company’s directors or by a court order. Liquidation is therefore different from both bankruptcy and receivership in Canada.

Can individuals be placed into receivership in Canada?

The answer is yes. When a secured creditor wishes to take enforcement action upon the security agreement they have against a debtor’s property, as indicated above, they have the remedy of receivership in Canada. This remedy allows them to collect as much of their secured debt as possible.

There are no restrictions as to who can go into receivership in Canada. One of our more famous (infamous?) receivership cases over the years has been the receivership of the assets, property and undertaking of Norma and Ronauld Walton.

receivership in canada

Receivership in Canada: Whose receiver is it anyway?

Now for the court case where two different provincial laws caused a fight amongst secured creditors over the appointment of a receiver. The case is Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2618905 Ontario Limited, 2618909 Ontario Limited, Beverley Rockliffe and Chantal Bock, 2022 ONSC 6186. The two competing provincial statutes are the Mortgages Act and the Personal Property Security Act.

The business is conducted through two affiliated entities. One owns the property and the other operates the business. This is quite a typical arrangement.

One creditor funded the purchase of equipment and took PPSA security over it. Another creditor funded the acquisition of the real property and has a traditional mortgage security. The security agreements extend over different assets, and the outcome is usually uncomplicated.

However, when equipment that has been purchased is attached to real property, there is disagreement about whether and how it can be removed, and whether such removal will negatively affect the value of both the equipment and the real property. The question is now more complicated: which creditor’s rights should take priority over this matter?

Both the equipment lender and the mortgagee are seeking to enforce their security. The equipment lender has filed a motion with the court to appoint a receiver over both the operating company (Opco) that owns the pledged equipment and the holding company (Holdco) that owns the real estate. This would allow the receiver to manage and sell the assets of both companies in order to repay the outstanding debt.

In this case, Opco was a commercial marijuana operation that was unable to get off the ground due to its heavy debt load and startup problems.

Although the mortgagee began power of sale enforcement proceedings, they do not object to a receiver being appointed over the equipment only. The mortgagee wishes to continue its power of sale proceedings and opposes the receiver being appointed over the building. The mortgagee in possession is of the opinion that the equipment is attached to the building and cannot be removed.

The mortgagee concurred that the court has the power to assign a receiver over the property of both Opco and Holdco according to section 101 of the Ontario Courts of Justice Act. They stated that, if a receiver is appointed, the receiver needs to be a firm chosen by them.

Both the licensed insolvency trustee firm preferred by the mortgagee and the firm nominated by the equipment lender filed a consent to act with the court.

What are the conditions under which a receiver may be appointed?

The court looked at numerous factors in order to make a decision on whether or not to appoint a receiver, and if so, which one, including those that have historically in receivership in Canada cases been taken into account in such determinations:

Although it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation, the court considered if no order is made, will irreparable harm be caused?
The size of the debtor company’s equity in the assets and the need for protection or safeguarding of assets during litigation are important factors to consider when assessing the risk to the security holder.
The kind of property it is.
The potential for the assets to be wasted or dissipated.
The need to safeguard the property until a legal ruling is made.
The parties’ respective balance of convenience needs to be considered when making the decision.
Pursuant to the loan documentation, the creditor has the right to an appointment.
Enforcing the security instrument when the security holder experiences or anticipates difficulties with the debtor.
The principle of appointing a receiver should be approached with caution.
The court will determine whether appointing a receiver is necessary to enable the receiver to carry out its duties efficiently.
The effect a receivership order will have on the parties.
The parties’ conduct.
How long a receivership may last.
The financial impact on the parties.
The likelihood of maximizing return to the parties is increased.
The goal of ensuring the smooth running of the receiver’s duties.

As everyone agreed that all assets of both Opco and Holdco should be sold to maximize recovery for all creditors, but cannot agree on the process by which that should be undertaken, resulting in the entire process being stalled, the judge was satisfied that it is just and convenient to appoint a receiver.

The court found that either proposed receiver was acceptable and decided that the receiver nominated by the mortgagee would be appointed by the court to administer all assets. The receiver would eventually come back to court with a sales plan to maximize the value of all the assets subject to the security of all stakeholders.

receivership in canada

How the entrepreneur can avoid receivership in Canada

As a business owner, the way to avoid the receivership process is long before financial difficulties ever become serious financial problems. Here are a few tips on how to do just that:

Keep a close eye on your finances. This means regularly reviewing your income and expenses, and making sure you have a good handle on your cash flow.
Stay current on your bills. This includes not only making timely payments but also staying on top of any changes in your billing terms or amounts.
Keep good records. This means having up-to-date financial statements and documentation for all of your income and expenses.
Make a plan. If you do find yourself in a financial bind, have a plan in place for how you’ll get out of it. This may include negotiating with creditors, seeking new financing, or making cuts to your expenses.
Seek professional help from a licensed insolvency trustee with commercial insolvency experience. If your business is viable and you seek help early enough, there may be many options. The most common ones are refinancing with or without financial restructuring. Reviewing your business allows us to make restructuring recommendations allowing your viable company to become healthy and profitable once again.

Receivership in Canada summary & speak with a licensed insolvency trustee

I hope you enjoyed this receivership in Canada Brandon’s Blog.

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

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

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

Tags assets for sale, assets subject, bankrupt estate, bankruptcy and receivership, bankruptcy proceedings, bankruptcy process, bankruptcy regime, bankruptcy trustee, Bankruptcy vs. receivership, business operations, business owners, Canadian bankruptcy, commercial insolvency experience, company defaults, company in default, company receivership, court appointed receiver, creditors in bankruptcy, debtor company, differences between bankruptcy, financial difficulties, insolvency trustee, insolvent companies, legal proceedings, legal process, licensed trustee, meeting of creditors, notice of intention, outstanding debt, private appointments, private receiver, real estate, receivership in Canada, receivership proceedings, receivership process, sales process, secured creditors, secured debt, secured lender, security agreement, security instrument, security rights, solvent company, Trustee and Receiver, trustee in bankruptcy, unsecured creditors

Brandon Blog Post

ENTREPRENEURIAL CANADIAN BUSINESS BANKRUPTCIES: THE TIP OF A HUGE ICEBERG?

Post author By Brandon Smith
Post date August 22, 2022

business bankruptcies

Insolvency for business including business bankruptcies

In the last two Brandon’s Blogs, I wrote about personal bankruptcy. The topic was the class of debts not released by a person’s discharge from personal bankruptcy. In this Brandon’s Blog, I discuss insolvency for business, and specifically, business bankruptcies, as a result of the recent report by the Canadian Federation of Independent Business (CFIB).

If a business is incapable to pay its financial obligations as they come due, it might deal with some negative effects, including legal action. However, this does not have to damage a business’s credibility forever, if management is prepared to take the required corrective activity before it is far too late.

If a business that is unable to pay its debts cannot turn itself around, it may be forced to declare business bankruptcies, which can have a devastating impact on the business and its employees.

What will happen to the company if it is insolvent?

If your company is financially troubled, it may need to assign itself into bankruptcy. Nonetheless, business bankruptcies are not always the automatic result of being insolvent. If your business is experiencing financial problems, it is essential to speak to a bankruptcy lawyer or a licensed insolvency trustee to review all of your realistic choices. Bankruptcy should be the last choice when nothing else will work.

Case in point, the recent report issued by the CFIB on small business insolvency says that its survey finds that only 10% of business owners would certainly declare bankruptcy if they were to shut down completely.

The CFIB report is meant to give a more comprehensive view of Canadian business insolvencies (bankruptcies + proposals). The data indicates that the number of businesses filing for bankruptcy has been on the rise and is now at the highest level of business insolvencies in two years.

As we recover from the COVID-19 pandemic, Canadian small businesses face a number of challenges in returning to normal operations, including debt from necessary pivots, increased costs of doing business and trouble finding employees to work.

The CFIB study found that half of the businesses (54%) are still seeing below-normal revenues, and over 60% are carrying unpaid debt from the pandemic. Small businesses are under significant financial pressure, with little room to maneuver.

Insolvency fears among Canadian small businesses are alarmingly high, and the true scope of the problem may be even greater than what is reflected in official statistics. Business owners have a range of options available to them when faced with financial difficulties, and bankruptcy is only one of these.

The CFIB recently released report details the different ways the surveyed small businesses in Canada said they would take if they had to shut down as follows:

46% – Just ceasing all operations permanently.
27% – Selling or transferring ownership to another party.
10% – Filing for business bankruptcies or business bankruptcy protection.
10% – Unsure at this time.
7% – Exploring all options.

Interestingly enough, recapitalizing the legal entity or taking on more business debt by way of loans was not one of the answers. That should tell you how tapped-out Canadian small business shareholders are and that the businesses have no borrowing base room left on their assets to increase their bank borrowings.

business bankruptcies

Business bankruptcies: The insolvency of a business – First steps

The first step for the Directors is to consult with a business bankruptcy attorney/lawyer and a licensed insolvency trustee (formerly called a bankruptcy trustee) (sometimes referred to as “Trustee”). The lawyer can confidentially discuss the situation with the Directors and develop a proposed plan to deal with the situation.

The licensed insolvency trustee will review the company’s financial position and proposed game plan, and consider all options available to the company and its Directors. In Canada, the only party licensed to run the administration of bankruptcy, or any formal insolvency process, is a licensed insolvency trustee.

The licensed insolvency trustee will want to understand fully the company’s assets and liabilities. With a clear understanding of the company’s financial status, the Trustee can explain how best to implement the plan to either restructure or liquidate the company. If necessary, the Trustee can tweak the game plan.

The next question is whether the business is viable. Does it produce goods or services that are still in demand in the marketplace? If not, one option to consider is selling the business to another company that has complementary lines of business. Would the business fit in neatly with the buyer’s existing operations?

Could it perhaps be integrated in some way that would make your standalone business, which is not currently viable, become viable? Keep in mind for this to be an option, the company would need to have a solvent business.

If you can’t sell your unprofitable but still solvent company, you could always explore the option of a statutory liquidation. This would involve liquidating all the company assets, paying off any outstanding liabilities, and then distributing the remaining amount to shareholders.

Companies under business bankruptcy protection

If your business is struggling financially but still has potential, you may be able to restructure it through business bankruptcy protection. In Canada, there are two main possible federal statutes to restructure under; (i) the Bankruptcy and Insolvency Act (Canada); and (ii) the Companies’ Creditors Arrangement Act. One of these restructuring legal proceedings is an alternative to business bankruptcies.

A proposal under the Bankruptcy and Insolvency Act (Canada) (“BIA”)

The BIA is the canadian bankruptcy legislation containing all the rules and regulations in Canada’s bankruptcy regime. However, it also includes bankruptcy options such as a Division I Proposal for debtors who owe more than $250,000. This kind of financial restructuring allows the company to remain in business while it restructures. The essence of a BIA Proposal restructuring is that the company is offering a contract to its unsecured creditors to pay less than the total it owes those unsecured creditors in return for eliminating all of its unsecured debt.

To ensure that the company can successfully implement a proposal and pay its post-filing debts, the licensed insolvency trustee will need to be satisfied that all relevant information has been obtained and that the company has a good chance of success. The company’s cash flow will need to be monitored to ensure that it is sufficient to run the business and pay for the goods and services it needs going forward.

The Trustee will send all known creditors a copy of the proposal, a portion of the company’s statement of affairs listing the company’s assets and liabilities, a list of creditors, a proof of claim form, a voting letter and the Trustee’s report providing additional information and the Trustee’s recommendation.

The meeting of creditors is then held and if the proposal is accepted by the required majority of unsecured creditors, the licensed insolvency trustee takes the proposal documentation to Court for approval. If the proposal is accepted by creditors and approved by the court, the company is now bound by the proposal.

If the companies successfully complete their financial restructuring proposal, they will avoid business bankruptcies. However, if the company fails to get creditor or court approval, or fails to successfully complete the proposal, it will automatically go into bankruptcy under the BIA.

Financial restructuring under a Companies’ Creditors Arrangement Act (“CCAA”) plan of arrangement

Restructuring through a CCAA plan of arrangement is a financial restructuring process that provides companies with a way to restructure their debts and other obligations. This process can help companies to avoid the business bankruptcy process and to continue operating while they repay their creditors. It is very similar to a BIA proposal. The main difference is that it is only for companies with debts of $5 million or more, it is much more court-time intensive and there is no automatic business bankruptcy provision. In a CCAA, the licensed insolvency trustee acts as a monitor under the CCAA to administer the restructuring process.

When you hear when a company files for protection, or bankruptcy protection, in Canada it is usually under the CCAA. In the United States, it is under Chapter 11 of the US Bankruptcy Code.

business bankruptcies

Licensed insolvency trustees say if companies are insolvent and not viable the best option may be business bankruptcies

We still want to know if the business is viable when it is insolvent. If it is viable, then we could look at doing a restructuring as outlined above. After the company is restructured, we could either keep running it or look to sell it. If there are impediments to a successful restructuring, the approach we take even through business bankruptcies will be different than if it is not a viable business model any longer.

If the business is not viable and insolvent, then there is not much that can be done. The business is financially unhealthy and the marketplace no longer wants the product or service this business provides. Therefore, we are looking at bankruptcy if there is not a secured creditor who is going to enforce their security through a receivership. Receivership is a whole topic unto itself which is for a different day.

As a licensed insolvency trustee, I am responsible for understanding all the issues in business bankruptcies and preparing the necessary documentation for limited companies to assign themselves to business bankruptcies. A meeting of directors must be called for them to resolve that the company should put its business into bankruptcy and appoint one of the directors to be the designated officer.

The officer designated by the board should be the director with the most intimate knowledge of the company’s affairs. This officer will sign the bankruptcy documentation and be the company’s representative at the first meeting of creditors.

The Trustee attends the director’s meeting and prepares the meeting minutes, or the minutes will be prepared by the directors and provided to the Trustee. Then, the licensed insolvency trustee prepares the bankruptcy documents which include the statement of affairs, which is the listing of assets and liabilities, names addresses and amounts owing to each creditor. The designated officer then attests to the truthfulness of the information and signs it all.

The companies are insolvent and have to go into business bankruptcies

The Trustee files the necessary documentation with the Superintendent of Bankruptcy, who issues a certificate of bankruptcy and appoints the Trustee. That’s when a company is officially entered into the bankruptcy process and the bankruptcy proceedings begin. This is the process of a company filing an assignment into bankruptcy.

So in a commercial bankruptcy administration, the Trustee has several responsibilities. The Trustee has to deal with the assets. The Trustee has to first determine are the assets subject to the security of a lender. Is that lender’s security good and valid?

What happens when the certificate is issued for business bankruptcies?

If every one of the assets is covered by a lender’s valid security which makes the security cover the assets in priority to the rights of a Trustee, then the bankruptcy trustee would not take steps to handle the company’s secured assets unless the secured lender particularly requests the Trustee to do so separately either as Receiver or Agent of the secured lender.

So let’s simply take the case where in bankrupting the company, the Trustee is handling the assets either due to the fact that they’re not secured or because the secured financial institution wants the Trustee to handle the secured assets within the bankruptcy (which is not normal, but not unheard of either).

The Trustee needs to make certain that the corporate assets are safeguarded, that they’re appropriately insured and that the Trustee has carried out an inventory of those assets.

The Trustee then needs to figure out how is it going to offer those business assets for sale. The Trustee must do a risk-reward analysis to see if it makes good sense for the Trustee to run the business. If so, is the Trustee looking for a sale of assets as a going-concern business sale or just shut down the business and liquidate the assets once the reasons for running the business have been met?

If it doesn’t make sense for the Trustee to run the business, the Trustee will close it down and take a look at the alternatives available. The assets can be sold by public auction, private sale or by tender sale separating the assets up into blocs. If the assets are such that they would attract a retail audience where consumers would pay more than if it was sold in lots to wholesalers, then a retail sale would be the way to go. The nature of the assets will identify what sort of sale of assets the Trustee runs.

Business bankruptcies: How will I know what’s going on?

The Trustee alerts all of the company’s creditors listed in the sworn statement of affairs of the bankruptcy in a mailing. The Trustee includes a proof of claim form so that all creditors can file their claim. The Trustee examines the claims and holds the first meeting of creditors.

After the first meeting, a meeting of inspectors is held. Inspectors are creditor representatives who assist the Trustee in providing approval for the Trustee’s recommendations and actions it wishes to take. This includes any approval of asset sales the Trustee recommends after making an informed decision. Inspectors also need to approve the Trustee’s Final Statement of Receipts and Disbursements near the end of the administration of all business bankruptcies.

Finding a Licensed Insolvency Trustee

I hope you enjoyed this Brandon’s Blog on business bankruptcies. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

If you would like our free e-Book, “Closing A Business Without Going Bankrupt” CLICK THE PICTURE BELOW

Brandon Blog Post

UNDISCHARGED BANKRUPTS: WHAT ALARMING RESTRICTIONS ARE PLACED ON CANADIAN UNDISCHARGED BANKRUPTS?

Post author By Brandon Smith
Post date August 1, 2022

undischarged bankrupts

Undischarged bankrupts: Declaring bankruptcy may not make all of your debts disappear

What? I thought the point of filing bankruptcy was to make all of a person’s debts go away.

For many years, people have used debt repayment strategies such as the debt snowball, debt avalanche and debt stacking to pay off their credit card debts and other unsecured liabilities. Each strategy has its own set of pros and cons in attempting to straighten out your financial affairs.

If you’re struggling with too much debt and you feel your financial affairs are in a mess, you can always try financial restructuring. This involves working with a licensed insolvency trustee to reorganize your finances. It is a sensible next step people take when they’re trying to get their debt under control.

Deciding to file for bankruptcy is never very easy, however, it may be the most effective choice for getting a fresh start to straighten out your financial affairs. If a do-it-yourself or restructuring method is not an option for someone after that bankruptcy will certainly be the required action.

Nobody likes to think of the possibility of personal bankruptcy, yet it is essential to understand the procedure. In this Brandon’s Blog post, I’ll discuss the insolvency process, what limitations are placed on individuals that have actually filed for bankruptcy and are still undischarged bankrupts, and also when in bankruptcy is the time financial obligations are gotten rid of.

Undischarged bankrupts: How bankruptcies work in Canada

The Canadian bankruptcy legislation is designed to help insolvent and not viable companies, or insolvent, honest but unfortunate people, obtain relief. Subject to trust claimants’ rights and the rights of secured creditors, the company or person is assigning all of their unencumbered assets to the licensed insolvency trustee.

After going through bankruptcy and being discharged, most of your debts will be gone. There are a few exceptions, but for the most part, you will be relieved of a great financial burden.

undischarged bankrupts

Undischarged bankrupts: Are there any debts not forgiven when I get my discharge from bankruptcy?

It’s crucial to remember that once undischarged bankrupts are released from bankruptcy, they are no longer responsible for the financial obligations they had at the time of bankruptcy. The discharge is a key part of this process, and it helps to give individual bankrupts a fresh start.

A bankruptcy discharge provides relief from most debts, except for:

support payments for a former spouse or your children;
penalties and fines assessed by the court;
any financial debts resulting from fraud or fraudulent breach of trust; and
student loans within the last seven years before your date of bankruptcy while you were a part-time or full-time student.

Additionally, the debts owing to secured creditors holding valid security fall outside of the bankruptcy process. Those secured loans must stay current or else the secured creditor can look to the default provisions of its loan in order to preserve their rights to collect.

Problems for undischarged bankrupts – What are the consequences of a bankrupt not being discharged?

The implications of not being discharged from bankruptcy are significant for undischarged bankrupts.

Being unable to obtain credit

If you are bankrupt (i.e., not discharged from bankruptcy), you may only borrow $1,000 or less without informing the lender (e.g., credit card company) that you are an undischarged bankrupt. If you fail to do this, it is an offence under the Bankruptcy and Insolvency Act Canada (BIA) and you could be fined and/or imprisoned.

Being unable to work in certain jobs or professions

Undischarged bankrupts in Canada, will not be able to work in certain jobs or professions. Examples are:

If possible employment requires you to pass a security clearance, you may not be able to pass it. If you cannot pass, then you will not be hired.
As someone who is not yet discharged from bankruptcy, you are not able to serve as a Director of a company.
You cannot operate a trust account so that is a problem for certain professions such as real estate brokerage or lawyer.
If you’re bankrupt and haven’t been discharged, you won’t be able to get bonded. So any jobs that require that are out of the question.

How long the information lasts on your credit report

The six to seven years AFTER your bankruptcy discharge that your bankruptcy information stays on your credit file is like a stain that just won’t come out. For undischarged bankrupts, the clock hasn’t even started ticking yet. Your credit score is negatively affected for anyone who goes bankrupt, especially for undischarged bankrupts.

Being subject to certain restrictions in relation to their property and finances

While you are an undischarged bankrupt, your property and finances are in play.

While you are an undischarged bankrupt, your property and finances are up for grabs! You cannot have any assets other than those allowed for by the exemptions allowed in the province where you live. So if you acquire any before your discharge from bankruptcy, they belong to your licensed insolvency trustee!

The most often cited examples are things that are out of your control, such as a windfall, like winning the lottery or getting an inheritance.

An undischarged bankrupt may be subject to having to make surplus income payments to their licensed insolvency trustee. The Office of the Superintendent of Bankruptcy Canada sets a minimum threshold in bankruptcy proceedings based on the person’s family income and the number of people in the household. That minimum threshold is essentially the Canadian poverty line. Any monthly income earned by an undischarged bankrupt above that minimum threshold set is subject to surplus income payments.

Essentially, one-half of the person’s monthly income, net of income tax, above the minimum, must be paid over. A licensed insolvency trustee administering the personal bankruptcy must recalculate the person’s obligation to pay, up or down, as the person’s income changes. The longer you remain an undischarged bankrupt, the longer your ability to keep all that you earn is restricted.

undischarged bankrupts

What is the meaning of undischarged bankrupts?

As soon as you declare personal bankruptcy, the individual bankrupt’s status is that of an undischarged bankrupt. People that have actually not yet gotten their discharge from personal bankruptcy are called undischarged bankrupts.

How does an individual bankrupt person get their discharge? By completing all of the required duties, including making full disclosure of all assets and liabilities to the licensed insolvency trustee and delivering non-exempt assets to the Trustee. You are expected to attend the two mandatory counselling sessions and any other meetings that may be called.

You are entitled to an automatic discharge after 9 months if you are a first-time bankrupt and do not need to pay surplus income. This assumes that you have met all of your obligations as an undischarged bankrupt, fully cooperated with the licensed insolvency trustee and that no creditor is opposing your discharge.

If you are a first-time bankrupt and subject to surplus income, you must pay it for 21 months before you are entitled to a discharge. Longer timelines apply if you are a second or more time bankrupt.

Suppose the Trustee has evidence that the bankrupt has not been forthcoming and cooperative, or has committed one or more bankruptcy offences. In that case, the Trustee needs to oppose the bankrupt’s application for discharge. Such undischarged bankrupts are not entitled to an automatic discharge. Unsecured creditors who have filed a proof of claim in the person’s bankruptcy on account of their unsecured liabilities may also object.

If your income tax debt is equal to or more than $200,000 and 75% or more of your total debt, you are not entitled to an automatic discharge either. If you have been bankrupt before, the Office of the Superintendent of Bankruptcy Canada may object. This would happen if they believe the person is abusing the Canadian bankruptcy system.

If you’re a secured creditor, you’re usually not affected by bankruptcy. That’s because bankruptcy is designed to help unsecured creditors with unsecured liabilities, not creditors who have a security interest in some or all of the bankrupt debtor’s assets. Secured creditors have the right to enforce their security, take possession of the asset(s) covered under the security, sell the asset(s) and get paid back all or a portion of their secured debt. Secured creditors who are not repaid in full after the sale of the secured asset(s), can file a claim in the person’s bankruptcy as an unsecured creditor for the unpaid unsecured liabilities.

Undischarged Bankrupts in Canada – Your Options

The Trustee is only responsible for filing an undischarged bankrupt’s application for discharge once in the bankruptcy proceedings. The system requires that the Trustee make the first application on their behalf. It is ultimately the responsibility of the bankrupt person to ensure that their application is filed.

If either the Trustee or one or more unsecured creditors oppose your application for discharge, the matter will need to go to a hearing in bankruptcy court. This will essentially put a hold on the bankruptcy proceedings until the court hearing.

Undischarged bankrupts are never sure what to do next. This is understandable, so, here are a few options to consider:

1. Contact your Trustee – They’ll be able to help you understand your options and what’s best for your situation. You’ll need to speak to your licensed insolvency trustee to find out why they’re opposing your discharge. It might be something as simple as not having had your second counselling session yet, or forgetting to give the Trustee some information or a document.

If the Trustee or creditor opposes your discharge for any reason, it may be more difficult to remedy the situation, but the best place to start is by talking to the Trustee and getting a copy of any notice of opposition filed.

This way, undischarged bankrupts can understand the issues preventing them from getting an automatic discharge from bankruptcy.

2. Get in touch with a bankruptcy lawyer – They can give you more specific advice about your options and what might be the best course of action for you. Undischarged bankruptcy may need to retain a bankruptcy lawyer for advice and representation in court.

3. File a consumer proposal – this is another option that might be available to you, depending on your circumstances. A consumer proposal filed by a bankrupt person that makes a sufficient offer to the unsecured creditors that is accepted and fully performed acts to annul the person’s bankruptcy. By doing this, the need for a bankruptcy discharge hearing is eliminated.

undischarged bankrupts

You owe money—The 5 types of bankruptcy discharges available to undischarged bankrupts

Automatic discharge from bankruptcy –

After you file for bankruptcy, you will be automatically discharged nine months later from your bankruptcy proceedings if:

this is the first time you were ever bankrupt;
unless your trustee, creditors, or the Office of the Superintendent of Bankruptcy oppose it;
you have gone to your 2 mandatory counselling sessions;
your income tax debt is less than $200,000 and less than 75% of your total debt; and
you have not been told to pay surplus income to the bankruptcy estate.

If you do have to make payments, and you qualify for an automatic discharge, you will get it after 21 months of payments.

If this is your 2nd bankruptcy, after 24 months of bankruptcy, you may be eligible for an automatic discharge if you don’t have to make payments of surplus income.

If you need to pay surplus income and are bankrupt for the second time, you must pay this money to your Trustee for 36 months. After that, you qualify to be automatically discharged.

If you do not get an automatic discharge, then you are required to attend a bankruptcy court hearing to consider all the evidence to decide what type of discharge you are entitled to. The court has various options available.

Absolute order of discharge –

As part of the bankruptcy proceedings, there are many factors the bankruptcy court will consider when you apply for discharge. Some of these may include:

What was your conduct before and during bankruptcy, as set out in the Trustee’s Section 170 Report?
Did you attend the financial counselling sessions and pay any required surplus income to the Trustee for your creditors as agreed?
How much do you earn annually?
Do you have any assets that are exempt from seizure (such as RRSPs)?
Do you have just one creditor, such as the Canada Revenue Agency or a litigation creditor?

The court will issue an absolute order of discharge if it is satisfied that there are no factors that would disqualify you from receiving your bankruptcy discharge immediately.

Conditional order of discharge –

If the court feels that your discharge should be conditional on you meeting certain conditions to obtain an absolute discharge, the court will order a conditional discharge.

This usually involves paying a certain amount of money over a set period of time. The court may also impose other conditions. Once you’ve met all the conditions, you’ll be given an absolute discharge.

Suspended order of discharge –

A suspended discharge is one that delays the absolute discharge to a later date. It can also be combined with a conditional order of discharge.

Refused discharge –

If the evidence demonstrates that the bankrupt individual is taking advantage of the bankruptcy process, has not worked cooperatively with the licensed insolvency trustee, or their conduct is deemed unacceptable, the court can refuse to grant a discharge.

In this instance, undischarged bankrupts must take measures to improve the situation before being able to apply again to court to hear the bankrupt’s application for discharge.

Undischarged bankrupts summary

I hope you enjoyed this Brandon’s Blog on undischarged bankrupts. Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

Call us now for a no-cost initial consultation.

Tags absolute discharge, application for discharge, automatic discharge, bankrupt person, bankruptcy proceedings, breach of trust, Consumer Proposal, discharge from bankruptcy, financial affairs, income tax, individual bankrupt, Ira Smith Trustee, secured creditors, surplus income, surplus income payments, undischarged bankrupt, undischarged bankrupts, unsecured creditors, unsecured liabilities

Brandon Blog Post

LIQUIDATION OF COMPANY ASSETS: WHEN SHAREHOLDERS ARE INTENT ON CRUSHING EACH OTHER WHAT CAN A VOLUNTARY LIQUIDATOR DO?

Post author By Brandon Smith
Post date July 25, 2022

liquidation of company

Liquidation of company assets: What is the liquidation of a company?

In business and the law, liquidation is the process of bringing a company to an end and distributing its assets to creditors. This usually happens when a company is financially solvent and can pay all of its debts after all its assets are sold or collected.

When a product is not selling well, retailers may choose to liquidate it by selling it at a discounted price. This process called a liquidation sale can help them clear out slow-moving inventory. This is not the process I am talking about today.

If you want to learn more about the types of liquidation in Canada, then you’ve come to the right place. In this Brandon’s Blog, I will explain everything about the liquidation of company assets and give you a real-life example that my Firm is currently involved in. This real case is an example of what can be done when shareholders who originally agreed to a voluntary liquidation (defined below) can no longer agree on the liquidation of company assets or anything else, even how to pay them the cash the shareholders are entitled to receive!

Why would a company want to have liquidation of company assets?

There are a few reasons why companies pick a liquidation process, including:

The business is solvent yet no longer practical to operate

Possibly time has actually passed the business by. Technological adjustments have made the products or services the limited company offers unneeded as well as no longer relevant. The shareholders want to call it quits now, sell off the corporate assets and properties, repay creditors and also distribute the leftover funds to the shareholders.

The shareholders do not intend to or think it is possible to convert the business to make it viable again. They do not feel it deserves the investment of time and resources, as well as to endure ongoing losses in turning the business around so that it ends up being pertinent again.

Shareholder disputes

The shareholders in a private entrepreneurial company no longer get along. The dissident shareholder(s) cannot or refuse to buy out the remaining shareholders or vice versa. Alternatively, certain shareholders are willing to do a buy-out but either cannot agree on the price or balk at paying the amount calculated under the formula prescribed in the shareholder agreement.

The company is not saleable

The limited company’s business is not viable anymore. Nobody wants the company’s products or services and the company never moved forward with new product offerings that are in demand. Therefore, nobody wants to buy the company or its assets. So while it is still solvent, the shareholders decided to realize all the assets, distribute the cash first to pay off all of the company’s debts in full, make a distribution to shareholders for what is left over and formally dissolve the corporation.

To avoid bankruptcy

If the company is not wound up, it will eventually become an insolvent corporation. The shareholders realize that it is much better to now agree to a voluntary liquidation while there still can be a distribution to the shareholders after all the business assets are sold or collected and all creditors are paid in full. The shareholders wish to get this value and avoid a corporate bankruptcy filing.

liquidation of company

How a liquidation of company assets begins

If shareholders wish to have a dissolution process for a corporation, they may do so by passing a special resolution to begin the liquidation process. In such cases, the company would call a meeting of shareholders in accordance with the corporate bylaws. Shareholders must be given notice of the meeting in advance. Alternatively, a court may make an order for the liquidation of company assets and the winding-up of the corporation. More on this below. This is how the liquidation of company assets and the winding-up of the company begins.

Shareholders will be given notice of the meeting where the special resolution authorizing the dissolution process will be considered. At the meeting, shareholders can vote to approve or disapprove of the special resolution for the dissolution of the company by special resolution.

Liquidation of company assets: What are the 2 types of liquidation in Canada?

When a company is struggling, it’s common to see a sale take place. When this happens, all of the assets of the company may be sold to pay off creditors. This process of selling off the company’s assets is known as “liquidation.” In Canada, there are two main types of liquidation: “compulsory liquidation” and “voluntary liquidation”.

Voluntary liquidation or voluntary dissolution begins with the shareholders agreeing to a special resolution for the liquidation of company assets, the distribution of the cash first to all creditors and then to the shareholders. When the liquidation is completed, the company is then would up.

Compulsory liquidation is when a court order is made directing the liquidation of company assets and the winding-up of the company.

In Canada, the laws under which a solvent company is liquidated depend on the laws under which the company was incorporated. If federally incorporated, then the Canada Business Corporations Act (CBCA) is the relevant statute. If provincially incorporated, then it would be the law of that particular province. In Ontario, it is the Ontario Business Corporations Act (OBCA). This is the statute that I will focus on in this Brandon’s Blog.

liquidation of company

Liquidation of company assets: What is the OBCA process for liquidation?

The Ontario Business Corporations Act is a piece of provincial legislation that is designed to govern the formation, administration, and dissolution of corporations in Ontario. In reality, most liquidations filed in Ontario are voluntary. This means that the company shareholders decide to seek liquidation.

Part XVI of the OBCA sets out the process for the liquidation of company assets in Ontario. The OBCA provides a comprehensive framework for the voluntary winding up of corporations. Sections 193 to 205 of the OBCA set out the procedures and requirements for the voluntary winding up of corporations.

As I have previously stated, the OBCA requires shareholders of a corporation to vote for a voluntary winding up of the company as the first step in liquidation of company assets and ceasing business. The shareholders’ requirement is evidenced by a special resolution made at a properly convened meeting of shareholders.

At the meeting, shareholders will appoint one or more people as liquidators of the company. These people may be directors, officers, or employees of the company. Their job will be to wind up the company’s affairs and distribute its property. Shareholders may also provide other instructions at that meeting or at any subsequent meeting.

It’s also common for shareholders to appoint a third party experienced in winding up corporations, like a licensed insolvency trustee. Even though the company isn’t insolvent, shareholders see the advantages of keeping a professional experienced in liquidating assets on board.

A corporation voluntarily winding down will cease carrying out business operations, except where doing so would be beneficial for the winding down process. All transfers of shares, except those made with the approval of the liquidator, taking place after the commencement of the winding down are void.

The OBCA provides for a stay of proceedings when an Ontario company is being liquidated and wound up. After a voluntary winding up has begun,:

no legal action can be taken against the corporation; and
no seizure, sequestration, distress or execution can be carried out against the corporation’s assets or property.

You will need the court’s permission before taking any action. The court will then decide what terms to set.

Liquidation of company assets: Special considerations in a compulsory or court-supervised liquidation

The court may dissolve the corporation if:

If the court finds that the actions or inaction of a corporation or any of its affiliates has resulted in or will result in an outcome that does not consider the interests of any security holder, creditor, director, or officer fairly, it may order the dissolution of the corporation.
All shareholders agree that dissolution should occur after a specific event, and that event has occurred.
Proceedings have begun to wind up the corporation voluntarily.
The court finds that if the actions or inaction of a corporation or any of its affiliates has resulted in or will result in an outcome that does not consider the interests of any security holder, creditor, director, or officer fairly, it may order the dissolution of the corporation.
It is best for those who would have to contribute to a company’s assets in the event of its dissolution, and for those who are owed by the corporation, that the court supervises the dissolution process.
The corporation cannot continue its business because of its debts and it is advisable to end its operations other than by bankruptcy.
The shareholders vote by special resolution to wind up the corporation through a court-supervised process.

Who can apply to the court for a court-supervised liquidation of company assets and the winding-up of the corporation? If you want to dissolve a corporation through a court-supervised process, you can do so by filing an application with the court. Shareholders, a contributory or creditor having a claim of $2,500 or more, or a voluntary liquidator can all apply to have the corporation wound up.

In the section below titled “Liquidation of company assets: Real-life example when voluntary had to become court-supervised” I describe a file that my Firm is involved in the liquidation of two companies, and we were forced to use the right of a voluntary liquidator to apply to the court to turn the voluntary liquidation into compulsory liquidation.

liquidation of company

Liquidation of company assets: How does the distribution of assets during liquidation work?

When a company is liquidated, its assets are sold off and the proceeds are distributed to creditors. The distribution of assets is first used to pay off secured creditors, then unsecured creditors, and finally shareholders.

The liquidator first needs to gain an understanding of all of the company’s assets and liabilities. The financial statements and the books and records of the company are a good place to start. The liquidator will put together a plan to collect and sell the assets of the company.

The liquidator then needs to put together a list of all creditors, and identify if they are secured creditors or unsecured creditors. This is necessary because the creditors need to be paid in order of priority. Any remaining funds will then be distributed to the shareholders.

The liquidator will keep company management and shareholders informed every step of the way. The liquidator would be very wise to get management and shareholder approval for all of the liquidator’s decisions. The liquidator will also need to make sure that the preparation of the company’s financial statements and income tax returns are kept current and that all government filings and payments are made on time.

The fee of the liquidator must be agreed to by the shareholders. The OBCA also provides for the court to be able to assess the fee charged by the liquidator. In doing so, the court will no doubt look at the steps and acts of the liquidator that were taken.

These are the main steps that every liquidator must carry out. Even in a compulsory liquidation done by court order, the practical steps involved in the liquidation of company assets are the same.

Liquidation of company assets: Real-life example when voluntary had to become court-supervised

The shareholders of two affiliated companies, each one a private company, passed special resolutions in August 2021 for both companies to begin liquidating their assets, winding up the corporations, and appointing Ira Smith Trustee & Receiver Inc. as the liquidator of both corporations. The desire to wind up both companies came from the very acrimonious litigation between family members.

We were very successful in helping the warring factions, through their respective legal representatives, make adequate provisions so that agreements could be reached in each crucial step of the liquidation process from August 2021 through April 2022. Unfortunately, we hit a snag in May 2022. The shareholders were unable to resolve their impasse due to the pertinent issues regarding the liquidation of both companies. Without court intervention, the stalemate would never end.

We knew that we could still provide value in helping these shareholders, but given their bitter disagreements, it could only be done under a court-supervised compulsory dissolution. Therefore, we prepared a report for the court and first circulated a draft to the stakeholders and their lawyers. We did so for two reasons:

we wanted to make sure that we did not make any factual errors; and
by circulating a draft in advance, we gave everyone the chance to consider consenting to our application to turn the voluntary liquidation into a compulsory dissolution.

We then had our legal counsel set up a court date, which they were thankfully able to get for mid-July. All stakeholders consented to the court-supervised liquidation of one of the two companies. One side also consented for the other company to enter a court-supervised process, but the other side opposed it.

The court made an order to convert the voluntary liquidation into a compulsory liquidation for the one private company that all shareholders consented to. It also set a hearing for mid-September, which will allow the opposing party to present their case, and for the consenting party and the liquidator to do the same. This provision in the OBCA allowing a voluntary liquidator to make the court application definitely prevented a less favourable outcome.

liquidation of company

Liquidation of company assets: Difference between insolvency and liquidation

There is a big difference between insolvency and liquidation, just as there is a difference between insolvency and bankruptcy. Being insolvent is a very difficult financial condition to be in. When a company or individual cannot pay their bills, debts, or liabilities, it is insolvency. This often leads to either restructuring or bankruptcy.

The liquidation of a corporation under the CBCA, OBCA or respective provincial legislation is a legal process that can be undertaken when the company is not insolvent but the shareholders wish to end the life of the company for other reasons.

In a liquidation, the company’s assets are sold and the proceeds are used to pay off creditors. The remaining funds are distributed to shareholders. This is not the case for an insolvent company, which may be forced to close its doors through an insolvency process such as bankruptcy.

The first step in determining the solvency of a company is to look at its most recent set of financial statements.

Key point takeaways on the liquidation of company assets

I hope you found this liquidation of company assets Brandon’s Blog interesting. The key takeaways from this blog, in my view, are:

Liquidation and winding-up of a company must be considered when a company is still solvent but is facing insurmountable problems such as its business is no longer viable or internal fighting makes its survival doomed.
While value still remains in the company, it is in the best interests of all stakeholders to get that value for everyone.
A liquidator can be very helpful to shareholders in a private company who no longer can effectively manage the companies on their own and there is value to be obtained for them.
A voluntary liquidator can apply on its own to court to turn a voluntary liquidation into a court-supervised compulsory liquidation.

Among the many problems that can arise from having too much debt, you may also find yourself in a situation where bankruptcy seems like a realistic option.

If you are dealing with substantial debt challenges and are concerned that bankruptcy may be your only option, call me. I can provide you with debt help.

You are not to blame for your current situation. You have only been taught the old ways of dealing with financial issues, which are no longer effective.

We’re passionate about permanently solving your financial problems with you and getting you or your company out of debt. We offer innovative services and alternatives, and we’ll work with you to develop a personalized preparation for becoming debt-free which does not include bankruptcy. We are committed to helping everyone obtain the relief they need and are worthy of.

You are under a lot of pressure. We understand how uncomfortable you are. We will assess your entire situation and develop a new, custom approach that is tailored to you and your specific financial and emotional problems. We will take the burden off of your shoulders and clear away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We realize that people and businesses in financial difficulty need a workable solution. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call us now for a no-cost consultation.

Brandon Blog Post

CORPORATE BANKRUPTCY FAQ: USE OUR HACK TO SOLVE YOUR CHALLENGING INSOLVENT COMPANY ISSUES

Post author By Brandon Smith
Post date May 23, 2022

Corporate bankruptcy: An overview

Corporate bankruptcy is a legal process by which businesses can reorganize their financial affairs or liquidate their assets. Although bankruptcy can be complicated and stressful, it can provide businesses with a fresh start.

When it does happen, the corporate bankruptcy process can be complicated. Insolvency can take a toll on your company’s employees, customers, and shareholders. A solid understanding of corporate bankruptcy can help you properly restructure and reorganize your company using an insolvency process without killing your business.

Last week, I gave my best FAQ answers to common questions about personal bankruptcy services. A business partnership or sole proprietorship means that the individual(s) operate the business in their personal name. Answers about business bankruptcies for those forms of business would fall under the personal bankruptcy process that was covered in last week’s personal bankruptcy FAQ blog.

When a corporation conducts business, some of the questions, and answers, are different. In this Brandon’s Blog, I answer the most frequently asked questions about corporate bankruptcy.

**Can a business declare corporate bankruptcy?**

As stated previously, only a corporation can declare corporate bankruptcy. A corporation is its own legal entity. A “person” is eligible for relief under federal bankruptcy law. A “person” is typically defined in the Canadian bankruptcy legislation to include an individual, part of a partnership, a proprietorship, a company, an unincorporated association, a cooperative society, or a cooperative organization. corporate bankruptcy canada

What are the different types of corporate bankruptcy in Canada?

There are 2 different types of bankruptcy that a company can file for under the Bankruptcy and Insolvency Act Canada (BIA). They are:

Liquidation: This is when the insolvent company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay its secured creditors and unsecured creditors as best as possible since it files for bankruptcy in the priority outlined in the BIA.
Restructuring: This is when the company is insolvent and is incapable to repay its debts due to its financial difficulties, yet all or a sufficient portion of the company’s business is still viable. So, the company negotiates brand-new terms with creditors to lower its financial obligations and also might have the ability to sell some assets to settle its financial debts. Restructuring is the most well-known alternative to bankruptcy. Restructuring under insolvency legislation is also described in the media as bankruptcy protection.

**What factors lead to corporate bankruptcy proceedings?**

A company always shows signs of trouble before it needs to file for corporate bankruptcy. Some of the early danger signals are:

continued history of losses;
dwindling cash position;
the departure of key management or employees;
difficulty meeting loan or lease obligations;
the breaking of loan covenants; and
difficulty meeting payroll.

Corporate bankruptcy: What does it mean for a company when it liquidates?

As stated above, when a company liquidates it means that the company is unable to pay its debts and its business is no longer viable. The only real option for it is to sell off its assets to repay secured creditors and unsecured creditors as best as possible through bankruptcy and then shut down. corporate bankruptcy canada

**What happens to debt in corporate bankruptcy?**

If the purpose of the corporate bankruptcy is to shut down and have liquidation of business assets, then we first need to see what the net proceeds of sale from those assets are. The BIA describes the order in which funds must be distributed by a licensed insolvency trustee (formerly called a bankruptcy trustee) in bankruptcy. The order in which the debts must be repaid, in whole or in part, is called the priority.

The priority of the rights of creditors to be repaid in a corporate bankruptcy is:

Trust and deemed trust claimants – These are parties whose property is being held or is deemed to be held in trust for them by the bankrupt corporation. The most common type of deemed trust claim in a corporate bankruptcy is Canada Revenue Agency for unremitted employee source deductions.
Secured creditors – Creditors who hold valid security over the assets of the company get paid next. There could be more than just one secured creditor. Within the secured creditor group, the order of priority is based on the ranking of the security registration dates.
Preferred creditors – These are unsecured creditors who have been given certain priority in a corporate bankruptcy under federal bankruptcy laws. The most common examples in a corporate bankruptcy would be Trustee fees, the Trustee’s lawyer’s fee, the levy payable to the Office of the Superintendent of Bankruptcy Canada on any distribution made by the Trustee to a creditor and certain salary, wages or commissions due to employees.
Ordinary unsecured creditors – This group comes after the preferred creditors. They are all creditors who have supplied goods or services and do not hold any security and do not fit into the definition of a preferred creditor.

The balance of any unpaid debt ends up getting written off on the books of the creditors because there are no assets left in the company to claim against.

**How does a company get into corporate bankruptcy and what happens to the company?**

The way a company gets into bankruptcy is the exact same way an individual can. For a liquidation, either the company can file a voluntary assignment into bankruptcy. If it is one or more creditors owed at least $1,000 trying to push the company into bankruptcy, then they would file a Bankruptcy Application with the court requesting the court to make a Bankruptcy Order. corporate bankruptcy canada

**Why might a company choose to file for corporate bankruptcy protection and restructure under a BIA proposal?**

Corporate bankruptcy protection and restructuring under a BIA proposal can provide a company with financial difficulties a much-needed relief and a chance to return to profitability. When a company files for protection, the BIA proposal offers an orderly and reliable process for restructuring, which can be appealing to businesses that have a good chance of a turnaround.

A corporation that has a viable business and can return to profitability after restructuring, with support from creditors, has all the right ingredients for a successful restructuring. This is why a company might choose to file for corporate bankruptcy protection and restructure under a BIA proposal. The company will survive and jobs will be saved.

Who is responsible for developing the reorganization plan for the company?

Reorganization is the restructuring of a business to gain efficiency, improve workflow, and drive profits. Reorganization plans vary in length and detail and take a certain period of time to properly develop. They generally describe desired outcomes and final goals. Sometimes a company will undergo a complete reorganization, while other plans focus on aspects that require reorganization, such as a business unit or department.

The reorganization plan of a company is essential to ensure its smooth transition. The reorganization plan involves restructuring various departments of the business, reducing operational costs, and streamlining the workflow. Writing a reorganization plan requires a lot of time, effort, and money.

When a business downsizes, it reduces its workforce to a smaller number. Such a reduction can be a painful process that even threatens to collapse the business. The company needs to have a plan in place to accomplish this reorganization while still running the business. When downsizing occurs, businesses require reorganization plans. Involving and informing employees of the process makes them more likely to follow new plans and less resistant to change.

All of the various individual department organization plans and product sales plans need to be combined into an overall business plan. This overall business plan must also include financial information to show how the company, emerging from restructuring, will operate profitably.

Now that the overall plan is set, senior management must work with its outside financial and legal restructuring professionals to establish the restructuring commercial proposal or plan of arrangement to be presented to the creditors to be voted upon. An excellent communication program must be put into place so that creditors can understand the benefits to them of supporting and voting in favour of the restructuring proposal. Normally negotiations with certain creditors or creditor groups must take place in order to come up with a final and successful restructuring plan that will gain both creditor support and pass through the legal proceedings of court approval. corporate bankruptcy canada

**What becomes of a corporation after corporate bankruptcy?**

Going through corporate bankruptcy means your company’s assets have been sold to pay off some portion of its debts. Bankruptcy also by operation of law terminates all of the employees. So the corporation is left with no assets and no employees. All it has is debt and a deficit equal to the total debt less the amount that is shown on the balance sheet for the company’s preferred and common stock.

Therefore, the corporation, as a legal entity, is then left to just float away into the stratosphere. There are only 2 ways that a company can survive a corporate bankruptcy:

from the sale of the corporate assets, pay off 100% of all of its business debt plus interest; or
file a BIA proposal, obtain creditor support and court approval and successfully complete it.

The first way will almost never happen. The second way can happen if there is a good reason to try to make sure that the corporation as a legal entity survives. A reason for doing this might be that there is value to the shares. After becoming bankrupt, a successfully completed proposal annuls the bankruptcy. By definition, the proposal will discharge all of the company’s outstanding debt. The company is now debt-free.

The common stock may have value because it is a public company and the shares can be relisted on the stock exchange. Now the corporate shell is attractive to a private company that wishes to go public and can do so by amalgamating with this public shell. Alternatively in a private company, or in a public company, there may be significant tax loss carryforwards available for use if this corporate shell is merged with the right kind of profitable company. the only way to use the tax losses is first by owning all the shares.

This is all possible, but, the normal outcome for a company that has gone through a corporate bankruptcy is just to fade away, never to be heard from again.

**When a company declares corporate bankruptcy, what will happen to your stock or bond?**

When you invest money in a company by investing your capital, your money is legally represented by the stock or bonds that you purchased. When you see a company declaring bankruptcy, it means the company can no longer afford to pay its debts.

If a company just liquidates its assets during corporate bankruptcy, the existing shares will likely be worth very little or nothing at all. For a private company, a successful corporate restructuring might increase the value of the shares as the company will emerge from its restructuring with much less debt than before.

The value of a company’s shares is most likely to lower if it effectively restructures its financial affairs. It might have to issue brand-new stock to creditors that will not be paid back in full, watering down the value of the business’s shares.

As far as corporate bonds are they secured or unsecured against the company’s assets? If secured, they could be repaid in whole or in part depending on where they stand in the secured assets pecking order. If unsecured, then it just becomes part of the larger unsecured creditor pool. In a corporate bankruptcy that is a liquidation, those bondholders will receive their share of any distribution made by the Trustee to the ordinary unsecured creditors if there is such a distribution made.

Corporate bankruptcy and insolvency at a glance

In conclusion, bankruptcy and insolvency of course go together, although many people prefer to think of bankruptcy as an economic failure while insolvency is more accurately a sign of a business’s financial failings.

In the same way I hoped last week’s personal bankruptcy blog helped your understanding, I hope this Brandon’s Blog on corporate bankruptcy was helpful to you in understanding more about the corporate bankruptcy system in Canada.

If you or your company has too heavy a debt load, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

If you’re struggling with money problems, call the Ira Smith Team today. We’ll work with you to develop a personalized plan to get you back on track and stress-free, all while avoiding the bankruptcy process if at all possible.

Call us today and get back on the path to a healthy stress-free life.

CLICK HERE TO GET THE FREE HOW TO CLOSE YOUR BUSINESS WITHOUT BANKRUPTCY OFFER

Brandon Blog Post

LEGAL PROCEEDING JUDGMENT LIEN: 2 KINDS OF JUDGMENT LIENS WITH HUGELY DIFFERENT RESULTS IN BANKRUPTCY

Post author By Brandon Smith
Post date May 9, 2022

Legal proceeding: What are some things I can do if someone owes me money and refuses to pay?

In Canada, there are several options in what you can do when someone owes you money and you do not hold any security against any of their property. First, a person or company should obviously make one or more demands on the party that owes them the money before starting any legal proceeding.

If that proves to be unsuccessful, your next steps will probably be governed by how that creditor reacted to your demand. Did they just ignore you or did they put up either a false or somewhat valid dispute to your claim?

One possible next step is that you can retain a lawyer to make a demand to collect the money owed. If those initial efforts to collect payment prove unsuccessful, your lawyer can begin a legal proceeding against the person or company you believe owes you the money. If your legal action is successful in proving your case in court, you will receive a judgment against the party. One option is you can then take this judgment to a debt collector to try to collect on it.

In this Brandon’s Blog, I first explore several issues surrounding being a judgment debtor, having a judgment debt to collect and what happens if the judgment creditor files for bankruptcy? As the title of this Brandon’s Blog suggests, there are 2 kinds of judgment liens and in bankruptcy, the results are very different.

So I first look at what it means to get a judgment and what happens to a judgment creditor and the judgment debt if the debtor files for bankruptcy. To do this, I look at a recent decision from the Court of Queen’s Bench of Alberta which looks at the 2 kinds of judgments in detail.

Legal proceeding: Retrieving payment from a debtor

If you are having financial difficulties collecting a debt from another person or company, you may need legal assistance. If the other person (or their lawyer) refuses to pay, then you can take a legal proceeding to collect the money you are owed.

If you are owed money by someone, your lawyer will want as much information as possible before starting any legal action. The first step is to collect as many details and supporting documents as you can about the debt. Make sure you have a comprehensive overview of the debt, including the amount owed, the name of the debtor, and any relevant deadlines or timelines.

Next, collect the name, address, and phone number of the individual or company who owes the debt – the debtor. Finally, make sure that your proposed legal proceeding is going to be handled for the person or company who is actually owed the debt – the creditor. You need to be precise in who the legal proceeding is against and who it is for.

Finally, make sure that your proposed legal proceeding is going to be handled for the person or company who is actually owed the debt – the debtor. You need to be precise in who the legal proceeding is against and who it is for.

Your lawyer will take the first step of issuing a demand letter to the debtor who owes you money. The letter will most likely threaten that your lawyer will begin a legal proceeding by filing a lawsuit on your behalf if the debt is unpaid after a specific number of days or weeks. If you win, you now have the amount owing as a proven judgment debt.

Legal proceeding: In Ontario, after how long does debt become uncollectible?

The law in Ontario prevents anyone from beginning a legal proceeding against you for debts that you owe that are over 2 years old. This law is called the Limitations Act, and it applies to any debts that you owe, even if the creditor stops trying to collect the debt.

The Ontario Limitations Act establishes a maximum timeframe within which court proceedings relating to a “claim” may be initiated. In general, someone has 2 years from the time they either knew or ought to have known, that they had suffered a loss or damages as a result of an action or omission on your part.

In general, debt is uncollectible and you cannot be sued on it after 2 years have passed from the time the debt went into default resulting in the party’s claim against you. This result has even been extended to Canadian insolvency proceedings where a creditor files a proof of claim. If there is no judgment, and the claim is over 2 years old, that debt may very well be statute-barred in Ontario and the licensed insolvency trustee would have to disallow that claim.

Legal proceeding: Collecting money that is owed to you after winning a court case in Ontario

A judgment is the result of a successful legal proceeding against one or more parties in order to prove the existence of a debt. Getting a judgment made by a provincial court is just the first step. Now the money must be collected. A judgment claim can then be registered against a debtor’s personal property or real property to become a judgment lien. A successful plaintiff in their legal proceeding, now a judgment creditor, would do this to secure payment of the debt. A lien is a method of ensuring payment of money owed by registering against a debtor’s property as security.

The lien arising from a legal proceeding judgment can be properly registered to attach as a security interest in either personal property or real property. Examples against personal property would be:

to garnishee wages;
obtaining funds from a bank account or non-exempt investments; or
amounts to be paid in the future, such as the accounts receivable of a business from various customers.

When it comes to real property, if the judgment debtor is a property owner, a registered judgment lien attaches to the real estate just like a mortgage if properly registered to secure amounts payable.

In Ontario, if you wanted to register a judgment lien against a judgment debtor’s personal property, you would do so under the Ontario Personal Property Security Registration System.

Legal proceeding: What could happen if you were to lose a lawsuit and be unable to pay?

What are the judgement proof laws in Ontario?

Being judgment proof means that creditors cannot take your assets if you cannot pay what you owe. The first way this could be is because the only assets you have are the type that is exempt from seizure under provincial law. The Ontario Execution Act stipulates which assets are exempt from seizure.

The second way you may be judgment proof is that your non-exempt assets are fully encumbered by secured loans, such as mortgages and lines of credit, and that there is no value in your property for anyone else, including the judgment debtor. So if you’re judgement proof, your assets are safe from seizure.

If you’re judgment-proof in Ontario, then you don’t have to worry about having your assets seized. However, you will have to learn to live without a bank account, as cash in the bank is not an exempt asset. You also need to be the type of person who doesn’t worry.

You can’t be the type of person who worries about unsatisfied judgments against them or their credit rating taking a hit because of that. You have to plan never to own any non-exempt property in your name because that can be seized.

The non-judgment proof debtor can take action as soon as judgment is given

What if the judgment debtor is not judgment proof but the judgment renders them insolvent? In that case, the assets owned by the judgment debtor are insufficient to pay off the judgment and all of the other debts of the judgment debtor in full. Therefore that judgment debtor may very well need to look at an insolvency proceeding to deal with their debts. Depending on their debt load, they may have to consider either a consumer proposal or a full restructuring proposal or even bankruptcy. Each of these insolvency proceedings is conducted under the Bankruptcy and Insolvency Act (Canada) (BIA).

This is the introduction to the court decision I will now discuss from MNP Ltd v Canada Revenue Agency, 2022 ABQB 320.

Legal proceeding: What does it mean to have a judgement against you in Canada when you file for bankruptcy?

At the beginning of Brandon’s Blog, I said that there are two types of judgment liens with very different outcomes in bankruptcy. The Alberta court decision released on May 3, 2020, supports this view. The Reasons for Judgment of the Honourable Mr. Justice M. J. Lema are quite clear and well-reasoned.

The issue that the court had to decide on was “What does a writ of enforcement’s “binding interest”, acquired on registration against a debtor’s land, mean after the debtor’s bankruptcy?”. The fact that the Canada Revenue Agency (CRA) and Royal Bank of Canada (RBC) are respondents, hopefully, gives you a clue as to the 2 kinds of registered judgment liens against a judgment debtor.

The licensed insolvency trustee argued that the pre-bankruptcy priority arising from that interest continues after bankruptcy, that the Trustee acquires that priority position on the debtor’s bankruptcy, and that, on behalf of registered writ-holders (and, in fact, all unsecured creditors). The Trustee further argued that it can assert the binding interest and resulting priority position against a down-title secured creditor (here, CRA) and a secured-against-personal-property-only secured creditor (here, RBC).

Unfortunately, the Trustee’s position as Trustee in the bankruptcy of the judgment debtor was incorrect, according to the Honourable Mr. Justice M.J. Lema. From here on, I will refer to the judgment debtor as the bankrupt.

The key facts are that, before bankruptcy, various registered judgment liens/writs of enforcement were done against various of the bankrupt’s lands. Those writs included writs in favour of the CRA for unpaid taxes and associated amounts. The CRA writs were registered after most or all of the other writs.

The bankrupt was also indebted to the RBC, which held a general security agreement giving it a security interest in all of the debtor’s present and after-acquired personal property. After bankruptcy, via both foreclosures and trustee-initiated sales, various proceeds were harvested from the debtor’s lands.

Legal proceeding: #1 – How a CRA judgment lien becomes their competitive advantage in bankruptcy

How does CRA get a judgment against a tax debtor? CRA can take its assessment of the taxpayer to Federal Court without notice to the taxpayer or anyone else. Before this happens, CRA has already sent the taxpayer the notice of assessment and if it was not appealed, tried to collect the money. If the taxpayer fails to pay, then CRA’s lawyer through the Department of Justice can go to Federal Court to get the judgment. The judgment that CRA obtains is called a “memorial”.

Read together, s. 223 of the Income Tax Act (ITA) and s. 87 of the BIA clearly provide that:

if the Crown registers a memorial against a property in the land titles office
under ss. 223(5) and (6), it is an ordinary judgment creditor by statute; however,
subsection 223(11.1) deems the memorial to be a secured claim in bankruptcy, provided that the requirements of s. 87(1) are met.

There is no ambiguity.

The Trustee acknowledged that, on bankruptcy and per the combined effect of ss. 223(11.1) of the ITA and ss. 86 and 87 BIA, CRA is deemed to be a secured creditor in the bankruptcy. However, the Trustee argued that CRA’s secured position is subordinate to any writs that were registered before the memorial was registered. The court shot down that argument so there is no need to go through the Trustee’s rationale for making it.

By virtue of the ITA, CRA not only has a secured claim but gets to leapfrog everyone else – for sure judgment lien creditors but also prior registered secured creditors registered in the land titles office against the bankrupt property owner. This assumes that the registration is done in the proper land titles office.

The CRA memorial registered against any parcels of land is the first kind of judgment lien. As you can see, Parliament intended that CRA gets a priority secured position ahead of everyone else upon the bankruptcy of the taxpayer landowner. Ahead of not just anyone with a judgment or construction lien, but also any prior registered secured creditors, normally mortgagees.

This takes care of the 1st type of a registered judgment lien in bankruptcy. CRA’s judgment lien moves into a #1 deemed secured lien position if the judgment debtor goes bankrupt.

Legal proceeding: #2 – What happens if a judgement lien is not paid and the judgment debtor goes bankrupt

The court’s analysis proves that the 2nd type of judgment lien, being that of an ordinary judgment creditor does not retain any special status. The judgment creditor is an unsecured creditor and the fact that they registered a judgment lien before the judgment debtor filed for bankruptcy means nothing.

The possibility of a judgment lien-enforcement sale of land or building by the judgment creditor in question or other judgment creditors is effectively eliminated once the debtor is bankrupt. The same is true for a sale of land or building or other disposition of the debtor’s assets by the debtor him-, her-, or itself, regardless of the purchase price. The Trustee is installed to realize the debtor’s non-exempt assets and make sure the creditors are paid, in priority according to the provisions of the BIA.

What is the significance of a judgment lien’s binding interest after the debtor becomes bankrupt? The answer is none.

If there is no bankruptcy, a judgment lien’s binding interest has been interpreted to mean that it:

anchors the judgment creditor’s right to seek a sale of the property;
protects that creditor’s position against sales or other dispositions (e.g. mortgaging or charging) of the property by the judgment debtor; and
provides that the creditor will get actual notice and can share in the proceeds of any legal disposition of the property, such as a writ-based sale by another enforcement creditor, a foreclosure, or a sale by the owner.

A registered judgment lien holder’s binding interest does not make it a “secured creditor” under the BIA. This means that the holder’s interest is not equal to or equivalent to a mortgage or other security against the property for a debt that is due or accruing due. So with the bankruptcy of the judgment debtor, all registered judgment lienholders are merely ordinary unsecured creditors. They have no special rights and can only expect to receive a distribution from the bankruptcy estate once any deemed trust, secured and preferred claims are paid in full, subject to the levy of the Office of the Superintendent of Bankruptcy.

The Trustee tried to argue that the judgment creditors who registered against the real properties of the bankrupt company somehow retained their priority position against each other based on their respective dates of registration. The court decided that this could never be the case. Rather, the BIA prescribes how their ordinary unsecured claims are treated.

The Honourable Mr. Justice M.J. Lema confirmed in his decision that this 2nd kind of judgment lien has no priority of any kind once the judgment debtor is bankrupt. Whether the bankrupt is a man, woman or corporation, the answer is still the same.

Legal proceeding: After judgement and bankruptcy

The judgment debtor’s bankruptcy changed the priorities landscape. The binding interests stemming from judgment lien registration against one or more parcels of land were undercut. Judgment lien creditors other than CRA were relegated to waiting and watching the Trustee gather and sell the assets, regardless of what period of time it takes.

Under that scheme, secured creditors are given priority over unsecured creditors, regardless of their position before bankruptcy. In this case, both CRA (via its deemed security interest against real property) and RBC (via its GSA against personal property) are secured creditors. According to the BIA, they must be paid in full before the unsecured creditors (both preferred and ordinary) are entitled to receive any money.

I hope this Brandon’s Blog on a successful legal proceeding leading to a judgment was helpful to you in understanding more about the 2 kinds of judgments and how they are treated very differently in bankruptcy. It does not matter if it is a personal bankruptcy or corporate bankruptcy.

If you or your company has too much debt, we understand how you feel. You’re stressed out and anxious because you can’t fix your or your company’s financial situation on your own. But don’t worry. As a government-licensed insolvency professional firm, we can help you get your personal or corporate finances back on track.

Call us today and get back on the path to a healthy stress-free life.

Tags Bankruptcy, deemed secured creditor, judgment, judgment creditor, judgment debt, judgment debtor, judgment lien, land titles office, legal action, legal proceeding, MNP Ltd v Canada Revenue Agency, personal property, personal property security registration, purchase price, real estate, real property, registered judgment, secured creditors, unsecured creditors

An Introduction to Company Is Bankrupt Asset Sales

Types of Bankruptcy

Benefits and Downsides of Court-Supervised Sales When a Company is Bankrupt

Advantages of Purchasing Assets through Court-Supervised Sales

Limitations and Challenges in Court-Supervised Sales

Balancing Pros and Cons for Strategic Bidders

Company is Bankrupt: Tactical Considerations for Potential Bidders

Company is Bankrupt: What the Court Requires

The Soundair principles

Application of the Soundair principles

Company is Bankrupt: Navigating Contracts and Leases

Options Regarding Contracts and Leases

Practical Challenges Regarding Contracts and Leases

Consent from Counterparties

Company is Bankrupt: Considerations for Governmental Approvals and Regulatory Reviews

Company is Bankrupt: Addressing Liabilities Affecting Bankruptcy Sales

Company is Bankrupt: The Insolvency Process and Sale Order Approval

Stages of the Bankruptcy Process

Role of Court Resulting in the Sale Approval Order

Key Milestones and Deadlines in Bankruptcy Asset Sales

Company is Bankrupt Conclusion: Key Takeaways for Successful Asset Acquisitions

Company Liquidation: Introduction

Company Liquidation: Understanding the Basics

Company Liquidation: Understanding Insolvency in Canada

Identifying Insolvent Companies

Duties and Responsibilities of Company Directors in Insolvency

Legal Obligations in Insolvency Proceedings

Company Liquidation: The Role of Insolvency Practitioners

The Official Receiver and their Role in Liquidation Proceedings

Secured Creditors vs Unsecured Creditors: What You Need to Know

The Company Liquidation Process: From Decision-Making to Implementation

Making the Decision to Liquidate: Understanding the Options

Company Assets and Outstanding Debts: Navigating the Financial Obligations

The Sale of Business Assets and the Exit Strategy

The Personal and Legal Ramifications of Company Liquidation

Understanding Personal Liability: The Impact on Business Owners and Directors

Voluntary vs Compulsory Liquidations: Factors to Consider

Navigating the Voluntary Liquidation Process: From Special Resolution to Finalization

Company Liquidation: The Importance of Trust and Collaboration in Business – Lessons from the Srivastava v. DLT Global Inc. Case

Background

Trust and Collaboration

Lessons Learned

Company Liquidation: Closing Thoughts

Receivers and receiverships: Introduction

Definition of receivers and receiverships

What Is Receivership?

When Is Receivership Considered?

Receivers and receiverships laws in Canadian provinces: Overview of the legal framework for receivership in Canada

Federal Laws

Provincial Regulations

Receivers and receiverships: Signs of financial troubles in Canadian law firms

Receivers and receiverships: Initiating receivership proceedings

Secured creditors and their loans

Types of receivers and receiverships: Role of receivers in legal proceedings

Privately-appointed receiver

Court-appointed receiverships

Receivers and receiverships case study: A recent instance of a Canadian law firm receivership process

Law firm receivers and receiverships: Background

Law firm receivers and receiverships: Facts

Law firm receivers and receiverships: What the Court needed to address

A wide array of factors should be taken into consideration when considering receivers and receiverships

Receivers and receiverships: The evidence and the Court’s analysis

Receivers and receiverships: The Court’s decision

Receivers and receiverships: Impact of receivership on law firm clients

Client confidences

Continuing legal obligations

Receivers and receiverships: Pros and cons of legal firm receivership

Advantages

Disadvantages

Alternatives to receivership for law firms: Restructuring options available to a law firm

Restructuring

Bankruptcy

Receivers and receiverships: Frequently asked questions

1. What triggers the need for receivership in a law firm?

2. Can a law firm continue to operate during receivership?

3. How does receivership impact the firm’s clients?

4. What alternatives exist to receivership for struggling law firms?

5. Are there differences in receivership laws across Canadian provinces?

Receivers and Receiverships: Conclusion

Bill C-228: Are pensions protected in Canadian insolvency proceedings?