What is a creditor introduction
The purpose of this Brandon’s Blog is to tell you a true story that all business people can learn from. Especially those wishing to provide consulting services to stakeholders in an insolvency proceeding. Let’s start simply by answering what is a creditor.
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A creditor is a person or company that has advanced credit and is owed the payment by a different person or company. The debtor is the party that owes the money and a creditor is a person or company that wishes to be paid.
Vaughan Crossings Inc.
In January 2017, my Firm became the court-appointed receiver of the real property of Vaughan Crossings Inc. (VCI). VCI owned real property comprised of 5.5 acres of commercial development land located at the northwest corner of Dufferin and Centre Streets in the City of Vaughan. The first mortgagee made the application to Court for our appointment. The second mortgagee was a fund made up of many small investors.
Upon our appointment, we learned that the second mortgagee stakeholders had retained a business consultant to advise and assist these investors to try to obtain value out of the receivership from their investment. We dealt with the business consultant throughout the receivership.
It became clear to everyone that there was insufficient value for the second mortgagee group to recoup any funds through the sale of the property. So, the business consultant put together a group which included those who had registered a lien against the property for non-payment and the second mortgagee group.
The business consultant was not paid in cash by the second mortgagee group for his work. His fee and costs were also part of the buying group. They ended up paying above market value in all cash. I was not involved in their financing discussions so, I don’t know how they were able to get the required financing.
The sale was completed and we were discharged as the court-appointed receiver. Now it gets even more interesting.
The business consultant
The second mortgagee group of VCI was put together by a promoter. It turns out that promoter had other properties that they financed by way of the second mortgage the same way. My Firm was not involved in those other properties. However, it appears the same business consultant was involved in at least one other property.
It also appears that the business consultant experienced the same problem in that other property that he did in VCI; no cash to be paid from. In fact, as it turns out, he didn’t even have a retainer to act on behalf of the second mortgage investors in those other properties. That didn’t stop him from trying to work that property and chase his VCI dollars!
The court case
That issue was decided in the court case, The Superintendent of Financial Services v. Textbook Student Suites (525 Princess Street) Trustee Corporation, 2018 ONSC 7392 (CanLII). The consultant’s primary claim is against the Investors’ Committee. He asserts to be entitled to costs for solutions that he executed for the board. He claimed against the Investors’ Committee that because of the work he did in advising them, his charges need to be safeguarded by a court-ordered charge against the properties.
He claims that as a “bankruptcy expert” that his solutions were for the advantage of the stakeholders. Therefore, he ought to be paid his charges in advance of any kind of distributions to lenders.
He also said that his job also helped the lenders in their recuperation of the funds owing to them. He did not provide the court with any case law to support his position. Rather, he was relying on the inherent jurisdiction of the court to order such security.
The analysis
Of course, there was not a written agreement between the consultant and the Investor’s Committee signed by both parties. The Judge stated that the legislation is well-settled that in identifying whether the parties had a binding agreement, the court will take into consideration whether they reached agreement on every one of the material terms. One term that can be material is whether an arrangement requires to be in writing or whether an oral contract will be enough.
As it turns out, there were several drafts of the consultant’s engagement letter discussed with the Chair of the Investors’ Committee. However, the Investor’s Committee found the engagement letter to be too vague. They told the consultant this and asked him to provide a more detailed engagement letter of the activities he would undertake, the time estimate for each phase of his work and what his hourly rate would be for those services. The consultant did not provide a more formal engagement letter and as a result, one was never signed.
Rather, the court found that the consultant continued working. At the same time, he was exchanging emails with the Investors’ Committee. The Committee learned that at this same time, the consultant was trying to strike a deal with the second mortgagee stakeholder in my VCI file. Now the Investors’ Committee felt that the consultant may have a conflict, and did not seek an engagement letter to sign. At the same time, the consultant advised the Investors’ Committee that his retainer, was subject to their legal counsel obtaining a court-ordered charge for his fee and costs ahead of any distribution to be paid to the second mortgage investors.
This email turned out to be the downfall of the consultant in this court case. The court found that by this email, the consultant knew that he did not have that priority, yet was continuing his work. No court application was ever made to obtain that court-ordered charge. The consultant tried advancing all sorts of other arguments as to why he should now be granted the priority claim, but none were persuasive, or even correct!
The Judge ruled against the consultant. So, not only did the consultant not get paid for his work, but he also had costs awarded against him for losing this court battle.
So what is a creditor not to do?
What you should not do is:
- Not start working if you do not have a properly written retainer to provide the consulting services.
- Even if you have the properly written retainer, know how you are going to be paid and that the party you are contracting with has the ability to pay.
This is especially true in an insolvency situation. In a receivership or bankruptcy administration, there are many claimants against the assets. Many times the creditor claims are competing. So anyone wishing to provide goods or services to a stakeholder in an insolvency administration better make sure there is a clear contract and know who is going to be actually paying. This consultant found out the hard way that a court is not going to protect you for your mistakes later on, no matter how reasonable you believe it is.
What is a creditor?
Is your business in financial distress because you cannot collect your billings? Do you not have adequate funds to pay your creditors as their bills to you come due?
If so, call the Ira Smith Team today. We have decades and generations of experience assisting people looking for financial restructuring, a debt settlement plan and to AVOID bankruptcy.
As a licensed insolvency trustee (formerly called a bankruptcy trustee), we are the only professionals accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A restructuring proposal is a government approved debt settlement plan to do that. We will help you decide on what is best for you between a restructuring proposal vs bankruptcy.
Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.
You can have a no-cost analysis so we can help you fix your troubles. Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.
