Monthly Archives: July 2013

Companies, Directors, Partners, and Bankruptcy!

Trustee of 684417 B.C. Ltd v. Johnson

This is a very interesting case which may have tax consequences, as well as insolvency and others.

 

J was working at a company collecting wages. In 2005, M the controlling party, offered to make J a partner in the company. J incorporated 417 which became a partner, with M’s company B, and took on all the liabilities and profits from the company. 417 didn’t have the resources to purchase equity in the partnership, so J and M agreed that 417 would receive partnership money that J would have received in the first 6 years, but no profits from the partnership. The partnership operated, paying both 417 and B as if they were salaried employees. They were paid more than the company was profiting  They requested to off-set the money taken out as tax-deductible expenses, but the accountant wouldn’t do it, because they were partners, and since it was in excess of the profits it must be a loan. 

J was unhappy, he wanted to be paid at his old salary, but he didn’t want to take the risk that the partnership would not make enough money to pay it. Therefore, 417 and its principal J, and B and its principal M, entered into an amended partnership agreement which upon one of three events occurring, if 417 was found to owe money to partnership, then B would indemnify 417.
However, bankruptcy was not one of the events. In 2008, the partnership and 417 made an assignment in bankruptcy.
At various times, 417 in 2007 and 2008 had made payments to J and his wife. At the end of the fiscal year, 417 passed a resolution to make these declared as dividends.
The trustee claimed that in 2007, 417 assets were not sufficient to pay its liabilities, and J knew this. This was also the case in 2008. J caused 417 to declare dividends of 60 k to J, and 100 k to his wife and in 2008, 253 k to J.
The court found that the relevant point was when they were declared to be dividends. It also found that J knew 417 was insolvent, and it rejected J’s claim that they were wages. Since his controlling stake and actions made it clear he was much more than that.

The judge found that these were dividends contrary to the BC Corporations Act. Further, these were all made within 1 year and under the BIA judgment would be granted against them.
So… think twice before using companies for taxes, income splitting, or moving away from employee to owner/partner!

What happens if my company doesn’t follow my proposal…

The Newfoundland and Labrador Supreme Court granted an application by a Trustee in Bankruptcy to annul a proposal based on delay in the performance of the proposal, and some additional prejudice to the creditors.

A debtor filed a proposal in May 2012. This was a fairly large debtor, with multiple creditors and a fairly large amount of debt. The proposal contemplated that the debtor would acquire financing, and if it could not acquire financing than it would liquidate its assets under the guidance of the trustee.
Once it was obvious to the Trustee that financing was not possible, the Trustee attempted to confirm that the assets had been listed for sale. But they had not been, and the justification given by the debtor was that they were attempting to obtain financing.
Multiple notices of defaults were issued, and extensions were requested and granted. By the third Notice of Default, the Trustee intended to go to court to annul. The debtor again sought to postpone, and it was temporarily successful.
The judge reviewed Section 63(1) of the BIA, and was of the view that even though this power was discretionary, to allow the debtor to continue to default on its proposal would prejudice its creditors. That the issues of not listing the assets for sale, the extended time delays, and the refusal by the debtor to carry out the provisions of the proposal were prejudicial.
The judge granted the order, and put the company into bankruptcy.

Re North Shore Manor Ltd 2013 NLTD (G)

What happens if my company doesn't follow my proposal…

The Newfoundland and Labrador Supreme Court granted an application by a Trustee in Bankruptcy to annul a proposal based on delay in the performance of the proposal, and some additional prejudice to the creditors.

A debtor filed a proposal in May 2012. This was a fairly large debtor, with multiple creditors and a fairly large amount of debt. The proposal contemplated that the debtor would acquire financing, and if it could not acquire financing than it would liquidate its assets under the guidance of the trustee.
Once it was obvious to the Trustee that financing was not possible, the Trustee attempted to confirm that the assets had been listed for sale. But they had not been, and the justification given by the debtor was that they were attempting to obtain financing.
Multiple notices of defaults were issued, and extensions were requested and granted. By the third Notice of Default, the Trustee intended to go to court to annul. The debtor again sought to postpone, and it was temporarily successful.
The judge reviewed Section 63(1) of the BIA, and was of the view that even though this power was discretionary, to allow the debtor to continue to default on its proposal would prejudice its creditors. That the issues of not listing the assets for sale, the extended time delays, and the refusal by the debtor to carry out the provisions of the proposal were prejudicial.
The judge granted the order, and put the company into bankruptcy.

Re North Shore Manor Ltd 2013 NLTD (G)