Category Archives: General

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Consumers are often the least important parties in a corporate insolvency. Gift cards are always a potential problem as the consumer has already made the payment, but the receiver has no requirement to honor them. Consider this before making a purchase.

http://www.cbc.ca/news/canada/saskatchewan/you-have-to-be-a-vigilant-consumer-gift-cards-worthless-when-stores-go-out-of-business-1.4457210

Income Tax Discharges…

 
Many people believe that a person can go bankrupt, and all their debts will disappear..this is simply not necessarily the case, especially if you owe significant tax debts, without any regard for the tax system..

In the bankruptcy of Gordon Charles McRudden [McRudden (Re) 2014 BCSC 217] the Bankrupt owed upwards of $900,000 to the Canada Revenue Agency, and more then 1.1 million dollars overall…
The bankrupt was involved in litigation from a patient who claimed he assaulted. He was sued, and rang up hundreds of thousands of dollars in litigation. Further, he then had GST and Income Tax deductions which he didn’t pay. In 2007, he disposed of his assets, and transferred 600 thousand to his sister. In 2008 he went bankrupt.
He lives in a home assessed at 3 million, and paid no tax or rent, his sister pays him $2,000.00 a month no tax. He also had child support arrears of 300,000.
The CRA objected. This was a first time bankruptcy.
The Trustee asked for a conditional discharge of full repay of taxes, or a refusal. The bankrupt asked for a full discharge.
The registrar reviewed everything, reviewed case law. He stated that not paying tax debt not honest or unfortunate, and that deterrence is the overriding consideration.

He ordered that surplus payments from Feb 1 2007 – Dec 31, 2008 to be paid. He had to pay the estate $69,500.00, supply income and expense statements, and to pay any further income tax and excise tax payments that were left.

Pre-Bankruptcy Court Decisions…

 

 

In a recent Ontario Superior Court case, the court confirmed a 1961 superior court decision that a court can not make a declaration as to the survival if a debt, pre-bankruptcy, even if the debt will survive from a person based on a exception under the BIA.

In Bridgemohan v. 2218667 Ontario Ltd 2014 ONSC the court confirm the decision of itself in Kemper Re (1961), 2 C.B.R. (NS) 130 (ONT SC).

The facts are not of particular importance: only that a fraud occurred involving a Contruction Lien Act claim, and the Defendants were found liable.

However, the Plaintiffs sought a declaration from the court that Section 69.3(1) of the BIA didn’t apply, and therefore by extension, the debt would not be discharged by bankruptcy.

The judge denied this request. He stated that this was not a bankruptcy court, and he wouldn’t and shouldn’t make this declaration.

Therefore, if a creditor is trying to pursue this line of action, or a debtor is trying to avoid it, they must go to bankruptcy court.

Please feel free to call me to deal with any problems along these lines.

Stay of Proceedings in Bankruptcy

 

In the bankruptcy of Scott Marasse, the registrar in Saskatchewan ruled on an order seeking leave for the Bank of Montreal (‘BMO’) to be able to proceed against a bankrupt. BMO contended that the bankrupt contined to borrow money on an unsecured line of credit, and to keep it in good standing, even though they knew that BMO would closwe it when it discharged the interest against the home which the loan had been secured against. BMO stated that this was an unsecured loan, the bankrupt knew or ought to have known, and that it rose to the level of fraud.
The registrar in her determination reviewed the law on the Stay under both Section 69.5 of the BIA, and pre-69.5.
In Re Bookman, (1983) 47 C.B.R. (N.S.) 144, Registrar Ferron explained that the bankruptcy stay’s purpose is to ensure that the trustee is able to administer a bankruptcy estate in an orderly fashion, without having to concern itself with complications arising from lawsuits against the bankrupt.
Following Bookman, the Ontario Supreme Court provided further guidance in Re Advocate Mines Ltd. (1984), where it categorized the types of claim that might support an application to lift the bankruptcy stay
In First Choice Capital Fund Ltd. v. First Canadian Capital Corp., 178 Sask. R. 100 (Sask. Q.B.), Baynton J. endorsed the Advocate Mines Ltd. categories of claim in the context of an analysis under s. 69.4 of the current BIA.
In Re Ma, 2001 CanLII 24076 (ON CA),the Ontario Court of Appeal revised the test for a declaration rendering the bankruptcy stay inoperable and in the course of doing so, explained that the test requires the establishment of something less than a prima facie case. According to the court, it involves an assessment of whether sound reasons, consistent with the scheme of the BIA exist to lift the stay.
The Superior Court, In 2011 in Mawji , confirmed that consideration of the merits of a proposed action may be appropriate if the merits are relevant to assessing whether “sound reasons” for lifting the stay exist in para. 4. But Mawji SC also confirmed that the onus of the applicant is low at the preliminary stage of the leave application
All these factors must be used to assess whether
(a) BMO a person likely to be materially prejudiced by the continued operation of the bankruptcy stay?
(b) If the answer to (a) is yes, then is it apparent that the action has little prospect for success?

The Registrar granted BMO’s application.

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!

Property issues… How I can get the property that I am owed!

 

I wrote a blog posting a while back about ex-wives, and what happens to division of property.

There is a ‘family’ law case that came out last year on joint-tenancy, intention, and right of survivor – Hansen Estate v Hansen, 2012 ONCA 112

In that case, a man and his wife were getting divorced, and he had drawn up a new will, with all of his assets going to his kids from a previous marriage, but before he could sever the joint tenancy, he died! So the JT was still effective, therefore giving full title to his ex-wife (from separation). His kids claimed that the father intended to sever, and create a tenancy in common, and gave evidence to that effect. The Court of Appeal agreed.

This case is interesting from an insolvency and partition standpoint. If a person goes bankrupt, and they are a joint tenant, then there is a different process to when there is a tenancy in common, and it’s simply their portion of the house. Same thing if a lawsuit is against a person, and they lose, the writ would different – and the procedure.

Of course if you die, then the intention needs to be interpreted.

Very interesting…but this reminds you that if you are separating, divorced, worried that the person you co-own your property with is going to go bankrupt or file a proposal, or is involved in a lawsuit, sever the interest. 

Come talk to me if you want to discuss real estate issues!

Contractual provisions triggered by a party's insolvency

Insolvent

In a fairly recent decision of the Ontario Court of Appeal, Aircell Communications Inc. v. Bell Mobility Cellular Inc 2013 ONCA 95, the court broadened the traditional doctrine to deprive a contracting party of its agreed-upon rights.

The traditional common-law doctrine recognizes that a contractual provision which is explicitly and directly triggered by a party’s insolvency may be unenforceable due to the public policy ramifications.

In this case, there was a dealer agreement between a dealer and distributor. The contract allowed the distributor to terminate the agreement in circumstances where the dealer had failed to make up for a default in payment within 30 days. Upon this termination, any outstanding commissions owed by the distributor to the dealer were to become unenforceable.

The dealer had not made payments to the distributor, and the distributor then gave the dealer the require 30 days to either pay according to its requirement, or have the agreement terminated.

Without telling the distributor, the dealer had already gone ahead and filed a notice of intention make a proposal under the Bankruptcy and Insolvency Act. As a result, before the 30 days could expire, the dealer was deemed insolvent and the contract could not be terminated.

The court had to decide whether the distributor was permitted to end the contract in accordance with its terms, based on the non-payment. The additional right being that it would be relieved of its obligation to pay any leftover commissions to the dealer/trustee.

The Court of Appeal decided that because the termination of the agreement was caused by the dealer’s failure to meet its payment commitment, and because this failure was incidentally caused by the dealer’s insolvency, the aforementioned termination itself should be deemed to have been caused by the insolvency. Therefore, the traditional common-law rule would apply.

The distributor was therefore denied its explicit contractual rights. Therefore, parties to a commercial contract should be careful to protect their rights. There will now be an area of insolvency which may be able to intervene. 

2 Very Common Situations Which Are IMPORTANT to know about

Sorry I haven’t posted in a while, been very busy, but I’m going to make a quick post here now and I will post again later:

2 Very Common Situations which come up often and are important to know about:

1.) You are married for a very long time, and then you get divorced and sign a separation agreement. A couple of months or a year later, your ex declares bankruptcy. What effect does that have on you? You have a joint account from when you got married, and you jointly owned a house.

The joint account is jointly owned by you and your wife. Which means that the trustee who your wife will hire, will have a claim to it. The trustee will move to realize the equity on the house; if you left it joint when you divorced and didn’t sever it, then you can have a very big problem. Separation agreement will not effect this. Any joint assets and liabilities are just that, joint. So the assets the trustee will seek to sell, and the liabilities you will owe from. See a lawyer as soon as possible, but it may be too late. When separating… always seek out a commercial lawyer for anticipation of this type of problem.

 

2.) You and your dad co-sign a credit card because you’re underage, or have bad credit. You or your dad rack up bills, and can’t pay them. What to do:

The first thing that comes to mind is to go see a licensed trustee in bankruptcy, as they can help you with your debts. But the problem that I am looking at is if you or your dad go bankrupt, the credit card company will still come after the other one. Co-signing a card essentially means that there is a contract between both of you and the bank. The bank doesn’t care how the other one gets out of it. If this happens to you, see a lawyer.

Thinking about representing yourself in Court?…. read about it, and the perils of doing so!

There was a recent poll conducted by the Law Foundations of Ontario, Alberta, British Columbia and the British Columbia Legal Service society of 259 self represented persons over an eighteen(18) month period.
Many of the cases were in family court, and the rest involved various civil actions. The study noted that many get frustrated, and create many problems for court staff, judges, and others.

Often it is difficult for court staff to help as they do not want to give legal advice. Judges are not there to give legal advice, and shouldn’t be perceived to be bias or acting as a lawyer.
There are rules of evidence, the concept of stare decisis, and various other applications and processes that are difficult to navigate through. Even in Small Claims Court, or Tribunals (LTA etc.) there are complexities which a lawyer can help with.
I am not writing this blog post to promote lawyers, but rather to explain to anyone thinking of going at it alone the complexities of doing so. Ask yourself, if I mess this up on my own, is it really worth it…
Also, while people may get sick of paying fees for lawyers, there are other, more affordable lawyers out there.
The study specifically addressed people who might be thinking of reading up on the internet, and found that this didn`t really help.

If you’d like some advice on a matter, please do not hesitate to contact Matthew Harris. For family matters, I’ll be happy to send you to any number of lawyers I know.

For more information on the study read about it in the Canadian Press