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Vancouver Business Bankruptcy, Insolvency and Restructuring Law Blog

Canada Post latest big insolvency?

Canada Post, a venerable institution which has been delivering our mail since 100 years before confederation, is possibly facing the end of its viability to Canadians. New technologies, from the fax machine to email and video chats, have left the corporation dealing with its lowest ever volume of delivered letter mail. 

Treatment of Claims in Insolvency Proceedings - Debt vs. Equity

If monies are advanced to a company by its shareholders, is such advance debt or equity? This can be an important question in insolvency matters. If the monies are debt and secured by a registered security agreement, then the shareholder will be entitled to payment ahead of the ordinary, unsecured creditors of the company. On the other hand, if the monies are equity, then the shareholder's right to repayment of them will be postponed behind the rights of all of the company's creditors, both secured and unsecured.

Deemed trust has limits

The Canada Revenue Agency (CRA) routinely takes a litigious approach whenever its deemed-trust rights appear to be challenged. But the recent ruling in Travelers Insurance v. Elite Builders indicates that mortgage lenders can take some confidence they are protected from CRA legal actions against mortgage debtors.

Several federal statutes create deemed trusts over funds that employers deduct at the source for income tax, pension contributions, goods and services tax, harmonized sales tax and similar collections. Where the employer fails to remit required amounts to the CRA, the Crown agency customarily seeks court enforcement of the deemed trust - and this can include clawing back payments that the employer/debtor has made to its creditors.

Pemberton Music Festival ticket holders lose out

The bankruptcy of the Pemberton Music Festival's organizers and the cancellation of the festival made headlines in 2017 with thousands of ticket holders left out of pocket. Where the tickets had been purchased using credit cards, the credit card companies issued refunds and then charged the refund back to the Festival's ticket sellers. 

Creditor proofing fails

It's a standard tactic of creditor proofing. Instead of investing in a business, principals make loans to the company. Then, if the business fails, they're secured creditors, standing first in line when the receiver sells company assets to pay creditor claims.

It should be noted, however, that this only works if the stratagem is properly executed, as the recent case of Tudor Sales Ltd. demonstrates. In Tudor, the Supreme Court of BC found that loans from the sole officer and director to the company were, in reality, capital contributions that were thus subordinated to all creditor claims. 

Lifting stay of proceedings against a bankrupt

One of the main protections for a debtor in entering into bankruptcy is the stay of proceedings: no creditors are allowed to take any collection or enforcement action against the debtor. However, a creditor can apply to court under section 69.4 of the Bankruptcy and Insolvency Act (BIA) to lift that stay of proceedings with respect to a particular claim. When a creditor alleges fraud and asks the court to lift the stay of proceedings, one might expect the court would require proof before granting the request. However, that was not the case in a recent Ontario decision.

Burden of proof

When a bank alleges fraud and petitions court to lift a stay of proceedings against a bankrupt company, one might expect the court would demand proof before granting the bank's request. Depending on the facts of the case, those expectations could well be dashed.

Recovering the excess from net winners in a Ponzi scheme

Ponzi schemes are fraudulent investment schemes whereby individuals are enticed by a conman or fraudster to make investments in an operation promising an unreasonably high rate of return. Once the first few investments are made, subsequent investors are enticed to invest partly through reported gains and partly through the high payouts of earlier investors. Ultimately, the conman either spends or disappears with the remaining money, or the scheme collapses on itself as funds are exhausted by payouts to earlier investors. 

Trading while insolvent

It's generally accepted, as a result of Canadian case law, that corporate directors have a duty to ensure their company does not carry on business after it becomes insolvent.

The Supreme Court of Canada has found, notably in Peoples and BCE, that directors owe a duty of care to all stakeholders in their company. That duty is very likely breached if business continues once the company is unable to meet its financial obligations as they come due, thereby making directors liable to claims of trading while insolvent and oppression.

CCAA under siege in 2018

The Companies Creditors Arrangement Act is something of a legal juggernaut, with the power to sweep all before it in the cause of restructuring insolvent companies and returning them to profitable operations.

It stays the actions of creditors, arm wrestles them into compromising their debt recoveries, gives special protection to interim lenders, discards environmental cleanup orders and gives the court power to "make any order necessary in the circumstances" to salvage the struggling company.

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