Tom McElroy

2Great. Thanks, Pulat. So my name is Tom McElroy. I'm a licensed insolvency trustee. My firm is Albert Gelman Inc. A little bit about myself. I started off as a chartered accountant and became a chartered business valuator, chartered insolvency and restructuring professional, but principally my practice and that of my firm relates around our status as Licensed Insolvency Trustees. We're a firm of 4 Licensed Insolvency Trustees. The office consists of about 10 people. Our principal office is downtown. We've got satellite offices throughout the GTA. We help individuals as well as small and medium-sized businesses in financial difficulty. We also work with lenders whether secured or unsecured in certain enforcement activities.

4Yeah. So a licensed insolvency— and I will be looking a little bit to my left here sometimes. I've got some notes and I don't want to miss anything and got some items I'd like to discuss. But so a Licensed Insolvency Trustee is an individual who's been granted a license by the Office of the Superintendent of Bankruptcy. There's about 950 individuals in Canada that hold the license. The license is specific to Canada. Only folks with the license, the LIT license, can assist individuals and businesses in bankruptcy and formal restructuring matters and can act as receivers in court-appointed mandates. So the process to becoming a licensed insolvency trustee starts with obtaining what's called the Chartered Insolvency and Restructuring Professional designation.

5CAIRP, which governs that organization, is closely aligned with the OSB, although they are certainly separate. That process used to take about 5 years. Now it's possible to get through it in about 2.5, 3 years, although typically most folks take about 4, 4 or 5 years to get through that process. From there, you make an application to the Office of the Superintendent of Bankruptcy, the official— what we call the official receiver. You attend an oral examination, and then they decide whether to grant or not grant you a license. And then if you are granted a license, you become a licensed insolvency trustee.

7Yeah, absolutely, absolutely.

9Yeah, yeah, absolutely.

11sorry. So the Bankruptcy and Insolvency Act, as you quite correctly mentioned, is one of the principal statutes in Canada. It's a statute for a lawyer, obviously. They know what a statute is. It's a set of laws that govern how bankruptcy and restructuring proceedings for certain individuals and corporations shall proceed in Canada. It's a fairly rigid statute. It's meant for, to apply to situations where individuals, you, me, you know, Uncle Bob, are in financial trouble and need to resolve those particular debts, as well as small and medium-sized companies. As I mentioned, it's a very rigid statute. So there's— it's quite thick. There's a lot in it. Case law has developed over many years also to play a role.

12But really, it governs how individuals and small and medium-sized businesses restructure or file formal bankruptcy.

14Yeah, that's a great question. And it is not unique to Canada, but it's certainly the creation of the trustee is a unique thing insofar as in the US there aren't trustees, or trustees are lawyers who are familiar with the legislation. Here there's a clear distinction between the trustee as the court officer who administers the process and the advocate being the lawyer who's representing their client. To get to the heart of your question, which, which again is a great question, I would say that for individuals, it's certainly a rehabilitation. As I mentioned, you know, when I speak and to my clients, if you have insurmountable debt an individual and you aren't able to, in some formal way, either reduce that amount or eliminate it, you're not going to be a productive member of society.

15Right. If this debt continues to burden you for the rest of your life, what incentive are you going to have to get up in the morning, go out and be a productive member of society? So really, it is, you know, and what they say is that you have the honest but unfortunate debtor. And this is a rehabilitation statute for corporations that file bankruptcy. It's a mechanism to end the corporation that can't otherwise be done through a dissolution because they're insolvent. But again, it's also rehabilitation for a corporation to restructure while it's in financial difficulty. And certainly in my experience, it's much easier to restructure an existing business that's been set up than for the government using this legislation to allow that business to continue, than for the government to incentivize somebody to start a new business.

16Right? So it's a rehabilitation and also a means to end corporations that otherwise are no longer viable.

18Yeah, absolutely. So I mean, they— what the term that gets thrown around, or the phrase that gets thrown around, is Without these restructuring proceedings and the stay of proceedings that kind of fends off the creditors, it's kind of the first one to get there, the first creditor to get there that would really benefit. What the insolvency process does, as you quite rightly mentioned, is it freezes out enforcement activity for the most part and allows the debtor company to operate in an environment albeit they're still in distress, but an environment free of enforcement activity so that they can preserve value to either restructure the debt in the company or ultimately to undertake some type of process to sell the business as a going concern.

19And ultimately, the creditors benefit from that. What happened back when these laws weren't around is that the first one to get into court, get judgment, start enforcing, was doing so to the detriment of all the other creditors. So this is really a forum. The restructuring of a company is really a forum to allow all creditors to participate without thinking that they've got to be the first one to the finish line.

21Yes. Yeah, great question again. So essentially, when somebody files a restructuring— what I mean by restructuring, if it's a corporation and it's a small or medium-sized business, it's really a proposal process. For the lawyers, it's called a Division 1 proposal in Part 3 of the Bankruptcy and Insolvency Act. And the way that that process is usually initiated is by the filing of a notice of intent to make a proposal, which is, as it, as it says, it's a notice that can be filed very quickly where the trustee files it with the government. So if the client comes in and says, you know, there's a creditor that's about to garner the bank account or seize assets or whatever the case is.

22You know, there's been situations where we meet in the morning we do our due diligence throughout the day, and then we file the notice with the government in the evening. And effective the date stamp, the time of filing, there becomes a stay of proceedings. Now that stay of proceedings is with certain limited exceptions, applies to all creditors, whether it's CRA, the landlord, a litigant, an execution creditor, a supplier, a utility, whoever it is. The stay of proceedings with certain limited exceptions applies automatically. So our next step is then to send to all those creditors a notice saying, look, stop, there's a, there's a legal stay of proceedings. And you cannot enforce. And, and for the most part, creditors get that.

23Where there is a litigation creditor in the process of either trying to obtain judgment or executing, we send a copy to the lawyer as well as to the court of it, and it's called the notice of stay of proceedings, specifically to the court, become part of the court file, and the proceeding is stayed. And so that really is the mechanism that stops all— again, with certain limited exceptions— all creditors from continuing their enforcement activities.

25Yeah, again, a great question. So the trustee's role in a restructuring proposal scenario is really as a monitor. So we monitor the business, right? Because all of the creditors have now been frozen out. You need a third party in there to monitor and report back to say everything's occur— you know, every— all, all of the activities of the business are continued to occur in the ordinary course. No assets are being dissipated. The company is able to maintain a positive cash flow during this restructuring proceeding and to basically report to the creditors. As a trustee in a proposal, we do not take— in very limited, certain limited circumstances we might, but generally speaking, we do not take possession of the assets.

26The company is what we refer to in the industry, debtor in possession. So they continue to operate their business in the ordinary course. The employees are still employed. The obligations, the post-filing obligations, continue to be paid by the company. So for example, if they want more supply or they want to continue to lease a piece of equipment, they've got to pay for that on an ongoing basis. But the trustee doesn't take possession. With respect to selling assets, the legislation, although I believe when it was conceptualized and put into law, it really contemplated a restructuring and continuation of the business. A lot of companies now are entering proposal restructuring proceedings with the objective of selling the assets.

27And one of the benefits of selling assets within a proposal proceeding is that, A, there's no threat from enforcement from, from your creditors. But also, when you run that process and you find a buyer, you go to court to get approval of the sale, and you get an order severing all liability from the assets. So the purchaser knows that they're buying the assets free and clear of any and all encumbrances. It's called an approval and vesting order. There's a standard order on the Commercial List website or Commercial List site. And, and so the purchaser buys knowing that there won't be any issues in purchasing these assets.

29Yeah, absolutely. So a proposal is a restructuring. And then there's the— what most folks would be familiar with, or the term anyway, would be bankruptcy. So in a bankruptcy, the trustee does take possession. So, for example, if there's a company that files a bankruptcy or an individual and there's a piece of real property, The trustee, depending on the circumstances, but the bankrupt's interest in that property vests in the trustee similar to any accounts receivable, inventory, equipment. It vests in the trustee and subject to any security over those assets. It's the trustee's responsibility with the direction of creditors to realize on the value of those assets. Liquidate, and then distribute to creditors. So bank— the bankruptcy process really is a liquidation process, whereas the restructuring may be a liquidation, but usually as a going concern or simply a restructuring of the debt on the balance sheet.

31Absolutely. Absolutely.

33Yeah, great question. So, and this is something that, you know, we as trustees, licensed insolvency trustees, deal with all the time. So every situation is unique, obviously. But generally speaking, if a business owner comes to me with an operating business where there is goodwill that has the potential to be realized on, we wouldn't necessarily recommend shutting down the business. Now, this also depends on the owner's appetite to enter into this process. But generally speaking, if there's an operating entity that could be sold on a going concern basis, I think all parties would agree at that point that the value that could be realized by selling through a restructuring would be greater than the trustee coming in, shutting everything down, terminating the employees, and liquidating.

34Nowadays, it's, it's, it's certainly very much less common for trustees to operate businesses because trustees become personally liable, and that liability is not something that a lot of trustees want to take on. But So a lot of sales where there is a going concern or goodwill value happen through a restructuring. Now, if a client comes to me and says, look, I'm a general contractor. I was operating for 10 years, but I had 3 bad jobs. They ruined me. I'm being sued by ABCD Supplier. I've got no money, and what do I do? Well, that's a— let's put it into bankruptcy. And there's a couple of reasons. One, generally, very generally, putting something— putting a company into bankruptcy is essentially a dissolution of an insolvent company.

35It is and it isn't. But you can't dissolve an insolvent company. So how do you stop the requirement to continue to have to file taxes or tax filings? You put it into bankruptcy. Notice is sent to all the creditors, including the litigation creditors. And so generally speaking, an individual or the owner of a business that is no longer operating now doesn't have to defend these actions because the bankruptcy automatically provides for a stay of proceedings as well. The tax benefit or potential tax benefit from putting a company into bankruptcy is that Oftentimes small, medium-sized businesses, the shareholders inject personal funds by a shareholder loan. If a company— if— and the accountants who may be participating would have better knowledge than I do, but the benefit of putting a company into bankruptcy is that it makes the process of requesting an allowable business investment loss from the CRA for the personal shareholder much easier.

36This, this loss— like, let's say the individual invested $300 grand in the company, it went bust. Now there's a shareholder loan that they're not going to be repaid. Put the company into bankruptcy so they know they're not going to get the money back. The accountant does what they need to do to apply for the allowable business investment loss. The shareholder, if granted the allowable business investment loss will have a loss that they can apply going forward to all sources of income, whether it's employment, capital gains, whatever the case is. So it does have significant value. Yeah, I think I've answered your question.

38Immediately. Yeah.

40Yeah. Not to be too technical, a monitor we're called the proposal trustee.

42All right.

44Generally speaking, a proposal will always generate more cents on the dollar. The way that we frame it— maybe I'll back up and give a couple more building blocks here just so that everybody understands why creditors would agree to a proposal. But in order for a proposal to be approved, creditors representing two-thirds in value and 50% in number have to be on side with it, right? So you can't just file a proposal, get your stay of proceedings, and then make, you know, an offer for nothing to your creditors, right? You can, but then they will vote against it and then the company will be automatically bankrupt. So what happens is the company and the trustee do an evaluation to say, okay, here's the— here's what the company can afford to pay its creditors if it's allowed to continue and restructure its debt.

45And here is what the creditors will get in a bankruptcy. So let's say in a bankruptcy the creditors will get half a million bucks because assets would be liquidated, accounts receivable will be collected, etc. Well, no creditor is going to vote in favor of a proposal that provides for less distribution than half a million dollars. So essentially it's a quid pro quo where the company says, look, we'll give you more than you would get in a bankruptcy. And you, we, as long as you vote in favor of the proposal and let us stay,

47That's right. That's right. And there's a couple of, you know, if it's a supplier and you continue to get supply from them, not only do they get more in the proposal than they would in a bankruptcy, but they continue to have a customer, albeit the relationship may be strained, but you're probably paying COD at that point anyway, or cash on delivery. So, so generally speaking, a proposal will always provide for more than a bankruptcy.

49Yeah. So that's a very good question. You're right. They are public. It is a public process. But it's not as though it's broadcasted. So if a client comes to me and, you know, in a very simple situation where they get reassessed by CRA and they owe a million bucks in HST or something, you know, we don't broadcast— that doesn't get broadcast to every creditor in Canada and, you know, in the news, whatever. Our statutory responsibility is to provide notice to the creditors affected by the proposal, the debtor company, the— obviously the Office of the Superintendent of Bankruptcy. So although yes, it is public and it is public record, the parties that receive direct notice would be the creditors.

51Yeah, absolutely. So, so a receivership so there's two forms of receivership. There's a private receiver, which essentially the, the the, these— let me back up one step. So a receivership, the difference between a bankruptcy and a receivership is a receivership is a process that is driven by secured debt. So you are appointed, a trustee would be appointed to be a receiver to realize on assets secured by a particular or several creditors. A bankruptcy is a process driven by unsecured creditors where the trustee works to administer the process of the bankruptcy for unsecured creditors. So if you're a secured creditor that is owed, make it round, a million bucks, and there's an op— there's an operating business or there's a piece of real estate or whatever the case is, you would appoint a trustee to be the receiver to go in and realize on your security and pay you back first.

52There's two ways to do that, generally speaking. You can do it by way of a private appointment where the terms of the general security agreement would dictate how the receivership is to unfold. Or you go to court, which these days is the much more common approach simply because there's too much liability to go in as a private receiver for trespass, improvident realization, etc. So most of the time, secured creditors make applications to court to appoint a receiver by court, and then the court The process is a court-driven process. So all of the creditors will be kept apprised of what's happening. Many assets are sold. The sale gets approved. So the process for improvident realization is mitigated significantly.

53And then ultimately, if creditors need to pursue personal guarantees, they can do that afterwards. But of course, the lawyers would know. Know much more about that than I do.

55Yeah.

57Yeah, absolutely. Absolutely. So we work for several financial institutions. So if there's a receivership really is the last step in enforcing. So if you're a lender and you've entered into forbearance with the debtor company, and one of the terms would be, depending, would be that they would consent to the appointment of a receiver or something like that if you enter into a forbearance agreement. But really, the relationship has broken down between the lender and the debtor— or it becomes abundantly clear that this business can no longer operate profitably and that there would be an erosion of the security. What I mean by that is AR would be collected just to fund operations, and/or equipment would continue to be used and degraded, et cetera, et cetera.

58Then you would appoint a receiver to stop everything, lock out the company, literally change the locks on the door, liquidate everything, and then repay the secured creditor whatever they're owed up to the balance of their outstanding debt.

60Yeah, yeah, absolutely. So as I mentioned before, the bankruptcy process is a process driven by unsecured creditors. And so if you're a creditor owed more than $1,000 and you can convince— of course, it's much more complicated complicated than this in actuality. But the two general thresholds that need to be met are you're owed more than $1,000 and you can prove that the debtor, whether it be a company or an individual, has committed an act of bankruptcy, which are spelled out— those acts are spelled out in the Bankruptcy and Insolvency Act. Then the court will be in a position to grant an order adjudging the debtor company bankrupt. At that time, right? So you go to court, you start the application to put the company into bankruptcy.

61If they consent, you go to court, you get the order effective— I guess when the order is entered, the debtor is bankrupt. If they appeal or they oppose— sorry, not appeal— if they oppose the application, then it may drag on. But it would be unsecured creditors that are owed money that would start that process. To put the individual or business into bankruptcy. And there's a couple of reasons why that might happen. Let's say you're litigating and you're owed a million bucks, unsecured, owed a million bucks, and there's real property involved. And that real property is transferred for whatever reason. They're able to transfer it. The bankruptcy— and it's transferred to a related party. The Bankruptcy and Insolvency Act, when, when says that when you start that application, you preserve dates.

62And what I mean by dates are dates related to transfers at undervalue or preferential payments. So let's say they transfer the property to a related party who, who's now holding the property. The Bankruptcy and Insolvency Act, if there is a bankruptcy and the trustee steps into the shoes of the bankrupt individual, what would happen is that the trustee would then go to court and say that this transaction was improper. And, and at that point would try and get an order reversing the transaction. Now, in bankruptcy, you don't need to prove intent within one year of the transaction happening. And the date of bankruptcy or the date that the application is started. The other benefit too to unsecured creditors or in a bankruptcy process that you can examine creditors, management, anybody who ought to have reasonable knowledge of the affairs of the bankrupt individual under oath without a court order.

63If the trustee believes that there's reasonable grounds to examine somebody to determine the causes of insolvency, the location of books and records, the location of assets, the trustee can compel that person to attend to an examination without a court order. We can also compel records from banks, financial— other financial institutions, other third parties. So an unsecured creditor who is concerned about dissipation— assets dissipating while they're litigating can start that process to put a company into bankruptcy or an individual to preserve those dates. And then ultimately, once they're in bankruptcy, the trustee can utilize its powers to reverse those transactions, obtain the necessary documents, and move forward. Also, if there's a fraud or the creditor believes that there is a fraud, the trustee has significant powers to investigate that fraud.

65Yeah, the bankruptcy application is, you know, significant relief, right? You're putting somebody into, or a company into bankruptcy. So it is significant relief. If they're defended, Sometimes it takes a while. If they're not defended, then you get the order. But, but yeah, it certainly is significant relief that you're requesting.

67Yeah, absolutely. I mean, their argument is I haven't committed an act of bankruptcy and I'm not insolvent. That would be their argument.

69I believe it's the master's court. So in Toronto where we operate, it's 393 University.

72Yeah, great question. So Canada, obviously, Canada Revenue Agency is the collection arm of the government, right? That's how the government builds roads, you know, pays, pays for government programs, etc. So they play a very important role in collecting from Canadians to individuals and businesses so that the country can continue to operate. Because of that, they have significant powers, collection powers. Far greater than any individual or corporate litigant or other creditor. So in terms of their power and their debt collection tools, in the— what I see in my practice is that if a company owes CRA money, let's say they owe them half a million bucks in HST for whatever reason, CRA can do a few things.

73If the company owns real property. They can register a lien on title to the real property. They, they can garnish bank accounts. So in cash businesses, so like restaurants— sorry, not cash businesses, but businesses that depend on their cash flow through a point-of-sale machine such as restaurants— CRA's main tool for them is they garnish the bank account, right? So now your bank account is frozen. Even if you get credit card receipts that are dumped into that account, CRA just continues to collect them. And the third, and what I would say the most critical thing to prevent, and I've seen it, you know, destroy businesses, is CRA can issue enhanced garnishments to the company's customers.

74And essentially what they say is that receivable that's owing to the debtor company is now property of the CRA, and the debtor and the customer has to pay that to the CRA. If they don't, they become liable. So what this does is two things. One, it strips the company of their ability to collect its AR and continue to operate with positive cash flow. And two, it notifies all of the creditors that they're in trouble with the CRA. And effectively cuts the legs out from underneath them. So it really makes it difficult to operate in that environment. So, so those are the 3 main debt collection tools that I see from CRA. And then in terms of how the debts are, are treated, so at a corporate level, generally speaking, there's 3 debts: there's corporate tax, HST, and source deductions.

75Source deductions being the amounts that are withheld from employees and are to be remitted to the CRA. The HST and corp tax are unsecured debts in a proposal or bankruptcy. The source deductions— and it's written directly into the Bankruptcy and Insolvency Act— the source deductions are deemed trust that, that, that are in priority to every creditor, whether secured or unsecured. So source deductions are have ultimate priority. HST, of course, is a director liability. So if a company owes HST and it's put into bankruptcy or just stops operating, CRA will 99 times out of 100 assess the director for the HST and the source deductions. And then the director or directors will become personally liable for that, that that HST.

76And then at the personal level, if the individual owes HST or personal income tax, those are unsecured debts that you can compromise in a bankruptcy or in a proposal.

78Yeah, thanks, Pulat. So my address is tmcelroy@albertgelman.com. We've got a website, albertgelman.com. Tommuller.com. You can go there, all of my contact information is there.

80Thank you very much, Pulat. I really appreciate the opportunity. Thank you.