Module 1

Question 1

Where trustee is not qualified to act

Answer 1

Except with the PERMISSION OF THE COURT and on such conditions as the court may impose, no trustee shall act as trustee in relation to the estate of a debtor

(a) where the trustee is, or at any time during the two preceding years was,

—- a director or officer of the debtor,

—- an employer or employee of the debtor or of a director or officer of the debtor,

—- related to the debtor or to any director or officer of the debtor, or

—- the auditor, accountant or legal counsel, or a partner or an employee of the auditor, accountant or legal counsel, of the debtor; or

(b) where the trustee is

—- the trustee under a trust indenture issued by the debtor or any person related to the debtor, or the holder of a power of attorney under an act constituting a hypothec within the meaning of the Civil Code of Québec that is granted by the debtor or any person related to the debtor, or

—- related to the trustee, or the holder of a power of attorney, referred to in subparagraph (i).

COPY OF THE APPLICATION TO THE SUPERINTENDENT

(1.1) A trustee who applies for the permission of the court for the purposes of subsection (1) shall without delay send a copy of the application to the Superintendent.

Question 2

Assessment of the Debtor (what information must be obtained?)

Learning Objective: Understand the key elements applicable to assessing a debtor’s financial situation.

Answer 2

• determine (precisely) who the debtor is (ex What is the proper legal name of the debtor?)
• determine what assets/property the debtor owns or has rights in (ex determine if any assets are leased rather than owned)
• determine the names and amounts owed to each creditor:
• What are the types of creditors? (ex Are there secured debts? Deemed Trust Claims?)
• determine what the debtor’s revenues and expenses are (irrespective of whether that represents income and expenses from the employment of an individual debtor or the cash flows of a corporate/commercial enterprise)
• determine if there are any third parties who might be affected by an insolvency proceeding (ex joint owners of assets with the bankrupt, joint debts)
• determine if there have been any transactions with closely related parties
• determine if tax returns and other filings up to date
• determine if there have been any previous insolvencies

Question 3

The role of the trustee

Learning Objective: Understand and explain the role and duties of the LIT in their role as trustee in assessing the situation of the debtor.

Learning Objective: Understand the application of the code of ethics with regard to the pre-engagement considerations.

Answer 3

• represents neither the debtor nor the creditors — trustees are appointed by the Official Receiver and are officers of the Court
• administers the provisions of the BIA as they apply to the rights and interest of all parties concerned
• is subject to affirmation or substitution by the creditors
• must maintain a high standard of conduct and ethics by complying with the Code of Ethics and CAIRP Standards of Professional Practice
• must be honest, impartial, and transparent in all dealings, and provide full and accurate information
• must not assist, advise, or encourage any person to engage in any illegal or dishonest behaviour
• must avoid any engagement that impairs or appears to impair their professional judgment (conflicts of interest)

Question 4

Pre-engagement Considerations

Learning Objective: Understand the application of the code of ethics with regard to the pre-engagement considerations.

Answer 4

1. Perform a conflict check on the Company (and its Directors and Officers) and All Lenders
2. Is there a conflict or an appearance of a conflict of interest with the engagement party and other parties?
3. Need to have sufficient staffing (number of staff and where staff is located).
4. Need to have sufficient knowledge of the industry to carry out the engagement
5. Need to have appropriate skills and competence
6. Ability to seek outside expertise as needed
7. Assessment of risk inherent to the engagement
8. Possible liability issues for the LIT (environment, successor employer, legal proceedings)
9. Risks associated with the Trustee’s fee security/indemnification.
10. Consider who initiated the engagement.
11. Is the debtor insolvent?
12. Where conflict of interest arises

— Confidentiality of the debtor and lenders
— consider existing relationship of the Consultant and the lender/debtor
— Need to implement ethical walls between staff/engagement teams working on the two engagements
— Information cannot shared among staff of one engagement team to another.
—

Question 5

Conflicts of interest/independence

Prior to accepting an engagement, the LIT must consider a number of key questions. While the answers to each question may not necessarily be documented by memos or supporting information in the LIT’s engagement files, the LIT should consider the following:

Answer 5

• Is this an appropriate mandate to accept?
• Is it possible to comply with all the provisions of the law and the various rules of ethics to which the professional is subject?
• Are there conflicts of interest issues (real or perceived) that might be seen to impair the LIT’s professional judgment?
• Are there any relationships that need to be disclosed to all stakeholders before accepting the engagement?
• Are there specific statutory provisions that may affect a potential appointment (i.e., Sections 13.3 and 13.4 of the BIA, Section 11.7 of the CCAA, etc.)

Question 6

Topic 1.3.2 : Date of initial bankruptcy event

Learning Objective: Explain the difference between the date of bankruptcy and the date of the initial bankruptcy event and the implications of each date.

Answer 6

The date of the initial bankruptcy event, in respect of a person, means the EARLIEST of the day on which any one of the following is made, filed, or commenced, as the case may be:

(a) an assignment by or in respect of the person

(b) a proposal by or in respect of the person

(c) a notice of intention by the person

(d) the first application for a bankruptcy order against the person, in any case
i. referred to in paragraph 50.4(8)(a) or 57(a) or subsection 61(2), or
ii. in which a notice of intention to make a proposal has been filed under Section 50.4 or a proposal has been filed under Section 62 in respect of the person and the person files an assignment before the Court has approved the proposal

(e) the application in respect of which a bankruptcy order is made, in the case of an application other than one referred to in paragraph (d)

(f) proceedings under the Companies’ Creditors Arrangement Act

Question 7

Date of the Bankruptcy

Learning Objective: Explain the difference between the date of bankruptcy and the date of the initial bankruptcy event and the implications of each date.

Answer 7

The date of the bankruptcy, in respect of a person, means the date of:

• the granting of a bankruptcy order against the person. A bankruptcy order is granted only after a creditor has made an application to the Court for that order.
• the filing of an assignment in respect of the person An assignment is made when an insolvent person completes the assignment documentation with the LIT and is confirmed by the Official Receiver, or
• the event that causes an assignment by the person to be deemed.

Events that cause a deemed assignment

1. Under Division I Proposals
   * failure to file the cash flow statements and reports within the requisite time period following the filing of an NOI
   * failure to file a proposal within the requisite time period following the filing of a NOI
   * creditors refuse the proposal
   * Court declines to approve the proposal
   * Court annuls the proposal for any reason
2. Under Division II Proposals
   * when a consumer proposal made by a bankrupt is deemed annulled.

Question 8

Transactions reviewed from the date of the Initial Bankruptcy Event

Answer 8

• The locality of the debtor is determined at the date of the initial bankruptcy event.
• The time frame covering certain claims under Section 81 is measured from the date of the initial bankruptcy events.
• The time frame for preferential payments and transactions at under value is measured from the date of the initial bankruptcy event.
• The time frame covering certain bankruptcy offences and facts under Section 173 is measured from the date of the initial bankruptcy event.
• For certain matters relating to bankrupts’ discharges (and pre-bankruptcy conduct), the timelines are measured from the date of the initial bankruptcy event.

Question 9

Assessment of the situation -Individual debtor (What information does the Trustee take in from the debtor?)

Learning Objective: Determine the estimated net realizable value of assets for an individual debtor.

Answer 9

In an individual debtor’s situation, the LIT will look for the following information

• Proper identification of the debtor: Normally a birth certificate, passport, or baptismal certificate is preferable. Caution should be exercised using identification such as driver’s licenses and health cards since these do not always display the proper legal name of the debtor.
• Assets: Includes bank accounts, furniture, personal effects (jewellery, clothing, etc.), investments (term deposits, RRSPs, RESPs, stocks, crypto currencies, etc.), real property (house, cottage, land), motorized vehicles (car, truck, motorcycle, etc.), recreational assets (cottage, mobile home, etc.), and any other assets the debtor might have.
• Liabilities: Locate statements, if available, for all creditors and, as well, identification of those who might have security on any of the debtor’s assets.
• Average monthly income: Acquire copies of paystubs, statement of income and expenses (if self-employed), and copies of bank statements, and identify any non-employment sources of income (e.g., child tax benefit, pension, annuity, etc.).
• Average monthly expenses: A list is generally sufficient for this unless the expense is a non-discretionary expense, in which case supporting documentation is required. Non-discretionary expenses will be discussed later in this topic.
• Other information relevant to the debtor’s financial affairs: This could include recent payments to creditors, transfer of assets, prior insolvency filings in Canada, and cause of financial difficulties.

At this point in the process, the LIT should make a calculation of Surplus Income.

Question 10

Impact of surplus income on eligibility for automatic discharge

Learning Objective: Explain the impact of surplus income obligation on the debtor’s discharge from bankruptcy.

Answer 10

1. 1st time bankrupt with no suplus income - 9 months from DOB
2. 1st time bankrupt with suplus income - 21 months from DOB
3. 2nd time bankrupt with no suplus income - 24 months from DOB
4. 2nd time bankrupt with suplus income - 36 months from DOB

Question 11

When is Mediation necessary?

Learning Objective: Explain when mediation is appropriate in the context of surplus income.

Answer 11

• surplus income offers the possibility of mediation should there be a disagreement between the
  1. trustee or the creditors and
  2. the bankrupt.
• when the bankrupt has not completed payments towards Surplus income by the deemed discharge date and there are no other duties required by the bankrupt.

Question 12

What happens if an agreement cannot be reached by Mediation?

Answer 12

the matter is referred to the Court for resolution (Section 68(10), Section 170.1(3)).

Question 13

Why must a Trustee apply professional skepticism to the determination of surplus income obligations? Hint: Avoidance by bankrupt

Learning Objective
* Apply professional skepticism to the determination of surplus income obligations.

Answer 13

• bankrupts may be motivated to understate their monthly income or overstate their non-discretionary expenses. Accordingly, professional skepticism should be applied to reviewing a debtor’s monthly income and expense statements.

Examples of manipulating income:
* Banking overtime
* Debtor is related to employer
* Income from self-employment: May need to review historical income.
* Part-time work and irregular pay cycles
* Tips and gratuities

Examples of Manipulating expenses:
* Child/spousal support payments - actual proof of payment should be required.
* Child-care expenses: Receipts required
* Expenses associated with a medical condition: Not all purchases made at the pharmacy relate to a medical condition. The allowable non-discretionary expense applies only to expenses associated with a medical condition.

Question 14

Options Available to the individual Debtor

Learning Objective
* Analyze, and explain to the debtor their available options under the BIA.

Answer 14

The same four options are available to all individual debtors:

1. Do nothing.
   ——– not a realistic option for many except for those who are judgment proof
   ——– those who have no assets that can be seized, have no income that can be garnished, and
   ——– are unconcerned about having judgments registered against them or about receiving harassing telephone calls and letters from collection agencies. But it is an option and the LIT is required to discuss that option with the debtor.

• Engage in a debt-management program.
  —- there is no stay of proceedings in a debt-management program
  ——– the creditors’ participation in a debt-management program is voluntary and they can opt out at any time
  ——– there is no facility to achieve a settlement in the amount owed
  ——– interest or late payment charges are only waived if the individual creditors agree to do so
  ——– the debtor’s credit history and rating will be damaged
• File a Proposal (Division I or a Division II).

——– the debtor may:
—————- work in a regulated industry (LIT, financial advisor, stockbroker, realtor, lawyer, CPA) from which they may be barred in the event of making an assignment in bankruptcy
—————- be a director of a corporation and would otherwise be disqualified from acting as a director
—————- have significant assets/surplus income, the sum of which may exceed their unsecured liabilities
—————- have the capacity to complete a proposal in a reasonable period of time
—————- be involved in litigation, control of which they would lose in the event of making an assignment in bankruptcy
—————- have been previously bankrupt and would be facing an extended period before being eligible for a discharge
—————- want to avoid the stigma of an assignment in bankruptcy

• Make an assignment in bankruptcy.

——– usually a last resort.

It may be the most appropriate option when
—————- the debtor’s household income does not meet the Low Income Cutoffs
—————- the debtor has no surplus income obligation
—————- the debtor has no unencumbered or non-exempt assets available to the bankrupt estate
—————- the debtor has significant unsecured debt
—————- the debtor is subject to harassing telephone calls and collection activities
—————- the debtor is subject to Court judgments that result in the garnishment of wages
—————- the debtor has had a significant change in the family structure

Question 15

After Acquired Property

Learning Objectives: Determine any other information required from the debtor to complete the assessment, including transfer of assets prior to a proposal or bankruptcy.

Answer 15

Property of the bankrupt divisible among their creditors includes any property that the bankrupt acquires or that devolves upon them (such as significant gifts, awards, or an inheritance) prior to their discharge.

The bankrupt is at liberty to acquire and dispose of such property at will, until the trustee intervenes.

There is an onus on the bankrupt to report such a material change in their financial situation to the trustee so that the trustee has the opportunity to intervene (Section 158(n.1)).

Question 16

What else should the LIT discuss with the debtor?

Learning Objectives
* Ensure that all relevant issues and possible outcomes have been discussed with the debtor.

Answer 16

• The debtor’s view of the current situation including specific issues of concern and expectations from the insolvency process: These may include the cause, in their view, of the insolvency, threats of creditors, garnishment on their wages, effect on family members, the desire to keep their house or carry on the business, protection of employees, not wanting to file bankruptcy, and so on.
• The possible outcome of the discharge from bankruptcy: The LIT should explain what is required for a bankrupt to maintain their eligibility for an automatic discharge. The LIT should also explain that, where the bankrupt is required to have a discharge hearing, and where any of the facts under Section 173 are proven against the bankrupt at that hearing, the Court cannot issue an absolute discharge and so must either refuse the discharge, suspend the discharge, or grant a discharge subject to terms and conditions.
• The significance of the discharge: The discharge is the bankrupt’s legal release from debts, other than those in Section 178. It is equally interesting to note that when a Certificate of Full Performance is issued, the insolvent person is released from their debts and liabilities, but it does not release the insolvent person from any debt or liability under Section 178 unless the proposal specifically calls for the compromise of that debt and the affected creditors vote in favour of the proposal.
• The requirement for an individual debtor to attend two counselling sessions:
• The duties imposed on a debtor:
• Bankruptcy offences by a debtor: Offences are discussed under Sections 198 and 199 of the BIA

Question 17

Income Tax Refunds and Returns outstanding at Date of Bankruptcy

Learning Objectives
* Ensure that all relevant issues and possible outcomes have been discussed with the debtor.

Answer 17

• income tax refunds are included in the definition of property under Section 67(1)(c) of the BIA.
• if a debtor has not received an income tax refund for any year prior to the date of bankruptcy, as well as any refund they are entitled to for the year of bankruptcy, it is considered an asset of the bankrupt’s estate to be realized upon by the Trustee
• Section 128 of the ITA imposes a deemed year-end on the day preceding the date of bankruptcy.

Question 18

Duty for Trustee to file outstanding income tax returns

Learning Objectives
* Ensure that all relevant issues and possible outcomes have been discussed with the debtor.

Answer 18

• a trustee is responsible for filing any income tax return that the debtor was required to file:

— in the calendar year prior to the date of bankruptcy, as well as — any returns required to be filed up to the date of bankruptcy.

Let’s look at an example.
Suppose Eric filed an assignment in bankruptcy on March 1, 20X5, and had not filed income tax returns for three years.
* The trustee will be responsible for filing the 20X3 tax return that was due in 20X4, because it was due in the calendar year preceding the year of the assignment in bankruptcy.

• The trustee will be responsible for the 20X4 return that was due in 20X5 because it is a prior year return and is due in the year of bankruptcy.
• The trustee will be responsible for the pre-bankruptcy return for the period from January 1 to the date of bankruptcy in 20X5.

Question 19

Bankruptcy - Merits and Consequences

Learning Objectives
* Determine an appropriate solution balancing the debtor’s goals, their financial situation and the return to creditors.
* Understand the fee structure for the various BIA options.

Answer 19

Merits:

• An eligible debtor has the right to file an assignment. Creditors have no control over this.
• If the bankrupt fails to make the payments required, Bankruptcy continues but discharge is delayed until all amounts are paid. Thus, no effect on stays of proceedings.

Consequence:

• All property vests in the trustee and debtor loses the ability to deal with their assets, including assets that devolve on them (after-acquired assets) between the date of assignment and date of discharge, subject to any exemptions (per S. 67(1)(a), (b), (b.1), (b.2) and (b.3)).
• Payments vary depending on debtor’s surplus income.
• Creditors, the trustee, and the OSB can object to discharge resulting in additional payments and/or a delay in the issuance of a discharge.
• Consequence: Bankruptcy notation on credit record for 6 years (increased to 14 years for a repeat bankruptcy) after date of discharge. No increase in credit rating from level 9.

Question 20

Proposal - Merits and Consequences

Learning Objectives
* Determine an appropriate solution balancing the debtor’s goals, their financial situation and the return to creditors.

Answer 20

Merit:

• Debtor retains control of their assets. No requirement to include after-acquired assets unless the proposal contains a clause to include them.
• Payments are based on amounts accepted by creditors in the proposal and do not vary with changes in income.
• Upon completion of terms of proposal, certificate of full performance issued pursuant to terms of proposal as accepted by creditors.
• Credit rating raised from level 9 to level 7 on completion of proposal.

Consequence:

• Debtor can file a proposal with the Official Receiver but creditors control its acceptance. Rejection of a Division I proposal results in a deemed assignment in bankruptcy. There is no deemed assignment in the rejection of a consumer proposal but the stay of proceedings is ended and the debtor must look at other options.
• Non-payment results in annulment of the proposal and the stay of proceedings is no longer in effect. The annulment process differs significantly for a Division I proposal and a Division II proposal.
• Proposal notation on credit record for 3 years after date of certificate of full performance.

Question 21

Summary Bankruptcy Tariff

• Understand the fee structure for the various BIA options.

Answer 21

128 (1) The fees of the trustee for services performed in a summary administration are calculated on the total receipts remaining after deducting necessary disbursements relating directly to the realization of the property of the bankrupt, and the payments to secured creditors, according to the following percentages:

(a) 100 per cent on the first $975 or less of receipts;

(b) 35 per cent on the portion of the receipts exceeding $975 but not exceeding $2,000; and

(c) 50 per cent on the portion of the receipts exceeding $2,000.

(2) A trustee in a summary administration may claim, in addition to the amount set out in subsection (1),

(a) the costs of counselling referred to in subsection 131(2);

(b) the fee for filing an assignment referred to in paragraph 132(a);

(c) the fee payable to the registrar under paragraph 1(a) of Part II of the schedule;

(d) the amount of applicable federal and provincial taxes for goods and services; and

(e) a lump sum of $100 in respect of administrative disbursements.

(3) A trustee in a summary administration may withdraw from the bank account used in administering the estate of the bankrupt, as an advance on the amount set out in subsection (1),

(a) $250, at the time of the mailing of the notice of bankruptcy;

(b) an additional $250, thirty days after the date of the bankruptcy; and

(c) an additional $250, four months after the date of the bankruptcy.

Question 22

Consumer Proposal Tariff

Learning Objective
* Understand the fee structure for the various BIA options.

Answer 22

Division II Tariff
129 (1) For the purposes of paragraph 66.12(6)(b) of the Act, the fees and expenses of the administrator of a consumer proposal that must be provided for in a consumer proposal are as follows:

(a) $750, payable on filing a copy of the consumer proposal with the official receiver;

(b) $750, payable on the approval or deemed approval of the consumer proposal by the court;

(c) 20 per cent of the moneys distributed to creditors under the consumer proposal, payable on the distribution of the moneys;

(d) the costs of counselling referred to in subsection 131(1);

(e) the fee for filing a consumer proposal referred to in paragraph 132(c);

(f) the fee payable to the registrar under paragraph 3(b) of Part II of the schedule; and

(g) the amount of applicable federal and provincial taxes for goods and services.

Question 23

Initial Assessment - Corporate Commercial Insolvencies

What documents should the Trustee obtain from the debtor?

Learning Objective: Understand the similarities/differences in the initial assessment of a corporate/commercial file compared to an individual debtor file.

Answer 23

During the initial meeting, it is rare that an LIT is provided with all the documentation they need to make an assessment of the situation. However, if it were available, the documentation would include the following:
* corporate minute book
* general ledger trial balance
* accounts receivable listing
* accounts payable listing
* inventory summary
* equipment listing
* details of security interests registered against assets
* details of insurance coverages (assets, operations, employee fidelity)
* employee roster
* payroll summary (detailing any outstanding wages or vacation pay owing)
* tax assessments from federal and provincial taxing authorities re: source deductions, GST/HST, and any other tax related obligations
* summary of current or threatened litigation
* details of any contingent liabilities (pension plans, environmental matters, corporate guarantees, etc.)
* material/significant customer or supplier contracts
* recent financial statements (externally prepared)
* year-to-date financial statements (internally prepared)
* current cash flow projections

Question 24

Initial Assessment - Corporate Commercial Insolvencies

What does the Trustee need to verify regarding the financial affairs of the debtor prior to the insolvency?

Answer 24

1. What are the assets?
   o Are any of them leased?
   o Are they subject to a security interest?
   o Are the receivables collectible?
   o Are the inventories current (or obsolete)?
   o Is the equipment in good working order?
   o Is the equipment insured?
   o If there is real property, are there any environmental concerns?
   o Is the debtor in possession of property that belongs to others (Third Party Property)?
   o Are there outstanding government income tax or GST/HST returns that may result in refunds?
2. What are the liabilities?
   o Are there any priority claims? These might include
    source deductions, unpaid wages and/or vacation pay, GST/HST
    directors’ liabilities
    any Section 81 claims
    secured creditors, and the debtor’s assessment of the relative priority of any competing secured claims (to be later verified by a PPSA or title search)
    owned, rented, or leased business premises (Is there a signed lease? What is the status of any claims from the landlord?)
3. What is the nature of the business operations?
   o Are there any critical suppliers?
   o Are there specific industry conditions (e.g., cannabis, crypto) or product licenses (e.g., transit, trucking) affecting the business?
   o Is there stable management?
   o Is there a competent work force?
   o Is there a book of business to be completed?
4. Are there any outstanding judgments or ongoing lawsuits?
5. Are there any environmental issues?

Question 25

Why is a Business Review Initiated Learning Objective * Explain the purpose and process of business reviews.

Answer 25

The business review is often prompted by one or a combination of the following factors: * significant losses or a deterioration of shareholders’ equity * negative trends in financial ratios and/or a failure to meet certain bank covenants (for a detailed discussion of financial ratio analysis refer to Appendix 1.4) * loss of key management personnel * loss of large customers * lack of financial information being provided by the debtor * the debtor often exceeds or hits its credit line limits. This is often associated with increased ageing of accounts receivable and an increase in inventory levels * expiry of the current credit facility agreement with a lender and initiation of a forbearance agreement.

Question 26

Possible Outcomes of Business Review Learning Objective * Explain the purpose and process of business reviews.

Answer 26

The business review assists the lender in considering its course of action, which may include: * informing the debtor of the need to seek a replacement for the lender because the lender will no longer provide financing after a certain time * supporting the debtor through a workout or restructuring. The consultant’s report may assist in developing the terms and conditions of the lender’s support * realizing on its security by the appointment of a receiver * not taking any further action and maintaining the status quo * requesting a shareholder injection of funds.

Question 27

Identifying the client Learning Objective * Explain the purpose and process of business reviews.

Answer 27

The lender is the consultant’s client where the: * review was prompted by the lender’s concern * the report and its findings are primarily being prepared for, and provided to, the lender * the report’s focus is generally on assessing the lender’s security position exposure * the primary purpose of the review is to assist the lender in assessing its alternatives with respect to the debtor.

Question 28

Engagement letter Learning Objective * Explain the purpose and process of business reviews.

Answer 28

* the specific identity of the company being assessed * the period that will be covered by the review * who will receive the report and to whom it will be addressed * the purposes for the report * the fact that the consultant is not management and will not be involved in management decisions * the scope of the review, or the specific areas that the review will cover * the payment of the consultant’s fees * the cooperation of the debtor. * Indemnification of the Trustee / Member From the Standards of Professional Practice: a) the role of the Member; b) indicate who the Member represents if the Member is appointed to represent a specific party or parties. c) the security agreement(s) or the provision(s) of the federal or provincial statute(s) pursuant to which the Member is appointed. d) the responsibilities of the Member in carrying out the engagement; e) the scope of the work to be performed; f) the remuneration arrangements; g) the expectations regarding frequency, timing and content of Reports; and h) the expectations regarding the timing of the engagement, in terms of start date, completion date, and period of review.

Question 29

Material Change Learning Objective * Understand how to address a material adverse change.

Answer 29

As per s.68(3), the LIT is required to determine, at the outset of the file, whether the bankrupt has surplus income. Under that same section the trustee is also required to make that determination: (a) whenever the trustee becomes aware of a material change in the bankrupt’s financial situation and (b) whenever the trustee is required to prepare a report referred to in subsection 170(1). THE TRUSTEE IS REQUIRED TO INFORM THE OFFICIAL RECEIVER AND EVERY CREDITOR WHO REQUESTED THE INFORMATION

Question 30

Material Adverse Change - CCAA Learning Objective * Understand how to address a material adverse change.

Answer 30

(a) file a report with the court on the state of the insolvent person’s business and financial affairs – containing the prescribed information, if any – i) without delay after ascertaining a material adverse change in the company’s projected cash-flow or financial circumstances, (b) advise the company’s creditors of the filing of the report referred to in any of paragraphs (b) to (d.1).

Question 31

Contents of a Business Review Learning Objective * Explain the purpose and process of business reviews.

Answer 31

Company background * organizational structure * owner/manager or public company * management structure * the company’s history and the causes of the company’s current financial difficulties * the company’s strengths and weakness, positive and negative developments (sometimes referred to as a “SWOT” analysis, referring to the company’s strengths, weaknesses, opportunities and threats) Management * adequacy – depth and competence of key management personnel * management remuneration * succession issues Operations * recent results of operations (by segment, line, etc.) * business or restructuring plan * industry information * major customers/suppliers * industry comparison with operating results * inherent industry risks * capital asset review * significant opportunities for improvement in the operating results, and an action plan and the costs necessary to take advantage of these opportunities Analysis of financial forecasts and projections * assisting in the development of the financial forecasts and projections; * assessing the company’s chances of returning to profitability; * assessing whether or not the company is viable; * determining the reasonableness of the assumptions; * assessing whether or not the lender’s position improves; and * conducting sensitivity analysis to determine the extent to which the projected results could be affected by specific changes in the assumptions Analysis of assets and liabilities * determining the realizable value of major assets including accounts receivable, inventory, equipment and real property * assessing whether or not the inventory is saleable or obsolete * determining whether or not there are set-off issues among accounts receivable and accounts payable * discovering if there are government obligations that may rank ahead of the lender * determining if there are intangible assets that have any value * assessing whether or not there are other secured lenders who will impact the position or options available to the lender who hired the consultant; and * assessing whether or not there are any issues with the lessor. Lender’s security position * calculating the lender’s security position based on value of assets and estimating the likely change in position over the period of the forecast * analysing and reviewing the information reported to the lender, including the financial covenants and margin/borrowing base calculation.

Question 32

Material Adverse Change - BIA Proposal Learning Objective * Understand how to address a material adverse change.

Answer 32

Trustee may monitor the debtor under the BIA (during NOI or Proposal) or CCAA. Under the BIA, the Trustee is required to: (a) file a report on the state of the insolvent person’s business and financial affairs – containing the prescribed information, if any i. with the official receiver without delay after ascertaining a material adverse change in the insolvent person’s projected cash-flow or financial circumstances, and ii. with the court at any time the court may order, and (a.1) send a report about the material adverse change to the creditors without delay after ascertaining the change.

Question 33

How does the Wind Up and Restructuring Act work? Learning Objective * Understand the Winding up and Restructuring Act and its application

Answer 33

- Filing an application with the court seeking the winding-up generally commences proceedings under the WURA. - The court will appoint a liquidator to administer the winding-up proceedings. - assets do not vest in the liquidator and the debtor continues to own the assets subject to the custody and control of the liquidator. - If an application for a bankruptcy order or an assignment has been filed under the BIA all proceedings commenced under the WURA will cease.

Question 34

Definition of a Trust

Answer 34

Under common law, for a trust to be valid there must be, among other things, * certainty of intent (What, precisely, is the intention of the person creating the trust? How is this trust to be administered and distributed?) * certainty of subject matter (What, precisely, is the property — money, investments, real estate, other property — being set up in trust?) * certainty of object (Who is the beneficiary of the trust and under what conditions/circumstances will they benefit?) In Quebec, in order for a trust to be valid, the following elements must exist: * an agreement * a person (the settler) * a transfer of property from the patrimony of the settler to a distinct patrimony * a purpose * a trustee who agrees to hold and manage the property

Question 35

How to Perform Voluntary Winding-Up Learning objective * Explain voluntary wind-ups

Answer 35

- Initiated by shareholders - Does not require involvement of the Court - shareholders must authorize the voluntary winding-up by special resolution and must appoint a liquidator. - The liquidator may be a director, officer or employee of the corporation.

Question 36

Define Preference Payments - Non-Arm's Length Learning Objectives: Determine any other information required from the debtor to complete the assessment, including transfer of assets prior to a proposal or bankruptcy.

Answer 36

- an unsecured receives payment or takes security or a transfer of property from the insolvent debtor - The transaction is made: ----- by an insolvent debtor; ----- in favour of a creditor; - Within 1 year prior to the date of INITIAL BANKRUPTCY EVENT. - With the effect of giving preference.

Question 37

Define Preference Payments - Arm's Length Learning Objectives: Determine any other information required from the debtor to complete the assessment, including transfer of assets prior to a proposal or bankruptcy.

Answer 37

- an unsecured receives payment or takes security or a transfer of property from the insolvent debtor - The transaction is made: ----- by an insolvent debtor; ----- in favour of a creditor; - Within 3 months prior to the date of INITIAL BANKRUPTCY EVENT. - With a view of giving preference. This means that the Preference is presumed but it is rebuttable.

Question 38

Rebutting Preference Payment (Arm's Length)

Answer 38

The creditor who received the preference can use the following defenses: 1. that the debtor made the payment in the ordinary course of business; 2. that the debtor made the payment in the expectation that this would enable him to continue in business and extricate himself from the financial difficulties; 3. that the payment was made to remedy a wrongful act committed by the debtor; 4. that security was given for a present advance, regardless if it occurred on the eve of insolvency, or if the favoured party was already a creditor; and 5. that a binding agreement to make a payment, or to give security, was made prior to the relevant period.

Question 39

Transfer at Undervalue - Non-Arm's Length Within 1 year prior to the date of INITIAL BANKRUPTCY EVENT.

Answer 39

1. The only thing that needs to be proven is that fair consideration was not received by the bankrupt for the property transferred. 2. No need to prove the bankrupt was insolvent

Question 40

Transfer at Undervalue - Non-Arm's Length Between 1 to 5 years prior to the date of INITIAL BANKRUPTCY EVENT.

Answer 40

- fair consideration was not received by the bankrupt for the property transferred. LIT must either prove - Debtor was insolvent at the time of the transaction or rendered insolvent by the transaction, OR (NOT AND -- it is OR) - the Debtor attempted to defeat or defraud creditors

Question 41

Define Transfers at Undervalue (Arm's Length) Learning Objectives: Determine any other information required from the debtor to complete the assessment, including transfer of assets prior to a proposal or bankruptcy.

Answer 41

- fair consideration was not received by the bankrupt for the property transferred. (i) the transfer occurred during the period that begins on the day that is one year before the date of INITIAL BANKRUPTCY EVENT and that ends on the date of the bankruptcy, (ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and (not OR -- it is AND) (iii) the debtor intended to defraud, defeat or delay a creditor;

Question 42

Transfers at Undervalue - How Trustee can attack TUVs?

Answer 42

1. The trustee may apply for recourse both in case of a transaction at arm’s length and a transaction at non-arm’s length, although the threshold of proof is different depending on the circumstances. 2. The remedy given by the Court may be to annul the transaction, or to give a judgment against the party to the transfer for the difference in consideration, and/or against a person who was privy to the transaction. 3. In the application to the Court, the trustee must provide an opinion as to * the fair market value of the property or services concerned in the transaction * the value of the actual consideration given or received by the bankrupt in the transaction In the absence of contrary evidence, the Court will use the assessment of values provided by the trustee.

Question 43

Dividends Paid by Corporation within 1 year from Date of Bankruptcy Learning Objectives: Determine any other information required from the debtor to complete the assessment, including transfer of assets prior to a proposal or bankruptcy.

Answer 43

* A trustee may attack or inquire into a dividend payment (other than a stock dividend) or a redemption or a purchase of its own shares by a corporate bankrupt done during the period that starts one year before the date of the initial bankruptcy event and ends at the date of bankruptcy. * The transaction must have occurred at a time when the corporation was insolvent, or the transaction must have rendered the corporation insolvent. The trustee must prove the following elements to the Court, on a balance of probabilities: * The event occurred during the period commencing one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy. * The debtor was insolvent at the time, or that the transaction rendered the debtor insolvent. The burden lies on the directors to prove that * the corporation was not insolvent at the time the transaction occurred and the transaction did not render the corporation insolvent, or * the directors had reasonable grounds to believe the transaction was occurring at a time when the corporation was not insolvent and the transaction would not render the corporation insolvent Remedies * Court may give judgment to the trustee for the amount of the entire dividend, or the entire amount redeemed or full amount to repurchase shares for cancellation, to the extent not already repaid to the corporation, with interest. * Court can give judgment in favour of the trustee against the directors and against shareholders that are related to one or more of the directors or to the corporation.