When it comes to finance, timing is everything. A creditor calling in a loan can mean the breaking point for an individual or business owner facing a cash crunch or challenging market. Even with a worthwhile defence, the prospect of litigation is immensely stressful, and relationships that started out with the best intentions can quickly sour.
On the flip side, there are steps a debtor can take to avoid disaster. Reassuringly, more often than not, creditors are motivated to reach a peaceful agreement, working toward sound business decisions to prevent inevitable litigation.
Highly charged emotions can damage discussions that could potentially resolve matters before they escalate. A radio-silence approach is equally as damaging as engaging in heated communications and will only make resolution more difficult. In most cases, it’s more useful to the debtor to rationally engage, rather than shut out the lender at this critical time.
Two sides to the coin
Sophisticated creditors understand that litigation is not always worth the inevitable expenditure and stress. For many reasons, a quick resolution is a good resolution. A bonus for “closing” a file, a tax writedown for bad debt or a deficiency in security are all valid incentives for avoiding litigation. Understanding the creditor’s motivations can only help a debtor’s chance for a positive outcome.
Understanding the scope and nature of a debtor’s potential liability is important. Obtaining advice early will allow counsel to consider questions like:
•Is the claim adequately secured against real assets, or is there risk of a shortfall?
•Are there personal guarantees that would offset any shortfall?
•What is the debtor’s overall cash flow situation? Will another issue arise in the next few months and is a more comprehensive solution required?
•Has the lender made appropriate demand on the loan or given appropriate notice to enforce security?
•Has the lender contributed to the loss in a way that would discharge a guarantee?
•Did the lender provide the right amount in its demand to pay off the loan?
•Is there outstanding GST or HST debt? In some cases, lenders could be liable for GST or HST on amounts paid to them if a “deemed trust” in favour of the government is found.
Legal counsel can provide advice to deal with creditors without the need to resort to litigation. A counsel may be able to negotiate:
•a forbearance agreement that will extend the loan relationship for a time in exchange for the lender’s pledge not to pursue the debtor; or
•informal proposals or workout strategies where creditors agree to accept less than they are owed.
The federal Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) provide statutory options, short of bankruptcy, where a debtor may stay all legal proceedings in the hope of a financial restructuring or a proposal that is acceptable to creditors.
The BIA allows a debtor to give notice that it intends to provide a proposal to creditors, which immediately stays all actions against the debtor. After a vote (and if accepted), a hearing will be held to approve the proposal. Once approved, all debts are compromised on completion of the proposal. If creditors do not accept the proposal, the debtor is deemed to be bankrupt.
For individuals who owe less than $250,000, the BIA provides a streamlined “consumer” proposal to creditors that does not require court approval. A consumer proposal can be an effective tool for individuals to restructure their financial affairs.
In some cases, bankruptcy may be the best option to achieve a compromise over corporate or individual debt.
Restructuring under the CCAA
For a company owing more than $5 million, the CCAA is a powerful tool to restructure its affairs under the supervision of a court-appointed monitor, while protecting itself from aggressive creditors.
While every situation is unique, the steps outlined above can go a long way to improving a debtor’s position. Experienced counsel is there to help individuals and business owners navigate a secure path to the other side of debt. Seek professional advice early, and work toward finding a sustainable resolution. •
Benjamin La Borie is an associate counsel at Hakemi & Ridgedale LLP. He practises primarily as a commercial litigator with a focus on insolvency and restructuring litigation.