During these challenging coronavirus pandemic times we are experiencing, our bankruptcy trustees Toronto office is open to answer any questions you may have. We are doing all consultations and meetings either on the phone or by video chat. I invite you to contact me and ask any questions you may have. My email and phone information is on this website.
Hello. My name is Ira Smith and I am one of the two trustees in our bankruptcy trustees Toronto company. First I hope that you and your family are safe and healthy. Ira Smith Trustee & Receiver Inc. is open and fully operational. We are doing all consultations and all meetings either by telephone or video meeting. We are available to answer any questions that you may have.
This bankruptcy trustees Toronto blog is on a very interesting matter. What it is about is two bankruptcy cases out of the United States and how the COVID-19 pandemic gave them an opportunity for very novel and creative use of the restructuring statute. I then explain how that quite possibly could also be used in a Canadian corporate business restructuring.
Case 1 - Modell’s Sporting Goods
In the United States, last March, Modell's Sporting Goods, which is the largest family-owned retail sporting good chain in the United States, filed under Chapter 11 of the US bankruptcy code for bankruptcy protection. Then in late March, they went to court with a motion that the court granted.
That motion was to have a suspension in both the bankruptcy administration and in the operational running of the company. This was necessary because of the fact that all the stores had to be closed because of the COVID-19 pandemic. Modell's gave the court a modified budget and showed all the expenditures that they are supposed to pay. They divided them up between those that they would pay and those that they would not pay. The ones they would not pay included commercial rent on all of their retail locations.
The reason being that the locations are all closed. They could not carry on the liquidation sale and they could not earn revenue. Also, their ability to look for an investor or purchaser was also thwarted because of this. The court approved it and gave them both a bankruptcy suspension and an operational suspension. The suspension goes until the end of April but the court also said that Modell's can continue coming back to court updating the information and getting these suspensions extended.
The stay of proceedings is in place so no creditor, including landlords, can upset the applecart.
Case 2 - Pier 1 Imports
The second case is that of Pier 1, the household furniture retailer. They filed for bankruptcy protection in February 2020. Again, the Chapter 11 bankruptcy protection restructuring statute was used. They borrowed a page out of Modell's playbook. In early April they went to court and got the same relief. They do not have to pay their rent now.
Bankruptcy trustees Toronto and COVID-19
You have already read in the newspaper and heard in the media that Canadian companies have already gone to their landlords and said we have to close down. We are not earning any money from the stores so we are not paying our commercial rent. Right now landlords seem to be working with their tenants. But what if a landlord gets overly aggressive, unreasonable and threatens the tenants with actions such as distraint or termination of the lease? The landlord does not have to go to court to get either of those remedies. But the tenant certainly would have to go to court to try to prevent the landlord from doing that and the courts right now are closed and only dealing with emergency situations. Whether the court thinks that would be an emergency or not I don't know.
The insolvency legislation in Canada could be used and as one of the Bankruptcy trustees Toronto I will explain why. The two insolvency statutes in Canada for corporate business restructuring are Part 3 Division 1 of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). The differences between the two are a subject for a different blog. For now, just understand that either one, depending on the circumstances, can be used for corporate restructuring.
The BIA gives the judges hearing a bankruptcy matter wide latitude in the kinds of orders a judge can make. It is certainly within the judge’s ability to make an order under unusual circumstances like we are in now. If the stores had to close down, the tenant, the debtor, trying to restructure could go for this relief. As long as it aids in the restructuring, is not illegal and is fair to all creditors in general, it should be approved. It doesn't matter that it might be unfair to landlords. On balance, it has to be fair to all creditors in general.
The maint test
One of the tests is, does this restructuring have a good likelihood of being successful and therefore maintaining jobs. That is really the test under the Canadian insolvency statutes. Under the CCAA, landlords could also be stymied in this way because that statute also gives judges wide latitude in the cases that they are overseeing. Their considerations are very much the same as I have already outlined. Does the restructuring have a good chance of success and is what is being asked that the court approve not illegal. As a whole, taking all known facts into consideration is it fair to all creditors.
So could this tactic be used in Canada by bankruptcy trustees Toronto to help ward off overly aggressive and unreasonable landlords? I believe it can be in a corporate business financial restructuring. I don't know any case where it's been tested yet but certainly, there have been rulings on different kinds of agreements. The courts have said before that the company trying to restructure does not have to live up to the terms of agreements, for the time being, when faced with overly aggressive and unreasonable creditors.
The court was very careful to say the terms of the agreement are not being waived and it is without prejudice for the creditor to come back to court later to claim everything they believe they are owed and to try to seek other relief. But, for the time being, the stay of proceedings prevents them from pursuing a termination or getting other relief.
Stay safe and healthy
So again, I hope that you and your family are safe and healthy. The bankruptcy Trustee in Toronto is open. We are doing consultations by telephone and video meeting and we are here to answer any questions you may have. If you have any questions or comments about this video or the blog, please shoot me a message or give me a phone call. My email and phone number are listed in the website. Stay safe, stay healthy.