Licence Appeal Tribunal
Appeal d'appel en Tribunal matière de permis
FILE: 7099/TIA
CASE NAME: 7099 v. Registrar, Travel Industry Act, 2002
An Appeal from a Notice of Proposal by the Registrar, Travel Industry Act, 2002, S.O. 2002, c. 30, Sch. D - to Revoke Registration
Bryan Swayze/Globe Travellers Inc. o/a Pathway Tours Applicant
-and-
Registrar, Travel Industry Act 2002 Respondent
REASONS FOR DECISION AND ORDER
ADJUDICATOR: Mary Ann Spencer, Member
APPEARANCES:
For the Applicant: Robert Van Kleek and Lynn Phillips, Agents
For the Respondent: Soussanna Karas, Counsel
Heard in Toronto July 27, 2012
REASONS FOR DECISION AND ORDER
BACKGROUND
This is a hearing before the Licence Appeal Tribunal (the “Tribunal”) arising out of a Notice of Proposal issued by the Registrar, Travel Industry Act 2002 (the “Registrar” and the “Act” respectively). The Notice of Proposal dated November 15, 2011 proposed to revoke the registration of Bryan Swayze/Globe Travellers Inc. o/a Pathway Tours (the “Applicant”), as a travel agent under the Act.
The hearing in this matter commenced on June 19, 2012, at which time, at the request of the Applicant and on consent of the Registrar, an adjournment to July 27, 2012 was ordered by the Tribunal. The Tribunal further ordered that the Applicant submit to Counsel for the Registrar financial statements for the year ended December 31, 2011 and for the period January 1, 2012 to May 31, 2012.
EVIDENCE AND FACTS
The background facts leading to the Registrar’s issuance of the Notice of Proposal to Revoke Registration are not in dispute. The Applicant was registered as a travel wholesaler on May 27, 1985. The president and one of the shareholders of the Applicant is Robert Van Kleek. Lynn Phillips is Mr. Van Kleek’s partner in the business and its general manager.
Registrants with sales in Ontario less than $10 million are required to file financial statements with the Travel Industry Council of Ontario (“TICO”) within three months after the end of their fiscal year. A minimum level of working capital, calculated as current assets minus current liabilities, is also required to be maintained with the minimum level determined by the amount of a registrant’s sales. A registrant with sales between $1,000,000 and $2,000,000 is required to maintain a minimum working capital of $20,000. Sales between $2,000,000 and $5,000,000 require a minimum working capital of $25,000.
The Applicant’s fiscal year end is December 31st. Therefore, its financial statements are required to be filed with TICO by March 31st of the following year. The Applicant failed to file financial statements for its 2007 through 2011 fiscal years within the regulated time frame and working capital deficiencies were identified in the statements for the 2007 through 2010 fiscal years.
Evidence for the Registrar
It is the Registrar’s position that the financial position of the Applicant is such that it cannot reasonably be expected to be financially responsible in the conduct of business. Further, the Applicant’s failure to file its financial statements and to maintain minimum working capital in accordance with the regulatory requirements affords reasonable grounds to believe it will not conduct business in accordance with the law and demonstrates that it is carrying out activities in contravention of the Act.
The evidence of the Registrar consisted of books of documents and the testimony of Sanja Skrbic who is a chartered accountant employed by TICO as a financial inspection supervisor. Ms Skrbic’s responsibilities include the review of registrant financial statements and TICO inspection reports.
Ms Skrbic testified that the working capital position of a registrant is an indication of a registrant’s financial health and its ability to pay off its debt. Ms Skrbic stated that the Applicant’s financial statements have shown a negative working capital position for the years ended December 31, 2007 through December 31, 2010 and an operating loss for the years ended December 31, 2008 through December 31, 2010. In addition, TICO inspections conducted in 2009 revealed trust accounting issues. Further, in 2011, TICO received a complaint from another registrant indicating that the Applicant owed it $70,000.
Ms Skrbic’s testimony relating to the Applicant’s fiscal year ends is summarized below:
Year Ended December 31, 2007 (Exhibit 3, Tab 16)
On July 2, 2008, TICO wrote to the Applicant and advised that review of the Applicant’s financial statements for the 2007 fiscal year indicated a working capital shortfall of $197,594. A response was requested by July 16, 2008. Ms Skrbic testified that the working capital was negative because of shareholder withdrawals. On July 30, 2008, the Applicant responded forwarding a list of life insurance policies assigned to TICO and indicating that $97,000 had been injected into the business. The Applicant stated that the required proof of deposit would be forwarded shortly.
On September 10, 2008 TICO sent a further letter requesting evidence of the $97,000 deposit and noting the total deficiency of $197,594. A response was requested by September 24, 2008. TICO sent a further letter on September 29, 2008 requesting a response by October 14, 2008 and indicating that if the response was not received, the Registrar would have no alternative but to issue a Notice of Proposal to revoke the Applicant’s registration. On October 14, 2008, the Applicant faxed a response indicating that the value of the insurance policies previously brought to TICO’s attention totaled $29,000. Deposit slips totaling $177,435.11 were also sent.
On December 15, 2008, TICO conducted an inspection to ensure the Applicant had maintained compliance with the working capital requirements. The inspection report (Exhibit 3, Tab 15) indicates that the funds injected into the business were still in place. However, the inspector noted that the registrant was not complying with the trust accounting requirements and was paying suppliers from the general account.
Year Ended December 31, 2008 (Exhibit 3, Tab 14)
The Applicant’s financial statements for the year ended December 31, 2008 were received by TICO on April 30, 2009. On reported sales of $2,212,439, the minimum working capital requirement is $25,000. The statements revealed a working capital deficiency of $112,541 and an operating loss of $47,675. Ms Skrbic also testified that the statements revealed a shareholder loan of $240,604. Note 5 to the financial statements disclosed that the company was in violation of TICO’s requirement with respect to working capital and that subsequent to year end the shareholders and officers had advanced additional funds in order to address the deficiency. Ms Skrbic testified that $181,500 had been injected into the company by the shareholders.
On October 21, 2009, TICO conducted a compliance inspection to ensure that the working capital injection was still in place. The inspection report (Exhibit 3, Tab 13) indicated the funds were still in place. However, the inspector again noted that the Applicant was making payments to suppliers from the general account in violation of the trust accounting requirements. On December 29, 2009, a letter was sent by TICO reminding the Applicant of those trust accounting requirements and advising it to take appropriate corrective action.
Year Ended December 31, 2009 (Exhibit 3, Tab 12)
On November 30, 2009, TICO sent a letter to the Applicant reminding it of the requirements for filing of financial statements and their due date of March 31, 2010. This reminder letter is sent by TICO to all registrants. The Applicant’s financial statements for the year ended December 31, 2009 were received by TICO on June 28, 2010. On reported sales of $1,698,113, the minimum working capital required is $20,000. Ms. Skrbic testified that the statements revealed deteriorating financial health with an operating loss of $340,143 and a working capital deficiency of $298,543. Shareholder loans were negative indicating the shareholders had put money into the company. As in 2008, Note 5 to the financial statements disclosed that the company was in violation of TICO’s working capital requirement and that subsequent to year end the shareholders and officers had advanced additional funds in order to address the deficiency. Included with the financial statements was a letter from the Applicant’s accountant enclosing slips showing a total of $113,800 had been deposited to the Applicant’s accounts (Exhibit 3, Tab 11) and asking, on behalf of the Applicant, that TICO review a six month interim statement to “better assess their current position”.
On July 30, 2010, the Registrar wrote the Applicant advising that an injection of $184,743 was still required in order to address the working capital deficiency and requesting proof of deposit. The letter indicated a response was required by no later than August 13, 2010. In response, on August 10, 2010, Mr. Van Kleek wrote stating that he realized a further injection of funds was required but requesting that TICO review the Applicant’s six month statement which he indicated “will show a significant improvement in our bank accounts”. He further noted the company was busy with bookings and wrote “consequently, we hope to end this year on a much better note than the last few.”
Period Ended June 30, 2010 (Exhibit 3, Tab 10)
On November 26, 2010, the Applicant filed interim financial statements for the period ended June 30, 2010. They were submitted with a Review Engagement Report although this is only required with year end statements. The interim statements show that on sales of $895,204, a profit of $270,538 was realized. Working capital was $43,288. Ms Skrbic testified that therefore no further action was required.
Period Ended December 31, 2010 (Exhibit 3, Tab 8)
The Applicant submitted its financial statements for the year ended December 31, 2010 on June 29, 2011. On sales of $2,097,455, a loss of $60,259 was realized. Including the regulatory requirement of $25,000, the working capital deficiency totaled $322,217. Again, Note 5 to the statements disclosed that the company was in violation of TICO’s working capital requirement and that subsequent to year end, the shareholders contributed $124,450 towards the deficiency. On July 21, 2011, Ms Skrbic wrote to the Applicant noting that a working capital correction was required and requesting evidence of the injection be provided by no later than August 5, 2011.
On August 12, 2011, the Applicant’s general manager Lynn Phillips wrote to TICO and provided deposit slips substantiating shareholders’ injections totaling $142,455. In addition, she noted that the company expected the upcoming Festival of Lights to “possibly be our largest ever” and provided deposit sheets representing block ticket purchases. TICO accepted the evidence relating to the $142,455. However, Ms Skrbic testified that TICO cannot base working capital compliance on sales because it does not have corresponding expense numbers although she noted that “generally speaking, higher revenues indicate a healthier picture”.
Ms Skrbic further testified that TICO had received a complaint about the Applicant from one of its suppliers. Typically, TICO looks at other history when such a complaint is received. On September 14, 2011, Registrar Michael Pepper wrote to Ms Phillips stating that “although Pathway Tours has made injections via shareholder loans totaling $268,520, the concern regarding Pathway Tours’ operations has not been resolved”. The letter highlighted the concern raised by a supplier regarding the Applicant’s ability to pay an outstanding balance owed to it as well as the Applicant’s “continuous working capital non-compliance” and requested that interim statements for the period ended July 31, 2011 be submitted to TICO by October 14, 2011. (Exhibit 3, Tab 3).
On September 21, 2011, Ms Phillips wrote to Ms Skrbic indicating that in fact the Applicant was owed money by the supplier who made the complaint and enclosing various sales documents in support of this position. Ms Phillips did not address the Registrar’s request for interim financial statements. The Registrar again wrote on October 21, 2011 to request the interim financial statements. The deadline was extended to November 7, 2011. On November 3, 2011, Ms Phillips replied to the Registrar and requested a non-specific extension to the request for an interim statement noting “our year end is December 31st anyway” (Exhibit 3, Tab 4). She also provided deposit information related to concert ticket sales. The Notice of Proposal to revoke the Applicant’s registration was subsequently issued on November 15, 2011 (Exhibit 1).
Year Ended December 31, 2011
On November 30, 2011, TICO sent out its standard reminder to the Applicant that its financial statements for the year ending December 31, 2011 would be due by March 31, 2012. On April 25, 2012, the Registrar again wrote to the Applicant reminding it that the 2011 financial statements were due March 31, 2012 and that if they was not received by April 30, 2012, the Registrar would use the non-filing as evidence in the hearing before this Tribunal (Exhibit 3, Tab 17).
Ms Skrbic testified that draft financial statements for the year ended December 31, 2011 statements were received on July 25, 2012 (Exhibit 4) but that the numbers cannot be accepted unless the statements are finalized. She did note, however, that from her personal experience in public accounting, that final statements do not generally change substantially from drafts. The working capital position calculated from the draft 2011 statements is a deficit of $204,990. Therefore, the total injection required, taking into account the minimum $20,000 required on the Applicant’s sales of $1,993,817, is $224,990. Ms Skrbic noted that both the working capital deficit and the Applicant’s net loss are smaller than they were in 2010.
Ms Skrbic further testified that the interim statements as of May 31, 2011, which this Tribunal ordered the Applicant to provide to the Registrar were not received. Rather, the Applicant submitted various listings of cheques written and deposits made, including a further deposit of $131,180.17 by shareholders to a related company on June 12, 2012. Ms Skrbic stated that the Applicant’s financial position cannot be determined from the information provided and noted that the shareholder deposit is insufficient to address the working capital deficit calculated from the draft 2011 statements.
On cross-examination, the Applicant’s agent asked Ms Skrbic three times if TICO allows ticket revenue deposits to be used as credit for working capital deficits. Ms Skrbic testified that they cannot be; that full financial information would be required to calculate a new financial position.
Evidence for the Applicant
Robert Van Kleek, the president and one of the shareholders of the Applicant, testified on its behalf. Mr. Van Kleek stated that the company has been in business for 32 years and has annual sales of approximately $2,000,000, with the bulk of its business occurring in the latter half of the year. He acknowledged that the company has been in default of the regulated working capital requirements but noted that the shareholders have responded by injecting capital into the company.
Mr. Van Kleek testified that the Applicant began to have problems after September 11, 2001, when thirty buses cancelled. He indicated that 40% of the Applicant’s business used to come from the United States market but this has been reduced to approximately 10% currently. He indicated that the requirement for American travellers to have a passport to re-enter the United States has been another negative factor. The Canadian/US dollar exchange rate has also been a problem; in particular, in 2008, when the company incurred an unanticipated $240,000 expense resulting from changes in the exchange rate between booking and payment dates.
Mr. Van Kleek stated that he believed that the complaint to TICO from his supplier ‘triggered’ his current situation. He noted that the supplier is a competitor who continues to owe the Applicant money and expressed his opinion that it was unfair that a competitor could write a letter to TICO to cause the trouble the Applicant finds itself in.
Mr. Van Kleek indicated that the company is working to reduce its expenses. It has scaled back on staff and has created a website, eliminating the need for the production of a costly brochure. He enumerated a number of expense items where savings are expected to accrue, including staffing, where a retiring staff member will not be replaced. He also indicated that a company related to the Applicant owns the building in which the Applicant is located and that there is a buyer interested in the property. Mr. Van Kleek estimated its value to be over $500,000 given it is on a major downtown street. Part of the sale arrangement would include a provision that the Applicant continue to occupy the premises at no cost. He noted that it takes time to reduce expenses and make the company lean.
Mr. Van Kleek testified that his accounting firm has advised him that the only reason the 2011 financial statements are in draft form is because they still require his signature and no changes will be made to them. He stated that he believed that the information provided for the May 2011 interim statements was what was required.
Mr. Van Kleek noted that the accounting firm the Applicant uses has evolved into a large enterprise and consequently he has had difficulty getting their attention at the Applicant’s year-end given it corresponds to tax season when the firm is very busy.
Mr. Van Kleek testified that the shareholders have injected $131,180.17 into the company. He then stated that further to that, in excess of $250,000 has been deposited and noted that he has also assigned two life insurance policies worth $150,000 to TICO. He stated that TICO should have no concern that the Applicant is a risk, that it has no debt and TICO is “well covered”. He also noted that he currently has 150 buses booked for the upcoming winter Festival of Lights in Niagara Falls.
On cross-examination, Mr. Van Kleek could not provide a response to why he did not bring any documents to the hearing to substantiate the shareholder injections he testified had been made. He further stated that he submitted the paperwork for the preparation of the 2011 financial statements to the accountant approximately a month ago. He also testified that he suffered a stroke on March 31, 2011 and that there were delays in organizing paperwork as a result. With respect to the injections shareholders have made, he testified that the source of funds has been mortgages on his home or matured investments.
Counsel for the Registrar asked Mr. Van Kleek about the significance of the related party transactions noted on the Applicant’s financial statements and if, when added together, they meant that money was owed to the company. Mr. Van Kleek did not respond and Counsel did not further pursue this line of questioning.
THE LAW
Section 8 of the Act sets out the provisions with respect to registration of applicants. Section 10 states that a ground for refusal of registration as set out in section 8 is also a ground to revoke an existing registration. The applicable provisions are as follows:
- (1) An applicant that meets the prescribed requirements is entitled to registration or renewal of registration by the registrar unless,
(d) the applicant is a corporation and,
(i) Repealed: 2010, c. 16, Sched. 5, s. 5.
(ii) having regard to its financial position or the financial position of an interested person in respect of the corporation, the applicant cannot reasonably be expected to be financially responsible in the conduct of its business,
(iii) having regard to the financial position of its officers or directors or of an interested person in respect of its officers or directors, the applicant cannot reasonably be expected to be financially responsible in the conduct of its business,
(iv) the past conduct of its officers or directors or of an interested person in respect of its officers or directors or of an interested person in respect of the corporation affords reasonable grounds for belief that its business will not be carried on in accordance with the law and with integrity and honesty, or
(v) an officer or director of the corporation makes a false statement or provides a false statement in an application for registration or for renewal of registration;
(e) the applicant or an interested person in respect of the applicant is carrying on activities that are, or will be if the applicant is registered, in contravention of this Act or the regulations, other than the code of ethics established under section 42;
(f) the applicant is in breach of a condition of the registration; or
g) the applicant fails to comply with a request made by the registrar under subsection (1.1).
(5) For the purposes of this section, a person shall be deemed to be an interested person in respect of another person if the person is associated with the other person or if, in the opinion of the registrar,
(a) the person has or may have a beneficial interest in the other person’s business;
(b) the person exercises or may exercise control either directly or indirectly over the other person; or
(c) the person has provided or may have provided financing either directly or indirectly to the other person’s business.
- (1) Subject to section 11, the registrar may refuse to register an applicant or may suspend or revoke a registration or refuse to renew a registration if, in his or her opinion, the applicant or registrant is not entitled to registration under section 8. 2004, c. 19, s. 23 (12).
ISSUES
The issues to be addressed are:
Can the Applicant reasonably be expected to be financially responsible in the conduct of business?
Can the Applicant reasonably be expected to carry out business in accordance with the law?
Is the Applicant carrying out activities that are in contravention of the Act?
APPLICATION OF LAW TO FACTS
The onus is on the Registrar to prove to the Tribunal, on a balance of probabililities, that the Applicant’s registration should be revoked. The Applicant is entitled to registration unless one of the grounds in section 8 of the Act applies. The Tribunal must make an independent assessment as to whether or not those grounds have been proven. In reaching its conclusions, the Tribunal has considered the evidence of the parties and the two decisions submitted by Counsel for the Registrar: Re: London South Transportation Centre Inc. [1990] C.R.A.T.D. No. 24 and Demasi Contracting Inc. v. Tarion Warranty Corp., 2011 CarswellOnt 190, 2011 ONSC 226.
Counsel for the Registrar argued that the Applicant’s negative working capital position and unprofitable operations demonstrate that it is not financially viable. She further argued that the Applicant’s failure to submit financial statements to TICO by the required due date and its failure to provide the interim financials for the period ended May 31, 2012 as ordered by this Tribunal demonstrate a pattern of conduct that indicates both that the Applicant cannot reasonably be expected to conduct business in accordance with the law and that it is carrying out activities in contravention of the Act and regulations.
The first issue to be addressed is whether the Applicant cannot reasonably be expected to be financially responsible in the conduct of business.
O. Reg. 26/05 under the Act provides explicit requirements for monitoring of the financial health of a travel agent and protection of consumers in sections 22 and 24. The relevant sections are set out below:
- (1) Every registrant shall file with the registrar the financial statements required by this section for each fiscal year.
(2) A registrant who had sales in Ontario of less than $10 million during the previous fiscal year shall file, within three months after the end of the fiscal year,
(a) annual financial statements with a review engagement report by a public accountant licensed under the Public Accountancy Act, 2004; or
(b) annual financial statements with an auditor‘s report from a licensed public accountant, if the registrant is required to obtain annual financial statements with an auditor‘s report under the Business Corporations Act.
(6) Financial statements required under this section shall include a statement of sales in Ontario made during the period to which the financial statements refer, a balance sheet, an income statement and a reconciliation of the trust accounts maintained under section 27.
(7) If additional information is necessary to provide an accurate and complete review of the registrant‘s financial position, the registrar may require that the registrant file audited financial statements that consolidate or combine the registrant‘s financial statements with,
(a) the financial statements of another registrant; or
(b) if the registrant is a corporation, with the financial statements of another person who is a shareholder associated with the registrant.
(8) If the registrar has reason to believe that a registrant is in financial difficulty, the registrar may require that the registrant provide to the registrar a written statement of the registrant‘s current net working capital, and the registrant shall do so within the time the registrar specifies.
(9) The registrar may require that a statement provided under subsection (7) or (8) be verified by affidavit.
- (1) This section applies on and after January 1, 2006.
(2) A registrant who had sales in Ontario during the previous fiscal year of an amount shown in Column 1 of the Table to this section shall maintain a working capital of at least the amount shown in Column 2 opposite the first-named amount.
(3) A registrant‘s working capital shall be calculated in accordance with generally accepted accounting principles and shall not include,
(a) the value of any security provided under subsection 25 (1); or
(b) capital belonging to any person who is an interested person in respect of the registrant for the purposes of section 8 of the Act.
The Table in the regulation indicates that where a travel agent‘s sales are more than $1,000,000 but not more than $2,000,000 in the previous fiscal year, the minimum working capital is $20,000. Where the sales are more than $2,000,000 but less than $5,000,000, the minimum working capital is $25,000.
Counsel for the Registrar argued that the Applicant was in breach of Section 8 (1)(d)(ii) of the Act. This section requires the Tribunal to address the financial position of the Applicant or of an interested party in respect of the Applicant to determine if the Applicant cannot reasonably be expected to be financially responsible in the conduct of its business.
There is no dispute between the parties that the Applicant’s financial statements have been submitted to TICO after their March 31st due date and that those statements have identified working capital deficiencies. The relevant evidence is summarized in the following table:
| Date Applicant’s Reporting Period Ended | Date Statements Received by TICO | Sales | Profit/Loss | Working Capital |
|---|---|---|---|---|
| 31/12/2007 | n/a | 3,977,125 | 19,500 | -197,594 |
| 31/12/2008 | 30/4/2009 | 2,212,439 | -47,645 | -112,541 |
| 31/12/2009 | 28/6/2010 | 1,698,113 | -340,143 | -298,543 |
| 30/6/2010 | 26/11/2011 | 895,204 | 270,538 | 43,288 |
| 31/12/2010 | 30/6/2011 | 2,097,455 | -60,259 | -322,317 |
| 31/12/2011 | 25/7/2012 | 1,933,813 | -21,088 | -224,990 |
The Tribunal was not provided with a copy of the Applicant’s 2007 financial statements and the date of their submission to TICO was not entered into evidence. Based both on Ms Skrbic’s testimony that draft financial statements are unlikely to significantly change and on Mr. Van Kleek’s testimony that his accounting firm has informed him that the only outstanding requirement for their finalization is his approval, the Tribunal accepts the financial information provided on the draft 2011 statements.
With respect to the financial position of the Applicant, the evidence summarized in the chart set out above indicates that the Applicant has been operating at a loss since 2008. Mr Van Kleek testified to some of the factors which contributed to these losses: significant fluctuations in Canadian/US exchange rates in 2008 and the recently introduced requirement for American citizens to hold passports to re-enter the U.S.A. He indicated that these factors resulted in the reduction of the percentage of the Applicant’s business originating in the United States to ten from forty. The Tribunal notes that the Applicant’s sales in 2010 and 2011 are approximately 50% of their 2007 level. 2009 was a particularly bad year for the Applicant with its highest loss realized against its lowest sales. Mr. Van Kleek testified that the Applicant incurred a $240,000 loss due to exchange rate fluctuations in 2008 but the Tribunal questions whether that loss was in fact realized in 2009 given the cost of sales is high that year. Notwithstanding the reason for the 2009 loss of $340,143, it was significantly reduced to $60,259 in 2010 and further reduced to $21,088 in 2011.
Operating at a loss, while certainly a strong warning signal, is not in itself an indicator of the lack of ongoing financial viability. The overall financial position must be considered. Working capital, which provides a measure of the ability of a company to meet its obligations and is calculated by deducting current liabilities from current assets, is a more robust indicator of financial health than operating profit or loss: this is recognized by the fact that minimum levels of working capital are regulated under the Act.
The Applicant’s working capital has been deficient at its year end since 2007. Ms Skrbic testified that as revenues increase, working capital should improve. The Tribunal notes that the corollary is also generally true: as expenses decrease, working capital positions should improve. In 2011, the Applicant reduced its expenses by 12% to $437,673 from $500,026 in 2010 and its working capital shortfall did in fact decline to $224,990 from $322,317 in 2010. However, the 2010 and 2011 shortfalls are significant, exceeding the respective $25,000 and $20,000 regulated minimum levels by a factor of ten.
The Applicant’s working capital deficiencies cast doubt on its ability to meet its obligations and the Applicant has had some difficulty in this regard. The evidence indicates that on September 14, 2011, the Registrar wrote to the Applicant following receipt of a complaint from one of its suppliers relating to non-payment of a bill. Mr. Van Kleek testified that in fact the Applicant was owed money by the supplier. In Ms Phillips’ September 2, 2011 response to the Registrar, she states that a when a representative of that supplier visited the Applicant’s premises to inquire about bill payment, an unsuccessful attempt was made to have deposits due from the supplier to the Applicant applied against the outstanding payment.
The evidence does indicate that the shareholders of the Applicant made cash deposits to its accounts to correct the working capital shortfalls with the majority of the funds contributed by Mr. Van Kleek and Ms Phillips. The Tribunal does note, however, that the shortfalls identified at the 2009 and 2010 year ends were only partially corrected. In his August 10, 2010 letter to TICO, Mr. Van Kleek acknowledged that the deposits made to offset the 2009 working capital shortfall were insufficient but requested that interim statements be reviewed to determine a more current financial position. After statements for the period ended June 30, 2010 were provided and analysis showed compliant working capital level, TICO took no further action. The Registrar’s September 14, 2011 letter to the Applicant indicates that a total of $268,520 had been injected towards the 2010 working capital shortfall of $322,317.
On July 25, 2012, the Applicant forwarded a fax to the Registrar which included evidence of a deposit of $131,180.17 made to a related company on June 12, 2012. It is somewhat unclear whether this deposit was made to further address the remaining 2010 working capital deficiency or to address the $224,990 deficiency identified in the draft 2011 financial statements which were forwarded to TICO on the same day, directly by the Applicant’s accountant. Given Mr. Van Kleek’s testimony that he only forwarded the paperwork for preparation of the 2011 statements to his accountant “about a month ago”, that is, the end of June, the Tribunal assumes the intent of the deposit was not to address the 2011 deficiency and further notes that if those funds are still available, that they are insufficient to address it in its entirety.
In her closing statement, Counsel for the Registrar suggested that by depleting their personal funds to address the Applicant’s working capital deficiencies, the Applicant’s shareholders, as well as the Applicant, face the risk of bankruptcy. It is conceivable that the shareholders’ failure to inject sufficient cash to address the shortfalls in 2009, 2010, and, as noted above, 2011, is indicative of their inability to raise the funds. The fact that the injections only partially addressed the deficiencies coupled with Mr. Van Kleek’s testimony that the sources of those injections were home mortgages and maturing investments is certainly suggestive of depleting assets. However, the documents and testimony presented at this hearing make it clear to the Tribunal that neither Mr. Van Kleek nor Ms Phillips completely understands how working capital is calculated. On August 12, 2011, in addition to providing evidence of deposits made to offset the working capital deficiency identified in the 2010 financial statements, Ms Phillips sent sales information to Ms Skrbic, presumably as proof of the Applicant’s financial health. At this hearing, notwithstanding the fact that Mr. Van Kleek asked Ms Skrbic three times if sales deposits could be used to offset working capital deficiencies, he did not appear to understand her response that the entire financial position must be taken into account. Therefore the Tribunal cannot determine whether or not the failure to fully address the working capital requirements was due to lack of funds or lack of understanding.
If the shareholders could continue to offset the working capital deficiencies and the Applicant continued to enjoy a stable pattern of sales while reducing its expenses, the Applicant would theoretically be financially viable. However, there is no evidence with respect to the ability to of the shareholders to continue to fund the Applicant: the evidence of their personal financial positions before the Tribunal consists of Mr. Van Kleek’s unsubstantiated testimony “we have funds”. He further testified that he had assigned two life insurance policies to TICO with a value of $150,000. The Tribunal does note that Ms Skrbic testified that evidence of these policies was forwarded to TICO in 2008 to address the 2007 working capital deficiency and assumes that their cash surrender value was credited towards it. Mr. Van Kleek did not provide evidence to indicate their current cash surrender value and therefore the Tribunal must discount his testimony. Mr. Van Kleek also testified that “in excess” of $250,000 was deposited subsequent to the June 12, 2012 deposit. However, the Tribunal must discount this testimony because no substantiating documentary evidence was provided and must conclude that the Applicant’s working capital remains in a shortfall position.
Notwithstanding the Applicant’s reduced sales, operating losses and working capital shortfalls, both Mr. Van Kleek and Ms Phillips appear to be optimistic about the future of the business. In her August 12, 2011 response to the Registrar, Ms Phillips noted she expected the upcoming Festival of Lights to “possibly be our largest ever” and, as noted above, the loss incurred by the Applicant in 2011 was in fact lower than that of previous years. Mr. Van Kleek testified that 150 buses have already been sold for an upcoming event in 2012. He also outlined his plans to further reduce the Applicant’s operating expenses.
The Tribunal recognizes that the Applicant has had a longstanding registration as a travel wholesaler and that its principals have taken steps to address its current issues. Mr. Van Kleek testified that it takes time to reduce expenses and ‘become lean’ and the Tribunal notes that some progress has been made in this regard in the Applicant’s 2010 and 2011 financial years. However, notwithstanding the optimism of its principals and the improvements in its financial position evident from the draft 2011 financial statements, that financial position remains unstable. The Applicant continues to operate at a loss and, more importantly from the perspective of consumer risk, continues to fail to meet the minimum working capital level required, which the evidence indicates has in fact caused it some difficulty in meeting its obligations. Even if the Tribunal accepts that the June 12, 2012 deposit is still available to the Applicant, a substantial working capital shortfall still remains. While Mr. Van Kleek testified that he has funds to offset the shortfall and that further deposits have been made, no evidence was provided in this regard. The Tribunal therefore finds that the financial position of the Applicant is such that it cannot reasonably be expected to be financially responsible in the conduct of business.
The second issue before the Tribunal is whether there are reasonable grounds for belief that the business will not be carried out in accordance with the law as set out in section 8(1)(d)(iv) of the Act.
The Act requires a registrant to submit financial statements within 90 days of its financial year end. In the Applicant’s case, the due date is March 31. The chart set out above shows that the Applicant has failed to meet the deadline. The 2008 statements were received by TICO on April 30, 2009. In the following two years, the statements were received at the end of June. Mr. Van Kleek testified that the public accounting firm used by the Applicant was unable to give priority to the Applicant given the Applicant’s March 31st year end coincides with the busy income tax season. He further testified that he suffered a stroke on March 31, 2011 and was therefore unable to provide the needed paperwork to the accountant. The Tribunal does not wish to appear unsympathetic to Mr. Van Kleek but notes that the statements should in fact have been prepared by that time. In fact, they were sent by fax to the Registrar on July 25, 2012.
The purpose of filing financial information is to enable TICO to ensure that a registrant is meeting the regulated financial requirements put in place to reduce risk to travel consumers. As set out in detail in the Tribunal’s analysis of the first issue before it, the Applicant’s financial statements indicated that it did not meet the minimum working capital requirement in the years 2007 through 2010. The 2011 draft statements also indicate a working capital shortfall. While the Applicant’s principals did respond to inject funds to address the shortfalls, the evidence indicates that the 2009, 2010 and 2011 shortfalls were not completely corrected. As the Tribunal noted above, a shortfall in working capital casts doubt on the ability of a business to meet its obligations as they become due. That in turn places the travel consumer at risk.
In his closing statement, Mr. Van Kleek testified that he now realized that continuing to use an accounting firm which was unable to meet TICO’s due dates was “probably a major mistake”. He later stated “being late doesn’t mean you should be turfed out of business.” A registrant is obligated to meet all regulatory requirements. However, given Mr. Van Kleek’s recognition of the need to retain a more responsive accountant, the Tribunal would not direct the Registrar to carry out its proposal were lateness of filing the only issue before it. However, for five consecutive years, the principals of the Applicant have failed to ensure the business maintained the regulated minimum working level capitals.
Shareholder injections resolved the Applicant’s 2007 and 2008 working capital deficiencies. The 2009 deficiency was only resolved when TICO accepted interim financial statements for the period June 30, 2010 which showed compliant working capital. However, at the 2010 year end, the working capital was again deficient and was not fully resolved. The draft 2011 statements also identify a significant shortfall and the evidence before this Tribunal indicates that the June 12, 2012 deposit to a related company is insufficient to address it.
In addition, the principals of the Applicant failed to fully comply with the Tribunal’s June 19, 2012 order to provide financial statements to Counsel for the Registrar for the period ended December 31, 2011 and for the period January 1, 2012 to May 31, 2012. The 2011 year end statements were submitted in draft format. Lists of deposits made and cheques written were the only materials submitted for the 2012 period. By failing to comply, not only did the Applicant forfeit a potential opportunity to resolve this matter, but it further demonstrated that it does not fully understand its obligations.
Based on the facts that the regulatory requirements to file financial statements within 90 days of the financial year end and to maintain the minimum level of working capital required for its level of sales were not met, the Tribunal finds that in accordance with the provisions of section 8(1)(d)(iv) of the Act, the conduct of the Applicant’s officers and directors affords reasonable grounds for belief that the business will not be carried on in accordance with the law.
The final issue before the Tribunal is whether the Applicant has been carrying on activities in contravention of the Act.
Ms Skrbic testified that TICO inspections conducted in October 2008 and December 2009 revealed that the Applicant was not complying with the regulatory requirements for trust accounting. However, Counsel for the Registrar, in her closing statement, indicated that she was not alleging that trust accounting was currently non-compliant. Rather, Counsel argued that non-compliance with regard to failure to file financial statements on time and failure to maintain minimum working capital no longer entitled the Applicant to registration.
The Tribunal recognizes that the Applicant has been in business for thirty two years and that some compliance efforts have been made by its principals and has given careful consideration to the appropriate decision in this matter. The Applicant has failed to file its financial statements by the due date since 2008. Although partially resolved, the requirement to maintain the minimum level of working capital has been an issue in each year since 2007. On June 19, 2012, the principals of the Applicant were given an opportunity by this Tribunal to address the Registrar’s concerns about its financial position by submitting financial statements for the period ending December 31, 2011 and for the period January 1, 2012 to May 31, 2012. However, they did not, or could not, fully comply with the Tribunal’s Order. This pattern of non compliance was highlighted once again. There is a risk to the public that flows from a finding that the financial position of the Applicant is such that it cannot reasonably be expected to be financially responsible in the conduct of business. Therefore, the Tribunal concludes that the Applicant’s registration should be revoked.
ORDER
Pursuant to the authority vested in it under the provisions of the Act, the Tribunal directs the Registrar to carry out the Proposal to Revoke Registration dated November 15, 2011.
LICENCE APPEAL TRIBUNAL
Mary Ann Spencer, Presiding Member
Released: August 9, 2012