SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
ESTATE NO.: 31-1446462
HEARD: 20130718
RELEASED: 20140529
In the Matter of the Bankruptcy of Gary Thomas Wilson
of the City of Toronto, in the
Province of Ontario
(Summary Administration)
APPEARANCES:
Rachel Moses -for the Bankrupt fax 416-864-9223
Martin Sole -for the Trustee fax 416-391-2285
Harold Manis -for Clancy Funding,
(opposing creditor) fax 416-364-1453
BEFORE: MASTER D. E. SHORT, Registrar in Bankruptcy
HEARD: July 18, 2013
REASONS FOR DECISION
I. Contested Discharge
[1] Gary Wilson filed for personal bankruptcy on December 23, 2010. It appears his bankruptcy was a consequence of the insolvency of his company Master Lift Truck Service Inc. (“Truck Service”).
[2] This is a Summary Administration matter. In the Trustee’s representative’s pre-hearing submissions it was suggested that in light of the reported net income an absolute discharge might well be appropriate.
[3] Conversely counsel for Clancy Funding vigorously argued that in this case a significant payment by the bankrupt ought to be ordered as a condition of any discharge.
[4] I was thus required to weigh, not only the facts presented before me, but also to consider the possible evidence that was not lead by any party before me. I have also considered any applicable statutory constraints on the discretion which I would otherwise be entitled to exercise on a discharge hearing.
II. Master Lift Truck Service Inc. Receivership
[5] Initially, Truck Service filed a Notice of Intention to file a Proposal on October 30, 2009. It then made a Proposal (in court file 32-1281856). Under the terms of the Proposal the Proposal Trustee was mandated to conduct “a ‘going-concern’ marketing and sale process” for Truck Service.
[6] On November 30, 2009 Mr. Justice Campbell made an “Extension and Sales Process Order” which established a dual track process whereby the company would be given time it needed to attempt to find an equity investor while, at the same time, allowing the Proposal Trustee an opportunity to fully canvas the marketplace for prospective purchasers of the assets of the company.
[7] Multiple offers were received by the contemplated Proposal Trustee. After consultation with the company and the secured creditors, the highest and best offer was determined to be that made by Terrich Capital Inc. (“Terrich”).
[8] Apparently, Terrich was owned by a long-time friend of the Mr. Wilson.
[9] The offered purchase price (excluding some real estate) was $1.7 million. “All or almost all of the existing employees the company were offered employment by the purchaser.”
[10] Having determined that there was a purchaser available at an acceptable price, the company then filed its Proposal to all its creditors on January 14, 2010.
[11] Notices were sent to all creditors (including the sole creditor now opposing Mr Wilson’s discharge, Clancy Funding which was listed as a creditor in those materials).
[12] On February 3, 2010 Justice Cameron appointed MNP as the receiver of Lift Truck and made an order approving the sale to Terrich’s nominee, Master Lift Inc. and granting a vesting order in that company’s favour.
[13] In March 2010 the proposal of the Lift Truck was rejected and that company was thus deemed bankrupt, with its assets already having been sold.
III. Guaranteed Debts
[14] The sale process resulted in significant short falls in the indebtedness owed to the creditors of the insolvent company. Mr. Wilson had provided personal guarantees to Laurentian Bank and various companies within the Clancy Funding corporate family. In rough terms the respective amounts owed on those guarantees were $1,000,000 and $300,000. The overall total claims in his personal bankruptcy were in excess of $1.5 million.
[15] Judgments with respect to those guarantees for approximately $300,000 were obtained against him by Clancy Funding in October 2010.
[16] Laurentian Bank of Canada made a demand against Mr. Wilson in November 2010 based upon his guarantee of the debts of Master Truck. The Proof of Claim dated March 1, 2011 filed in the bankruptcy on behalf of the bank asserts an unsecured claim for principal and interest in the amount of $1,006,154.38.
[17] The bankrupt’s discharge was opposed by Laurentian Bank until the week before this discharge hearing the discharge hearing before me.
[18] It is my understanding that Laurentian determined to withdraw its opposition in exchange for an agreement to include in any discharge order a condition requiring that the bankrupt pay to the estate the total sum of $2100, at the rate of $100 per month,
[19] In his supplementary report, dated a week before the hearing before me, the trustee notes that the current proceeds in the estate are less than $5700.
IV. Master Lift Inc. Corporate Structure
[20] The successor corporation seems to have continued on with the existing business seemingly seamlessly.
[21] Following the completion of the sale Mr. Wilson was employed as the president of the new company. The previous controller assumed her former position as did Mr. Wilson’s daughter with respect to sales activities.
[22] It is of some significance that in addition to her $40,000 salary, Mr. Wilson’s daughter received $60,000 per annum for serving as a director of the new corporation.
V. Statutory Environment: Discharges
[23] In my decision in Re Baran, 2013 ONSC 240, I commented on the difficulties flowing from the current practice with respect to the lack of meaningful particularity contained in the Notices of Opposition to the discharge of a bankrupt. The bankrupt seems often to be forced to guess what the substance of the opposition is likely to be.
[24] As in Baran, I am required to examine and to place emphasis on components of the discharge process applicable in this case. Section 172 of the BIA is of general application and reads:
(1) On the hearing of an application of a bankrupt for a discharge, other than a bankrupt referred to in section 172.1, the court may
(a) grant or refuse an absolute order of discharge;
(b) suspend the operation of an absolute order of discharge for a specified time; or
(c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property.
(2) The court shall, on proof of any of the facts referred to in section 173, which proof may be given orally under oath, by affidavit or otherwise,
(a) refuse the discharge of a bankrupt;
(b) suspend the discharge for such period as the court thinks proper; or
(c) require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments or comply with such other terms as the court may direct.
VI. Issues on Discharge Hearing
[25] The bankrupt filed for bankruptcy on December 23, 2010. An initial hearing to deal with his discharge was scheduled for August 29, 2012 and was adjourned sine die at that time.
[26] It took until July 2013 for that hearing to come on before me. The bankrupt has been required to be kept in limbo until this hearing before me.
[27] Conversely he failed to file the various documents at an earlier stage. Understandably he is trying to continue to run his former company and has other priorities. Nevertheless a process that came to court a year ago only was addressed in the months before the hearing.
[28] While it is often the case that “if it weren’t for the last minute nothing would get done”, nevertheless for the court to engage in a meaningful hearing with appropriate witnesses in attendance there needs to be more understanding of what is really in issue.
[29] Originally a Discharge hearing was scheduled by the Trustee as a result of the notices of opposition filed by the two largest creditors.
[30] Clancy Funding asserted the following grounds for opposing the discharge in this case:
The assets of the bankrupt or not of a value equal to 50 cents on the dollar on the amount of the bankruptcy unsecured liabilities due to circumstance which the bankrupt can justly be held responsible;
Given his age and experience in business, the bankrupt is likely to earn income sufficient to enable him to make payments to the trustee on behalf of her [sic] creditors;
The bankrupt has continued to trade after becoming aware of being insolvent;
The bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities;
The bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustified extravagance of living, by gambling or by culpable neglect of the bankrupt’s business affairs;
The bankrupt has failed to comply with requirement to pay surplus income imposed under section 68 of the BIA given the bankrupt’s household income;
The bankrupt’s failed to perform the duties imposed on him of the BIA or to comply with the Orders of this Court;
Such further and other grounds as Clancy Funding may advise and this Honourable Court may permit.
[31] This notice was delivered in September of 2011. As previously noted, prior to his bankruptcy Clancy Funding obtained judgments totalling about $300,000 against the bankrupt based on personal guarantees given by him with respect to loans made to Master Lift Truck Services Inc. or affiliated companies. Clancy was related to Master Truck firm accountant prior to the bankruptcy.
[32] The notice of opposition delivered by Laurentian Bank of Canada was more succinct. Their list included items one and three included in the Clancy list and added an additional item:
“The bankrupt may have sufficient income over and above his expenses to warrant a monthly payment to his trustee for the benefit of his creditors.”
[33] The disputing creditors attended with no witnesses. Counsel for the bankrupt raised my decision in Baran and complained about the lack of identification of any facts relied upon by the opposing creditor. In response there were complaints about the extremely late delivery of the bankrupt’s materials.
[34] Ultimately, I determined to proceed with the evidence that was available and advised counsel for Clancy that I would be holding him to the items identified in his notice of objection. Certainly I would have preferred more clarity as to what was the thrust was the expected thrust of his opposition. When all was said and done the only items that I was prepared to consider related to the surplus income calculation and the possibility of additional available income being available to provide a recovery for the creditors utilizing the sections that permit the court to refuse or grant a discharge conditionally such as section 173(1)(o):
“the bankrupt has failed to perform the duties imposed on the bankrupt under the Act …”
[35] Laurentian Bank also was owed about $1 million on a personal guarantee they to opposed but negotiated a last minute settlement whereby an amount would be payable by the bankrupt as a condition of his discharge in exchange for the withdrawal of the opposition by Laurentian bank.
[36] On occasion, I have observed what appeared to me to be instances of creditors apparently seeking to require parties to remain in bankruptcy for longer periods by taking advantage of systemic delays flowing from the filing of an opposition. On many occasions I have observed them then withdrawing the opposition on the eve of, or at the actual hearing of the discharge.
[37] In my view this is not how the system is intended to run. There is at least some responsibility on an opposing creditor to justify its allegations raised in a notice of opposition. This is particularly the case where other creditors may elected not to undertake the expense of filing an opposition in the expectation that the existing opposition would not be withdrawn.
[38] Subject to those limitations and concerns, I now turn to a consideration of whether funds ought to have been available to the creditors in this case.
VII. Surplus Income?
[39] With respect to surplus income the trustee reports on July 11, 2013 as follows:
“On July 8, 2013, [sic] the Trustee requested further information to the bankrupt in order to determine if the bankrupt was required to pay surplus income. A copy of the Trustee’s letter and the bankrupt’s response along with the trustee’s surplus income calculation is attached as Exhibit “H”. The schedule indicates that the bankrupt is not required to pay surplus income.” (my emphasis)
[40] That schedule reflects an average monthly income of $4,820.19, which when spousal support and childcare costs were deducted left a net income of $1,814.92. Since the superintendent’s standards for a one-person household allow $1,926 there was apparently a negative “surplus income” of just over $100 per month.
[41] I note that the summary of income and expenses for each month in 2013 completed and signed by the bankrupt were all delivered electronically, three days before the hearing, on July 10, 2013. The package included copies of the T4 statement of remuneration paid issued by Master Lift Inc. with respect to Mr. Wilson for each of 2011 and 2012.
[42] The covering letter from his counsel advises, in part:
“iv) Mr. Wilson advises that his eldest daughter is funding his monthly deficit and the expectation is that he will repay the amounts borrowed when, and if, he is financially able to do so.
v) Mr. Wilson has the use of a company vehicle and all expenses associated therewith are paid for by his employer, Master Lift Inc.”
[43] The trustee concludes its report with this “Recommendation”:
“The Trustee believes that the bankrupt is entitled to his discharge subject to any matters raised at the discharge hearing that would warrant a Conditional discharge.”
[44] Mr. Wilson’s discharge from bankruptcy was thus, for all practical purposes, only opposed at the hearing before me, by Clancy Funding’s counsel.
VIII. Surplus Income Directive
[45] A brief review of the basis for considering surplus income in this case is in order.
[46] Section 68 of the BIA (with my emphasis added )provides in part:
(1) The Superintendent shall, by directive, establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the surplus income of an individual bankrupt and the amount that a bankrupt who has surplus income is required to pay to the estate of the bankrupt.
Definitions
(2) The following definitions apply in this section.
“surplus income” means the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living, having regard to the applicable standards established under subsection (1).
“total income”
(a) includes, despite paragraphs 67(1)(b)
and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, …
[47] Subsection 16 of Section 68 gives a wide discretion to the court in addressing surplus income assessments:
(16) If an opposition to the automatic discharge of a bankrupt individual who is required to pay an amount to the estate is filed, the bankrupt’s obligation under this section ceases on the day on which the bankrupt would have been automatically discharged had the opposition not been filed, but nothing in this subsection precludes the court from determining that the bankrupt is required to pay to the estate an amount that the court considers appropriate.
IX. The Teaching Point
[48] Directive 11 issued by the Superintendent deals with surplus income and provides in section 5 dealing with calculation of the surplus income that the total monthly income is determined by subtracting from the total of all monthly income amounts:
“(a) in the case of a salaried employee, minimum statutory remittances (Income Tax, pension and employment insurance deductions) and other mandatory deductions paid;
[49] It would appear that in this case, for whatever reason, significantly more than the minimum statutory remittances were being withheld and remitted. This may have been simply inadvertent; but counsel for Clancy submitted otherwise. Regardless, it appears that significantly more than the statutory minimums were being deducted from the Bankrupt’s income. Were he to obtain an absolute discharge at the hearing of this motion, this apparent excess withholding would have had the effect of making Revenue Canada, a quasi-bank holding the potential refunds for 2011, 2012 and ( at the stage of the hearing of this motion) the first six months of 2013 for the benefit of the bankrupt.
[50] The T4 slips in this case are reproduced in Schedule “A”. In the normal course they make their way to the Trustee and the data on them is accepted and used to calculate surplus income.
[51] Where the individual is in control of the corporation it is conceivable that extra withholding might have be arranged. Such overpayments would only be refunded after the tax return for the relevant year was submitted and the Notice of Assessment issued.
[52] If the post-bankruptcy returns are not filed until following a discharge the Trustee might never be aware of them.
[53] A number of web sites are available to indicate the usual withholding requirement. One site is found at http://www.metca.com/payroll/webTOD/2014A/webTODpa.php.
[54] There, entering an income of $120,000 yields a CRA withholding of $34,938.86. Significantly less than the amounts in excess of $54,000 reflected on each T4.
X. Reasons for Concern
[55] Clancy Funding is made up of various entities controlled or related to the previous chartered accountant used by the bankrupt and/or his insolvent company.
[56] That entity in all likelihood was aware of some approaches to financial planning that the bankrupt might have considered when it was clear that the recession of 2008 was going to have a devastating impact on his business
[57] No one however testified on behalf of that creditor nor was any affidavit filed.
[58] Their counsel however cross examined the bankrupt with respect to a number of matters contained in the trustee’s report to the court.
[59] The bankrupt attended with counsel who examined him in some detail and filed a chronology with respect to the bankruptcy of the Truck Service outlined earlier in these reasons.
[60] The bankrupt testified that the new business was owned by a childhood friend of his who endeavoured to assist him when a sale either to his competitors or other corporations could not be arranged at acceptable terms.
[61] As noted earlier the court approved the sale to Master Lift Inc. and Mr. Wilson was made the president of that new entity. He was not a director. He was paid $120,000 per annum by way of salary and provided with a company car. In the course of his cross examination it became clear that one of his daughters was also a sales agent for the old company and the new company and was serving as a director of Master Lift Inc.
[62] My understanding is that she was earning about $40,000 per year in her sales position.
[63] However, it was also disclosed that she was being paid $60,000 per annum as for services as a director of the new company.
[64] She was not present to give evidence and it is unclear to me what real services were being provided that justified such a stipend. Particularly, in light of the current market conditions and the fact that numerous employees had otherwise been laid off due to reduced sales volume and market conditions.
[65] The bankrupt filed monthly statements as to his income and expenses for 2011, 2012 and the. January to June 2013. This documentation was sent by his counsel to the trustee on July 10, 2013 this matter was heard on July 18, 2013. This short period of time did not prevent permit detailed analysis of the various documents.
[66] The T4s provided for 2011 and 2012 did not identify the allocation of any amount relating to the use the provision of that vehicle.
[67] What they do disclose is that with respect to income of $120,000 income tax was deducted in 2011 in the amount of $54,967.64 and in 2012 in the amount of $54,441.40. Thus it would appear his net income after withholding amounts is about $65,000 per year or on average $5500 a month
[68] An online income tax program calculated based on a hypothetical single individual making $120,000 in Ontario that in 2012 the income tax payable would have been $36,180.67.
[69] The documentation used to calculate surplus income asks for the net salary of the individual. In this case each monthly statement reflects the take-home net salary of Mr. Wilson with no indication as to the unexplained additional retention reflected on the T4 slips. Mr. Wilson was a unable to provide any explanation as to why the controller had been deducting the higher amount.
[70] Mr. Wilson’s current rental expenses appear to be $2955 a month. In addition he has continuing obligations to his previous spouse for about $2500 per month. Not surprisingly with an average income of $5500 per month and rent in support expenses of $5455 per month he is running a deficit each and every month. By way of examples in January 2011 his shortfall was $3200; in March 2011 it was $2700; in 2012 the January deficit was $1900 and in October 2012 it was 2275. Apparently in January 2013 the deficit was $4010.21.
[71] This kind of budgeting does not reflect that the bankrupt has “trimmed his sails” so as to be able to operate on a balanced budget.
[72] However he has been receiving monies from his daughter who is being paid $60,000 for her duties as a director. I assume that that amount is being taxed at usual rates. The net result may well be that at least for the time being his daughter is not ending up with very much in her pocket for her services as director to the company in which her father is the president.
[73] I would expect that once Mr Miller is out of bankruptcy, as president of the Company it would be reasonable to expect him to be made a director of Master Lift Inc. If that were to happen hi gross income would increase by 50%.
[74] If the monies paid to his daughter were treated as notional income to the father together with a notional payment of the monthly portion of the withholding excess it is clear that there would be a substantial alteration in the surplus income calculation.
[75] At the conclusion of the hearing the bankrupt acknowledged that if he in fact was entitled to a refund on his 2011 and 2012 tax returns which to date he had failed to file, at least a portion of those funds ought to be available to his creditors.
[76] I am left with a dilemma. The bankrupt has been an entrepreneur and received plaudits for his creative approach to the marketing of forklift trucks. He has created jobs and continues to create jobs for people in Ontario.
[77] He was adamant in his evidence that he is only an employee of the new company and that there is no scheme or plan that he will at some point re-acquire the company after its debts and the liabilities on his personal guarantees with respect to the former company’s business have been erased.
[78] There is no evidence before me to contradict this position and the suggestions by counsel for the creditor that this was always the plan are not clearly proven by the evidence before me. Nevertheless the circumstances as outlined above lead me to the conclusion that a significant payment is necessary to maintain the viability of the bankruptcy discharge system and in particular the surplus income provisions of the Bankruptcy and Insolvency Act.
[79] In every discharge case I am required to take a hard look at the personal circumstances of each bankrupt individual. I am obliged to consider the evidence put before me and to determine a just result in all the circumstances.
XI. Disposition
[80] The diligence of counsel for the creditor provided further information that would not of been available to the court but for their challenging this discharge. I am satisfied that they ought to be awarded a first charge on any monies received hereafter by the trustee in the amount of $10,000 which I hereby fix for their “all-in” legal costs payable on this motion.
[81] Mr. Wilson indicated that times continue to be tough in the manufacturing sector and that the industry in which he is involved is extremely competitive with the result that profits are nowhere near what they once were.
[82] Nevertheless monies have been available to pay for the director’s salary and there are funds that will be forthcoming which I calculate at $18,000 for each of 2011 and 2012. The trustee in his submissions indicated that the calculation of surplus income undertaken by him during the course of the hearing today suggested that an amount of about $50,000 would be appropriate. Counsel for the creditor adopted this amount as well.
[83] I am prepared to make the award at $55,000 on the understanding that that number includes the settlement amount that had been previously arranged with Laurentian Bank and an allowance towards the costs that I have established above.
[84] The original settlement with Laurentian Bank contemplated payment being made within 21 months. It seems to me that given the available income tax refunds the bankrupt should be able to complete payment of the total $55,000 amount within 24 months and so the discharge is conditional on payment of $55,000 by July 1, 2016 on the understanding that the 2011, 2012 and 2013 tax returns, if still unfiled, will be filed within 90 days and that a direction will be provided to CRA to forward the all refunds directly to the trustee.
[85] The bankrupt will be entitled to his discharge upon the satisfaction of the condition I am establishing with respect to the payment of the sum of $55,000. If that amount is paid prior to the tax returns being filed then obviously he will be entitled to keep the refunds.
[86] Mr. Wilson had faith in his business. Through no fault of his own, the business suffered severe losses. Nevertheless his creditors relied on him and his personal guarantee with respect to the business. The admitted claims total in excess of $1.5 million. It seems fair to me that at least a payment of 3.33% of that amount to be available to those creditors in the circumstances of this case.
Master D. E. Short
MAY 29, 2014 Registrar in Bankruptcy
DS/ B17
Schedule “A”
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