Consumer Learning Case Study: Summary Administration
This case has been developed and is meant for educational purposes only. All persons, companies, facts and discussions appearing in this case are fictitious. Any resemblance to real persons, living or dead, or companies, existing, or no longer operating, is purely coincidental.
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The Case of Mr. and Mrs. Mitchell
Background
Mr. and Mrs. Mitchell have come to your office as a result of a garnishment of Mr. Mitchell’s Canada Pension Plan (CPP) by the Canada Revenue Agency (CRA). Mr. and Mrs. Mitchell have been partners in the running of a convenience store.They have disclosed the following information by way of the application form (see Appendix A) and throughgeneral discussion.
Youlead the Mitchells through a discussion about the consequences of the issues at hand. You will formalize the options available to the Mitchells at the end of the meeting.
Before considering proceeding with the Mitchell’s, you should consider whether there is any conflict of interest. For example, you should ensure that your firm has not been the recent auditor for the convenience store owned by Mr. Mitchell (see below).
How should the first interview be structured?
You should begin the interview with an explanation as to your role as a trustee in this meeting. You should explain that a trustee is an officer of the court, appointed to administer the Bankruptcy and Insolvency Act. You should explain for whom you are acting, and should also address confidentiality issues. The goal is to explore all options available formal and informal so Mr. & Mrs. Mitchell, the debtors, are in a better position to make a properly informed decision as to how best to deal with their debt. See Directive 6R with respect to a trustee's assessment (see Appendix B).Getting the Full Story
Objectives
- To appreciate the different aspects ina debtors’ history.
Mr. and Mrs. Mitchell are 66 years old and are both retired.
What conclusions might you draw from the fact the Mitchells are retired, and what other information might you ask about their retirement?
The fact that Mr. and Mrs. Mitchell are retired implies their income is likely to be fixed. You should investigate, however, whether one or both of the Mitchells may consider obtaining employment at some point in the near future, as this could trigger a required surplus income payment if they end up filing an Assignment in Bankruptcy. If they consider increasing their income, a consumer proposal may be a possible option, though their ages are an issue.Mrs. Mitchell receives CPP and OAS totalling $1,272 per month, as does Mr. Mitchell. Their combined net monthly income totals $2,544.Their monthly pensions are being used entirely to manage their household expenses.
Given their pension income, what should you explain to the Mitchells?
You should explain that based on the Superintendent's standards a surplus income payment would not be required at this point. However, a slight increase in their pensions could create a required surplus payment. Regardless of whether a consumer proposalor a bankruptcy is considered, the required surplus income amount is a factor to be considered.Five years ago Mr. and Mrs. Mitchell registered a partnership known as “The Whistle Stop” and through it they operated as a mom and pop convenience store from 123 ABC Street in Anywhere, Ontario. The business, they said, "did OK".However, on many occasions, they paid for their incoming inventory with their personal credit cards and lines of credit.
Are there any possible consequences you should consider given that they used credit cards?
You should ask the Mitchells whether they continued to trade after becoming aware of being insolvent. If so, their use of credit could be viewed as a BIA s. 173(1) fact for which discharge could be refused, suspended, or granted conditionally.On Mr. Mitchell's 65th birthday, 18 months ago, as he walked through the plaza parking lot the convenience store was located in,he slipped on a patch of black ice and fell. Mr. Mitchell had been complaining to the owner of the plaza about keeping the walkway and parking lot clear of snow and ice but the owner of the plaza had not taken any action to rectify the situation. An ambulance had to be dispatched as Mr. Mitchell was unable to get up. At the hospital it was confirmed that he had fractured his left ankle and surgery was required.
Though he was on crutches for six weeks,Mr. Mitchellreturned to work after four weeks because Mrs. Mitchell was struggling with managing the business onherown. Mr. Mitchell was diligent with his physiotherapy and made an almost complete recovery within aboutfour months buthewas left with chronic pain in his ankle, which his doctor said he would have to learn to live with.
Since his injury almost two years ago, Mr. Mitchell has been going downhill emotionally. Mrs. Mitchell thinks he’s depressed.
What should you discuss with the Mitchells regarding Mr. Mitchell’s injury?
The issue is whether Mr. Mitchell is considering suing the landlord (on the basis that the landlord was negligent in poorly maintaining the property, resulting in Mr. Mitchell injuring himself and leaving him with chronic pain for the rest of his life). If Mr. Mitchell seeks damages and compensation for pain and suffering this could be an issue if he decides to file an Assignment in Bankruptcy.Approximately six months after the accident, the couple decided it was time to sell the business and retire.However, the Mitchells were unable to find a buyer. As time went on and despair set in, the Mitchells thought they would just sell the inventory and equipment for $5,000 to a couple who were renting the apartment above the store and move on with the rest of their lives.
Unexpectedly,a Canada Revenue Agency auditor came tothe store prior to the sale and conducted a payroll and GST audit. The audit revealed that the couple had failed to file their GST returns or to pay GST for quite some time because they had insufficient cash flow.
After learning of the outstanding GST debt, the couple upstairs decided not to purchase the assets.
Ultimately the Mitchells decided to deplete the inventory and close the store. The business ceased operations eight months ago. At that point they still had two years remaining on the lease at $1,000 per month. They havenot yet heard from the landlord.
What issues concerningthe business's operations should you discuss with the Mitchells?
Although the Mitchells have not heard from the landlord, they would be wise to list him as a creditor for the balance owing for the remainder of the lease. This debt would be considered in a consumer proposal as well as in a bankruptcy.You should note that in the event the Mitchells consider filing an assignment in bankruptcy, it would not be necessary to bankrupt the partnership as there are no longer any assets.
You may wish to review applicable legislation to explain why the couple upstairs decided against purchasing the assets (that is, the Bulk Sales Act issues or similar legislation in provinces where the Bulk Sales Act no longer applies).
Mr. and Mrs. Mitchell own their home jointly. It was recentlyappraised at $105,000. The current outstanding mortgage balance with TD is for $100,000. The mortgage payments are current and the Mitchells would like to keep their house.
The Mitchells both have small life insurance policies with London Life. Each has a face value of $10,000 and they are the beneficiaries of each other’s policies. They have no children.
What should you explain about how the Mitchells' home and their life insurance policies would be treated in a consumer proposal? In a bankruptcy?
You should explain that it appears there may be $5,000 of equity in the house that may have to be considered in determining the amount proposed in a consumer proposal, depending on provincial exemptions. In the event of a bankruptcy, the equity may have to be paid into the bankruptcy estate (50/50 as joint property), depending on provincial exemptions. In the event they want to keep the property, the Mitchells should arrange with the mortgagee to continue making mortgage payments.You should also explain that, pursuant to the Insurance Act, the cash value of a life insurance policy would be exempt from seizure. You should explain current case law with respect to inheritances and life insurance proceeds in the event of the death of one or the other spouses. Specifically, life insurance proceeds would vest with the trustee (based on Grobstein v Kouris 17 C.B.R. 333 (1936) S.C.R. 264. See also Houlden, Morawetz and Sarra in this regard.
Mr. Mitchell's nephew, Robert, owns an automotive repair company and,since his retirement, Mr. Mitchell has helped out around the shop. Indeed, in his retirement, Mr. Mitchell has become a Director and shareholder of Robert’s automotive repair company and he holds the office of Secretary.
While Mr. Mitchell was helping out Robert, Mrs. Mitchell, unknown to Mr. Mitchell, was going to the casino in the next town in an attempt to win enough money to pay off their debts and get them “out of this mess”. To finance her gambling, Mrs.Mitchell obtained two credit cards in her own name and ran up $15,000 of debt on each credit card.
Given the Mitchell’s situation, are there any other unique factors you should explain to them?
You should explain that under certain provincial corporation acts a person cannot be a Director of a provincial corporation and be personally bankrupt at the same time. You should also mention that the value of the automotive company shares held by Mr. Mitchell will be a consideration in whether a consumer proposal is considered or an assignment in bankruptcy is filed. The shares are property of the debtor and valued in considering the amount of a proposal that should be made. In the event of an Assignment in Bankruptcy the shares vest with the Trustee.The fact that Mrs. Mitchell used credit to gamble is frowned on by the courts and her actions may be causefor which discharge may be refused, suspended, or granted conditionally, pursuant to s. 173 of the BIA. Because of this, the Mitchells should they decide to file assignments in bankruptcy, should consider separate assignments rather than a joint assignment in bankruptcy.
You should explain that under Directive 2R, assignments filed under the provisions relating to summary administration may be dealt with as one estate where the debts of the individuals making the joint assignment are substantially the same and the trustee is of the opinion that it is in the best interest of the debtors and the creditors but that, given their situation, this may not be the best choice for the Mitchells.
Note: Going forward, assume that two separate assignments will be filed, one for each individual.
Mrs. Mitchell is the registered owner of a 2000 Dodge Caravan. Her mechanic advises that it has no cash value as it would cost more to certify it than it is worth.
Mr. Mitchell is the registered owner of a1999 Dodge Neon, which he pledged as security for a consolidated loan two years ago. The $19,000 loan was used to pay off various credit card debts at that time and to purchase about $4,000 of inventory for the store. He is now two months behind in payments on the loan and the bank is threatening to repossess the car, which has a market value of $1,500.
Whatshould you explain to the Mitchells about the cars and other assets they own in terms of what would happen to them in the insolvency?
Pursuant to Directive 25, a trustee will not take any action against Mrs. Mitchell’s vehicle as there would be no financial benefit to the estate creditors. Additionally, a vehicle may be considered exempt pursuant to provincial legislation, depending on the province.In the event the bank seizes Mr. Mitchell’s vehicle prior to bankruptcy, the shortfall will be discharged. If a consumer proposal is considered the shortfall would be unsecured and included in the proposal. A trustee will have to have a firm understanding of the applicable provincial legislation to be sure what will happen with respect to the vehicle because in some provinces it may be that the vehicle could not have been pledged to begin with. In others, legislation may prohibit the seizure of the vehicle as it could be considered exempt property because the loan was a consolidated loan and not a PMSI (purchase money security interest).
Having verified that the bank perfected its security interest in the vehicle and that provincial legislation allows the bank the right to enforce its security, a trustee in a bankruptcy scenario could release its interest in the vehicle as there is no equity available for the unsecured creditors. Mr. Mitchell could either arrange to continue payments to the secured lender in order to maintain the vehicle or he could abandon it to the trustee the day of the filing of the Assignment in Bankruptcy.
You should, however, explain the applicable provincial legislation that relates to the ability or inability of a secured creditor to realize on security that is considered exempt property as defined by provincial legislation.
Because a consumer proposal is made to unsecured creditors only, you should explain that a trustee would not be required to release his/her interest in the vehicle in the event Mr. Mitchell wanted to maintain the payments. The only consideration with respect to the vehicle is that the amount of the secured debt is included in determining whether or not his debts are under $250,000, thereby providing them the opportunity to file a Division II Consumer Proposal as defined in s. 66.11 of the Bankruptcy and Insolvency Act.
TheMitchells both indicate they have no other assets, investments, or property other than their home furnishings, which, at auction, might have a total value of $5,000, and personal items that might have a total value of $1,000.
What should you tell the Mitchells about the treatment of these other items?
You should explain whether these items will be considered exempt under the applicable provincial legislation.Understanding Government Payments
Objectives
- To understand debts under s. 178 of the BIA.
- To appreciate the relationship between E.I. particulars and procedures in relation to s.178 debts.
- To understand the timing of the appeals process under the provisions of the Income Tax Act.
When Mr. Mitchell visited his bank recently to withdraw some cash he noticed that his Canada Pension Plan deposit was considerably less than it should be. He quickly contacted Income Securities and learned that CRA had issued a “Requirement to Pay” against his pension.
According to the collection agent in charge of his personal income tax account, Mr. Mitchell is delinquent in filing his personal tax returns for the previous two years. As a result, CRA completed an arbitrary assessment two months agoclaiming that Mr. Mitchell owed $30,000 in personal income taxes. Apparently this assessment was sent to Mr. Mitchell at that time but, because he didn’t understand what the assessment meant, Mr. Mitchell ignored the notice.
What should you advise Mr. Mitchell concerning his Canada Pension Plan issues?
You should ask Mr. Mitchell if he believes CRA’s assessment is realistic. Whether he believes it is not, you should explain to Mr. Mitchell that, pursuant to the ITA (Income Tax Act), he has 90 days to appeal the CRA's decision from the date of the Assessment. In the event he proceeds with filing an assignment in bankruptcy so that the personal income tax would be discharged (because it is unsecured), you are required to file tax returns for the year immediately preceding the year of the assignment together with the return for the year of the assignment (both for the pre- and post-bankruptcy periods).You should also explain that, in the event of a consumer proposal, the outstanding returns should be filed by the debtors so accurate balances of what is owed to creditors can be determined.
Mr. Mitchell should be advised that a formal proceeding of either a consumer proposal or bankruptcy would stay the requirement to pay issued by CRA against his CPP.
Although Mrs. Mitchell also failed to file her income taxes for the past two years, she has not yet been assessed.