"Going concern" v "insolvency": there is a difference

There are still too many among directors and senior management that believe an auditor's assessment of  a company as a going concern is the same as as a directors' assessment of its potential for insolvency. That is not a correct view, because the two concepts can diverge either way:

• an entity may still be capable of paying its debts as and when they fall due, but at the same time not be a going concern because the directors intend to liquidate or significantly curtail its operations within the relevant reporting period; and
• a company may still meet the criteria of being a going concern because of its intention and capacity to maintain the scale of its operations, while still facing significant uncertainty in being able to pay longer-term debts as and when they fall due.

An entity's status as a going concern arises from IAS 1, which is its current foundation  in Canadian GAAP. Securities laws require it to be addressed in an annual report's Management Discussion and Analysis, although the Ontario Securities Commission has noted major deficiencies in that regard.

The directors' assessment for the potential of insolvency is preemptive in nature, and arises from both statutory and contractual duties. CPA Canada has noted that there is a crucial need to ensure an early determination, in order to employ available  options and avert potential default on a timely basis.

Even if there are no immediate concerns, auditors must still address whether any material uncertainties may exist that need to be noted in a company's financial statements, and be prepared to issue an adverse opinion if such uncertainties are not addressed therein.

This is further evidence of the current requirement of directors and management to be proactive in addressing their duties, as being reactive will, in almost all cases, will be too late.

In performing their duties, directors must act reasonably.  It has been held that reasonable grounds do not include "unquenchable optimism," and the following list indicates factors that suggest where an unreasonable action has occurred in assessing insolvency:

1. Where, although the officer has never adverted to it, there is at the objective level no reasonable or probable ground of expectation  to the relevant effect;
2. Where the officer himself has a subjective expectation of the relevant kind, that there is no objective ground for the expectation;
3. Where, as a matter of subjective judgment, the officer lacks the expectation yet, unknown to him, there is, on an objective appraisal, a reasonable or probable ground of expectation; and
4. Where the officer does not care whether the postulated event of payment will occur, and it appears that objectively there was no ground of expectation.

On the other hand, directors cannot give a qualified opinion as to material uncertainties, either through an expression of hope or envisaging unlikely scenarios, and the use of boilerplate statements in either the MD&A or the notes to financial statements is viewed as being very unhelpful. For example, if a qualified opinion is being considered as to the availability of financing from a financial institution or shareholder to ensure continuing as a going concern, genuine negotiations with a reasonable likelihood of success should be shown to be underway at the date of the statement.

The future of HR for employers

Last month's ruling by the Supreme Court of Canada in Wilson v Atomic Energy of Canada Ltd—even though it is ostensibly restricted in scope to federally regulated employers—should give pause to all organizations in the management of their workforces. Taken together with other recent SCC judgments, we can see that the HR landscape is becoming quite different in many respects from what many of us have been used to over these past few decades.

This most recent decision has several notable aspects that have far-reaching consequences: Much comment has been made about the inability of federally regulated employers to terminate non-managerial employees without just cause (provided that they have worked for more than twelve months). It was noted that the federal scheme displaced the common law with a scheme requiring reasons to be given for dismissal, and that the payment of a generous package cannot avoid a determination under the Canada Labour Code on whether the dismissal is unjust. I can see this having an impact in dealing with complaints on human rights issues, such as under Ontario's Human Rights Code, where settlements can be reached only after a complaint has been filed. This scheme appears to qualify as another instance where the common law has been displaced in favour of a statutory right.

One commentator has suggested that perhaps, in the federal sphere, probation periods can be extended to twelve months in order to be able to quickly dismiss employees before the Code's protections kick in. I can see several practical reasons why this would not be so easy from the employer's point of view:

• such periods only exist when specified in an employment agreement, and its consequences must be explicitly laid out therein;
• they cannot be unreasonable in length (which will depend on the nature of the position and the qualifications of the incumbent), but can be extended when the agreement explicitly provides for such an option;
• there can be liability for negligent misrepresentation, where the parties are each under a duty to exercise reasonable care to ensure that any representations they make are correct, which can impact on the intent being expressed for the use of probation;
• if the specified period is greater than three months, the agreement must comply with the minimum notice provisions in the Employment Standards Act, 2000;
• liability for wrongful dismissal will still occur if termination occurs before a probation period even begins, as noted in a recent BC case;
• termination within the period does not mean that notice (or pay in lieu thereof) can be avoided, as the common law still requires adequate notice to be given even when statutory notice is not required; 
• keep in mind that employers in Québec are required to act in good faith during all stages of the employment relationship, while the common law provinces have such a duty only during the relationship and its termination.
• termination can only be done in good faith, and that concept should be reinforced by stating within the agreement the purpose for which the probation period is required, for which adequate documentation should be kept to support the employer's assessment of the employee's performance;
• however, there have been cases where a court has held that termination can occur without notice and without reasons when not done in bad faith.

The above list is not exhaustive, but it applies to provincially regulated employers as well, and other concerns may easily arise. These are interesting times indeed!