In insolvency, trigger clauses have their limits

I have observed many situations where very large corporations have dropped the ball in drafting their contracts.  Employment contracts contain many dumb errors, which I should expand upon in a later post. In this one, I want to talk about how Bell Mobility discovered how a clause in their contracts that aimed to limit its liability could be easily set aside by the courts. McCarthy Tétrault discussed it recently (as seen here), concerning the case of Aircell Communications Inc. v. Bell Mobility Cellular Inc. (2013 ONCA 95 (CanLII)).

Aircell, a dealer of Bell's products and services, was experiencing financial difficulties. Its agreement with Bell provided that:

• upon its expiry, or 
• if Bell terminates the Agreement as a result of Aircell’s failure to remedy a default in payment within 30 days after notice of default, or 
• otherwise in accordance with the Agreement, 

 all of Bell’s obligations to pay commissions “shall cease immediately”.

At the time in question, Aircell was holding CAD 64,000 of Bell's product, and Bell owed Aircell CAD 188,981 in commissions. Aircell held a meeting, at which a Bell representative was present, to explore restructuring options, and Bell gave notice at the end of that meeting that it would terminate the agreement within 30 days if payment had not been made in full. Unbeknownst to Bell, Aircell had already filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. It was deemed to be bankrupt before the end of the 30-day notice period.

The bankruptcy trustee for Aircell successfully sued Bell Mobility for the difference between the value of the inventory held  and the amount of commissions owing, and the ruling was upheld by the Ontario Court of Appeal last February.

The ruling was based on the common-law principle of "fraud against the bankruptcy law", which was imported into Canadian bankruptcy law in the case of CIBC v. Bramalea Inc. (1995 CanLII 7420 (ON SC)). In that case, a clause in a partnership agreement provided that, in the event of default by an insolvent partner, a non-insolvent partner would have the right to purchase the other's partnership interest at the lower of net book value and fair market value. The Supreme Court of Ontario held that such a clause was void as being contrary to "the public policy of equitable and fair distribution amongst unsecured creditors in insolvency situations."

CIBC dealt with this principle in the case of the direct consequence of insolvency. Aircell has extended it to indirect cases as well. All businesses should be aware of the impact this may have on business arrangements they have entered into, or are contemplating to undertake. At the very least, trigger clauses may need to be framed to occur only in cases that fall outside the Canadian definition of insolvency.

Another reason to keep your affairs in order

The Globe and Mail recently published an article relating to the long-arm powers available to the Canada Revenue Agency to collect its debts. In this case, it concerns the transfer of property in non-arm's-length transactions where the transferor has outstanding tax liability, which, under s. 160 of the Income Tax Act, will attract liability in the hands of the recipient.

S. 160's reach is quite broad:

• it captures the transfer of property, either directly or indirectly, by means of a trust or by any other means whatever, to
• a person's spouse or common-law partner, anyone under the age of 18, or anyone not being dealt with at arm's length,
• resulting (before taking into account the effect of the income attribution rules in the Act) in both the transferor and transferee being jointly and severally liable for the amount (in excess of the fair market value of any consideration given) in order to satisfy the outstanding tax liability in question.

What constitutes a "transfer of property?" It can be:

• a gift or bequest,
• a deposit into the transferee's bank account,
• releasing an interest in a joint bank account or a joint tenancy to the other titleholder,
• making payments on another person's mortgage,
• a tax-debtor corporation issuing dividends to related shareholders who are in a position to control the corporation, or
• a series of transactions from one non-arm's-length person to another (in which case the joint and several liability applies to all parties!)

but it does not include payments made under a court order or separation agreement (by virtue of s. 160(4)).

Two recent cases at the Federal Court of Appeal help to explain s. 160's scope:

• Canada v. Livingston, 2008 FCA 89 (CanLII), [2008] 3 CTC 230(which addresses the key criteria for s. 160 assessments)
• Yates v. Canada, 2009 FCA 50, [2010] 1 FCR 436, [2009] 3 CTC 183(which calls for strict interpretation of the section)

There is no limitation period by which such an assessment can become statute-barred, and the effects do not end there:

• s. 325 of the Excise Tax Act provides that, where there is an amount by which such an undervalue transaction exceeds the liability that can be assessed under the ITA, it is available for similar assessments to satisfy any outstanding liability for GST/HST.
• s. 96 of the Bankruptcy and Insolvency Act provides similar recovery powers in the event of certain undervalue transactions occurring prior to bankruptcy (within the previous year, or the previous five years if the transaction was not at arm's length) where the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or the debtor intended to defraud, defeat or delay a creditor.

I have published several posts recently on the need to prove a genuine business case before undertaking transactions that are not at arm's length. This is an addition to what should be kept in mind.

You always need a business case...

Many readers in the business world will know of instances where corporations they were working for, or dealing with, have indulged in oppressive or abusive behaviour. The larger ones are more likely to have internal procedures or protocols to mitigate such effects, but the SMEs have tended to be more reckless.

If you're dealing with an American corporation, the rules will more than likely operate in their favour. If the corporation has been established in Canada, you can fight back through the oppression remedy available under the various corporation laws. This is an innovation that has developed in many countries of the Commonwealth, but it has attained significant breadth of scope here.

What types of behaviour can be addressed under an oppression claim? Basically, it can be potentially used by any stakeholder to deal with any type of unfair conduct by a corporation, and the definition is "wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure" (as noted in the English case Re HR Harmer Ltd, [1959] 1 WLR 62 at 75,  by Jenkins LJ). In Canada, stakeholders include:

• a current or former registered security holder,
• a current or former director or officer,
• the Director appointed under the CBCA, or 
• "any other person who, in the discretion of a court, is a proper person to make an application under this Part" (which can cover creditors, debtors or employees)

The types of behaviour that can be addressed, and the scope of the remedies available, are breathtaking:

• Claims can extend to an affiliate not incorporated under the same Act 
• It has been used to enforce unpaid judgments against the corporation's directors, where the corporation had been subject to asset stripping 
• It has also been used in conjunction with other remedies — including the threatened winding up of a company by the court — in order to resolve shareholder disputes in closely held companies. 
• The Crown has employed the oppression remedy in its status as a creditor under the Income Tax Act, in order to set aside dividend payments that rendered a corporation unable to pay its tax liability. 
• Where a company has made excessive salary payments to a controlliing shareholder, a judgment creditor has been permitted to be a complainant in order to recover the excess amounts. 
• A wrongfully dismissed employee can make a claim in order to thwart a corporation from conducting asset stripping in order to make itself judgment proof. 

What can a company do to protect itself against such claims? The Supreme Court of Canada, in BCE Inc. v. 1976 Debentureholders, stated that, where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. There are no absolute rules and no principle that one set of interests should prevail over another. Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform.

Therefore, the directors really need to do their job properly in looking after the corporation's interests first, being aware that evasion of liabilities and condoning disputes among shareholders and other key players do not make for good business, and documenting the business case for undertaking any fundamental changes to their corporate and cost structures. Well-written business agreements will also go a long way to address key concerns.

Your presence on the web: what's best for your needs?

While Facebook and Twitter are receiving excellent visibility in the media — as they very well should — there are other options somewhat less ephemeral but nevertheless worth considering in getting your message across.

Personal websites

Options that are available at Google Sites, LinkedIn, VisualCV and the like are somewhat static, but they can help focus your message to specific audiences. I particularly like Google Sites, as you can create multiple pages and filing cabinets in order to individualize your presentation.

Blogs

Both Blogger and Wordpress have impressive options relating to widgets and templates, as well as the ability to incorporate specialized scripts. I particularly like MathJax, which I have put into Blogger in order to properly construct mathematical expressions for some of my articles. You can also arrange to publicize your new posts to Facebook and Twitter as well, in order to spread the word.

I have opted to split my postings into two blogs — Blogger for particularly professional statements, and Wordpress for personal viewpoints and recollections. That is a personal choice, but it seems to fit into the tools that are available for each, and it gives me a chance to experiment with what can be done. Besides, it's fun!

Wikis

I have been doing some editing on Wikipedia, and I am finding that wikis can be very powerful tools, especially in an organizational context:

• as any article can be edited by anyone,  a topic can be quickly created and refined where there is a critical mass of knowledge that can be drawn upon (ie, the wisdom of crowds)
• an article can be promptly updated when updated information becomes available
• it can provide a reasonable replacement for the organization manuals that can otherwise be subject to the obsolescence of the printed word in a fast-changing environment
• all previous versions of the article are still available to be consulted, in order to review for reasonableness and to provide document control (which can be critical for complying with documentation requirements such as those found in ISO 9001)
• footnotes and bibliographies can be easily constructed, together with hyperlinks to related articles and to reliable external sources
• when appropriate policies are instituted relating to the enforcement of reliability and the observance of intellectual property rights, proper administration and supervision of the wiki will result in a reliable body of information that members of the organization will be willing to rely on

MediaWiki, the platform on which Wikipedia is based,  is free to download and to implement. Just make sure you check all the other notes relating to installation requirements and compatibility. There are other wiki platforms as well, so see which one would work best for you.

I still can't believe this

The story that came out several days ago about top Liberal staffers in the Ontario provincial government — including those in the Premier's office — caught deleting e-mails from their systems is wrong on multiple levels:

• it runs contrary to the desire to keep all such communications as part of the historical record
• retention is mandated under the province's Archives and Recordkeeping Act, 2006
• even if the Act's penalties are weak, observance is the honourable thing to do
• there are relatively cheap means that could have been implemented to ensure that deletion could not have taken place (I particularly recommend the solution provided by Mailstore, but there are others)

There have been many spectacular stories in recent years about how this province's government has been mismanaged, but this story serves as a microcosm for the entire affair.

The real reason for Canada's lagging productivity?

Deloitte has been tracking the issue of the low productivity of Canadian businesses relative to those in the US for some time now, and this year's report proved to be a genuine eye-opener. On the other hand, the results were not really that surprising to those who know: as The Globe and Mail summarized it, Canadian companies are delusional:

• 36% of them are chronically underinvesting and not aware of it, while 14% know they are and are comfortable with that choice
• there is too much inclination to view matters internally, without benchmarking to what is happening externally
• firm size accounts for only 2% of the Canada-US productivity gap, and sector composition only 6% — the rest is happening within the sector itself
• all of this is happening despite the huge incentives Canadian tax legislation has in place to encourage capital spending and R&D activity, as well as the relatively cheap cost for improving IT and communications infrastructures

 This is no surprise to those who have had to deal with management on both sides of the border. Perhaps embarrassment is the way to go, to really start things moving...

A reminder: what you need to do to secure your ITCs

The Canada Revenue Agency is tightening their audit routines for determining how much can be allowed for input tax credit claims. Here is a refresher about the rules you must follow when you are registered to collect GST/HST.

What has to appear on invoices

The regulations presume that the basic information must appear on invoices that are supplied for a transaction, and must be captured on the registrant's books and records (essentially your accounting system). The information that must be supplied depends on the value of the invoice:

Information required	Invoice less than CAD 30	Invoice = CAD 30.00 - 149.99	Invoice = CAD 150 or more
Your business or trading name, or your intermediary's name (registrant with whom you have an agreement to help you supply your goods or services)	Y	Y	Y
Invoice date	Y	Y	Y
Total amount paid or payable	Y	Y	Y
An indication of the total amount of GST/HST charged or that the amount paid or payable for each taxable supply (other than zero-rated supplies) includes the GST/HST at the applicable rate	N	Y	Y
When you supply items taxable at the GST rate and the HST rate, an indication of which items are taxed at the GST rate and which are taxed at the HST rate	N	Y	Y
Your business number or your intermediary's business number (registrant with whom you have an agreement to help you supply your goods or services)	N	Y	Y
The buyer's name or trading name or the name of their authorized agent or representative	N	N	Y
A brief description of the goods or services	N	N	Y
Terms of payment	N	N	Y

Most accounting systems will capture the above information on invoices that they generate.

Circumstances where no invoice is supplied 

Certain exceptions are allowed with respect to the invoice requirement in the case of:

• unvouchered cash payments, 
• computerized books and records, 
• contractual arrangements (such as leases), 
• reimbursement of meal and entertainment expenses, 
• meal and entertainment expenses allowances, 
• reimbursement of expenses (other than meal and entertainment expenses), 
• allowances (other than for meal and entertainment expenses), and 
• taxi or limousine fares 

 There are some minor variations of the requirements for each of these categories, but the following apply to all:

• name or trading name of the supplier (or employer with respect to reimbursements and allowances)
• business number of the above
• date or reporting period for the transaction
• amount paid, as well as the amount of GST/HST
• the type of supply

 This area is where many businesses may get tripped up:

• are business numbers of suppliers being recorded on the books and records?
• are they being otherwise supplied on the execution of contractual arrangements?
• are all business numbers supplied being verified through the CRA GST/HST registry (and the QST registry, if you are registered for Quebec Sales Tax)?
• would it be a good idea for the employer to print its business number on expense reimbursement forms?
• do reimbursement claims distinguish between the different provinces with respect to the travel that has occurred (which may impact on any recapture of ITCs)?
• does the same go for any allowances that are paid?
• are the requirements relating to the use of corporate credit cards being properly observed?

The above is just a shortlist of the questions that need to be examined. The CRA website has many other topics that should be taken into account as well.