My Contractor Doesn’t Exist, Can I Sue?

It is common for contractors and other service providers to incorporate prior to starting a business. A corporation can provide a certain level of insulation from liability for the people who operate it, and in addition, allows for other advantages such as tax planning. While it provides the operators with liability protection, it can leave an aggrieved customer with nowhere to turn. This is especially true where the issues are not evident at first instance. Many times a construction defect takes years to materialize.

Making this situation even worse for the customer is that by the time the construction defect materializes, the corporation that provided the service may no longer be in business. A corporation can, subject to certain requirements, dissolve and liquidate its assets at any time. If a corporation does so before it is sued, or even knows about the construction defects, any leftover assets can be paid out to its shareholders. At the first instance, the customer is left holding the bag, while the shareholders are left with a windfall.

Thankfully, The Business Corporations Act (Saskatchewan) (the “Act”) contemplated these issues. Section 219 specifically allows someone to sue an inactive corporation. However, even in that instance, you must act fast as you only get two years to do so. While not a perfect solution, it does provide an avenue for aggrieved customers to right the wrong.

In addition, the Act also allows you to attempt to recover the assets or at least their value, that were paid out to the shareholders. This prevents the corporation and its operators from side-stepping its liabilities.

That being said, deciding to sue a dissolved corporation will cost time and money. It may be that the corporation dissolved because it had no assets. In some situations, all of the assets of the corporation may have gone to other creditors such as a bank or someone else who sued the corporation. Therefore, any legal action is unlikely to provide meaningful results.

Before deciding to sue, some background work can be done to determine if legal action is worthwhile. These steps include:

  1. Pulling a corporate profile report from Information Services Corporation. A certificate of dissolution, and sometimes other supporting documents, may be filed online. Recovering a copy of these, for a small fee, may shed some light on the financial situation of the corporation; or
  2. Contact the Ministry of Finance. The Act specifically requires corporations with known creditors, who cannot be located, to payout a certain portion of their assets to the Ministry of Finance for future claims. There is no guarantee that the corporation will have done so, and if it did not know that the construction was faulty, the funds may not have been paid, but it is an inexpensive step that may lead to partial recovery.

At the end of the day, you should ask yourself whether you are ready to commit the time and financial resources to pursue an inactive corporation. In some instances, your first loss is your best loss, and throwing further money down the rabbit hole may only lead to frustration.

However, in others, meaningful recovery may be achieved. You should not simply give up because your contractor has gone out of business, especially where he or she has started a new business. They may have simply taken their assets to avoid their liabilities, and you can still recover.

This article is intended to provide legal information only, not legal advice. 

For further information, please contact:

Travis K. Kusch
Direct: 306-933-1373
Email: [email protected]

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Protecting Your Assets the Right Way

A creditor bearing down on you, or an impending bankruptcy, brings many concerns and unknowns. You may have a family farm, a collectible such as an antique car or other assets that you wish to protect from your creditors. In order to save those assets, you may think it is prudent to transfer those assets to a spouse, family member or close family friend. However, these types of approaches are not as straightforward as they sound and can come with pitfalls where the transfer is not properly completed.

Before attempting to protect your assets, a few helpful tips should be remembered.

Transfer The Asset for Fair Market Value

This is the most important rule to remember. If you have a quarter section of land or an antique car, you cannot simply gift it away to a family member before assigning into bankruptcy. All transfers when you are, or are about to be, insolvent will be subject to scrutiny. The Fraudulent Preferences Act requires that all transfers to a non-arm’s length party (think someone you know better than an acquaintance) require the transfer to be for fair market value.

In order to do so, it is generally advisable to obtain a valuation from an arm’s length third party, such as an auctioneer. Having these objective benchmarks will allow you to show to your creditors, and the Court if necessary, that the transfer was within reason.

However, just because you have transferred the asset for fair market value does not mean you are out of the woods. The cash you receive for those assets needs to be accounted for, as your creditors may be entitled to a share of those funds as well. If you are planning a transfer, you should consult with your legal advisors as to if those funds should be held in a segregated trust account, paid directly to creditors or otherwise.

Among other things, you will want to make sure you account for your secured creditors who may have a security interest in the asset you have sold.

The Asset May be Exempt

Just as important to consider is the fact that the transfer may be unnecessary. There are various pieces of legislation that provide bankrupt parties with exemptions, meaning certain assets cannot be seized. This is especially true for farmers, who, provided they have a plan to continue actively farming, may be able to retain many of their farming assets.

It may be that the transfer is unnecessary, and you are not only incurring extra work and expense, but you are also raising the suspicions of your creditors. A careful evaluation of whether or not the asset is even capable of seizure should be done before you begin to decide where and how to transfer it.

Conclusion

Of course, before any transfer of this nature is undertaken, you should consult with both your legal professional and/or your insolvency professional to ensure you are acting in accordance with the law. Transfers prior to an insolvency will raise red flags for any creditor, so you will make sure the reward outweighs the risks and difficulties you will face.

Should you have questions, please contact Robertson Stromberg today to begin the process.

Contact a Lawyer on this subject.

Travis K. Kusch

Direct: (306) 933-1373
Main: (306) 652-7575
Fax: (306) 652-2445
Email: [email protected]

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The Limitations of Bankruptcy Proceedings

As an unsecured creditor, you are often placed in a difficult position when it comes to debtors who cannot afford to pay their bills. You can seek judgment, but you are often taken in line with other unsecured creditors who do not expect to receive on their debts as well. Furthermore, you are always subject to the risk that the debtor will simply file for bankruptcy and wipe the slate clean.

Where the debtor does not make the empty threat, and actually assigns into bankruptcy, the unsecured creditor is often left to take pennies on the dollar. However, section 178 of the Bankruptcy and Insolvency Act provides a laundry list of reasons why a debt may survive the bankruptcy. While there are ten separate situations in which the debt may survive bankruptcy, from a creditor’s perspective the most common is that the debt was incurred as a result of fraud or fraudulent misrepresentation.

In Saskatchewan, the most common allegation of fraud occurs when a debtor applies for financing and knowingly misleads the creditor in filling out the disclosure forms. The failure to include certain debts, or misleading the creditor about the value of one’s assets, may result in a finding of fraud. In other examples, the creditor may allege that the debtor fraudulently conveyed his or her assets on the eve of bankruptcy and therefore, those assets must be returned.

Where a creditor suspects this to be the case, and the debtor has filed for bankruptcy, the creditor is left with two, non-exclusive, options:

  1. The creditor may oppose the discharge of the debtor from bankruptcy on the basis of fraud. The fraud claim may then proceed as part of the bankruptcy matter and affect the conditions or suspension of the discharge. Typically, there must be more than a mere allegation of fraud before the Registrar in Bankruptcy will intervene; and/or
  2. The creditor may commence a completely independent action on the basis of fraud against the debtor. This may be started before or after the bankruptcy proceeding.

Where option two is selected, this brings into play important considerations regarding how a limitations period may be effected. An assignment into bankruptcy automatically stays all proceedings against the debtor and in Saskatchewan, The Limitations Act provides for a two-year window from the date a claim was discovered to commence an action.

Luckily for creditors, section 25 of The Limitations Act provides that the limitations period is stayed during the course of the bankruptcy proceeding. The two-year calculation stops on the date of assignment and restarts at the date of discharge. This provides creditors with the ability to see how the bankruptcy plays out, determine the amount of their deficit and make an educated decision on whether they should run the risk of attempting to prove fraud and collect. 

Interestingly enough, the Ontario Superior Court was recently given the opportunity to weigh in on a unique interplay between limitations periods and the Bankruptcy and Insolvency Act. In Re Eyton, 2021 ONSC 3646, Mr. Eyton was assigned to bankruptcy, listing all of his creditors in his initial assignment documents. Notably present was a debt owing to Forty-One Peter Street Inc. from 2001, nearly 18 years prior to his assignment. While some periodic payments were made and Mr. Eyton made plenty of empty promises to Forty-One Peter Street Inc., it was relatively clear that the Forty-One Peter Street Inc. debt was limitations barred had there not been an assignment into bankruptcy.

Notwithstanding that, upon being listed on the statement of creditors, Forty-One Peter Street Inc. filed a proof of claim for $400,000. The Trustee disallowed the claim by Forty-One Peter Street Inc., and, for obvious reasons, the other creditors also objected to its inclusion. The Court concluded that, notwithstanding the fact the bankrupt conceded the debt, given the debt was statute-barred it was not an enforceable debt and Forty-One Peter Street was not entitled to share with the other unsecured creditors.

It is interesting to note that the Court concluded that just because a bankrupt lists and concedes a claim, it does not always follow that the creditor is entitled to a share of the Estate. The creditor must still be able to prove their claim in bankruptcy and a limitations period would prevent the creditor from doing so. An assignment in bankruptcy cannot operate to save a creditor and revive an otherwise unenforceable claim.

The above serves to reinforce that, while in certain circumstances the Bankruptcy and Insolvency Act can provide creditors with additional time, creditors must be ever vigilant of impending limitations periods and be careful not be mislead by creditor’s empty promises and threats. If you are of the opinion the two-year period is approaching, it is best to issue the claim out of an abundance of caution and plan accordingly thereafter.

    Every determination of reasonableness will, of course, always be fact-specific.

    A side question not raised in Bryant Estate, was whether a party in the position of Franklin’s estate could also simply rely on the inherent jurisdiction of the Court of Queen’s Bench to secure an order for an accounting. That specific question will therefore have to await the guidance of a future court.

      If you are interested in bankruptcy and insolvency, commercial litigation, debt collection, and related matters, Robertson Stromberg LLP would be pleased to assist.  For more information, please contact Travis K. Kusch at 306.933.1373 or email  [email protected].

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      The Deadbeat Debtor – Is it Worth it?

      All too often, creditors are forced to face the realization that their debtor cannot, or simply will not, pay. Whether it be because of a tenant, purchase of goods or contractor, the creditor is faced with very few avenues to recover the debt. The creditor is forced to consider taking ten cents on the dollar and drawn-out payment plan or bringing a formal court action.

      While suing a defaulting debtor can lead to a relatively quick judgment as some defaulting debtors simply do not defend, the creditor then faces the realization that the judgment they have obtained is not worth the payment it is written on. The creditor has spent time and money, including legal fees, to obtain a judgment that they will never collect on. To avoid this pitfall, there are ways for creditors to attempt to act quickly to ensure they obtain some form of payment.

      First, focussing specially on the commercial landlord, landlords can attempt to distrain on their tenant’s property. In doing so, the landlord must act quickly as one can only distrain on property that remains on the leased property. The landlord must also avoid the common pitfall of terminating the lease and then attempting to distrain, as once a lease is terminated, the landlord’s right to distrain goes by the wayside.

      Creditors may also attempt to register a lien in order to protect their interests. While the most well know lien is the builders’ lien, there are other lesser-known processes provided for in The Woodmens’ Lien Act, The Commercial Liens Act and The Threshers’ Lien Act. Any creditor who may have lien rights should act quickly to ensure the funds that are being held back under the lien legislation are not disbursed.

      If you are one of those unfortunate creditors who cannot utilize a lien to enforce the debt, and do not have a security interest in the debtor’s property, you may be forced to consider whether pursuing the debt is worth while. If the debtor is unwilling to agree to a payment plan or other resolution, you will be forced to gamble on whether you can enforce your judgment through The Enforcement of Money Judgments Act. In making that decision, there are a few considerations worth noting:

      1. Does the debtor have land and if so, how many mortgages or judgments are registered against it? It is important to note that pursuant to the Bankruptcy and Insolvency Act and The Saskatchewan Farm Security Act, the debtor is entitled to certain exemptions for their homestead or home-quarter, as the case may be.
      2. Does the debtor own any vehicles and if so, more than one?
      3. Have you run a judgment search? If there are several judgments already registered against a debtor, the chances of you collecting are reduced as there are more people claiming a piece of the pie.
      4. If the debtor is a corporation, are they up to date on their taxes and payroll remittances? CRA holds a super priority interest on a debtor’s asset for unpaid remittances. Furthermore, the failure to remit to CRA is usually a strong indicator of financial health, or lack thereof.

      In short, it is usually helpful to determine ahead of time if there is any meaningful chance of enforcing your judgment. This will help you save time, money and frustration in chasing a dead beat debtor who will not, and probably cannot, pay.

      Contacting a Lawyer on this Subject

      Should you require more information on how to efficiently and cost-effectively recover against your debtors, please contact Travis K. Kusch at (306) 933-1373

      Benchmark Litigation Canada Lists RS as Recommended Firm in Saskatchewan

      Benchmark Litigation Canada has published its guide to the leading litigation teams in the country.

      The guide’s results are the culmination of a four-month research period during which time extensive interviews are conducted with litigators and their clients.  The researchers examine casework handled by the firms and seek opinions on litigators practicing within their province or practice area. Using this client and peer-review methodology, Benchmark strives to provide the most accurate and comprehensive coverage of the Canadian litigation market.

      Robertson Stromberg is pleased to see that the firm is ranked as a Recommended Firm for the province of Saskatchewan. Lawyers singled out as “local litigation stars” include M. Kim Anderson in the area of Insolvency Law and Gary Young in the areas of Class Action, Commercial, Insurance, and Intellectual Property.   This designation reflects individuals who were recommended consistently as reputable and effective litigators by clients and peers.

      Benchmark also lists Jennifer Pereira and Sean Sinclair as “future stars”.  This designation is given to “ones to watch”, lawyers who are rapidly building their reputations in the market.

       

       

      Whether it’s personal or business, we handle cases ranging from wills to overseeing complex business deals, and everything in between. Our success comes as a result of our collective effort. Combining the experience of your lawyer together with the resources of our team, you can put your trust in us to handle your case with confidence.

      Area of ExpertiseBankruptcy and Insolvency