Joint Family Ventures

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The phrase “joint family venture” is a relatively new concept developed by our Courts to address the circumstance in which life mates/husbands and wives/boy and girl carry on a business together and eventually have their relationship disintegrate.

It is not unusual to have mature mates have their personal relationship fall apart yet part of their personal relationship had been the operation of a business which one or the other or possibly both operated.

Invariably, in these business ventures, there is no documentation to record things like shareholders’ agreements, what happens if the parties split up or rights and obligations as between the parties. These are, frequently, the most vexing of issues either Family Law lawyers or Commercial lawyers face because there is no fall-back to any established procedure for resolution.

Example: Gentleman has his own business and together with is life mate establishes a second business. The life mate operates the second business while the husband carries on his venture. The secondary business is essentially 50/50 but the wife carries the bulk of the responsibilities for day to day operations.

The relationship falls apart. There is no provision for husband to buy out wife or vice versa or for that matter any resolution of the division of the secondary business. All expenditures of the household in previous years whether paid by one or the other of the mates is largely irrelevant.

In these cases, first and foremost, each mate may require clarification of their respective rights, primarily to assist in determining what their legal parameters are. Then, if communication can be had between the mates, the reasonable approach suggests trying to settle matters on your own. A Collaborative Family Law lawyer may be of great assistance. Recommendation: Verena Fraser at Feltmate Delibato Heagle.

Thereafter, recording the agreements reached is critical and each mate should get Independent Legal Advice before completion.

We’d be pleased to be of assistance.

The Bulk Sales Act – Beware!

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Two recent cases have highlighted the risks associated with buying assets from a business.

Let’s start with the normal alternatives of whether to buy the shares or assets (obviously, if a business is not incorporated, there are no shares). Normally the shareholders of a Canadian-controlled private corporation will seek to sell shares in order to take advantage of their lifetime capital gains exemption, if they are eligible. However, a Purchaser, when buying shares, automatically assumes all of the liabilities that exist within the corporation. Apprehensive about those liabilities, accordingly, many Purchasers prefer only to buy what they think are the assets on the left side of the Balance Sheet.

Not necessarily true. In fact, thanks to the Bulk Sales Act (Ontario) a Purchaser may well find himself liable to all of the creditors that existed at the date of the sale.

The Bulk Sales Act (Ontario) (one of only two provinces in which the Bulk Sales Act still exists; the other is Newfoundland), provides that a business Vendor, selling all or substantially all of its assets out of the ordinary course of business, must comply with this Act. Compliance requires a Statutory Declaration listing all secured and unsecured creditors and satisfaction of all of those creditor claims from the sale. In the event there are insufficient proceeds to satisfy all creditors (which more than just rarely occurs), there are alternatives for a Vendor (that is the subject of another message).

Essentially, to buy the assets representing all or substantially all of the assets of a business, the Purchaser must obtain that Statutory Declaration listing all of the creditors and be sure they’ve all been satisfied. Failure to do so means that the sale can be set aside and treated as void and, in addition, the Purchaser is personally liable to all of the Vendor’s creditors.

In a recent case, it would now appear that the Vendor provided the Statutory Declaration, but the Statutory Declaration was false. The Purchaser, relying upon what turned out to be a false Statutory Declaration, completed the transaction and is now facing the claims of the Vendor’s creditors.

In a second case, the Purchaser’s lawyers correctly identified all of the creditor exposure and required the Vendor to satisfy creditor claims. For whatever reason, the Purchaser not only dispatched the Purchaser’s lawyers prior to the Closing, but in addition, believed the Vendor’s personal commitment to pay out the creditors. The Vendor did not. As a result, one of the Vendor’s creditors has brought an Action to set aside the sale. The HST alone payable on the sale is $125,000 in addition to the loss by the Purchaser of all of the assets the Purchaser thought it had bought amounting to a further $954,000.

It is as simple as this: When buying the assets of any business, full compliance with the Bulk Sales Act is mandatory. Failure to comply will result in the Purchaser being personally responsible to the Vendor’s creditors in addition to the money that the Purchaser has already paid to the Vendor which may or may not ever find its way to the creditors.

Credit Reporting Agencies & Proposals/Assignments

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As we know, there are two main credit reporting agencies in Canada: Equifax and Trans Union. Banks, car dealerships, mortgagees and virtually all other institutes that provide credit rely upon reports filed by either one or both of these credit reporting agencies.

As you also know, while the credit reporting agencies are not permitted to provide recommendations, they do, on the other hand, rank consumers according to reports they have received. The essential effect of which is virtually the same as providing a recommendation.

There is, at law, a significant difference between a consumer filing a Proposal under the Bankruptcy & Insolvency Act (Canada) (“BIA”) and making an Assignment in Bankruptcy. In the former, the consumer is not “bankrupt”. Rather, the consumer, via the Proposal, seeks to compromise with all of his creditors all of his indebtedness. A failure to comply with an agreement under the Proposal does, in fact, result in the consumer becoming “bankrupt”. On the other hand, a “bankruptcy” results in a Trustee in Bankruptcy seizing all of the assets of the debtor and distributing them to the creditors in the ranking of priorities as established by the BIA.

However, to the detriment of consumers who attempt to resolve their indebtedness by way of a Proposal, the credit reporting agencies treat both a Proposal and a Bankruptcy essentially the same and maintain records relating to the consumer for approximately 6 years. Equally unfortunately, future creditors misinterpret the credit reporting agencies’ reports to treat both a Proposal and an actual “bankruptcy” exactly the same. For example, credit card applications are generally refused as are purchases on credit.

While there may be logic protecting prospective suppliers of services or credit relative to a consumer who, by history, has compromised previous indebtedness, the BIA has formulated the alternatives to support those who seek to work with their creditors (by a Proposal) from those who simply turn over their assets for whatever benefit.

The credit reporting agencies should be more cautious in the way they treat these significantly different consumer options and give more credit to those who have genuinely attempted to resolve their debt obligations with payments over time, recognition of their creditors and the cooperation a Proposal requires.

We think credit reporting agencies should recognize this difference, but currently they do not.

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