An unfortunate fact about business is that companies sometimes get into trouble, often getting behind in their debts to suppliers, public utilities, and the government.
The Canada Revenue Agency isn’t known for taking kindly to businesses that get behind in their corporate taxes, and has aggressive strategies in place in the event they need to collect unpaid balances. These strategies even include garnishing the company bank account, which could quickly result in a business shutting down permanently.
Fortunately, there are options for business owners who want to bring their company back to profitability. A forbearance agreement can help companies in financial distress, but business owners need to fully understand what they’re getting into before signing on the dotted line, only to find later that doing so made their financial problems even worse.
Solutions for Companies in Financial Distress
If you find your company is having trouble paying the bills, it’s time to seek out a licensed insolvency trustee for advice. A common way they help companies under financial stress from debt is by filing a Division 1 proposal.
However, as viable a solution a Division 1 proposal can be to solving a corporate financial crisis, it’s not always the best option to take. In my business, we get a lot of company presidents coming in after Canada Revenue Agency has garnished their company bank account, and wanting us to file a Notice of Intent (NOI) right away. They don’t realize that if their financial reorganization is unsuccessful and the proposal is declined by their creditors, the company will immediately be considered bankrupt with no way to plan for it ahead of time.
So before filing the NOI, we check to see if the company has a line of credit or loan facility agreement with its bank. If so, we take a close look at the loan documents as one of the common promises or covenants the company makes to the bank when arranging financing is that they will not bank elsewhere.
If that promise is in the agreement, and CRA has garnished the company bank account, how can we proceed with reorganizing the company?
This is where a forbearance agreement comes into play.
What is a Forbearance Agreement?
In these situations, we recommend that the company retain knowledgeable legal counsel to help them negotiate an agreement with the bank. This agreement is called a forbearance agreement.
A forbearance agreement is an agreement between the company and the bank, whereby the bank continues to deal with the company during its financial restructuring, and also agrees not to call the personal guarantee the president of the company almost assuredly signed.
Once this is in place, we can proceed with a Notice of Intention to Make a Proposal, stop the CRA garnishment on the bank account, and help the company move forward into reorganizing their finances.
One circumstance that can put a wrinkle in this strategy is when the company has already opened a new bank account at a different bank. In this case, we still refer the company to legal counsel, however the bank will almost always call both the company loan and the personal guarantee. This can make the corporate reorganization more difficult, but not impossible.
But what are the dangers of forbearance agreements with lenders?
Forbearance Agreements and Bankruptcy
Banks are there to help when a company needs it, but they’re also there for another important reason: to make money. A forbearance agreement is no small matter, which is why we refer clients to a lawyer to help negotiate its terms.
Some of the components that a lawyer can help a company watch out for include:
- Waiver: In many cases, the lender will want the company to sign a waiver against all claims, defenses, and set-offs to the debt. If the company agrees to this, and doesn’t successfully solve its financial problems under the terms of the forbearance agreement, it has no recourse or defenses against any actions the bank’s claims against the company.
- Additional collateral: The bank may ask for additional collateral in the forbearance agreement. Such collateral could include cash, or even collateral that they wouldn’t normally be able to claim in collection efforts, such as security interest in your home. Company owners need to fully understand what kind of collateral their lender is asking for.
- Vague clauses: Sometimes, lenders may be tempted to sneak in clauses that are vaguely worded, but could deal a company a fatal blow during the restructuring period. For example, there may be a clause that allows the bank to consider the company to be in default if the bank “feels insecure” about the company’s efforts to restructure. It’s hard to actually define at which point the bank feels insecure, and even harder to argue, especially if the company signed the waiver.
Any one of these components, if acted upon by the bank, could quickly cause your company to go bankrupt.
With a lawyer by your side, you’ll have someone knowledgeable in your corner fighting for an agreement that offers you the most protection. They’ll also make sure you fully understand the ramifications of the agreement so you make an informed decision.
At Charles Advisory Services, we regularly work with some of the top lawyers in insolvency, as we believe that finding the best solution often means being part of a team. We’re proud to work with the lawyers we do to provide complete solutions to the companies and their officers who seek our help.
Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.
For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped businesses in Toronto weigh their debt recovery options so they can move beyond debt towards financial health. Contact us today for a free consultation.
TIP : In many cases, the causes for corporate financial stress are unforeseen, unexpected, and beyond your ability to control. It’s a good idea to plan ahead for a “rainy day”, and have to ability to access contingency funds if you need it. With proper planning beforehand, your company will be able to weather any stormy financial crisis.