Archive for the ‘Corporate Law’ Category

Security Issues – A Rose by Any Other Name …

Friday, June 4th, 2010

The Ontario Court of Appeal released a decision last Friday that may be of interest for small business owners.

A fairly typical practice is for an entrepreneur to incorporate a company and then to advance loans to the company for startup capital. If this is seen as pure “equity” then if the company goes under the entrepreneur runs the risk of losing whatever he/she put into the company. To try and avoid this problem, it is not uncommon to see the company give security over various assets to the owner so that if the company goes under the owner can try and get repaid his/her investment from the assets. (At this point I should mention that while this is somewhat effective, it is often undermined by the fact that most lenders will require the owner to “subordinate” his/her security to that of the lender so that the lender gets the first crack at the assets’ value to satisfy the debt owed to the lender.)

The difficulty is that the personal property security regime in Ontario is stringent and this fact was emphasized again by the Court of Appeal. In that case, the company was incorporated with the name “Friction Tecnology Consultants Inc.” Note that “Tecnology” was misspelt with the letter “h” missing from the word. It is not clear whether this was an oversight or was intentional. In any event, the company dealt with the rest of the world under the name “Friction Technology Consultants Inc.” – that is, with the correct spelling of the word “Technology”. Friction factored its receivables and then obtained a loan from a bank. When Friction failed financially, the factor and the bank fought over who had priority to the assets. Why did this matter? Because the factor had registered its security against “Friction Technology Consultants Inc.” – with an “h” – while the bank had registered against the company name as it was properly registered – that is, without the “h”.

The Court of Appeal upheld the lower court decision that since the properly registered name did not have the letter “h”, then only the bank had properly registered its security and it won the priority fight. A harsh lesson for the factoring company.

So why should you care? The simple reason is because many small businesses either seek to do incorporations by themselves or else have “quickie” incorporations done to save money. There is nothing wrong with this, but you should ensure that there are no discrepancies like existed in the recent case. The reality is that once the incorporation takes place, the entrepreneur rarely ever looks again at the articles of incorporation and over time may simply assume that there is nothing wrong or different between the “real name” and the name being used by the business. But this type of oversight could very well create problems for you in the future if it turns out that your security is in the wrong name and now whatever protection you thought you had turns out to be nothing.

Something to think about.

[Meanwhile, as a little post-script, I have to say that this particular post was probably my most fun to write as I got to do so using my new iPad. It's a welcome addition to my technology lineup. And it's kind of a fun "toy" at times as well. ;-) ]

CALC

Legal Fees – What’s the Going Rate?

Saturday, July 5th, 2008

I received my latest copy of Canadian Lawyer magazine yesterday and took a few minutes to skim through it.  The magazine’s annual survey of legal fees has returned (it took a couple of years hiatus) and it is interesting to see what “the going rate” is for a couple of different areas of legal practice of interest for small businesses.

Before I give the numbers, I should explain what they represent.  The magazine polled law firms across the country and hundreds replied.  For each area three sets of numbers were created: the minimum fee, the maximum fee and the average fee.  However, each of these numbers is itself an average of all the answers given by the law firms that responded to the survey.  As well, the answers were broken down into two areas: national averages by size of law firm and regional / provincial averages.  So, I will give you the averages based on law firm size (but please bear in mind that these averages will include numbers from everywhere – and the overhead costs of Toronto are more than the overhead costs of, say, Oromocto, New Brunswick) as well as the average costs for Ontario law firms (which is not broken down by law firm size).

I will share with you four sets of numbers: civil lawsuits – trial level; civil appeals; simple incorporations and commercial lease agreements.

One of the first questions I am asked is “how much is this going to cost me?”  Sometimes I can give a fixed fee answer.  Sometimes I cannot.  The purpose of these numbers is to provide some guidance – although they cannot be “hard and fast” numbers.

More importantly, there is the old saying that there are lies, damned lies and statistics.  That is true here because in some cases we are comparing apples to oranges.  For example, in many instances, the larger the law firm, the higher the fees.  That is not always the case – for example, on commercial leases the opposite is true for the all-round average costs.  In some instances, though, you are paying more money for the larger firm, but you do so as a “premium” for the ability to show that you have hired “the big guns”.  That is not to say that the big firm lawyers are any better or worse than their smaller firm counterparts, but sometimes you are paying for the perception.  As well, you have to remember that each case is different.  For example, I had a recent commercial lease file where the landlord said to my client at the very outset “we’re not changing a darned thing, so don’t bother trying to renegotiate the terms of our standard lease – take it or leave it.”  In that instance, I charged the client a few hundred dollars to review the lease and let the client know where the pitfalls were located so that the client knew to avoid them.  This should be compared to another client for whom I was involved in long negotiations to get a more fair lease.  The landlord was willing to do this to have a long-term lease with a relatively happy client.  I charged that client a lot more money.  Looking at these two files, they were both “commercial lease agreements” but they really aren’t comparable in terms of the type of work performed.  So, please realize that these are not completely straight-line comparisons.

Finally, please remember also that these are only the amounts for fees.  What you might be billed will be not only the fees, but also any disbursements (ie. out-of-pocket expenses such as government filing fees) and any applicable taxes such as the GST.

1.  Civil lawsuit – from start to finish of a two day trial:

For firms with 1 to 4 lawyers, the average minimum cost is $13,850; the average maximum cost is $34,480 and the all-round average is $19,340.

For firms with 5 to 25 lawyer, the average minimum cost is $16,520; the average maximum cost is $69,140 and the all-round average is $34,150.

For firms with 26 or more lawyers, the average minimum is $31,500; the average maximum cost is $75,000 and the all-round average is $47,250.

For Ontario, the average minimum is $15,440, the average maximum is $56,250 and the all-round average is $27,450.

2.  Civil Appeals:

For firms with 1 to 4 lawyers, the average minimum cost is $12,370; the average maximum cost is $48,580 and the all-round average is $22,780.

For firms with 5 to 25 lawyer, the average minimum cost is $13,720; the average maximum cost is $60,400 and the all-round average is $23,050.

For firms with 26 or more lawyers, the average minimum is $14,500; the average maximum cost is $62,500 and the all-round average is $31,880.

For Ontario, the average minimum is $13,250, the average maximum is $55,310 and the all-round average is $21,100.

3.  Simple, Small Business Incorporation:

For firms with 1 to 4 lawyers, the average minimum cost is $1,010; the average maximum cost is $2,380 and the all-round average is $1,420.

For firms with 5 to 25 lawyer, the average minimum cost is $800; the average maximum cost is $1,490 and the all-round average is $950.

For firms with 26 or more lawyers, the average minimum is $710; the average maximum cost is $5,450 and the all-round average is $890.

For Ontario, the average minimum is $810, the average maximum is $1,680 and the all-round average is $990.

4.  Commercial Lease Agreements:

For firms with 1 to 4 lawyers, the average minimum cost is $1,740; the average maximum cost is $5,230 and the all-round average is $4,670.

For firms with 5 to 25 lawyer, the average minimum cost is $2,520; the average maximum cost is $10,020 and the all-round average is $2,900.

For firms with 26 or more lawyers, the average minimum is $1,050; the average maximum cost is $75,750 and the all-round average is $1,750.

For Ontario, the average minimum is $1,670, the average maximum is $10,170 and the all-round average is $1,740.

CALC

Limited Liability Partners’ Liability

Tuesday, January 1st, 2008

 

Section 26 of New York’s Partnership Law provides that no partner of a limited liability partnership “is liable … for any debts, obligations or liabilities of … the limited liability partnership…”  (Paragraph 10(2)(b) of Ontario’s Partnership Act is to roughly the same effect – although the wording is slightly more vague.)

 

The New York Court of Appeals last week had to deal with an interesting argument involving this provision.  In Ederer, a lawyer was a partner in a limited liability partnership.  Surprisingly, the partnership did not have a written partnership agreement (… the cobler’s children going barefoot comes to mind …) and the subsequent dispute over distribution of the partnership’s assets and an accounting of profits as between the partners therefore fell to be decided under the general rules set out in the legislation.

 

The former partners argued that the wording of the legislation was broad enough to prevent the one partner from suing them personally since the partners were not liable for “any debts” of the limited liability partnership.  The five-judge majority of the Court disagreed with the former partners’ argument.  Since Section 26 is found in the section of the legislation for dealings between the partnership and third party creditors and not in the section setting out the relationship between the partners themselves (again, the same in the Ontario legislation), the limitation of liability only applied to claims of third party creditors.

 

Judge Read, with whom Chief Judge Kaye agreed, came to the opposite conclusion.  In Judge Read’s view, to follow the majority would be to create an unfair preference for partners.  If the partnership were to fail, for example, “ordinary” creditors of the limited liability partnership could only go after the assets of the partnership and not after the personal assets of the partners outside of the partnership (homes, cars, money, etc.).  However, in any dispute between the partners after the limited liability partnership failed, the partners would be able to look to all of the other partners’ assets whether in the partnership or outside.

 

The majority’s decision is certainly in keeping with the common view of lawyers in Canada and the U.S. that the provision only deals with relations between the partnership and outside creditors.  That said, an interesting point is raised by the minority and it would be just as interesting to see how the argument is dealt with by the Ontario courts when it is inevitably raised.

 

CALC