Archive for December, 2008

The Benefit of Security

Monday, December 22nd, 2008

Today’s Globe and Mail reports online a comment from the leader of the Ontario New Democratic Party, Howard Hampton, regarding the bailout of the three North American automobile manufacturers.  It says:

“Ontario NDP Leader Howard Hampton said he would like to see the government take some shares in the companies in return for the loans.

“If, worst case scenario happens and one of these companies goes under, you’ll want some assets.”

A clearer example of someone NOT understanding how the system works couldn’t be found.  As a shareholder, the shareholders are entitled, upon a dissolution or a bankruptcy, to a division of the equity of a company.  However, while the equity comes from “some assets”, it is only those assets which are left over after all of the creditors have been paid.

If the auto makers need bailouts – and that is the case for Daimler-Chrysler and G.M. (but in Canada, for the moment, not for Ford) – then that means that they are insolvent.  Insolvency, as defined in the Bankruptcy & Insolvency Act, is the inability to meet your financial obligations as they come due.  In other words, you can’t pay your bills.  So, if their liabilities exceed their assets, then there are no assets left to pay the shareholders.  It’s therefore all well and good for Mr. Hampton to say that the federal and provincial governments should take shares, but if the shareholders are the last ones to ever get paid (and likely wouldn’t ever get paid if the “worst case scenario” happens) then the shares are worthless pieces of paper.  Instead, the governments should have the opportunity of converting their loans (ie. debt) into shares (ie. equity) if and when the auto manufacturers turn the financial corner.

So, what does this mean for your business?  Well, again, it is great for you to have all sorts of shares in the company or other forms of equity.  But, if things start to go downhill, then your shares mean that you have a one-way ticket to the back of the line behind the other creditors.  Instead, you should think about making loans to the company rather than taking an increased equity position in the business.  To make things even better, have the company grant security for the loans and have that security registered with the personal property security registry.  That way, if things do go badly, you may not have a position at the front of the line, but you will not be guaranteed to be at the back of the line.  Similarly, the loan agreements can give you the right to convert your loans into equity later on if the business does well.  That way you can cover the good and the bad times.



Service by Internet & Facebook

Saturday, December 20th, 2008

The general requirement of the rules of litigation is that parties to a lawsuit have to be served in a “personal” manner.  Generally, for when a lawsuit starts, it requires that the defendant(s) be physically handed the claim.  After that, the parties can serve each other through means requiring less than direct human contact – for example, via mail, facsimile and even in some instances via e-mail.

An interesting decision has been reported from Australia in which a default judgment has been permitted to be served through notice on Facebook.  This is not a huge stretch when one considers that if Australia’s rules are similar to those in North America, the defendants in that case were provided personally with the claims, so they knew about it.  However, the question will be to what extent plaintiffs can take this further.  For example, with the economy faltering more and more each day, people will be defaulting on their credit obligations and then starting to “hide from creditors”.  I’ll give you a simple example that is not limited to economic downturns.  I currently have a file in which a temporary bookkeeper was sent by a temporary agency to work for a company.  The bookkeeper then proceeded to defraud the company of hundreds of thousands of dollars through unauthorized cheques.  By the time the company found out what had happened, the crook had flown to England (and who knows where after that).  The compay sued the temporary agency and its bank (my client) for the fraud but did not sue the crook since it was clear that they couldn’t serve him.  I expect that they are waiting for the crook to be arrested, extradited and when he is back to face criminal charges they can serve him at that time.

With this Australian decision, it wouldn’t be a far stretch (assuming the crook has a Facebook presence) to say “he’s on Facebook all the time, so if you let me serve him by giving him notice that way, then he should become aware of it and can then arrange for a defence.”  The same argument would be made for any other debtor who is hiding from creditors. 

It will be interesting to see how far the courts will go to permit service by Facebook or similar networking sites.  My expectation is that to the extent it is allowed, it would be at least initially as a further manner of service – for example, service can be made by mailing to the last known address AND by notice on Facebook – rather than as the sole means of service.  Either way, if you are on Facebook, it might be a good idea if you wish to hide from creditors to shut down your presence there or else to ensure that you check it often to ensure no creative lawyer has a present for you that is time sensitive.