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Copyright © 2004 by Nelson, a division of Thomson Canada Limited CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon O’Byrne Sally Gunz Presentation prepared by Allan Elliott, Southern Alberta Institute of Technology
Copyright © 2004 by Nelson, a division of Thomson Canada Limited CHAPTER TWENTY-SEVEN BANKRUPTCY AND INSOLVENCY OBJECTIVES: The legal aspects of business failure The rights and obligations of debtors and creditors when a business fails The various stages in the bankruptcy process
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BUSINESS FAILURE THERE ARE FOUR POSSIBLE OUTCOMES FOR FINANCIALLY TROUBLED BUSINESSES the debtor and creditor may agree to a proposal the debtor can make an assignment in bankruptcy secured creditors can appoint receivers creditors can petition the debtor into bankruptcy
Copyright © 2004 by Nelson, a division of Thomson Canada Limited NEGOTIATED SETTLEMENT SETTLEMENTS – DEBTOR’S OPTIONS can be more or less formal depending on the circumstances key to negotiated settlements is ensuring that all creditors genuinely agree to the arrangement when the parties reach an agreement, it is typically concluded with a contract that binds all
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ADMINISTRATION OF BANKRUPTCY BANKRUPTCY ACT Superintendent of Bankruptcy – the most senior ministerial appointment with general supervisory authority for all functions prescribed under the Bankruptcy and Insolvency Act Official Receiver – the administrative officer legally responsible for all aspects of the bankrupt’s estate
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ADMINISTRATION OF BANKRUPTCY BANKRUPTCY ACT trustee in bankruptcy – the officer assigned legal responsibility by the official receiver for administering the bankrupt’s estate inspector – a person appointed by a creditor to act on his or her behalf and supervise the actions of the trustee estate – the collective term for the assets and liabilities of the insolvent or bankrupt
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PROCEEDINGS INITIATED BY THE DEBTOR PRE-BANKRUPTCY PROCESS debtor locates a trustee trustee prepares preliminary statement of assets and obligations trustee may decide that the debtor is insolvent
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PROCEEDINGS INITIATIED BY THE DEBTOR A DEBTOR IS INSOLVENT IF owes more than $1,000, and is unable to meet financial obligations as they fall due, or has ceased paying obligations as they fall due, or has insufficient assets to meet obligations
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PROCEEDINGS INITIATED BY THE DEBTOR DEBTOR’S NEXT STEP bankruptcy, or debtor may make a proposal PROPOSAL a contractual agreement between the debtor and creditors for the payment of debts that allows the business to continue
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PROPOSAL A PROPOSAL IS DESIGNED TO ACHIEVE A COMBINATION OF THREE ALTERNATIVE PURPOSES a reduction in the amount of money to be paid to creditors, while the debtor retains assets (a composition) an extension of time for payment of claims an arrangement whereby the trustee has control of assets for the benefit of the creditors for the period of time of the proposal (a scheme of arrangement)
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ARRANGEMENT COMPANIES’ CREDITORS ARRANGEMENT ACT used for corporations that have extensive debts and the affairs of which tend to have considerable impact on the broader business community
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BANKRUPTCY DEBTOR MAKES AN ASSIGNMENT IN BANKRUPTCY the debtor’s voluntary assignment to the trustee of legal title to all the debtor’s property for the general benefit of creditors bankrupt – the legal status defined by the bankruptcy and insolvency act that prevents a person from having control of his or her assets and debts
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ACTIONS BY CREDITORS CREDITORS PETITIONING THE DEBTOR INTO BANKRUPTCY creditors may file a petition – the statement filed by the creditor claiming the debtor owes at least $1,000 and has committed at least one act of bankruptcy act of bankruptcy – one of ten acts that the debtor must commit before a creditor can petition the debtor into bankruptcy ©
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ACTS OF BANKRUPTCY AN ACT OF BANKRUPTCY OCCURS WHEN THE DEBTOR COMMITS ONE OF THE FOLLOWING ACTS makes an assignment to the trustee makes a fraudulent transfer of property of any kind makes a fraudulent preference tries physically to avoid creditors permits the sheriff to take property when there is insufficient value in the property to pay the debt
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ACTS OF BANKRUPTCY ACTS OF BANKRUPTCY CONTINUED advises creditors that he or she is insolvent or cannot pay debts attempts to deceive creditors by disposing of property in any way advises creditors that he or she has suspended payment on debts defaults on an approved proposal stops meeting liabilities as they fall due
Copyright © 2004 by Nelson, a division of Thomson Canada Limited ACTION BY CREDITORS ACTIONS TAKEN BY SECURED CREDITORS AGAINST SPECIFIC ASSETS creditors often appoint a receiver – a person appointed by a secured creditor to retrieve the asset and realize the debt
Copyright © 2004 by Nelson, a division of Thomson Canada Limited RECEIVING ORDER CREDITOR FILES PETITION WITH THE BANKRUPTCY COURT receiving order – the court order following a creditor’s petition that formally declares the debtor to be bankrupt and transfers legal control of the estate to the trustee interim receiver – the official appointed to take care of the estate in the period between the filing of the petition and the making of the receiving order
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BANKRUPTCY FRAUDULENT PREFERENCE a payment made by an insolvent debtor within three months of bankruptcy with the intent of favouring one creditor over another REVIEWABLE TRANSACTION a payment made to a person related to a bankrupt within one year of the bankruptcy order with the intention of giving the related person priority over at least one other creditor
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BANKRUPTCY RELATED PERSON any person who is a blood relative (or related by marriage or adoption) of the bankrupt or of the person with controlling interest in the bankrupt corporation SETTLEMENT a sale that can be declared void because it was not made in good faith or for valuable consideration FRAUDULENT CONVEYANCE a transfer of real or personal property made to defeat, hinder, delay, or defraud
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BANKRUPTCY CREDITORS FIND OUT ABOUT BANKRUPTCY THROUGH FORMAL NOTICE proof of claim – a formal notice provided by the creditor of the amount owed and the nature of the debt
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PAYMENT OF CLAIMS TRUSTEE MUST ESTABLISH PRIORITIES FOR PAYMENT ACCORDING TO THREE BROAD CATEGORIES OF CREDITORS secured preferred – those creditors identified in section 136 of the Bankruptcy and Insolvency Act who are paid after secured creditors and before unsecured creditors unsecured creditors
Copyright © 2004 by Nelson, a division of Thomson Canada Limited DISCHARGE OF BANKRUPTCY DISCHARGE the formal process releasing the bankrupt of most liabilities not available to a corporation, unless debts have been paid in full
Copyright © 2004 by Nelson, a division of Thomson Canada Limited BANKRUPTCY OFFENCES BANKRUPTCY OFFENCES ARE criminal acts defined by the Bankruptcy and Insolvency Act and committed by any participant in the bankruptcy and insolvency process
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PERSONAL BANKRUPTCY BANKRUPTCY AND INSOLVENCY ACT provides a streamlined process for small consumer estates any estate with debts under $75,000 (excluding the family residence) may fall within the provisions for consumer proposals
Copyright © 2004 by Nelson, a division of Thomson Canada Limited PERSONAL BANKRUPTCY DEBTS SURVIVING BANKRUPTCY Some liabilities survive the discharge: fines penalties alimony or support payments student loans these exemptions serve the public interest
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