1. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-1 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

2. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-2 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

3. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-3 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

4. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-4 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

5. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-5 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

6. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-6 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

7. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-7 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

8. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-8 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

9. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-9 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

10. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-10 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)

11. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-11 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

12. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-12 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

13. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-13 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 ©

14. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-14 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

15. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-15 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

16. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-16 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

17. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-17 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

18. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-18 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

19. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-19 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

20. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-20 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

21. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-21 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

22. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-22 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

23. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-23 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

24. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-24 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

25. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 27-25 PERSONAL BANKRUPTCY DEBTS SURVIVING BANKRUPTCY  Some liabilities survive the discharge:  fines  penalties  alimony or support payments  student loans  these exemptions serve the public interest