1. Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 7 – THE DEBTOR-CREDITOR RELATIONSHIP  Chapter 32 – Bankruptcy and Insolvency Prepared by Douglas H. Peterson, University of Alberta

2. Copyright © 2004 McGraw-Hill Ryerson Limited 2 BANKRUPTCY AND INSOLVENCY Introduction Historical Background Bankruptcy Legislation in Canada

3. Copyright © 2004 McGraw-Hill Ryerson Limited 3 INTRODUCTION Some protections will never be enough – risk of default, misfortune & dishonesty present Where reality dictates that not all creditors can be paid in full, there must be an orderly system of priorities to divide what assets do exist Statutory mechanisms allow for reliable process of clearing the books, starting over, and punishing the dishonest and fraudulent

4. Copyright © 2004 McGraw-Hill Ryerson Limited 4 HISTORICAL BACKGROUND Roman Law Unlucky debtor, delivering up existing assets – lives Dishonest debtor, hiding assets – executed Term Italian for bankarupta “broken bench” Creditors would go to work place and break up debtors workbench Complex procedure in England through Industrial Revolution Provincial responsibility 1879- 1919 Federal responsibility before and since those dates

5. Copyright © 2004 McGraw-Hill Ryerson Limited 5 PURPOSE AND INTENT Multi-purpose Honest unfortunates gain a release from their debts Eliminate preferences of one creditor over another Mechanism for distribution of available assets Punish creditors who attempt to defraud creditors Uniform throughout Canada Bankruptcy is a federal act

6. Copyright © 2004 McGraw-Hill Ryerson Limited 6 PURPOSE AND INTENT Promote survival of debtor’s business Rehabilitation of debtor Focus on debtor not creditor Preserve business firms and the employment they support Enhance rights of unsecured trade creditors

7. Copyright © 2004 McGraw-Hill Ryerson Limited 7 APPLICATION Superintendent of Bankruptcy Administers the Bankruptcy and Insolvency Act Investigate suspected violations of the Act Constitution Bankruptcy under federal jurisdiction

8. Copyright © 2004 McGraw-Hill Ryerson Limited 8 APPLICATION Companies Creditors Arrangement Act - applies to corporation who have outstanding issues of bonds or debentures Submit a plan to provide time to reorganize financial affairs Normally only used by large corporations Act Not apply to certain persons or corporations Farmers or fishers Chartered banks, trust or loan companies, insurance, railway Dealt with by separate statutes

9. Copyright © 2004 McGraw-Hill Ryerson Limited 9 ACTS OF BANKRUPTCY Distinction between insolvency and bankruptcy Insolvency Inability to pay debts as they generally become due Financial condition usually precedes bankruptcy Bankruptcy Legal condition Person has debts exceed $1000 and has committed one of the ten acts of bankruptcy set forth in the act

10. Copyright © 2004 McGraw-Hill Ryerson Limited 10 ACTS OF BANKRUPTCY Assignment in bankruptcy made Fraudulent conveyance made Fraudulent preference made Depart Canada or dwelling to avoid creditors Allows seized property to go unredeemed Makes written admission to creditors meeting of inability to pay debts Secrets property with intent to defraud creditors Gives notice to creditors of suspension of payments Defaults in a proposal under the Act Ceases to meet his liabilities generally as they become due

11. Copyright © 2004 McGraw-Hill Ryerson Limited 11 BANKRUPTCY PROCEEDINGS Distinguishes between commercial and consumer bankruptcies Commercial (options) Proposal Voluntary assignment Petition

12. Copyright © 2004 McGraw-Hill Ryerson Limited 12 BANKRUPTCY AND INSOLVENCY Copyright © 2004 by McGraw-Hill Ryerson Limited. INSOLVENT DEBTOR INITIATION OF BANKRUPTCY PROCEEDINGS Voluntary Assignment by Bankrupt Person Proposal to Creditors by Debtor (through a Licensed Trustee) Creditor May Petition Court for Receiving Order (2) Has Committed an Act of Bankruptcy Within Past 6 Months (1) If Debtor has Debts in Excess of $1,000

13. Copyright © 2004 McGraw-Hill Ryerson Limited 13 PROPOSAL An offer made by a debtor to the creditors for a scheme of payment or an extension of time to make payments Once prepared filed and presented to creditors for approval Voted upon by creditors to determine if it is accepted Both secured and unsecured creditors entitled to vote Each votes as separate group or class

14. Copyright © 2004 McGraw-Hill Ryerson Limited 14 PROPOSAL Emphasis on unsecured creditors Unsecured creditors vote most important since they have the most to lose Secured creditors are secured and can look to secured asset If accepted, it must be further approved by the court Once approved by the court, it becomes a contract between the debtor and creditors that gives the debtor time to adjust his financial affairs A proposal keeps the debtor out of formal bankruptcy

15. Copyright © 2004 McGraw-Hill Ryerson Limited 15 VOLUNTARY ASSIGNMENT Place oneself into bankruptcy Debtor voluntarily assigns all their property to a trustee for the general benefit of creditors The most commonly used bankruptcy procedure Debtor files with Official Receiver an assignment of his or her property for the general benefit of the creditors debtor sets out a list of debts and creditors Trustee takes possession of the bankrupt’s property, notice of a first meeting of creditors is given At the meeting the trustee advises the creditors as to how the assets will be liquidated

16. Copyright © 2004 McGraw-Hill Ryerson Limited 16 PETITION Put into bankruptcy by creditors Creditors make request to the court to obtain a receiving order against a debtor Done when debtor has debts over $1000 and has committed an act of bankruptcy Several creditors can submit a petition together, which then becomes a class action Debtor can consent or object

17. Copyright © 2004 McGraw-Hill Ryerson Limited 17 TRUSTEE IN BANKRUPTCY Receiving Order - a command to the debtor to release all assets to the court or court- appointed agent, usually a trustee in bankruptcy (court imposed bankruptcy) Appointed trustee takes control over all property and notifies all creditors Trustee duty to call together creditors (first meeting) Debtor is also present Inspectors may be appointed if required Trustee is approved or new one appointed

18. Copyright © 2004 McGraw-Hill Ryerson Limited 18 TRUSTEE IN BANKRUPTCY Statement of account Information about reasons for bankruptcy, status of debts, etc. used by the trustee to plan and perform the liquidation of assets Unpaid suppliers May reclaim goods if recognizable and delivered within 30 days preceding bankruptcy Farmers, fishers, aquaculturalists have some special-priorities

19. Copyright © 2004 McGraw-Hill Ryerson Limited 19 TRUSTEE IN BANKRUPTCY Collects assets and liquidates Assets subject to security interests must be made available to secured creditors Surplus goes to trustee for general benefit of creditors Deficiency – secured creditor can claim balance as an unsecured creditor

20. Copyright © 2004 McGraw-Hill Ryerson Limited 20 PRIORITIES Secured creditors, unpaid suppliers of recognizable inventory Funeral expenses Costs of administration Court fees Wages owing to employees (6 months or $2000 ea.) Municipal taxes (2 years worth)

21. Copyright © 2004 McGraw-Hill Ryerson Limited 21 PRIORITIES Landlord – three months rent Fees & costs ss.70(2) Workers compensation deductions, EI deductions, and income tax owing to Federal government Direct claims of injured employees Any other claims of the Crown Unsecured creditors

22. Copyright © 2004 McGraw-Hill Ryerson Limited 22 DISCHARGE Discharge – the release from an obligation Until a bankrupt is discharged by the court, bankrupt is not released from his or her debts Any earnings or other income received before discharge may be applied to payment of debts Court order releases bankrupt from debts Corporation cannot obtain discharge without complete payment of creditor’s claims

23. Copyright © 2004 McGraw-Hill Ryerson Limited 23 DISCHARGE Behavior key to obtaining order Bankrupt may not engage in business without disclosing one is a un-discharged debtor Bankrupt cannot purchase goods on credit over a certain amount Cannot be a director or a senator Usually discharge after 3-6 months but no longer than 12 Discharge releases bankrupt from all debts and obligations

24. Copyright © 2004 McGraw-Hill Ryerson Limited 24 CONSUMER BANKRUPTCY SUMMARY PROCEEDINGS Available for non-trader or consumer insolvencies If assets less than $5000; and Debts less than $75,000 Process Debtor secures assistance of administrator Assigned by superintendent or trustee Prepares proposal Must be completed in 5 years Creditors approve or reject

25. Copyright © 2004 McGraw-Hill Ryerson Limited 25 BANKRUPTCY OFFENCES Purpose: identify and punish debtors who attempt to take advantage of their creditors by fraud or other improper means Superintendent Wide powers to investigate fraudulent practices and allegations of violations of the Act

26. Copyright © 2004 McGraw-Hill Ryerson Limited 26 BANKRUPTCY OFFENCES Not to what is required of them Fraudulent disposition before or after bankruptcy Non-disclosure False statement or omission on statement of account Concealment of documents Obtain credit by misrepresentation Concealment or removal of property Improper disposition of property

27. Copyright © 2004 McGraw-Hill Ryerson Limited 27 BANKRUPTCY AND INSOLVENCY PROCEDURE Copyright © 2004 by McGraw-Hill Ryerson Limited. Receiving Order Issued Meeting of Creditors Appointment of Inspectors by Creditors to Supervise Trustee Trustee Liquidates Assets Distributes Proceeds to Creditors in Accordance with Priorities in Act Discharge of Bankrupt Appointment of Trustee

28. Copyright © 2004 McGraw-Hill Ryerson Limited 28 SUMMARY Act is federal Provides for: Rehabilitation of debtor Punishment of wrongdoing by debtor Priority system for creditors Act of Bankruptcy Insolvency 3 methods Proposal Voluntary Assignment Petition