||JAMES D. L. KERR
||FROM: James D.L. Kerr ● Lawyer
17 – 151 Merton
Toronto, Ont., M4S 1A7
Tel 416 485-4254
Fax 416 485-8836
Certified Specialist Civil Litigation
|DATE: August 4, 2004
|RE: BANKRUPTCY – GENERAL INFORMATION
One often hears that a person or business has “gone bankrupt”. “Bankruptcy” is technically a legal proceeding under the Bankruptcy and Insolvency Act (the “BIA”) of Canada. When laymen talk about “going bankrupt” they are not necessarily referring to bankruptcy in its technical sense. “Bankruptcy” is often used in a colloquial sense to
mean any personal or business financial failure. For example, if a business has borrowed money from a bank, the bank will typically
have taken a mortgage of all of the business’ assets; in this context, the mortgage is usually called a “security interest”. If the business defaults on its loan, the bank has the right
to enforce its security interest. Typically, the bank
enforces its security interests by appointing a private receiver who seizes the
assets of the business. When that occurs, the customers and suppliers of the business will often say that the
business has “gone bankrupt”. In fact, while the
business will have gone “out of business”, no bankruptcy has taken
place. A private receivership has terminated the business existence.
The balance of this Memo
summarizes, in a very general way, the process of going formally bankrupt under
WAYS OF GOING BANKRUPT:
The BIA is a law of Canada that was enacted to provide a mechanism by which:
1. Debtors can rehabilitate
themselves by eliminating or reducing their indebtedness; and
2. Creditors can collect
indebtedness owed by the debtor on a pro rata basis to the extent that the
debtor has assets.
The BIA provides three
procedures by which the foregoing ends can be achieved:
A person or business can voluntarily place themselves in
bankruptcy by making an “Assignment for the Benefit of Creditors”; this is what takes place when a person or business “goes bankrupt”.
A person or business can make a “Proposal” to creditors under the
BIA. A Proposal is, essentially, a global offer made to creditors to repay a
percentage of the indebtedness on specified terms and conditions. A meeting is
held and the creditors vote on the Proposal. A Proposal is approved by
creditors only if a “double majority” votes in favour of the Proposal; that is,
a majority of the creditors voting (by counting heads) holding at least 2/3’s
of the value of the indebtedness. If the Proposal is approved by the creditors,
it must then be further approved by the Bankruptcy Court. Once the Proposal has
been approved by both the creditors and the Court, then all of the creditors
are bound by the Proposal including those who opposed it. Accordingly, a BIA
Proposal is a method of forcing a compromise on uncooperative creditors
provided the double majority of creditors are in favour of the compromise. This
is analogous to a “Chapter 11” reorganization in the United States. Debtors can also seek
to reorganize their financial affairs under the federal Companies Creditors Arrangement
Act, but that procedure is more subjective and costly than a Proposal
under the BIA.
Bankruptcy: Creditors can force a person or
business into bankruptcy by petitioning the Bankruptcy Court for a “Receiving Order”. A creditor can petition a debtor into bankruptcy if the debtor has total debts of
at least $1,000.00 and has committed an "act of bankruptcy" within the preceding
6 months. The BIA lists what qualifies as an “act of bankruptcy”; examples are:
the creditor has a court judgment against the
debtor and has been unable to collect on the judgment; the debtor has exhibited a statement in writing that demonstrates that
the debtor has insufficient assets to pay debts; the debtor has ceased to meet obligations generally as those obligations come due.
CONSEQUENCES OF BANKRUPTCY:
In the case of a
Voluntary Bankruptcy, an Involuntary Bankruptcy or a failed Proposal, a
trustee-in-bankruptcy (the Trustee) takes control of all of the debtor’s
assets, except certain exempt assets, and liquidates the debtor’s assets. The
funds received from the liquidation are used to pay the costs of the bankruptcy
and the debtor’s unsecured creditors. Examples of exempt assets include wearing
apparel up to $1,000, household goods up to $2,000, trade tools up to $2,000,
and Canada Pension Plan and Employment Insurance benefits.
Surplus income earned by
the debtor while the debtor is an “undischarged bankrupt” must be paid to the
Trustee for the benefit of the creditors. “Surplus income” means the debtor’s
earnings beyond a fair and reasonable amount necessary to maintain the debtor
and the debtor’s family according to the debtor’s station in life.
Secured creditors (for
example, a bank that holds a mortgage on the debtor’s home) are outside of the
bankruptcy proceeding and are entitled to enforce their security
notwithstanding the bankruptcy.
Unsecured creditors (for
example, trade payables, credit card companies, and the like) are divided into
two classes: preferred creditors and ordinary creditors. Preferred creditors
get paid ahead of the ordinary creditors. Preferred creditors include spousal
support, unpaid employee wages (up to $2,000), municipal taxes not secured by a
lien on land, landlords (for up to 6 months rent) and employee personal injury
claims to the extent of applicable insurance proceeds.
claims also have priority over creditors and the federal government has a
“super-priority” entitlement to be paid unremitted employee source deductions
ahead of all other creditors.
Directors and officers
of bankrupt corporations can also be personally liable for certain unpaid
government claims such as employee source deductions, GST and PST.
And the credit bureau
will show the bankruptcy on its computer records within about 2 weeks of the
date of the bankruptcy. The credit bureau you will keep the bankruptcy on its records for seven years and this will impact the
debtor’s ability to obtain credit even after the debtor’s discharge from
bankruptcy (see below).
After a bankruptcy, all
claims except the claims of secured creditors to enforce security are “stayed”.
Than means that creditors can no longer enforce payment (for example, by
commencing or continuing a lawsuit) except for their right to participate in
the proceeds of the liquidation of the debtor’s assets by the Trustee.
suppliers have a right to repossess the goods they supplied to the debtor by
delivering a notice in writing to the Trustee. The right is limited to goods
delivered within the 30 days prior to the supplier giving the notice.
MAJOR STEPS IN BANKRUPTCY:
typically, the debtor (call the “Bankrupt”) consults a Trustee who prepares an Assignment for the Benefit of Creditors and files the Assignment with a government
official called the Official Receiver. The bankruptcy is effective on the date when
the documents are filed with the Official Receiver.
of Property to
Trustee: The Bankrupt must deliver to the Trustee all
credit cards, books and records, real estate title papers, insurance policies
and income tax records.
3. Counselling: Individuals
(as opposed to corporations) who go bankrupt must go through credit counselling
between 10 and 60 days after the bankruptcy.
A second counselling session must take place not later than 210 days after the bankruptcy.
by Official Receiver: The Bankrupt must
submit to an examination under oath by the Official Receiver with respect to
the Bankrupt’s conduct that led to the bankruptcy and the disposition of
property by the Bankrupt prior to the bankruptcy. Neither the trustee nor the creditors are entitled to attend the
examination. The Bankrupt may, however bring his lawyer, accountant or a translator
5. Statement of Affairs: The Trustee prepares a Statement of Affairs
from information provided by the Bankrupt. The Statement of Affairs lists all of the Bankrupt’s assets and liabilities (including the names and addresses of all creditors and amounts owed) along
with certain other information. The Bankrupt must also
disclosed to the trustee:
(a) All property disposed of
by the Bankrupt within the 1 year preceding the bankruptcy as well as details
of the disposition; and
(b) Any gifts made within the 5 years preceding the bankruptcy.
Meeting of Creditors: Within 5 days after the Trustee’s appointment, the Trustee must send notice of a
first meeting of creditors to all creditors.
The notice must be sent at least 10 days before the day appointed for
the meeting. The meeting must be held
within 21 days following the date of the Trustee’s
appointment. Normally the meeting is held at the Official Receiver’s office. The purpose
of the first meeting of creditors is to consider the affairs of the Bankrupt, affirm the appointment of the Trustee or substitute another
trustee, appoint “Inspectors”, and give such directions
to the Trustee as the creditors may see fit with
reference to the administration of the bankruptcy. Creditors are entitled to question the Bankrupt at the meeting. Only creditors who have filed proper “proofs of
claim” are entitled to vote at the meeting. “Inspectors” are representatives of
the creditors who, essentially, function as a board of directors that oversee
the Trustee’s administration of the bankruptcy.
7. Trustee’s Report: Eight months after the bankruptcy, the Trustee prepares a report to the Superintendent of Bankruptcy on the bankruptcy application for discharge. The Bankrupt must supply an
affidavit of family earnings and living expenses to accompany this report.
8. Discharge of Bankrupt: If there is no opposition by a creditor, the
Trustee, or the Superintendent in Bankruptcy to the Bankrupt’s release from bankruptcy (called a “discharge”), then first time
individual bankrupts are automatically discharged 9 months after going
bankrupt; the Trustee issues a certificate of automatic
discharge. If the discharge is opposed,
the matter must be decided by the Bankruptcy Court; the Court can
issue one of 4 kinds of discharge orders: absolute, subject to certain
conditions, suspended or refused. If the
Bankrupt has been bankrupt before, then the automatic
discharge rule does not apply and the matter must go to the Court. Corporations can
never obtain a discharge unless all creditors have been paid in full.
9. Debts Not Discharged: Certain obligations are not eliminated by
bankruptcy; these include court fines and penalties, awards of personal injury
damages, including sexual assault, and wrongful death, alimony and spousal and
child support, debts or liabilities arising out of fraud, and student loans
(for 10 years after ceasing to be a student).
10. Discharge of Trustee:
Approximately 1.5 to 2 years after the commencement of the bankruptcy,
the trustee will finish the administration of the bankruptcy and apply
for its own discharge. The bankruptcy is then completed.
The foregoing is not intended to be a comprehensive guide to the applicable
law. General Client Memoranda and mailings from James D.L. Kerr ● Lawyer are
intended to inform clients and acquaintances with respect to current issues
that may be of interest to them. Memos are current to the date shown on the Memo.
The law is constantly changing, however, and for that reason a Memo may not be
completely accurate after it's stated date. Where circumstances warrant, the
advice of a lawyer or other qualified professional should be obtained.
© 2005 James D.L. Kerr