Bankruptcy and Insolvency Act

Bankruptcy and Insolvency Act
An Act respecting bankruptcy and insolvency
Citation	RSC 1985, c. B-3[1]
Enacted by	Parliament of Canada
Date assented to	1985

The Bankruptcy and Insolvency Act ("BIA") is the statute that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.

It also governs the Office of the Superintendent of Bankruptcy, a federal agency responsible for ensuring that bankruptcies are administered in a fair and orderly manner.

The purpose of the Act is not only to preserve as many of the debtor's assets as possible for the benefit of creditors, but also to rehabilitate debtors by forgiving the unpaid debt, thus removing an insurmountable burden and restoring them as productive members of society.

History and development

Consolidation of pre-Confederation legislation

No specific legislation on bankruptcy and insolvency previously existed in New Brunswick and Nova Scotia.

Development of federal legislation^[10]

Organization of the BIA

• Part I Administrative officials
• Part II Bankruptcy orders and assignments
• Part III Proposals

• Division I General scheme for proposals (ie, commercial proposals)
• Division II Consumer proposals

• Part IV Property of the bankrupt
• Part V Administration of estates
• Part VI Bankrupts
• Part VII Courts and procedure
• Part VIII Offences
• Part IX Miscellaneous provisions
• Part X Orderly payment of debts
• Part XI Secured creditors and receivers
• Part XII Securities firm bankruptcies
• Part XIII Cross-border insolvencies
• Part XIV Review of Act

Key concepts

• A bankrupt is a person who has made an assignment or against whom a bankruptcy order has been made.^[17]

• An insolvent person is a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.^[18]

A debtor includes an insolvent person and any person who, at the time an act of bankruptcy was committed by him, resided or carried on business in Canada and (where the context requires) includes a bankrupt.^[19]

A creditor is a person having a claim provable as a claim under sections 124-135 of the BIA.^[20]

• An insolvent person may make an assignment of all the insolvent person’s property for the general benefit of the insolvent person’s creditors.^[21]

• One or more creditors may file in court an application for a bankruptcy order against a debtor if it is alleged in the application that

(a) the debt or debts owing to the applicant creditor or creditors amount to $1,000; and

(b) the debtor has committed an act of bankruptcy within the six months preceding the filing of the application.^[22]

• A debtor commits an act of bankruptcy in each of the following cases:

(a) if in Canada or elsewhere he makes an assignment of his property to a trustee for the benefit of his creditors generally, whether it is an assignment authorized by this Act or not;

(b) if in Canada or elsewhere the debtor makes a fraudulent gift, delivery or transfer of the debtor’s property or of any part of it;

(c) if in Canada or elsewhere the debtor makes any transfer of the debtor’s property or any part of it, or creates any charge on it, that would under this Act be void or, in the Province of Quebec, null as a fraudulent preference;

(d) if, with intent to defeat or delay his creditors, he departs out of Canada, or, being out of Canada, remains out of Canada, or departs from his dwelling-house or otherwise absents himself;

(e) if the debtor permits any execution or other process issued against the debtor under which any of the debtor’s property is seized, levied on or taken in execution to remain unsatisfied until within five days after the time fixed by the executing officer for the sale of the property or for fifteen days after the seizure, levy or taking in execution, or if any of the debtor’s property has been sold by the executing officer, or if the execution or other process has been held by the executing officer for a period of fifteen days after written demand for payment without seizure, levy or taking in execution or satisfaction by payment, or if it is returned endorsed to the effect that the executing officer can find no property on which to levy or to seize or take, but if interpleader or opposition proceedings have been instituted with respect to the property seized, the time elapsing between the date at which the proceedings were instituted and the date at which the proceedings are finally disposed of, settled or abandoned shall not be taken into account in calculating the period of fifteen days;

(f) if he exhibits to any meeting of his creditors any statement of his assets and liabilities that shows that he is insolvent, or presents or causes to be presented to any such meeting a written admission of his inability to pay his debts;

(g) if he assigns, removes, secretes or disposes of or attempts or is about to assign, remove, secrete or dispose of any of his property with intent to defraud, defeat or delay his creditors or any of them;

(h) if he gives notice to any of his creditors that he has suspended or that he is about to suspend payment of his debts;

(i) if he defaults in any proposal made under this Act; and

(j) if he ceases to meet his liabilities generally as they become due.^[23]

No person may terminate or amend — or claim an accelerated payment or forfeiture of the term under — any agreement, including a security agreement, with a bankrupt individual by reason only of the individual’s bankruptcy or insolvency.^[24] Similar provision is made with respect to any insolvent person upon filing a notice of intention or a proposal.^[25]

A notice of intention,^[26] a Division I proposal,^[27] or a Division II proposal,^[28] will automatically create a stay of proceedings and "no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy". Similar provision is also made on the bankruptcy of any debtor.^[29] Directors of insolvent companies that have filed a notice of intention or a proposal have similar protection.^[30]

The Bankruptcy and Insolvency Act does not apply to banks, insurance companies, trust companies, loan companies, and railways.^[31] Insolvent financial institutions are governed by the Winding-Up and Restructuring Act ^[32] and insolvent railways by the Canada Transportation Act.^[33]

The Farm Debt Mediation Act (SS. 12-14) provides that farmers cannot be forced into bankruptcy, but they can make a voluntary assignment.^[34][35]

Principal roles in bankruptcy proceedings

Creditors

a) Priority of Claims

The amount available from the estate, after deemed trusts are settled, is distributed to the creditors in the following order of priority (with each class/subclass paid in full before proceeding to the next):

1. "Super-priority" creditors
   1. wages, salaries, commissions and compensation, to a maximum of $2,000 per employee, plus reimbursement of salesman's expenses, to a maximum of $1,000 each (other than for officers and directors)^[36][37]
   2. payroll deductions and normal employer's contributions due but not remitted to a company pension plan^[38]
2. Secured creditors (in order of priority, and to the extent that they have not realized on their security)^[39]
3. Preferred creditors^[40]
   1. expenses and fees of a trustee
   2. legal costs
   3. levy due to the Superintendent
   4. wages, salaries, commissions, compensation, and reimbursement of salesmen's expenses, in excess of the "super-priority" amounts shown above (other than for officers and directors)
   5. the difference between what secured creditors would have received and what they actually received, because of the operation of the super-priority for wages, etc, and reimbursements
   6. the difference between what secured creditors would have received and what they actually received, because of the operation of the super-priority for pension plan contributions
   7. alimony, support and maintenance payments
   8. municipal taxes due and unpaid for the previous two years, to the extent that they do not constitute a secured claim
   9. rent due and unpaid for the previous three months, plus a maximum of three months' accelerated rent due under the terms of the lease (less what is owed by the trustee for occupation rent)
   10. legal costs due to the creditor that first filed execution against the property of the bankrupt
   11. claims resulting from injuries to employees for which workers' compensation laws do not apply
4. Unsecured creditors (i.e., all remaining creditors whose claims are not postponed below) subject to any subordination agreements that may be in place^[41]
5. Postponed claims^[42]
   1. creditors not at arm's length with the debtor
   2. silent partners (i.e., lenders who earn interest that varies with the level of profits, or that share in the profits)
   3. wages, salaries, commissions, compensation and reimbursements due to officers and directors

There are several important notes to consider in assessing the above priorities:

• all claims in each class are paid rateably^[43]
• equity claims are settled only after all non-equity claims are settled in full^[44]
• receivership and CCAA proceedings may proceed directly into bankruptcy proceedings after the super-priority and secured creditors have been settled in full, in order to vary the priority in which certain other items must be settled
• participation in the claims process does not preclude any other remedies creditors may have available. For example, guarantees may be called, with the guarantors having the subsequent right to make a claim against the estate for the amounts they were required to pay. Guarantees can normally be demanded by suppliers from officers and directors, and parent company guarantees are also common. Financial institutions, in order to fully realize on secured obligations of a debtor, will normally require guarantors to execute a Guarantee and Postponement of Claim, which prevents the guarantor from filing a claim against the estate until the secured creditor has been paid in full.

b) Proof of Claims

Every creditor must prove his claim and a creditor who does not prove his claim is not entitled to any distribution of the proceeds from bankrupt’s estate.^[45] The claim must be delivered to the trustee in bankruptcy and the trustee in bankruptcy must examine every proof of claim and can request further proof. The trustee may disallow, in whole or in part, any claim of right to a priority under the BIA or security. Generally, the test of proving the claim before the trustee in bankruptcy is very low, and a claim is proved unless it is too "remote and speculative". (Re Wiebe). The rationale for such a low test is to discharge as many claims as possible to allow the bankrupt to make a fresh start after the discharge.

Trustee in bankruptcy

A trustee in bankruptcy is an individual or a corporation licensed by the official superintendent to hold in trust and, subsequently, to distribute bankrupt’s property among the creditors in accordance with distribution scheme under the BIA. The bankrupt and all other persons holding bankrupt’s property must transfer the property to trustee. The trustee may also assist individual in preparing and submitting a consumer proposal to creditors. The trustee must arrange mandatory counseling of the bankrupt. The trustee must follow the procedures under the BIA, call creditors meetings and send the parties required notices of proceedings and documents. The trustee is responsible for preparation of pre-discharge report and may oppose the bankrupt’s discharge.

Bankrupts often misunderstand the role of the trustee in the bankruptcy process considering him to be personal representatives and counsels of the bankrupts. In reality, despite the fact that the bankrupt pays for trustee’s services, trustees in bankruptcy are required to act in the interest of the creditors. The major duty of trustee is to arrange bankrupt’s compliance with the procedures under the BIA in order to distribute the estate among creditors, which is not always in the best interest of the bankrupt, who is more interested in excluding as much property from distribution among creditors and been excused from as many debts as possible as a result of discharge order.

Office of the superintendent of bankruptcy

The Office of the Superintendent of Bankruptcy ("OSB") is designed to supervise the administration of all estates and matters to which the BIA applies. It grants licenses for the trustees in bankruptcy, inspects investigates bankruptcy estates, reviews the conduct of the trustees in bankruptcy and the receivers, and examines trustee’s accounts, receipts, disbursements and final statements. It has specific powers to intervene in any matter or proceeding in court as if the OSB were a party thereto, as well as to issue directives providing official interpretation of the bankruptcy process to the trustees in bankruptcy and the receivers.^[46]

Bankruptcy court

The provincial Superior Courts have "such jurisdiction at law and in equity" as will enable them to exercise bankruptcy process under the BIA.^[47] The decisions of the court are enforceable in the courts of other Canadian provinces and all courts and the officers of all courts must act and co-operate in all bankruptcy matters.^[48]

Registrars of the provincial Superior Courts have significant powers in relation to procedural matters, unopposed proceedings and in other matters under the Act.^[49]

Inspectors

At the first meeting of the creditors, up to five individuals may be appointed to be inspectors of the estate (except where the creditors decide that that is not necessary).^[50] No inspector may be appointed if he is a party to any contested action or proceeding against the estate. Where the value of an individual debtor’s property is under $15,000,^[51] inspectors are not appointed (except where the creditors decide otherwise).^[52]

The trustee is required to obtain the inspectors' permission before carrying out many of his responsibilities, such as the sale of property of the estate, the institution or defending of actions relating to the property of the bankrupt, settling any debts owing to the bankrupt and exercising trustee’s discretion in retaining and assigning bankrupt’s contracts. The inspectors must give their approval to the final statement of receipts and disbursements and trustee’s fees.

Inspectors have a fiduciary duty to the creditors and should be impartial though acting in their interest. They should supervise the trustee’s compliance with the BIA and the Superintendent's directives, and may apply for the removal of the trustee.^[53]

Receivers and interim receivers

The court may appoint a receiver where a secured creditor is enforcing his security, or is acting under a court order made under any other federal or provincial statute that authorizes the appointment of a receiver or receiver-manager. ^[54]

The court may appoint an interim receiver:

• at any time after the filing of an application for a bankruptcy order and before a bankruptcy order is made, ^[55]
• after a secured creditor has filed an advance notice of intention to enforce his security on the debtor's property,^[56] or
• at any time after the filing of a notice of intention or of a Division I proposal ^[57]

In the first case, the applicant must give an undertaking with respect to the debtor's legal rights, and to damages in the event of the application being dismissed. The interim receiver can take conservatory measures and dispose of perishable property in order to comply with the order of the court, but the receiver cannot otherwise unduly interfere with the bankrupt in the carrying on of the debtor’s business.

In the latter two cases, the court can only make the appointment if it is shown that it is necessary for the protection of the debtor's estate, or in the interest of the creditor(s).

The courts have set out the following factors^[58] to be considered in exercising discretion on whether to appoint an interim receiver:

• whether the person is in control of the property
• whether the debtor is acting in bad faith and giving preferences to other creditors
• whether the debtor is fraudulently disposing and concealing his assets
• allegations of criminal offenses have been made
• the debtor's property is in the possession of third parties

The receiver must to do what "practicality demands" to preserve the assets ^[59] and must not go beyond what is necessary in the circumstances. ^[60]

See also

• Commercial insolvency in Canada
• Consumer bankruptcy in Canada
• Insolvency law of Canada

External links

• Bankruptcy and Insolvency Act
• Winding-Up and Restructuring Act
• Canada Transportation Act
• Farm Debt Mediation Act

References