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

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

CANADIAN BUSINESS CANADIAN BUSINESS

AND THE LAWAND THE LAWSecond EditionSecond Edition

byby

Dorothy Duplessis

Steven Enman

Shannon O’Byrne

Sally Gunz

Presentation prepared by Presentation prepared by

Allan Elliott, Southern Alberta Institute of TechnologyAllan Elliott, Southern Alberta Institute of Technology


CHAPTER TWENTY-SEVENCHAPTER TWENTY-SEVENBANKRUPTCY AND INSOLVENCYBANKRUPTCY 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


BUSINESS FAILUREBUSINESS 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


NEGOTIATED SETTLEMENTNEGOTIATED 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


ADMINISTRATION OF ADMINISTRATION OF BANKRUPTCYBANKRUPTCY

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


ADMINISTRATION OF ADMINISTRATION OF BANKRUPTCYBANKRUPTCY

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


PROCEEDINGS INITIATED BY THE PROCEEDINGS INITIATED BY THE DEBTORDEBTOR

PRE-BANKRUPTCY PROCESS debtor locates a trustee trustee prepares preliminary statement of

assets and obligations trustee may decide that the debtor is

insolvent


PROCEEDINGS INITIATIED BY PROCEEDINGS INITIATIED BY THE DEBTORTHE 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


PROCEEDINGS INITIATED BY THE PROCEEDINGS INITIATED BY THE DEBTORDEBTOR

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


PROPOSALPROPOSAL

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)


ARRANGEMENT 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


BANKRUPTCYBANKRUPTCY

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


ACTIONS BY CREDITORSACTIONS 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

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ACTS OF BANKRUPTCYACTS 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


ACTS OF BANKRUPTCYACTS 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


ACTION BY CREDITORSACTION 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


RECEIVING ORDERRECEIVING 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



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



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



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


PAYMENT OF CLAIMSPAYMENT 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


DISCHARGE OF BANKRUPTCYDISCHARGE OF BANKRUPTCY

DISCHARGE the formal process releasing the bankrupt

of most liabilities not available to a corporation, unless debts

have been paid in full


BANKRUPTCY OFFENCESBANKRUPTCY OFFENCES

BANKRUPTCY OFFENCES ARE criminal acts defined by the Bankruptcy and

Insolvency Act and committed by any participant in the bankruptcy and insolvency process


PERSONAL BANKRUPTCYPERSONAL 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


PERSONAL BANKRUPTCYPERSONAL BANKRUPTCY

DEBTS SURVIVING BANKRUPTCY Some liabilities survive the discharge:

fines penalties alimony or support payments student loans these exemptions serve the public interest

Documents

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