Bankruptcy and Insolvency – Winter 2012
Professor: Me Kenneth Atlas
Summary: Michael Shortt
Where you will learn that bankruptcy is, in essence, a sharing process;
that most people don’t like to share; and that the sweetest words a lawyer can hear
are “I’d rather pay you fifteen thousand dollars than pay him five.”
Note: I reorganized the structure of the course significantly from the structure
that Atlas uses, but all the content is still there. I’ve also tried to use underlining
to indicate defined terms used in the BIA, and bold to emphasize important
parts of provisions.
Bonus Note: Professor Gold was looking over my shoulder as I worked on
this during Faculty Council, and has asked me to remind everyone
that common law property is the most important class in law school.
Table of Contents
CHAPTER 1: INTRODUCTION .............................................................. 3
Section 1.1: Overview and Fundamental Notions ............................. 3
1.1.1 Key Definitions .......................................................................... 3
1.1.2 Purpose of Bankruptcy Law ....................................................... 6
1.1.3 The Main Bankruptcy and Insolvency Statutes .......................... 7
1.1.4 The Administration and Offices of the Bankruptcy Regime ...... 8
Section 1.2: Constitutional Issues ..................................................... 10
Section 1.3: Link to Secured Transactions ...................................... 12
CHAPTER 2: ENTERING BANKRUPTCY OR CCAA PROTECTION ..... 13
Section 2.1: Voluntary Bankruptcy Proceedings ............................ 13
2.1.1 BIA Proposals ........................................................................... 13
2.1.2 BIA Consumer Proposals .......................................................... 16
2.1.3 General Assignment for the Benefit of Creditors ..................... 17
2.1.4 CCAA Initial Orders ................................................................. 18
Section 2.2: Involuntary Bankruptcy Proceedings.......................... 21
2.2.1 Bankruptcy Order ..................................................................... 21
2.2.2 Acts of Bankruptcy .................................................................. 25
2.2.3 Automatic Involuntary Bankruptcies ....................................... 26
CHAPTER 3: EFFECTS OF BEING BANKRUPT ................................... 26
Section 3.1: Trustee’s Powers and Duties ........................................ 26
Section 3.2: Effect on the Person of the Debtor ............................... 27
Section 3.3: Effect on the Property of the Debtor ........................... 28
3.3.1 Property that Vests vs Exempt Property ................................... 29
3.3.2 Trustee’s Powers Over Property............................................... 30
Section 3.4: Effect on Creditors ........................................................ 30
3.4.1 Unsecured Creditors ................................................................. 30
3.4.2 Secured Creditors ..................................................................... 31
3.4.3 Creditors’ Role in the Bankruptcy Process ............................... 32
Section 3.5: Effects of CCAA Proceedings ....................................... 32
3.5.1 Effects of Initial Order ............................................................. 32
3.5.2 Ongoing Effects of CCAA Protection ....................................... 33
3.5.3 CCAA Plans of Arrangement .................................................... 37
3.5.4 Effects of Success/Failure of Plan ............................................ 38
CHAPTER 4: DISTRIBUTION OF ASSETS ........................................... 39
Section 4.1: Types of Claims and Creditors .................................... 39
4.1.1 Structure of BIA Categories...................................................... 39
4.1.2 Super-priorities......................................................................... 39
4.1.3 Secured Claims and Creditors .................................................. 39
4.1.4 Preferred Claims and Creditors ................................................ 40
4.1.5 Unsecured Claims and Creditors .............................................. 41
4.1.6 Deferred Claims and Creditors ................................................. 41
4.1.7 Special Categories of Claimants............................................... 41
Section 4.2: Provable Claims and the Claims Process .................... 43
Section 4.3: Claims for Return of Property ..................................... 45
Section 4.4: Liquidation of the Property of the Bankrupt ............. 45
Section 4.5: Distribution under BIA ................................................. 46
Section 4.6: Distribution under CCAA Plans of Arrangement and
Compromise ....................................................................................... 46
Section 4.7: Set-off and Compensation ............................................ 47
4.7.1 Compensation........................................................................... 48
4.7.2 Set-off ...................................................................................... 48
CHAPTER 5: DISCHARGE AND RELEASE OF DEBTS .......................... 49
Section 5.1: BIA Discharges .............................................................. 49
5.1.1 Procedure ................................................................................. 50
5.1.2 Types of Discharge .................................................................. 52
5.1.3 Refusal to Grant Discharge ...................................................... 55
5.1.4 Review or Annulment of Discharge Order ............................... 55
5.1.5 Effects of BIA Discharge .......................................................... 56
Section 5.2: CCAA Discharge ............................................................ 56
CHAPTER 6: REVIEWABLE (FRAUDULENT AND UNDERVALUE)
TRANSACTIONS .................................................................................... 56
Section 6.1: Remedies under the BIA ............................................... 56
6.1.1 Fraudulent Preferences under the BIA ...................................... 57
6.1.2 Transactions at Undervalue ...................................................... 58
6.1.3 Other Reviewable Transactions (ss 97, 98.1, 101) ................... 59
6.1.4 Undervalue and Fraudulent Transfers and the CCAA ............... 60
Section 6.2: Remedies under Provincial Law .................................. 60
6.2.1 Common Law: Fraudulent Preferences Acts & Fraudulent
Conveyances Acts.............................................................................. 60
6.2.2 Civil Law: Paulian Action ........................................................ 61
CHAPTER 7: INTERNATIONAL BANKRUPTCY ................................... 62
CHAPTER 8: NON-LIQUIDATION ADMIN. OF INSOLVENT ESTATES . 63
Section 8.1: General ........................................................................... 63
Section 8.2: Receivers ........................................................................ 63
CHAPTER 9: SPECIAL/MISCELLANEOUS ISSUES .............................. 64
Section 9.1: Directors and Officers under the BIA and CCAA ...... 64
Section 9.2: Related Party Rules under the BIA and CCAA .......... 65
Section 9.3: Protection of Third Party Purchasers under the BIA 66
1
BIA Table of Contents/Structure
SHORT TITLE [1.]
INTERPRETATION [2. - 4.]
HER MAJESTY [4.1]
PART I — ADMINISTRATIVE OFFICIALS [5. - 41.]
Superintendent [5. - 11.]
Public Records [11.1]
Official Receivers [12.]
Trustees [13. - 41.]
PART II — BANKRUPTCY ORDERS AND ASSIGNMENTS [42. - 49.]
Acts of Bankruptcy [42.]
Application for Bankruptcy Order [43. - 45.]
Interim Receiver [46. - 48.]
Assignments [49.]
PART III — PROPOSALS [50. - 66.4]
DIVISION I — GENERAL SCHEME FOR PROPOSALS [50. - 66.]
DIVISION II — CONSUMER PROPOSALS [66.11 - 66.4]
PART IV — PROPERTY OF THE BANKRUPT [67. - 101.2]
Preferences and Transfers at Undervalue [95-101.2]
PART V — ADMINISTRATION OF ESTATES [102. - 157.]
Meetings of Creditors [102. - 104.]
Procedure at Meetings [105. - 115.1]
Inspectors [116. - 120.]
Claims Provable [121. - 123.]
Proof of Claims [124. - 126.]
Proof by Secured Creditors [127. - 134.]
Admission and Disallowance of Proofs of Claim and Proofs of Security [135.]
Scheme of Distribution [136. - 147.]
Dividends [148. - 154.]
Summary Administration [155. - 157.]
PART VI — BANKRUPTS [157.1 - 182.]
Counselling Services [157.1]
Duties of Bankrupts [158. - 160.]
Examination of Bankrupts and Others [161. - 167.]
Arrest of Bankrupts [168.]
Discharge of Bankrupts [168.1 - 182.]
PART VII — COURTS AND PROCEDURE [183. - 197.]
Jurisdiction of Courts [183. - 186.]
Authority of the Courts [187. - 191.]
Powers of Registrar [192.]
Appeals [193. - 196.]
Legal Costs [197.]
PART VIII — OFFENCES [198. - 208.]
PART IX — MISCELLANEOUS PROVISIONS [209. - 216.]
PART X — ORDERLY PAYMENT OF DEBTS [217. - 242.]
PART XI — SECURED CREDITORS AND RECEIVERS [243. - 252.]
PART XII — SECURITIES FIRM BANKRUPTCIES [253. - 266.]
PART XIII — CROSS-BORDER INSOLVENCIES [267. - 284.]
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CHAPTER 1: Introduction
Section 1.1: Overview and Fundamental Notions
Fun fact: the term “bankruptcy” comes from the Italian “banca ruptura” or “broken bench.” Merchants were assigned benches in the
marketplace at which to trade, and merchants who didn’t pay their debts had their tables broken as a sign of their disqualification from
trading.
Historically debtors could be enslaved (Rome) or sent to prison (England – debtor’s prisons still existed at the time of Dickens).
Bankruptcy was seen as a sign of dishonesty, or even as fraud or theft. The first British bankruptcy statute dates to 1542 and
introduced the pari passu principle of repaying creditors. It continued the older notion of bankruptcy being a fraud on creditors, rather
than an unfortunate outcome caused as much by bad luck and market forces as the debtor’s conduct. This can be seen from the
preamble of the act:
Where divers and sundry persons craftily obtaining into their hands great substance of other men’s goods do suddenly
flee to parts unknown or keep their houses, not minding to pay or restore to any their creditors their debts and duties, but
at their own will and pleasure consume the substance obtained by credit of other men, for their own pleasure and
delicate living, against all reason, equity and good conscience ...the Lord Chancellor ... shall have power and authority
by virtue of this Act to take ... imprisonment of their bodies or otherwise, as also with their [real and personal property
however held] and to make sale of said [real and personal property however held] for true satisfaction and payment of
the said creditors, that is to say; to every of the said creditors a portion, rate and rate like, according to the quantity of
their debt.
Bankruptcy reform in Britain occurred in 1869 (but bankruptcy only for traders) and 1875 (now everyone could go bankrupt). Britain
continues to have separate statutes for person and corporate bankruptcies. Canada modelled its 1919 BIA on British bankruptcy
statutes, but used one statute for both people and corporations. Canada later passed a US-style rescue statute, the CCAA, in 1933 as a
reaction to the Great Depression. Canada’s 1992 bankruptcy reform further entrenched a US-style rescue culture, this time influencing
the BIA as well. On a last historical note, Canadian trustees in bankruptcy often misbehaved and for a long time had a reputation as
thieves and crooks. This explains the multiple layers of safeguards and oversights found in the law. The problem has been much
improved, but based on some of Atlas’ stories, has not disappeared entirely.
1.1.1 Key Definitions
Definitions of Bankruptcy
The best definition of bankruptcy is probably that given in Sam Levy, which conceives of bankruptcy as a purely legal process, one
that attaches to certain factual conditions (see Insolvency, below), and which has as its goal the fair and orderly payment of debts.
Sam Levy & Associates v Azco Mining: “‘Bankruptcy’ is a well understood procedure by which an insolvent debtor’s property is
coercively brought under a judicial administration in the interests primarily of the creditors.”
Robinson v Countrywide Factors (Concurring Minority): “There is no common law of bankruptcy and insolvency in the technical
sense, but the disruptions resulting from insolvency in the general sense had of necessity to be taken into account by general legal
systems such as the common law and the civil law.”
Definitions of Insolvency
The best definition of insolvency is probably that given in Century Services and Ladore (first and last cases of this section), which
sees insolvency as a purely factual scenario of being unable to meet one’s obligations.
Century Services v Canada (Attorney General), 2010 SCC 60: “Insolvency is the factual situation that arises when a debtor is unable
to pay creditors.”
Robinson v Countrywide Factors (Majority): “…the term ‘insolvency’ in s. 91(21) has as much an independent operation in the
reservation of an exclusive area of legislative competence to the Parliament of Canada as the term ‘bankruptcy.’”
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Reference Re Farmers Creditors Arrangement Act (Privy Council appeal text quoted in Robinson): “In a general sense,
insolvency means inability to meet one’s debts or obligations; in a technical sense, it means the condition or standard of inability to
meet debts or obligations, upon the occurrence of which the statutory law enables a creditor to intervene with the assistance of a Court,
to stop individual action by creditors and to secure administration of the debtor’s assets in the general interest of creditors; the law also
generally allows the debtor to apply for the same administration.” [The technical sense definition is tautological if you combine it with
the standard definition of bankruptcy as “the legal consequences attached to insolvency,” since insolvency is being defined here as
“the factual circumstances to which bankruptcy attaches”! – Mike]
Robinson v Countrywide Factors (Concurring Minority): “The primary meaning of ‘insolvency’ in s. 91(21) of the Constitution is
insolvency in a technical sense, not in a general sense. This Lord Thankerton made clear just a few lines after the passage quoted
above: with respect to the jurisdiction of Parliament under s. 91.21, he referred to ‘the statutory conditions of insolvency which
enabled a creditor or the debtor to invoke the aid of the bankruptcy laws ...’” [rejected both by majority in Robinson and by the
Century Service court; if this definition were accepted it would mean that “bankruptcy” and “insolvency” mean essentially the same
thing and thus that Parliament could not enact the CCAA – Mike]
Ladore v Bennett (1939 Privy Council case): Lord Atkin provided the following definition “Insolvency is the inability to pay debts in
the ordinary course as they become due.”
General Definitions in the BIA
I’ve underlined defined terms used in other definitions. Bold is used for emphasis. From section 2 unless otherwise noted.
“Assignment” means an assignment filed with the official receiver [i.e. an assignment for the general benefit of creditors – Mike]
“Bankrupt” means a person who has made an assignment or against whom a bankruptcy order has been made (BIA s2). [Compare to
the definition of a debtor… bankruptcy is the legal consequence attached to insolvency in certain cases – Mike]
“Claim Provable in Bankruptcy”, “Provable Claim”: BIA ss 121, 135
121
(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes
bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred
before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.
(2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall
be made in accordance with section 135.
(3) A creditor may prove a debt not payable at the date of the bankruptcy and may receive dividends equally with the other
creditors, deducting only thereout a rebate of interest at the rate of five per cent per annum computed from the declaration of
a dividend to the time when the debt would have become payable according to the terms on which it was contracted.
135
(1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further
evidence in support of the claim or security.
(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable
claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its
valuation.
(2) The trustee may disallow, in whole or in part,
(a) any claim;
(b) any right to a priority under the applicable order of priority set out in this Act; or
(c) any security.
[subsections 135(3-5) set out an appeal procedure to the supervising court from the decisions of the trustee –Mike]
“Corporation” means a company or legal person that is incorporated by or under an Act of Parliament or of the legislature of a
province, an incorporated company, wherever incorporated, that is authorized to carry on business in Canada or has an office or
property in Canada or an income trust, but does not include banks, authorized foreign banks within the meaning of section 2 of the
Bank Act, insurance companies, trust companies, loan companies or railway companies. (BIA s 2)
“Creditor” means a person with a claim provable under the BIA. (s 2)
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“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. (s 2) [Compare with definition of “bankrupt”; also, the use
of “includes” is strange… who else could be a debtor? - Mike]
“Insolvent person” means 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;
[Atlas shrugged when someone asked him about (c) and said he’d never seen that criteria used in practice, but warned us that since
judicial sale typically brings in 20-30% of real value, it could theoretically be a very easy criterion to prove – Mike]
“Person” includes a partnership, an unincorporated association, a corporation, a cooperative society or a cooperative organization, the
successors of a partnership, of an association, of a corporation, of a society or of an organization and the heirs, executors, liquidators
of the succession, administrators or other legal representatives of a person;
Re Parc Commémoratif de Montréal v Fleury, (1980) 114 D.L.R. (3d) 600 (QCCA) concerns the definition of person, and
Parc Commémoratif claimed that because it was incorporated under a special statute, the Cemetery Companies Act it was not
a “corporation” in the sense of the BIA, since the BIA was allegedly only concerned with “standard corporations”
incorporated under the Business Corporation Acts of the various provinces. The QCCA ruled that because the definition of
“corporation” contained a list of exclusions, Parliament intended that anything not excluded was included.
“Property” means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land
and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description
of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property
“Unsecured Creditor” is never actually defined. Basically if you’re a creditor and not a secured creditor, then you’re unsecured.
“Secured creditor” means a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or
any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based
on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable,
and includes
(a) a person who has a right of retention or a prior claim constituting a real right, within the meaning of the Civil Code of
Québec or any other statute of the Province of Quebec, on or against the property of the debtor or any part of that property, or
(b) any of
(i) the vendor of any property sold to the debtor under a conditional or instalment sale,
(ii) the purchaser of any property from the debtor subject to a right of redemption, or
(iii) the trustee of a trust constituted by the debtor to secure the performance of an obligation,
if the exercise of the person’s rights is subject to the provisions of Book Six of the Civil Code of Québec entitled Prior Claims and
Hypothecs that deal with the exercise of hypothecary rights;
“Special resolution” means a resolution decided by a majority in number and three-fourths in value of the creditors with proven
claims present, personally or by proxy, at a meeting of creditors and voting on the resolution.
“Ordinary resolution” means [referral to BIA 115, which says “resolution carried by the [simple] majority of votes, and for that
purpose the votes of a creditor shall be calculated by counting one vote for each dollar of every [provable] claim of the creditor that
is not disallowed”]
Time and Place Definitions in the BIA
“Locality of a debtor” means the principal place
(a) where the debtor has carried on business during the year immediately preceding the date of the initial bankruptcy event,
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(b) where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event, or
(c) in cases not coming within paragraph (a) or (b), where the greater portion of the property of the debtor is situated;
[(c) would be relevant for foreign companies filing for bankruptcy in Canada on the basis that they own property here, or a non-profit
that is going bankrupt, or for the bankruptcy of a succession, all of which don’t satisfy either (a) or (b) – Mike]
“Date of the bankruptcy”, in respect of a person, means the date of
(a) the granting of a bankruptcy order against the person,
(b) the filing of an assignment in respect of the person, or
(c) the event that causes an assignment by the person to be deemed;
[Note: this is the date you actually became bankrupt, so it always come after the initial bankruptcy event, which is the event that starts
the bankruptcy process – Mike]
“Date of the initial bankruptcy event”, in respect of a person, means the earliest of the day on which any one of the following is
made, filed or commenced, as the case may be:
(a) an assignment by or in respect of the person,
(b) a proposal by or in respect of the person,
(c) a notice of intention by the person,
(d) the first application for a bankruptcy order against the person, in any case
(i) referred to in paragraph 50.4(8)(a) or 57(a) or subsection 61(2), or
(ii) in which a notice of intention to make a proposal has been filed under section 50.4 or a proposal has been filed
under section 62 in respect of the person and the person files an assignment before the court has approved the
proposal,
(e) the application in respect of which a bankruptcy order is made, in the case of an application other than one referred to
in paragraph (d), or
(f) proceedings under the Companies’ Creditors Arrangement Act;
“Time of the bankruptcy”, in respect of a person, means the time of
(a) the granting of a bankruptcy order against the person,
(b) the filing of an assignment by or in respect of the person, or
(c) the event that causes an assignment by the person to be deemed;
Definitions in the CCAA
“Provable Claim” means any claim that would be provable under section 2 of the BIA [i.e. CCAA incorporates BIA criteria – Mike]
1.1.2 Purpose of Bankruptcy Law
Atlas: “There are two bankruptcy cultures: a liquidation culture and a rescue culture. Liquidation cultures view bankruptcy as punitive,
and an indication of poor management, if not quasi-criminality. The goal is to sell the company’s assets for the maximum return in
order to pay off creditors, and nothing more. In a rescue culture the goal is to rehabilitate the company, prevent it from going
bankrupt, and to save jobs. North America has had more of a rescue culture, while continental Europe tended to have a punitive
culture.”
Husky Oil v MNR (SCC 1993): The twin goals of the BIA are (1) to provide for the orderly payment of a company’s debts and (2) to
financially rehabilitate the debtor, so that after leaving bankruptcy proceedings the debtor can begin anew.
CCAA section 44: This set out the purpose of the international bankruptcy rules of the CCAA, but arguably they apply to Canada’s
bankruptcy regime as a whole.
44 (a) cooperation between the courts and other competent authorities in Canada with those of foreign jurisdictions in cases
of cross-border insolvencies;
(b) greater legal certainty for trade and investment;
(c) the fair and efficient administration of cross-border insolvencies that protects the interests of creditors and other interested
persons, and those of debtor companies;
(d) the protection and the maximization of the value of debtor company’s property; and
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(e) the rescue of financially troubled businesses to protect investment and preserve employment.
In re Roy, (1963-64) 5 CBR (NS) 64 (Qc SC): “En droit strict, un débiteur n’'a pas le droit de faire effacer en tout ou en partie ses
dettes contre le gré de ses créanciers. La Loi sur la faillite, aux articles 127 et seq., y pourvoira cependant pour fins d’intérêt public
lorsque d’une part il appert que sans une libération, le débiteur ne pourra se réhabiliter et jouer un rôle actif dans la société, qu'il sera
toujours une charge et un fardeau pour la communauté, à moins que, s’il le mérite, on ne lui donne l’opportunité de recommencer à
neuf.”
Canadian Purposes (Atlas)
 To oversee and to administer the equitable distribution of the debtor’s assets among the creditors: Individual lawsuits and
execution of judgments are chaotic and have a high transaction cost for all concerned, which diminishes total assets available
in the debtor’s patrimony. Individualized recovery also means full recovery for the first few creditors to clear the court
system and no recovery for others, so it’s both inefficient and unfair. Bankruptcy uses a centralized system to maximize
recovery and to ensure that all creditors are treated fairly, even if each one recovers only a fraction of their debt’s value.
 To rehabilitate the debtor: The original purpose of bankruptcy laws, after orderly payment of debts, was to provide an honest
but unlucky debtor with a fresh start.
 To ensure that the system of credit functions in an equitable and stable manner: All lending takes place in the shadow of
bankruptcy law, so it’s important to have a smoothly-functioning bankruptcy system as a backstop to an efficient banking
sector.
 To punish debtors who act fraudulently: Desperate people often take selfish and stupid measures, especially if they perceive
that they have nothing left to lose. A good bankruptcy system must be ready for this and have both oversight and punishment
mechanisms in place.
Purposes / objectives as per the UNCITRAL draft legislative guide
Economic certainty and stability
Maximize value of assets
Strike a balance between liquidation and reorganization
Ensure equitable treatment of similarly situated creditors
Provide for timely and efficient commencement of proceedings and impartial resolution of insolvency
Prevent premature dismemberment of the debtor’s assets
Transparent procedure with incentive for gathering and distributing information
Recognize existing creditor rights and priority claims in a predictable process
Establish a framework for cross-border insolvency
1.1.3 The Main Bankruptcy and Insolvency Statutes
The Bankruptcy and Insolvency Act
This is Canada’s oldest bankruptcy statute (dating from 1919), and the one that deals with core issues of liquidating insolvent
companies’ and persons’ estates. Proposals were added later, so that a debtor could avoid liquidation and the full brunt of bankruptcy
by offering a deal to creditors, but the BIA still remains liquidation-focused. That said, once you’ve gone through bankruptcy, you are
fully discharged and free from all pre-existing debts and liabilities that were considered “provable claims”. The BIA is applicable to
almost any entity in Canada except certain kinds financial services companies, which must use the Winding Up and Restructuring Act.
The Companies’ Creditors Arrangement Act
This is a rescue-style piece of legislation that was introduced in the 1930s. Its goal is to keep the company running by shielding it from
creditors long enough to come up with a plan to satisfy its existing liabilities. These plans generally involve compromising its debts
down from 100% to some lesser percentage (20%-50% being typical). In some cases money debts will be replaced with equity in the
debtor company, wiping out existing shareholders. Creditors typically agree because the alternative is bankruptcy and recovering close
to nothing. It has numerous advantages for a company that invokes CCAA protection, including a stay of proceedings by all creditors
(including secured creditors) or any other lawsuit. It is more expensive to administer, since there is a lot of court-time, and the debtor
corporation has to hire a “Monitor” (typically an accounting firm) to supervise all of its activities during the CCAA process. The
CCAA is a skeletal statute, so courts have granted themselves wide-ranging discretion to make whatever orders seem appropriate in the
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circumstances. The CCAA is available only to corporations, who must also have debts of more than $5 million.
The Winding Up and Restructuring Act
Not to be confused with provincial “Winding Up Acts” that deal with the voluntary dissolution of solvent companies. The Federal
WRA applies to certain kinds of companies: any corporation incorporated under federal jurisdiction, banks, trust companies, insurance
companies, some loan companies, some building societies, and “incorporated trading societies.” That said, it does not apply to any
railway or telegraph company, or any company incorporated under the Canada Business Corporations Act [so the “any corporation
incorporated under federal jurisdiction” part loses a lot of its scope – Mike]. The WRA is not a preferred method of dissolving an
insolvent corporation and paying off its debts in an orderly manner, especially since it’s been left out of the last few rounds of
statutory modernization, so it is obscure and archaic in many places. However, it’s obligatory for the specific companies listed above
[although I’m not sure why – Mike]. A company cannot opt for the WRA if BIA proceedings are already underway (s 213).
Wage Earner Protection Program Act
Enacted in 2008, WEPPA provides a mechanism to protect wage earners of bankrupt corporations and also addresses the power and
knowledge imbalance between individual employees and their employer’s creditors. Changes to the BIA following the introduction of
WEPPA give employees a first rank secured claim of $2,000 per employee over the current assets (inventory, accounts payable, cash)
of the employer who is bankrupt or subject to receivership (81.3 BIA for bankruptcy, 81.4 BIA for receivership). This is a secured
claim on very liquid assets that outranks all other claims, so there’s a high chance of full recovery. However, WEPPA allows the
employee to assign this bankruptcy claim to the government in return for a cash payment. The employee gets guaranteed cash
immediately, while the government takes the risk of non-recovery and also can aggregate all the employee claims together until they
are worth litigating to recover. Interestingly, the government pays a larger amount to the employee (currently over $3,000) than it
gains in terms of secured claims (still $2,000). Presumably this is to encourage employees to use WEPPA. WEPPA is a two step
process:
(i) Workers whose employer is bankrupt or subject to a receivership submit their claims for eligible wages to Service Canada
for payment. They currently receive up to $3,250.
(ii) The federal government then assumes the interests of the wage earners against the estate of the employer. This becomes a
super-priority secured claim ahead of all other creditors. The priority charge has a limit of $2,000 per employee and is over
the current assets of employer only.
For more details on this process, see sections 4.1.2 (super-priorities) and 4.1.3 (secured claims).
1.1.4 The Administration and Offices of the Bankruptcy Regime
Bankruptcy in Canada is largely controlled by creditors, who exercise power through a trustee. To prevent wrongdoing by the trustee
or abuses by creditors or debtors, there are a few supervisory posts (inspectors, interim receiver, official receiver, and the
Superintendant of Bankruptcy) as well. The Monitor is a CCAA analog to the Trustee, although a Monitor’s function is mostly
advisory, rather than administrative.
Atlas’ Analogy: Shareholders > Directors > Officers (CEO, CFO, etc)
Creditors
> Inspectors > Trustee
[With SEC supervising/regulating]
[With Superintendant supervising/regulating]
Trustee in Bankruptcy: These are the basic officials who do almost all of the day-to-day bankruptcy work. They notify creditors of
the bankruptcy, administer estates (BIA 71, 119(1)), approve claims against the estate (BIA 121,135), supervise the sale of assets, and
distribute the proceeds to creditors. They are not true trustees in the sense of administering equitable trusts. They are officers of the
court and also representatives of the creditors as a whole. Various powers of the trustee are set out at 30(1), and must be exercised
with inspector approval unless there are no inspectors (30(3)). Trustees are typically accountants, must pass special licensing exams,
and need to get bonds for insurance purposes to protect against any wrong doing on their part (general bond and a bond for each file).
Trustees owe duties to the creditors in general. Note that trustees in bankruptcy are in some ways analogous to trustees of Equitable
trusts (since both are fiduciaries who manage property for the benefit of others) but they are not equitable trustees and the rules
applicable to each are completely distinct. We probably could have built a workable bankruptcy regime using equitable trusts, but we
didn’t go that route.
The initial trustee can be replaced or affirmed at the first meeting of creditors by special resolution (102(5)).
Trustee can be replaced by special resolution at any meeting of creditors (14).
After failure of proposal, trustee can be replaced by ordinary resolution (57)
8
Where a court declares that a proposal is deemed refused under 50(12) or 50.4(11), it may also, “if it is satisfied that it would
be in the best interests of the creditors to do so,” appoint a different trustee than the one in the NOI/proposal.
Any interested party can apply to the court to have the trustee removed “for cause” (14.04).
The trustee must notify all creditors and the Superintendant of the bankruptcy within five days of (102(1)).
The trustee must call a meeting of creditors whenever 25% in number and 25% in value request it (103).
The trustee’s remuneration is approved at any meeting of creditors (39(1)).
Trustees require inspector approval to exercise certain powers (30(1)) unless there are no inspectors (30(3)).
A bankrupt’s property vests in the trustee (71).
Trustees may be required to provide or arrange financial counselling for consumer debtors (157.1).
The trustee must report evidence of wrongdoing to the Superintendant (205(1)).
Trustees are disqualified from acting in certain cases due to conflicts of interest (13.3).
Discharge of Trustees (40). Trustee must apply to discharge bankrupt prior to own discharge (169(2)).
Trustees can be forced to act by creditors on application to the court if trustee inaction is prejudicing them (38).
Trustees must comply with their ethics code (BIA 13.5; the Ethics Code is in Bankruptcy General Rules at 34-53).
Inspectors: These are persons who supervise the trustee’s exercise of powers (119, 120). They are appointed by the creditors (102(5))
and are often the creditors themselves. Inspector approval is required for the trustee to exercise the most important powers granted
under the BIA (30(1)). Inspectors’ decisions can be overridden at any time by the creditors voting as a whole (119(1)). Inspectors’
decisions may also be appealed to the court by the trustee or any other interested party (119(2)). Atlas: Inspectors cannot be party to
actions against the bankruptcy estate, although they can file proofs of claim.
Up to five inspectors elected at first meeting of creditors (116(1)). They can be replaced easily (116(5), 118).
Creditors with litigation against estate may not be inspectors (116(2)), and inspectors cannot acquire estate property (120).
Inspectors act by majority vote (116(3)). Trustee breaks ties (117(2)).
Inspectors determine the kind and amount of insurance on bankrupt’s property (24).
Official Receiver: These are deputies of the Superintendant of Bankruptcy, who fulfill an important administrative role. They are also
officers of the court. All bankruptcies in a bankruptcy district must be brought to the attention of the local Official Receiver, and the
Official Receiver in turn notifies the Superintendant. They act as a communication link between trustees/creditors and the
administrative apparatus of the state. Where there is no Official Receiver appointed, it is the Registrar of the Superior Court who
performs the function of Official Receiver (12(4)).
It is the Official Receiver who appoints the first trustee when a bankruptcy estate opens via general assignment (49(4)), who
chairs or nominates the chair for the first meeting of creditors (51(3)).
The Official Receiver who receives general assignments in favour of creditors (49(2)). The Official Receiver is also the
recipient of any payments under the Trustee’s insurance bonds and then distributes these funds to creditors (16(2)).
The Official Receiver must be given copies of proposals and many other documents, and also examines the debtor (158(c)(d), 159 – examination upon initial bankruptcy; 161 – examination prior to bankrupt’s discharge).
If directed by the Superintendant, the Official Receiver investigates suspicious activity by bankrupts (162).
The Official Receiver also reports suspicious activity or wrongdoing to the Superintendant (205(1)).
Superintendant of Bankruptcy: This is the highest level of administrative authority under the BIA. The Superintendant’s position
exists to police misconduct by anyone connected to the bankruptcy regime – whether trustees, creditors, or debtors. The
Superintendant receives reports from the Official Receivers, and also has various investigative powers (5-6, 10-11) to investigate
abuses connected to “any estate or matter” to which the BIA applies. The Superintendant can direct the local official receiver to
investigate particular bankruptcies (162). The Superintendant also controls licensing and regulation of trustees, prescribes forms and
documents to be used under the BIA, and can intervene in any bankruptcy or CCAA proceeding (BIA 5(4), CCAA 27).
Interim Receiver: This position is an extraordinary measure, used to prevent a debtor from dissipating or hiding assets. Interim
Receivers are appointed under the BIA only if it can be shown that there is a very high possibility of debtor fraud. The appointing
provisions of the BIA are set out below; see also sections 47, 47.1. Atlas said that interim receivers are basically only available in cases
of very likely fraud by the debtor. Typically the application for an interim receiver will be presented alongside a bankruptcy order.
46(1) The court may, if it is shown to be necessary for the protection of the estate of a debtor, at any time after the filing
of an application for a bankruptcy order and before a bankruptcy order is made, appoint a licensed trustee as interim
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receiver of the property or any part of the property of the debtor and direct the interim receiver to take immediate possession
of the property or any part of it on an undertaking being given by the applicant that the court may impose with respect to
interference with the debtor’s legal rights and with respect to damages in the event of the application being dismissed.
46(2) The interim receiver appointed under subsection (1) may, under the direction of the court, take conservatory
measures and summarily dispose of property that is perishable or likely to depreciate rapidly in value and exercise
such control over the business of the debtor as the court deems advisable, but the interim receiver shall not unduly
interfere with the debtor in the carrying on of his business except as may be necessary for conservatory purposes or to
comply with the order of the court.
Monitor: This is a role that exists only in CCAA proceedings. The Monitor is typically a large accounting firm that acts somewhat like
a trustee, but with almost no powers over the property and actions of the CCAA company. The debtor company remains in control of
its own business operations, so the Monitor’s function is mostly advisory and administrative. The Monitor also acts as the supverising
court’s eyes and ears, preparing periodic reports on the CCAA process. A Monitor must be appointed as part of the CCAA initial order
(CCAA 11.7(1)) and must be qualified to act as a trustee in Bankruptcy (CCAA 11.7(2)). A Monitor’s main functions are to report to
the court about the progress of the CCAA process, and to administer the provable claims process for the CCAA.
The Monitor’s duties in general are set out in section 23 of the CCAA.
The debtor company is required to assist the Monitor (CCAA 35).
The Monitor approves or disallows claims made under the CCAA process (Atlas; CCAA 20, BIA 121, 135).
The Monitor’s input and opinion will also be considered by the Court in making various orders (CCAA 11.3(3), 11.2(4)).
The Monitor’s permission is required to use the resiliation/disclaimer power of s 32 CCAA, unless the court overrides the
Monitor’s decision.
The Monitor must be appointed as part of the initial order (11.7(1)), and can be replaced on an application by a creditor to the
supervising court (11.7(3)).
Bankruptcy Districts: Canada is divided into bankruptcy districts that directly mirror provincial superior court districts (2(1)).
Superior Courts: Only superior courts exercise bankruptcy jurisdiction (183). They also supervise CCAA proceedings. The registrars
of the Superior Courts are also given certain powers (192) mostly for uncontested and administrative bankruptcy proceedings. Their
registrar is typically the official receiver.
Section 1.2: Constitutional Issues
While the federal government has jurisdiction over “Bankruptcy and Insolvency” by virtue of s 91(21) of the Constitution Act, 1867,
its legislation often interacts with provincial legislation passed under the “property and civil rights” power of 92(13). Section 3 of the
Bankruptcy and Insolvency General Rules also provide that “In cases not provided for in the Act or these Rules, the courts shall
apply… their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules.”
Essentially, the provinces can define who owns property, who has a security right (lien, hypothec, etc). But only the BIA can set
priorities among creditors, and only the BIA can classify creditors as secured/unsecured.
Concurrent Remedies
BIA 72(1) “The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or
statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights
and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.”
(2) BIA orders, assignments, and other documents aren’t covered by provincial laws on the registration of liens, charges, etc, unless
the Act otherwise specifies.
Husky Oil v MNR (1995 SCC): This case sets out six general principles governing the interaction of federal and provincial laws in the
realm of bankruptcy:
(1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s.136(1)…;
(2) while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred s.
136(1) of the BIA determines the status and priority of the claims specifically dealt with in that section;
(3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different
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scheme of distribution on bankruptcy from province to province, an unacceptable situation;
(4) the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in bankruptcy
cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined
for the purposes of the Bankruptcy Act;
(5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest
created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are
prohibited from doing directly; and
(6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with
the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of
provincial legislation is to do so.
The fifth and sixth propositions bear a close resemblance to the doctrine of colourability, but with two fundamental
differences. First, the doctrine of colourability is a concept which only applies in assessing the pith and substance of the impugned
legislation whereas propositions 5 and 6 continue to apply after the validity of the impugned provincial law has been determined.
None of the quartet cases was concerned with colourable provincial legislation. Second, a legislative intention to intrude into an
exclusive federal sphere is neither necessary nor sufficient to scrutinize the applicability of provincial law. The intrusion, and not the
intention to intrude, is determinative for division of powers purposes.”
Robinson v Countrywide Factors (Majority judgment): Four things stand out. First, s. 91(21) is an exclusive federal power; second,
it is a power confided to the Parliament of Canada notwithstanding anything else in the Act; third, it is a power, like the criminal law
power, whose ambit, does not lie frozen under conceptions held of bankruptcy and insolvency in 1867; and, fourth, the term
“insolvency” in s. 91(21) has as much an independent operation in the reservation of an exclusive area of legislative competence to the
Parliament of Canada as the term “bankruptcy.”
CL – Robinson v Countrywide Factors, 1978 SCC
Facts: R is trustee in bankruptcy of K Co. Prior to R taking over, K Co made certain transactions with Countrywide. These
preferences were disputed by R under the province’s Fraudulent Preferences Act.
Issue: (1) Is the Fraudulent Preferences Act ultra vires? (2) If it is not, is it nonetheless rendered inoperant be a conflict with the BIA?
Holding: (1) No; (2) No.
Reasoning: Majority: The provincial legislation is valid (not much reasoning). The BIA, by granting a three-month window to reverse
transactions, did not intend to prohibit any longer window under provincial law. Hence there is no operational conflict here.
Concurring Minority: It is impossible to define the scope of valid provincial jurisdiction by looking merely to the federal bankruptcy
and insolvency power and giving the provinces “whatever is left.” Provinces need to be able to legislate over insolvency in the nonstatutory sense. They also need to be able to create coherent property and civil rights regimes, which will interact with the statutory
scheme. The Fraudulent Preferences Act is a valid property and civil rights law.
Dissenting Minority: The provincial legislation makes insolvency the trigger of certain reversible transactions. This is a direct invasion
of the federal competency over bankruptcy. The provincial legislation allows a creditor to interfere with the eventual distribution of
assets by reversing transactions that would not otherwise be reversible under the BIA. Hence it is ultra vires: “No more under
bankruptcy and insolvency law than under the criminal law can a Province make unlawful what is lawful under valid federal
legislation, nor make lawful what is unlawful under valid federal legislation.”
Ratio: Provincial Fraudulent Preferences Acts are intra vires and applies concurrently with the BIA.
Comment: Fraudulent Preferences Acts or Fraudulent Conveyances Acts allow the trustee to set aside certain transactions if they
seems suspicious and were undertaken by a bankrupt corporation within a certain amount of time prior to bankruptcy. The time period
is longer than the time period available under the BIA.
CL – Pacar Financial Services v Sinco Trucking, 1989 Sask CA
Facts: P leased four trucks to S, and never perfected its lease as required under the PPSA. S leased and then later sold two trucks to
third parties. The third parties paid fair market value and had no notice of P’s interest in the trucks. S went bankrupt, and now both P
and the third parties claim the trucks from the estate of the bankrupt.
Issue: (1) Is the PPSA ultra vires? (2) If it is not, is it nonetheless rendered inoperant by a conflict with the BIA?
Holding: (1) No; (2) No.
Reasoning: (1) The PPSA is legislation concerning property and civil rights, since it deals with broad questions of property and
security interests. It is not disguised or colourable bankruptcy legislation. Furthermore, relying on Robinson, the court reasons that if
the trustee in bankruptcy can rely on provincial fraudulent preferences legislation, then the trustee can also use any other beneficial
aspects of provincial law without creating a constitutional conflict. (2) P argues that it is a secured creditor under the BIA, and that the
provincial legislation robs it of its secured status. However, applying the definition in the BIA, a lease is not a security interest for the
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BIA’s purpose. Furthermore, the trustee has control over “property of the debtor” and this includes leased items. Lastly, the BIA does
not define secured creditors rights, it merely preserves them in bankruptcy. Under provincial law, P had no security rights because the
lease was unperfected.
Ratio: (1) The BIA merely preserves the rights of a secured creditor in bankruptcy, and the “determination of what rights a secured
creditor has in the collateral is made under provincial law”; (2) Legal integration of provincial and federal laws in this field is “not
only permissible, but desirable and essential.”
DC – Sam Levy & Associates v Azco Mining, 2001 SCC
Facts: Azco is an American company which operated in Canada from a BC office. Sam Levy is a bankruptcy trustee for Eagle, a
Québec company. Azco concluded a mining deal with Eagle while it was solvent. The contract provided that all disputes would apply
BC law, and among other things gave shares in Eagle to Azco. Eagle went bankrupt after petitioning a Québec court. After being
appointed trustee, Sam Levy is attempting to undo parts of the contract. Azco asks that the case be transferred to British Columbia.
Issue: (1) Did the Québec court properly take bankruptcy jurisdiction? (2) Can a Québec court hear the contract claim? (3) Can Azco
have the case transferred to BC on an exceptional basis?
Holding: (1) Yes; (2) Yes; (3) No.
Reasoning: (1) Eagle was required to petition the court in whose judicial district it was headquartered, hence a Québec court had to
take jurisdiction. (2) The choice of law clause in the contract did not impose a choice of forum, so the Québec Superior Court was
competent to hear the dispute and apply BC law. Furthermore, only a “stranger to the bankruptcy” can go before the regular civil
courts; otherwise the claim must be brought before the bankruptcy court. Azco is either the largest creditor or the largest debtor of the
estate, depending on the outcome of this legislation, so it is hardly a stranger to the bankruptcy. (3) The BIA contains a regime to deal
with relocation of bankruptcy proceedings, so there was no possibility of applying Québec private international law rules. Azco has
not satisfied the requirements under that regime, so the proceedings will take place in Québec.
Ratio: (1) Application of the “stranger to the bankruptcy” principle”; (2) Provincial procedural statutes apply only if BIA or the
bankruptcy rules do not already prescribe a rule covering that eventuality.
Comment: Binnie admits that the “stranger to the bankruptcy” principle is hard to define, let alone apply. Here are some specific
examples of strangers and non-strangers (privies?) to the bankruptcy: “There are limits, of course. If the trustee’s claim is in relation to
a stranger to the bankruptcy, i.e. ‘persons or matters outside of [the] Act’ (Re Reynolds, supra, at p. 129) or lacks the ‘complexion of a
matter in bankruptcy’ (Re Morris Lofsky, supra, at p. 169) it should be brought in the ordinary civil courts and not the bankruptcy
court. However, claims for specific property may clearly be advanced in the bankruptcy courts (Re Galaxy Interiors, supra, and
Sigurdson, supra), as can claims for relief specifically granted by the Act (Re Ireland, supra, and Re Atlas Lumber, supra).”
Section 1.3: Link to Secured Transactions
For our purposes, secured creditors have perfected their security interests. Thus we don’t ask whether or how they acquired their
security interest; instead, we are interested in how the BIA and CCAA treat secured vs unsecured creditors. And in fact, secured
creditors have a number of special advantages. According to Atlas, this arises in part from a historical British belief that secured
creditors (typically banks) were more trustworthy and deserving of protection than the average creditor.
Note that section 244 applies to secured creditors as long as the debtor is insolvent, but irrespective of whether the debtor is bankrupt.
For those of us who, like me, didn’t take secured transactions prior to taking bankruptcy, the Re Griffen case is helpful to understand
how the provincial PPSAs work.
CL – Re Griffen, 1998 SCC
Facts: Telecom Leasing Co leased a car to a company, who then leased it to G, an employee. The lease was for more than one year
and allowed G to purchase the car at the end. TLC was not a party to the lease, but it played an active role in the terms and received a
deposit. TLC was also described as the lessor and G as the lessee on insurance documents. G went bankrupt. Neither the employer
company nor TLC had registered their security interest under the PPSA. G went bankrupt, the car was sold, and now G’s trustee and
TLC are disputing who gets the proceeds of the sale. TLC claims it owns the car since it never sold it to G, while the trustee relies on
the PPSA declaring him to have priority over the lessor of an unperfected lease.
Issue: Who has the right to the sale proceeds?
Holding: The trustee.
Reasoning: The PPSA effectively replaces the common-law “title” system with a system of “priority” for “security interests.” This
represents a radical departure from the common law of property. The PPSA deems all leases of more than one year to be security
interests. And the PPSA subordinates the interest of the unperfected security interest holder to that of the trustee once bankruptcy
occurs. TLC did not perfect its security interest. Hence the trustee is accorded “priority” over TLC. The trustee can pass valid title by
selling the car, because section 81 of the BIA applies, extinguishing all competing titles and encumbrances. The trustee is thus entitled
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to the full proceeds.
Ratio: (1) Explanation of how PPSAs create and regulate security rights; (2) Agree with Paccar that leasehold interests are property;
(3) Reaffirms that the BIA is built on the foundation of provincial property and civil rights legislation which specifies what sorts of
rights exist between the parties, whereas the BIA merely sets priorities.
Comment: The SCC makes a big deal about the trustee not acquiring better title than the bankrupt, and says that the PPSA creates an
exception to this rule. Their reasoning gets very complicated at times, and I’m not sure that they needed to go down that road. It seems
to me that the PPSA could be interpreted as extinguishing or lowering the quality of the lessor’s title, rather than improving the quality
of the trustee’s title. Hence the trustee acquires exactly the same rights as the bankrupt, but we arrive at the same result in this case
because the relative title of the lessor was lowered below that of the lessee.
CHAPTER 2: Entering Bankruptcy or CCAA Protection
This section is mostly about entering (or avoiding) BIA proceedings, with a little bit on the WRA and CCAA at the end. There are three
ways a debtor can enter the bankruptcy process: by voluntarily initiating proceedings (via a proposal, general assignment, or CCAA
proceeding); by being forced into bankruptcy by creditors (via a bankruptcy order, also called a bankruptcy petition); or by operation
of law (an automatic process, typically caused by failed proposals or by missing deadlines). If successful, some of these options allow
the debtor to avoid bankruptcy, while other options put the debtor into bankruptcy.
Negotiation/informal restructuring involves bargaining with your creditors for reduced obligations, longer repayment periods, waive
certain burdens, etc. It’s a contractual, private, solution to bankruptcy issues. As such you require complete agree from each creditor,
which may not be easy. By contrast, bankruptcy law is public law and in many cases can impose outcomes on creditors, or grant rights
to the debtor which are otherwise unavailable.
Entering or Avoiding Bankruptcy (WRA stuff not included):
Non-legal (Negotiated)
Legal (Court-based) Bankruptcy Proceedings
Reorganization
Initiated by Debtor
Initiated by Creditor
Need 100% creditor
General
CCAA
agreement
BIA Proposal
Bankruptcy Order*
Assignment*
Reorganization
By Operation of Law
Failed BIA proposal,
failed CCAA reorg.,
missed deadlines, etc*
Note: A * means you go bankrupt, while the non-starred options avoid bankruptcy (if successful)
Section 2.1: Voluntary Bankruptcy Proceedings
2.1.1 BIA Proposals
Proposals are generally an attempt to avoid bankruptcy by having your creditors agree to take reduced payment on their debts.
They can also be made during bankruptcy as an attempt to achieve a faster or fairer settlement than the normal bankruptcy rules would
allow. Sometime they’re made for strategic reasons, because filing a proposal or NOI grants the ability to resiliate contracts under
BIA 65.11, and provides an automatic stay of both secured and unsecured creditors under BIA 69 and 69.1. Proposals have strict
timelines within which they must be made (50.4). BIA proposals can last up to six months (50.4(9)). Contrast this with CCAA
compromise and arrangements which can last as long as necessary. BIA 50.6 also allows DIP financing after an NOI is made, or after a
proposal is made.
Proposals are one of the only ways to survive bankruptcy for corporations. Corporations cannot get discharges from bankruptcy
unless they pay all of their debts (169(4)). But that’s almost never going to happen, since inability to pay debts is what put them there
in the first place. However, because a successful proposal annuls the original bankruptcy, it gets around this rule (61(1)).
Note that all the provisions of the BIA (including section 84 for example) are imported into the section on proposals by section 66.,
which reads “All the provisions of this Act, except [sections on consumer proposals] in so far as they are applicable, apply, with
such modifications as the circumstances require, to proposals made under this Division.”
Proposals are made by the debtor or the trustee, supervised by a trustee, and must be approved by both unsecured creditors and the
court. If successful, the debtor gets a discharge of all those debts included in the proposal, and any outstanding bankruptcy order is
annulled. Proposals are made to all unsecured creditors generally (51(1.2)), and can’t be made to one or a subset of your creditors.
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However a proposal can treat classes of creditors differently, and may optionally deal with secured creditors as well. If there is
disagreement over classes of secured creditors, a court order may determine the classes of secured claims (50(1.5)). Secured creditors
can be included in the proposal, in which case the stay applies, but don’t have to be included (51(1.2-1.3)).
Creditors vote by class, with all unsecured creditors in a single class unless the proposal creates subclasses. Note that proxy votes are
allowed. The required approval conditions are:
50(2)(d) the proposal is deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors — other than,
unless the court orders otherwise, a class of creditors having equity claims — vote for the acceptance of the proposal by a
majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the
meeting and voting on the resolution.
The creditor-approved proposal must still be approved by the court (59). This approval is contingent on the proposal including certain
mandatory provisions. Failure at any stage of a proposal (missed timelines, vote goes against proposal, court refuses to approve
proposal) results in a deemed assignment into bankruptcy by the insolvent person.
Also, under 173(1)(n), if a bankrupt could have made a viable proposal, but chose to go bankrupt instead, this is a ground that will
prevent an absolute discharge.
Who May Make Proposals
51(1) Proposals may be made by: (a) an insolvent person; (b) a receiver, within the meaning of subsection 243(2), but only in relation
to an insolvent person; (c) a liquidator of an insolvent person’s property [presumably this is to catch both trustees and administrators
under consumer proposals – Mike]; (d) a bankrupt [so it is possible to make a proposal after being petitioned into bankruptcy by your
creditors - Mike]; and (e) a trustee of the estate of a bankrupt.
51(1.1) Consumer Proposals follow a different structure and not the rules in Part III Division I.
Notice of Intention (NOI)
This is a notice that you will present a proposal. It is not mandatory, but it is strategically useful for debtors because it gives a stay
against all creditors. Often used after receiving 244 notices. Creditors can get interim receivers appointed during this period (47.1).
50.4(1) NOI is filed by an insolvent person with local official receiver in the locality of the debtor. It must state: (a) the insolvent
person’s intent to make a proposal later; (b) the name and address of a licensed trustee who will take the case; (c) the names of all
creditors with claims over $250, and the exact amounts owed.
50.4(6) Within five days of filing the NOI, the trustee must notify all creditors mentioned in the NOI.
50.4(2) Within ten days of filing the NOI, you need to file additional documentation and accounting data. Failure=50.4(8) triggered.
50.4(8) Within thirty days you need to file a proposal with the interim receiver. If you fail, you are deemed to have made a general
assignment in favour of your creditors.
50.4(9) Extensions of time are available for the thirty day time limit. However the insolvent person must prove: (a) good faith and due
diligence, (b) the ability to make a proposal if the time extension is granted, and (c) no material prejudice to creditors. Each extension
can be up to 45 days long, and multiple extensions may be granted, but the total extensions can’t exceed 5 months (Atlas: so counting
your initial thirty days you have up to six months to get a proposal in place).
50.4(11) The court can terminate the thirty day period (or any extension) immediately on evidence of abuse, low chance of making a
successful proposal, or material prejudice to creditors.
50.4(7) Trustee has various powers and duties of monitoring over debtor’s property while proposal process is ongoing.
65.13 After filing the NOI you can’t dispose of your property outside the ordinary course of trade without court approval.
50.4(8) Where the additional documentation from 50.4(2) is not provided or deadlines are missed triggers deemed general assignment.
Benefits of Proposal or NOI for Debtor
69(1) Stay: On filing an NOI (a) creditors are prevented from instituting any action to recover money or execute judgments or seize
property; (b) even secured creditors are prevented from realizing on their security; (c-d) the government can’t pursue some tax
remedies. Lasts until filing of proposal.
69(2) Exclusions, mostly minor, from the stay. Typically proceedings already under way when NOI filed. 69(3) tax exclusions.
69.1 On filing proposal a similar stay of proceedings comes into effect. Lasts until trustee discharged or person becomes bankrupt.
69.1(5-6) Secured creditors can avoid the stay if the proposal does not include them or if they vote against it.
50.6 DIP financing available.
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84.1 (imported via 66) Debtor can have trustee apply to court to assign agreements, like leases, against the will of the co-contractant.
65.1(1) If a notice of intention or a proposal has been filed in respect of an insolvent person, no person may terminate or amend
any agreement, including a security agreement, with the insolvent person, or claim an accelerated payment, or a forfeiture of the
term, under any agreement, including a security agreement, with the insolvent person, by reason only that
(a) the insolvent person is insolvent; or
(b) a notice of intention or a proposal has been filed in respect of the insolvent person.
65.1(2) Additional protection for termination of leases and licensing agreements.
65.1(3) Protection versus public utilities discontinuing services.
65.1(4) Notwithstanding 65.1(1-3) creditors can ask for immediate payment for goods and services rendered in future, require other
advances of money or credit, and there’s a special exception for aircraft leases.
65.1(6) Court can lift or modify subsections 65.1(1-3) if the creditor convinces it that 65.1(1-3) will cause financial hardship.
65.11(1) Debtor who files a proposal or notice of intent may disclaim or resiliate contracts. This must be approved by trustee.
65.11(8) Loss caused by a disclaimer/resiliation under this section becomes a provable claim.
65.11(7) Even if the bankrupt disclaims an intellectual property license contract, the licensee can keep using it, if the licensee
upholds its part of the contract.
65.11(10) Section 65.11 cannot be used to disclaim a collective bargaining agreement, eligible financial contracts, leases which are
covered by 65.2, any lease of which you are the landlord, or a financing agreement of which you are the debtor.
65.12 Some provision to renegotiate collective bargaining agreements.
65.2 Power to resiliate some commercial leases. Lessor can’t accelerate rent, special damage provision used instead.
Procedure (and Trustee’s Role)
50(1.8) All procedural questions with respect to the proposal, except its ultimate approval, are determined by ordinary resolution.
47.1 Interim receivers can be imposed by creditors
50(2) Certain documents must be filed with the trustee, and copies provided to the official receiver 50(2.1).
50(3) If you are bankrupt when you make the proposal, it must be approved by the inspectors.
50(5-8) Trustee must compile necessary accounting information and present it to creditors upon creditor request or court order.
50(4) Once made, proposals cannot be withdrawn until approved or disallowed by court.
50(12) A proposal can be declared deemed refused by the court if there is proof of fraud by debtor, or if it is unlikely to be accepted,
or if it somehow causes prejudice to the creditors as a whole. This declaration triggers BIA 57(a)-(c)
50(13-18) Proposals and directors.
50.1 Secured creditor included in proposal files proof of claim, can vote. 50.2 Secured creditors who were not included in proposal do
not file proofs of claim.
50.3 If proposal fails or debtor otherwise goes bankrupt, existing proofs of claim are void and the regime in BIA 127-134 applies.
57.1 If 50.4(11) or 50(12) are triggered (debtor misbehaviour or proposal declared likely to fail) then the court can appoint new trustee
if convinced it would be beneficial to creditors.
Voting on the Proposal
51 Trustee calls a meeting of creditors within 21 days of filing the proposal. Certain documents must be sent to creditors and the
official receiver ten days before the meeting.
50(1.5) Secured creditors can go to court to dispute their classification. Unsecured creditors cannot.
51(1.6) Creditors file proofs of claim in response to proposals to determine voting weight. Procedure for claims is 124-126 for
unsecured creditors and 124-134 for secured creditors.
53 Creditors can vote once they have proof of claims approved. Can vote ahead of meeting or by proxy.
54(2)(d) To approve a plan requires all unsecured classes to vote yes by a majority in number and 2/3 in value.
54(2)(c) Secured creditors vote, but only for purpose of 62(2), and their votes do not count for overall approval of plan.
54(2)(b) All unsecured creditors vote as a class unless the proposal creates subclasses, as do secure creditors who are part of proposal.
54(2.1) Government tax claims rules.
54(3) Related parties cannot vote for proposal although they can vote against it.
55 Provisions on supervision of the debtor may be added by creditors to proposal with debtor’s consent.
56 Creditors may appoint up to five inspectors.
50.1(5) If no secured creditors in a class bother to file claims, that class is deemed to have voted against the proposal.
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Approval by Court
In addition to creditor approval, a proposal must receive court approval. This approval is contingent on several factors. Certain claims
must receive priority payment: preferred creditor claims, employee wage claims, pension claims, certain tax claims (60(1)-(1.5)).
Equity claims must be paid last (60(1.7). The proposal must also be reasonable and to the benefit of the general body of creditors
(59(2)).
59 Must be approved by court. Opponents of proposal can make representations.
59(2) Where the court is of the opinion that the terms of the proposal are not reasonable or are not calculated to benefit the general
body of creditors, the court shall refuse to approve the proposal, and the court may refuse to approve the proposal whenever it is
established that the debtor has committed any one of the offences mentioned in sections 198 to 200.
60(1) Proposals will be approved only if they provide for priority payment of preferred claims. (Atlas: You can get around this by
specifying full payment, but over a long time period).
60(1.1-1.2) Proposals cannot be approved if they do not pay off certain tax debts within six months, unless Crown waives this right.
60(1.3) Proposals cannot be approved unless employees get certain amounts of money and the court is satisfied that the employer can
and will make these payments. Employees have right to their salary and commissions under 136(1)(d) for the six months prior to the
proposal or notice of intention, whichever came first.
60(1.4) However, employees can’t use the claims under 60(1.3) to vote on the plan.
60(1.5) Proposals cannot approved unless pension plans dealt with in a particular way.
60(1.7) Proposals cannot be approved unless equity claims are paid last.
Effects of Creditors Accepting Proposal (Refusal BIA 57 you make a deemed general assignment)
61(1) If your proposal was made in bankruptcy, the bankruptcy order is annulled and your property revests in you.
62(2) Successful proposals are binding on all unsecured creditors and involved secured creditors and release you from your debts.
65.13 You cannot dispose of assets outside the ordinary course of business except with court approval.
Failed Proposals
It is not clear to me what happens if you make a failed proposal after already being bankrupt. I’m not sure if I’m missing something or
what, since there doesn’t seem to be any negative consequences, like barring you from making another proposal for six months or
something.
57 If you proposal fails because creditors vote against it you are deemed to make an assignment into bankruptcy.
61(2) If your proposal is not approved by the court, you make a deemed assignment of all your property into bankruptcy.
50(12) This is the deemed refusal by court order provision. Has same effects as a section 57 refusal (57(12.1)).
Default or Annulment of Proposal
62.1 Where the debtor defaults, the default is not waived by inspectors, and the default is not remedied by debtor, the trustee informs
all creditors and the official receiver of the default. This triggers potential application of 63.,
63(1) Court can annul proposal on default, if it was obtained by fraud, or if “the proposal cannot continue without injustice.”
63(4) Annulment leads to deemed assignment.
Cost-Benefit of Making a Proposal (Atlas)
- Stays: Affects both secured and unsecured creditors, in contrast to the general bankruptcy stay, which does not affect secured
creditors.
- Get to choose the trustee, rather than being stuck with the trustee chosen by a creditor. Of course, trustee can be changed, but
typically people stick with the original trustee.
- Do you have sophisticated financing (like DIP financing) that will allow you to avoid bankruptcy??
- Are there creditors attempting to enforce security (especially secured creditors who can take possession of substantially all of your
assets), and who can only be stayed via a proposal? Have you received a 244 notice within the last 10 days? (more than 10 is too late!)
2.1.2 BIA Consumer Proposals
This is a specialized regime for proposals by individuals rather than companies. It applies to all “consumer debtors,” defined in the act
as physical persons who are “bankrupt or insolvent and whose aggregate debts, excluding any debts secured by the individual’s
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principal residence, are not more than $250,000 or any other prescribed amount.” Note that the definition includes both bankrupt and
insolvent persons, and also excludes mortgage debt on one’s home.
Who can Make a Consumer Proposal
66.12(1) A consumer debtor
66.12(1.1) Consumer proposals can be consolidated where the consumers have a close relationship [spouses, presumably – Mike]
66.12(3) Must be made to creditors generally, just like regular proposals.
66.12(4) Creditors file proof of claim, just like regular proposals
Filing a Proposal
6.13(1)(a) get an administrator to agree; (b) give the administrator the required information.
6.13(2) Administrator investigates your finances, gets you debt-counselling, prepares and files proposal.
Benefits for Consumer
66.34 Prevents others from cancelling contracts or accelerating payments against you. There are also public utility provisions, etc,
mirroring the benefits of a regular proposal, although this section is not as extensive.
66.35 Cancels any existing assignments of future wages from the date of the filing of the proposal onwards.
66.36 Employers can’t fire you just for filing a consumer proposal.
69.2 Stay of proceedings
Procedure
66.14 Send out creditor notice within ten days of filing proposal.
66.28 Proof of claim rules
66.15(1) Official receiver can call a meeting of creditors (optional) within 45 days of filing of proposal.
66.15(2) Administrator must call a meeting if requested by creditors representing at least 25% of the value of proven claims.
66.16-66.17 rules for meeting.
66.18 If no meeting is requested or if there is a meeting but no quorum, the proposal is deemed accepted.
66.19 Voting rules: all creditors vote as one class, secured creditors exempted entirely from process.
66.2-66.21 Supervision and inspectors can be included in proposal.
6.25 A consumer can withdraw the proposal at any time prior to approval by the court or it is deemed approved after 15 days.
Requirements for Approval
66.12(5) The proposal must be completed within five years.
66.12(6) The proposal must pay preferred claimants first, provide for payment of expenses/fees, provide the manner of distribution.
66.22 Courts can review proposals, but it’s not required or automatic. Administrator must apply for review if requested to do so by the
official receiver or any interested party. Up to fifteen days from the date of approval to apply for this review. 6.23, 6.24 set out
procedure for this review. Proposal must be reasonable and fair to consumer, among other things.
Effects of Successful Proposal
66.28 Releases all unsecured debts (except 178(1) debts) and secured claims which were proposed and filed. [so not filing allows
secured creditors to avoid the consumer proposal it seems – Mike]
66.35(2) Administrator can garnish wages and any other payment to consumer in order to distribute to creditors.
Annulment
66.3 Various misdeeds by the consumer can result in annulment of the proposal. Where a proposal is annulled, this triggers a deemed
assignment into bankruptcy 66.3(4).
66.31 There is also a deemed annulment if you miss payments under the plan. Again there is an automatic assignment if you were
bankrupt when you made the proposal, but not if you were just insolvent when you made the proposal. If you’re merely insolvent, and
if you administrator agrees, notices are sent to your creditors telling them the plan will be automatically revived unless they object
66.31(6-8) If they do, your proposal ends and you cannot make another one: 66.32.
2.1.3 General Assignment for the Benefit of Creditors
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A general assignment is what most people mean when they say someone “declared bankruptcy” or “filed for bankruptcy” – you admit
that you are insolvent and place your property at the disposal of your creditors. A general assignment makes you a bankrupt (s 2
definition of “bankrupt”). It can be your initial bankruptcy event. All statutory provisions contained in BIA 49. Debtor has to
provide a list of property divisible among creditors (i.e. property that would vest in trustee) and the names of all creditors and the
amounts of their claims (49(2)). The assignment has no effect until registered with the official receiver in your locality 49(3), who
then appoints a trustee 49(4). Trustee will be appointed following the wishes of “the most interested creditors” if they can be
ascertained (49(4)). If no trustee can be found, the assignment is cancelled 49(5). There is a special procedure for small estates owned
by people (not corporations) and that are worth less than $5,000 after deducting secured claims 49(6). You can end up in a deemed
assignment under various conditions (see section 2.2.2).
Under BIA 181(1), a court can annul an assignment “if the order ought not to have been filed.” Case law has interpreted this to cover
three circumstances: (a) procedural requirements not met (like not filing in the right locality), (b) formal requirements not met (debtor
is not insolvent, is undischarged bankrupt), (c) invalid consent of debtor.
Who can Make a General Assignment
Easy to qualify: any Insolvent Person, or their estate if they’re dead (court leave required for estate/successor to file).
Validity Requirements
Insolvent at time, not already bankrupt
Person in sense of BIA
Filed with the official receiver in the locality of the debtor (49(3))
Subject to post-filing 181 anullment power (see above)
Cost-Benefit Calculation for Making General Assignments (Atlas)
- Before making an assignment, check that you owe enough (you must be an “insolvent person” in the sense of the BIA)
- Consider the costs of bankruptcy: historically personal bankruptcy is $1,500; the cheapest corporate bankruptcy will cost $5,000 to
$10,000.
- Number of Creditors: Having too many creditors makes the situation more difficult to manage.
- Past Proceedings: Are your assets being seized or in danger of being seized? Do you have sympathy of your creditors?
- Pride and Reputational Costs: Stigma remains for having declared bankruptcy.
- No choice of trustee.
- It is possible to make a proposal while bankrupt, which means you can make a proposal after filing an assignment. But why not just
go straight to the proposal? A failed proposal will lead to deemed bankruptcy anyways.
- It seems like the general assignment is intended for people and companies which have no hope of avoiding bankruptcy via a
proposal/CCAA and just want to go through the bankruptcy process as quickly as possible.
2.1.4 CCAA Initial Orders
The CCAA is the Canadian equivalent to American Chapter 11 bankruptcy protection. It is a rescue statute, designed to save a
company from bankruptcy and liquidation. It imposes automatic stays on all creditors, secured and unsecured, and offers a number of
additional powers/privileges that are not available to debtors under the BIA. The CCAA is also very flexible, since section 11 of the
CCAA creates a general power for the supervising court to issue any order it thinks fit.
This flexibility was famously used to turn the CCAA into the vehicle that resolved the Canadian fallout of the subprime crisis. See
ATB Financial v Metcalfe & Mansfield Alternative Investments II Corp, 2008 ONCA 587, which allowed a CCAA plan to incorporate
releases to third parties, so that the plan would not only affect debts owed to the debtor company, but also companies and individuals
that were not part of the CCAA process. [Atlas worked on the creation of this deal, which as you may have guessed was named after a
Montreal intersection - Mike].
The CCAA is also famous for its “real time” litigation, in that debtors can get court time on short notice, and since there is a designated
supervising judge, they can visit that judge for additional orders and motions on short notice, without needing to wait weeks for court
time.
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The goal of the CCAA is to create a “Plan of Arrangement and Compromise” wherein the company offers its creditors a deal, which
typically includes a combination of fractional recovery, delayed repayment, and payment in stock rather than cash. The creditors then
vote on the plan, and if approved, the company discharges all of the debts included in the plan according to the plan. The plan
typically includes all possible claims, which means the company emerges from the restructuring process with none of its old debts.
CCAA model orders are extremely complex, but are also very flexible. Lawyers start with the local provincial model order, make
changes, and bring a “track changes” version before a judge, who reviews the amended order. All deviations from the model order
must be justified, and the judge can allow or disallow them on a line-by-line basis. Note that CCAA proceedings are always voluntary no one can force you into a CCAA reorganization. In fact, most creditors want to keep you out of CCAA!
Although the CCAA is theoretically a rescue statute, there have been liquidations carried out under it. This remains controversial, and
has been mainly an Ontario development (Re Anvil Range Mining Corp, [2002] OJ 2606, 34 CBR (4th) 157 (ONCA)).
CCAA Definitions
2 “company” means any company, corporation or legal person incorporated by or under an Act of Parliament or of the legislature of a
province, any incorporated company having assets or doing business in Canada, wherever incorporated, and any income trust, but
does not include banks, authorized foreign banks within the meaning of section 2 of the Bank Act, railway or telegraph companies,
insurance companies and companies to which the Trust and Loan Companies Act applies;
2 “debtor company” means any company that
(a) is bankrupt or insolvent, [courts have interpreted “insolvent” differently under the CCAA than under the BIA - Mike]
(b) has committed an act of bankruptcy within the…[BIA] or is deemed insolvent within the…[WRA], whether or not
proceedings in respect of the company have been taken under either of those Acts,
(c) has made an authorized assignment or against which a bankruptcy order has been made under the [BIA], or
(d) is in the course of being wound up under the Winding-up and Restructuring Act because the company is insolvent;
3(2) [Defines “affiliated companies”]
(a) companies are affiliated companies if one of them is the subsidiary of the other or both are subsidiaries of the same
company or each of them is controlled by the same person; and
(b) two companies affiliated with the same company at the same time are deemed to be affiliated with each other.
3 (3) [Defines “controlled”; a company is controlled by a person or persons if]
(a) securities of the company to which are attached more than fifty per cent of the votes that may be cast to elect
directors of the company are held, other than by way of security only, by or for the benefit of that person or by or for the
benefit of those companies; and
(b) the votes attached to those securities are sufficient, if exercised, to elect a majority of the directors of the company.
3(4) [Defines subsidiary as a company controlled by another company]
Entering CCAA
According to 3(1) and the defined terms therein, the requirements for a CCAA filing are:
(1) You are a company within the sense of the CCAA;
(2) You are insolvent, bankrupt, or fulfill some other requirement to be a “debtor company”; [this means a bankrupt company
can enter the CCAA even after being declared bankrupt - Mike]
(3) You and your affiliated debtor companies have aggregate outstanding debts of at least $5 million. [note that the affiliated
companies must be debtor companies, so they have to bankrupt/insolvent/etc… you can’t count claims against solvent
subsidiaries in your $5 million - Mike]
Although it might seem logical to give the term “insolvent” the same definition under the CCAA as under the BIA, this has not been
done. Instead, courts have held that since “insolvent” under the BIA requires very dire straits, this would be inappropriate in the
context of a rescue statute like the CCAA. In order to be most successful, CCAA proceedings should be initiated prior to the company
going under. The following passage from Halsbury’s Laws of Canada - Bankruptcy & Insolvency sums up the state of the law:
[Although this definition is useful for the purposes of the CCAA, the test for insolvency under the CCAA has been expanded
to fulfil its particular rehabilitative objective. Courts have held that it would defeat the CCAA’s purpose to limit or prevent a
filing until the company’s financial difficulties are so dire that it would not have sufficient financial resources to successfully
carry through its restructuring. Thus, a financially troubled corporation is insolvent if it is reasonably expected to run out of
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liquidity within a reasonable proximity of time as compared with the time reasonably required to implement a restructuring.
There should be a reasonable cushion, the significance of which is determined by the facts of each particular restructuring.
This less onerous “reasonable foreseeability” insolvency test has not been universally accepted by the courts. Certain courts
have held that it should be limited to obligations currently payable or properly chargeable in a given accounting period.
However, it appears that the “reasonable foreseeability” insolvency test is somewhat more accepted by Canadian courts.
[citations, mostly to Re Stelco, 2004 OJ 1257, 48 CBR (4th) 299 (SCJ), omitted]
3(1) A company may make an application under the CCAA if the total claims against the debtor company or its affiliated debtor
companies, as proven under section 20, are at least $5 million.
9(1) Applications may be made in the province where the company has its head office or chief place of business in Canada, or if it has
no place of business, in any province where its Canadian assets are located.
2 “court” defines court to mean the superior court of the various provinces under whichever name it is locally referred to.
10(1) Procedural vehicle of the CCAA application follows local practice.
10(2) CCAA application must be accompanied by (a) weekly cash flow statements; (b) report containing certain accounting analyses
as prescribed by regulation; (c) copies of all financial statements prepared by the company in the year prior to the application.
11.02(3) (a) The court shall not make the order unless the applicant satisfies the court that circumstances exist that make the
order appropriate
11.02(1) Successful application will result in a 30 day stay, that can be extended under 11.02(2)
11.6 You cannot use the CCAA if your company is bankrupt and (a) You have already filed a proposal under part III; (b) Your
inspectors do not consent or (i) you failed to comply with the terms of your proposal (BIA 54.1(8)) or (ii) your proposal under the
BIA was refused by courts or creditors, or deemed refused by creditors, or was annulled.
11.7 Court must appoint a monitor at the same time that the initial request is granted. Monitor must be qualified as a BIA trustee.
8 The CCAA applies notwithstanding any agreement otherwise [like a contractual promise not to seek CCAA protection - Mike]
CL – Re Royal Oak Mines, 1999 Ont Gen Div
Facts: Royal Oak Mines seeks CCAA protection and asks for DIP financing as part of its initial order.
Issue: (1) Should Royal Oak receive CCAA protection? (2) What content should be included in the initial order?
Holding: (1) Yes; (2) Only the minimal relief needed.
Reasoning: CCAA orders have been growing in complexity over the years, as lawyers seek to cover every possible eventuality in their
initial order. Since the CCAA exists to provide real time protection, some creditors receive little notice, and most receive none. Here,
the request for DIP financing would prejudice certain secured creditors who received no notice of the CCAA proceeding, while others
had received only 1-2 days notice. The initial order here is incredibly complex and sophisticated, so even creditors with notice could
not realistically respond. Without the benefit of informed submissions from creditors, it seems inappropriate to grant the additional
relief beyond what is available in 11(3). Hence Royal Oak will receive the 11(3) stays, but for all other relief, including DIP financing,
it must return 30 days from now, having given notice and an opportunity to respond to its creditors.
Ratio: Initial orders should include only the relief that is reasonably necessary to preserve the company between the date of the order
and the “comeback” date (typically one month later).
Comment: This seems to have kicked off the trend of making the initial order itself bare-bones, and waiting for the comeback date to
deploy the really sophisticated/complex stuff.
CL – Re Algoma Steel, 2001 ONCA
Facts: Noteholders (creditors) appeal a CCAA order authorizing Algoma to obtain additional financing from its existing bank lenders
during the 30-day stay. The CCAA order gave super-priority status to this additional financing and to certain administration charges.
Both would outrank the noteholders’ existing security. The CCAA order was made ex parte. Algoma experienced a serious negative
cash flow and might have had to cease operations without the additional financing to restructure its indebtedness. The order contained
a comeback clause. The noteholders brought a motion to vary the order and appealed the order to the ONCA. The appeal was brought
prior to the expiry of the 30 day comeback period.
Issue: Should Algoma receive the super-priority DIP financing and administrative charge?
Holding: Yes.
Reasoning: The appeal was premature. CCAA processes are complex and urgent, as is the case here. The trial judge made the best
order that he could on the information available at the ex parte hearing, and ex parte hearings are authorized by the CCAA. The
noteholders received notice of the initial order and were invited to present their views at the comeback hearing 30 days later.
Moreover, the noteholders had initiated a motion to vary, which would allow them to challenge the order before the trial judge, who
has better knowledge of the facts of the case than the Court of Appeal does. Moreover, by bringing their motion to amend, and then
appealing the trial judge’s disposition of the motion if they are still unsatisfied, the noteholders will ensure that the court has a full
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factual and legal record to consider. Appealing the initial motion provides very little in the way of background, since the trial judge
has not yet considered the changes which the noteholders propose.
Ratio: Parties dissatisfied with the initial order should bring motions to vary, rather than appealing the initial order.
Comment: Implicitly, they seem to be endorsing the expanded contents of the initial order given the debtor’s desperate position, in
contrast to the previous case.
BIA-CCAA Interaction
11.6(a) Proceedings under Part III of the BIA can be converted into CCAA only if no proposal has been filed yet.
11.6(b) Bankrupts can enter CCAA protection only with the permission of inspectors.
11.6(b)(i-ii) No conversion from the BIA to the CCAA by a bankrupt is possible if the bankruptcy resulted from: 50.4(8), or the
deemed refusal of creditors or the court, or the annulment of a proposal by the court.
Cost-Benefit Calculations for CCAA Protection
- Far more expensive for the debtor, since you are paying a Monitor and using a lot of court/lawyer time. Claims Officers (see section
4.6) are also often appointed, and must be paid for out of the company’s own funds. CCAA is also a much longer process than normal
bankruptcies. Abitibi’s restructuring took 2 solid years with lots of court orders and litigation.
- CCAA stays affect secured creditors too, without any of the exceptions provided in the BIA.
- CCAA grants you access to the critical supplier regime and the DIP financing regime.
- CCAA initial orders are almost always granted ex parte, so you’ll normally get the order, but with a comeback clause so that the
debtor and the creditors will return to court and present full arguments later.
- CCAA plans often pay creditors not in cash, but in stock in the reorganized entity. This effectively wipes out existing shareholders,
but means that the new company will have lots of cash on hand, since it paid off its debts in equity rather than cash.
Section 2.2: Involuntary Bankruptcy Proceedings
This section sets out the two main ways to become an involuntary bankrupt: one of your creditors takes out a bankruptcy order against
you (section 2.2.1) or you makes a deemed general assignment to your creditors (section 2.2.3).
2.2.1 Bankruptcy Order
A Bankruptcy Order is a court order declaring someone to be bankrupt, appointing a trustee, and otherwise beginning the bankruptcy
process. In the past it was often called a bankruptcy petition or petition into bankruptcy. It’s involuntary because someone else takes it
out against you, forcing you into bankruptcy whether you like it or not. There is no discovery, since it’s brought to court as a
motion/application. This means it isn’t always easy for creditors to find each other and compare notes about whether the bankrupt is
not paying everyone, or just holding out on them.
Who can Institute Proceedings
Here is the list of requirements to obtain a bankruptcy order against someone. The underlined terms are defined terms in the BIA, and
are explained in section 1.1.1 of this summary.
 43(1): One or more creditors [i.e. persons holding provable claims – Mike] can file an application for a bankruptcy order
against the debtor if they allege: (a) the bankrupt owes at least $1,000 to his creditors as a whole) and (b) the debtor
committed an act of bankruptcy in the last 6 months. Note that only creditors have standing to bring the application, so even
if you prove the bankrupt owes $1,000 to creditors in general, if the bankrupt can show you aren’t a creditor then you lose
standing and the application fails on that ground.
 43(3): The application must be accompanied by an affidavit by someone having personal knowledge of the facts in question.
 43(5): The application must be filed with the superior court in the judicial district of the locality of the bankrupt. See Sam
Levy & Associates in section 1.2 for some discussion of the geographic aspects of bringing a bankruptcy order.
 43(7): Defenses to a bankruptcy order. “Where the court is [i] not satisfied with the proof of the facts alleged in the petition
or of the service of the petition, or [ii] is satisfied by the debtor that he is able to pay his debts, or [iii] that for other sufficient
cause no order ought to be made, it shall dismiss the petition.”
Note: Under 43(2) secured creditors cannot use this section unless (a) they renounce the benefit of their security to generate an
unsecured claim (typically they renounce exactly $1,000 of their security), or (b) they are under-secured, in that after deducting their
estimate of the value of their security from the debt owed by the debtor, there is a balance which would be an unsecured claim (i.e. If I
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have collateral worth $40, and you owe me $10, I can’t take out a bankruptcy order against you, since I should just seize my security;
but if I have collateral worth $40 and you owe me $100, I can get a bankruptcy order, because even after seizing my security you will
owe me money).
Atlas: If you read the wording closely, banks shouldn’t be allowed to take out bankruptcy petitions, since they aren’t “persons” in the
definition of the BIA. However, case law like Selkirk Spruce Mills and Re Owen recognized that this would be absurd, so it
reinterpreted the BIA to allow this.
Re Meloche (1977 Ont HCJ): Atlas cites this for the rule that unliquidated damages of more than $1,000 (even if it’s not clear exactly
what amount) will be enough to grant standing to bring a bankruptcy order. This seems to be a typo, since this case deals with a proof
of claim against someone already bankrupt, and was decided under bankruptcy rules that have since been amended!
Re Four Twenty-Seven Investments Ltd. (1985), 55 C.B.R. (NS) 183 (Ont SCJ): “Dealing with the question of quantum, the
authorities make clear that it is unnecessary to determine precisely the amount of the indebtedness so long as the court is satisfied that
the debt meets the statutory minimum.”
CL – Re Malidav Holdings, 1979 Ont HCJ [disputed debts]
Facts: Federal Investments Ltd is attempting to petition Malidav into bankruptcy on the basis of unpaid mortgage payments and
unpaid taxes on the mortgaged property. Malidav resists the petition. It argues that since it made up the tax payments later it owes
Federal nothing. With respect to the back mortgage payments it argues that since Malidav made payments to other companies in
Federal’s group, the group as a whole may owe Malidav money, rather than the other way around. As well, the existence of an
unsecured debt held by Federal is dependent on the outcome of litigation about one of the other mortgages – if the mortgage is found
valid, Federal’s security is insufficient to cover Malidav’s debt to it and Federal will have an unsecured debt. But if the mortgage is
annulled Federal will have fully secured debts and can’t bring a petition.
Issue: (1) Was there an act of bankruptcy? (2) Was there a debt of at least $1000?
Holding: (1) Yes; (2) Depends on ongoing litigation, so petition will be stayed to await result.
Reasoning: There are only six creditors: five mortgagees and the government for taxes. So a failure to pay any mortgage is an act of
bankruptcy. The record shows that there were unpaid taxes for more than 15 days, which was the “cure” period in the mortgage.
Failure to pay the taxes within 15 days breached the mortgage and was an act of bankruptcy, even though the taxes were paid up later.
After outlining the various mortgages, cross-company debts and payments, the judge concludes that the total debt between Federal and
Malidav is uncertain and depends on the outcome of ongoing mortgage litigation. He stays his ruling until this litigation is decided.
Ratio: (1) Where a debt is dependent on ongoing litigation already before the courts, the bankruptcy petition will be stayed until the
litigation is resolved; (2) An act of bankruptcy that is later cured will still be considered an act of bankruptcy for the purposes of a
petition.
Comment: To see why the secured/unsecured status of the debt was relevant, see BIA 43(2) “…[secured creditors] may be admitted as
an applicant creditor to the extent of the balance of the debt due to them after deducting the value [of the security/collateral], in the
same manner as if they were an unsecured creditor.”
CL – Re Concept Marketing, 1976 ONCA [future debts; disputed debts]
Facts: This is an appeal of two bankruptcy petitions. One petition was granted on the basis of a debt that had not yet been billed to
Concept Marketing. The second petition was granted to Concept Records, a related company that had substantial cross-transactions
with Concept Marketing.
Issue: (1) Is the first petition valid? (2) Is the second petition valid?
Holding: (1) No; (2) No.
Reasoning: (1) A petition cannot be granted on the basis of a debt which does not yet exist, and since the debt had not been billed
against Concept at the time the petition was granted, Concept did not have a debt of $1,000 owing, so the petition is invalid. (2) Based
on the conflicting evidence between Marketing and Record, it is clear that there is a bona fide dispute between the two about their
mutual indebtedness. The debt that Concept Marketing raises in its defense is not vague and uncertain, and should be litigated in a
regular trial or by arbitration. A motion for a bankruptcy petition is not the proper forum to decide that kind of issue.
Ratio: (1) The $1,000 debt must exist at the time that the bankruptcy petition is made, future debts do not count; (2) To determine
whether a $1,000 debt is owed to the petitioner, any debts owed by the petitioner to the defendant must be set-off; (3) If there is a bona
fide dispute about the validity of one or more debts, and these disputed debts will determine whether a $1,000 debt exists, then the
petition will be adjourned until a final determination can be made in the proper forum, typically a regular trial [presumably arbitration
could work too – Mike].
Comment: This case deals with disputed debts between the parties to the order (i.e. the petitioner and debtor), while Malidav dealt
with disputed debts that hinged on the outcome of litigation involving third parties to the order.
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CL – Re 484030 Ontario Ltd, 1992 OCJ (Gen Div) [disputed debts; future debts; partial payments]
Facts: TD Bank is owed loan payments by Ontario Ltd. It values its security for the loan at $500,000 and the debt at $650,000. Hence
there is an unsecured debt of $150,00 owing to it. It alleges that Ontario Ltd has committed two acts of bankruptcy: it is substantially
behind on payments to TD and two other mortgagees, and it has ceased depositing its income at TD, which TD says is an attempt to
remove and secret its property. Ontario Ltd counters that the bulk of its indebtedness to the bank is two seven-year loans that cannot
be called in by TD before seven years, so it has no current debt, only a future one. It also argues that TD’s loan is fully secured and
that it is not trying to hide its property; rather TD is trying to force it to repay the loans early.
Issue: (1) Is there a $1,000 unsecured debt? (2) Did Ontario Ltd commit an act of bankruptcy, and if yes, which one(s)? (3) Was TD’s
conduct inappropriate or abusive?
Holding: (1) Yes; (2) Yes – ceasing to meet its liabilities, but not secreting its property; (3) No.
Reasoning: (1) The weight of authority in Canada is that a debt that is due in the future is enough to found a petition in bankruptcy as
long as the debt exists at the time the petition is made (see ratio #1). The bank’s valuation of its security is not unreasonable, and the
courts have shown deference to secured lenders with respect to their evaluations, so the $500,000 stands. The entire point of having
secured creditors perform these estimates is to save the judicial system the effort of arriving at the “correct” figure itself. Hence the
bank has standing to bring a petition in bankruptcy.
(2) Where the petitioner presents evidence that the debtor has not been making required payments to several important creditors, this
creates a presumption that the debtor is failing to meet his liabilities as they come due (see ration #4). This presumption can be
rebutted by the debtor if he presents clear and independent evidence that the rest of his affairs are in order. This evidence must provide
a complete picture of the debtor’s finances, since it is easy to pay small debts and show them to the court if the debtor is ignoring large
debts! The evidence provided by Ontario is not clear, independent, and complete. It has ceased to meet its liabilities generally as they
come due. However, TD’s accusations of fraudulent behaviour were not substantiated.
(3) Judge dismisses this argument in one sentence with no reasons. Presumably once petition found valid, no evidence of abuse.
Ratio: (1) “it is sufficient for the petitioning creditor to establish that there was money owing to it at the date of the petition and need
not establish that there was anything due and payable” [in contrast to Concept Marketing - Mike]; (2) the valuation of a secured
creditor will be accepted as long as it is reasonable, and not absurdly low or a sham; (3) improper conduct of the creditor can be “other
sufficient cause” under 43(7); (4) Failure to pay several important creditors creates a presumption of insolvency that can be rebutted
by filing a complete picture of the debtors finances that demonstrates that the rest of the creditors are being paid.
CL – Re The Pas Foundation & Excavation, 1975 MBQB [six months; no demands by creditors]
Facts: PFE is being petitioned into bankruptcy on the basis that it has ceased to meet its obligations as they generally become due.
PFE opposes the petition because it was not asked for payment by any creditor in the past six months. That said, it has been unable to
meet its creditors demands for a couple of years now.
Issue: Did PFE cease meeting its obligations as they generally become due in the last six months?
Holding: Yes.
Reasoning: PFE admitted that it ceased making payments to creditors more than six months ago, and that this has continued to the
present. Thus if any demand for payment was made in the last six months, the answer would have been “no.” For the purpose of the
BIA, it is clear that PFE has not been meeting its obligations throughout the last 6 months.
Ratio: (1) “If the debtor ceases to meet his liabilities generally more than 6 months prior to the filing of the petition, and he continues
to do so in the six months before the petition, there is a sufficient act of bankruptcy”; (2) Creditors need not make demands in the last
six months as long as they have made them prior to that and the bankrupt remains in a continual state of default.
CL – Re Aarvi Construction Co, 1978 Ont HCJ [six months; affidavit; abuse of process]
Facts: Two petitions are made against Aarvi. Three years prior to filing the first petition, the petitioning company won $3,200 in a
lawsuit against Aarvi and has been unable to collect from Aarvi. The affidavit supporting the first petition is signed by the president of
the company, on information and belief. The second petition is supported by an affidavit from the controller (accountant) of the
petitioning firm.
Issue: (1) Do the affidavits supporting the petitions meet the BIA requirement of “personal knowledge”; (2) Was the first petition an
abuse of process? (3) Did delays in litigating the first petition bar its granting? (4) Was the second petition brought within six months?
Holding: (1) Yes; (2) No; (3) No
Reasoning: (1) “It is my view that a deponent in an affidavit of verification is not required to have first-hand knowledge of the facts
stated in the petition. He is entitled to rely on information and belief, including information received from others, as to the debts
allegedly owing by the debtor to other creditors. He is under no obligation before swearing the affidavit to make inquiries of the
creditors to confirm the debts.” The deponent can also rely on legal advice from lawyers. (2) To a certain extent bankruptcy will
always be about collecting debts. After all, creditors are the only ones who have a motive to petition an insolvent company into
bankruptcy. Here the petitioner waited three years for payment, so this is hardly an abuse of process. (3) The delays in prosecuting the
petition are not so long or inexplicable that the petition should be withdrawn. (4) Aarvi has been in continuous default of its
obligations, and there are currently 33 outstanding execution orders against it. Even if only one of them was brought in the last six
23
months, there is no question that Aarvi is not meeting its obligations as they come due.
Ratio: (1) Re-affirmation that failure to meet ones obligations can be a state of continuous default beginning prior to the six months
before the petition and continuing up to the date of the petition; (2) “Information and belief” are acceptable for affidavits supporting
the bankruptcy petition, as is reliance on legal advice or official documents; (3) Abuse of process is difficult to prove against a
creditor.
Who Can be the Target of a Bankruptcy Order
Section 43 targets “debtors” [defined as “[i] an insolvent person or [ii] any person who, at the time an act of bankruptcy was
committed by him, resided or carried on business in Canada…”]. Recall that the BIA’s definition of “person” excludes banks, among
others.
Exclusions: BIA 48 creates a farming/fishing exclusion, and a “small salary” exception: “Sections 43 to 46 do not apply to individuals
whose principal occupation and means of livelihood is fishing, farming or the tillage of the soil or to any individual who works for
wages, salary, commission or hire at a rate of compensation not exceeding twenty-five hundred dollars per year and does not on their
own account carry on business.” Note that even if you can’t be declared bankrupt via involuntary bankruptcy order, you can still go
bankrupt through voluntary means.
CL – Re Sonnenberg, 2002 ABQB [section 48 exception]
Facts: Application by the bankrupt, S, for a determination that certain land was exempt from enforcement on the ground that he used
the land for farming as his principal occupation. S had been digging a large hole with his own back hoe on the property for future use
as a fish pond when he was not running his own company where he earned $75,000 annually, as did his wife. When his company
started to go into receivership, S tried to speed up his plan for the fish farm development, but he lacked the capital to take the project
much farther before the bankruptcy occurred. S claimed he had been developing the fish farm for three years, and it was not yet
operational, so it was unable to earn income, despite it having been his principal occupation. There was evidence that the property was
zoned as a farm for tax purposes, and that S had a fully serviced mobile home on the property where he planned to build his
homestead in the future.
Issue: Is Sonnenberg a farmer or fisherman in the sense of BIA 48?
Holding: No.
Reasoning: Application dismissed. Sonnenberg did not provide sufficient evidence to allow the court to conclude that he was a bona
fide farmer. Farming was not his principal occupation on the date of bankruptcy. The evidence showed that Sonnenberg's principal
occupation was running his business, and he had future plans to develop and run a fish farm on the land. The Sonnenbergs were
entitled to $20,000 each from the proceeds of sale of the land under their exemption for a principal residence. They were not entitled
to the blanket farming exemption.
Ratio: Principal occupation is to be determined as a matter of common sense and good faith. Tax purposes are evidence of neither.
Comment: This is shamelessly copy-pasted from the Quicklaw headnote. Probably a copyright violation. Probably saved by fair use.
Comment2: Heard before a registrar, not a judge. Significant because it shows scope of BIA 192 powers.
Procedure
Remember that the application must be filed with the superior court in the judicial district of the locality of the bankrupt (43(5)). The
court then hears evidence and either allows or dismisses the application (43(6)-(7)), or orders a stay of proceedings and requires a trial
of the allegations later (BIA 43(10)). Proceedings for a bankruptcy order must be prosecuted with “due diligence and effect” otherwise
the court can substitute another creditor for you (BIA 43(13)). If the bankruptcy order is allowed, the court appoints a trustee (BIA
43(9)) which is typically the one requested by the moving party. The creditors can also ask for an interim receiver to be appointed
(BIA 46) if there’s a danger of assets being dissipated or otherwise misused. Withdrawing a petition requires permission of the court
43(14).
Effects of Order
2 “bankrupt” The target is now bankrupt (“bankrupt means a person…against whom a bankruptcy order has been made”)
43(9) Trustee appointed.
46 You can get an interim receiver appointed at the same time.
Cost-Benefit Calculation for Order (Atlas)
- Costs: Legal fees can be substantial if the order is contested. You also have to pay trustee costs if the estate cannot pay them.
- Uncertain Benefit In Many Cases: What are you hoping to achieve? Are you worried about fraudulent transactions? Do you think the
bankrupt’s situation will deteriorate even farther so you want to stop the flow of losses now?
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- Assess Likely Recovery: Try to estimate your percentage recovery on your debts. If it’s low, or if your debts are small, why bother?
- Fraudulent Transactions: Be aware of the 1-year time limit to reverse these transactions.
- Speed: Bankruptcy proceedings are fast – two weeks rather than two years. Courts don’t like being used as shortcuts, so make sure
there’s a solid bankruptcy case.
- Potential to Improve Ranking: However, courts don’t see the use of bankruptcy to improve one’s ranking as abusive. By putting a
tenant into bankruptcy, a secured creditor’s rights will now outrank a landlord’s distress rights, for example. Bankruptcy can also
eliminate deemed trusts for government debts, again helping secured creditors, and even unsecured creditors to a lesser degree. This is
not considered to be abusive.
- Creditor gets to pick trustee. Can be changed, but typically people stick with the original trustee.
2.2.2 Acts of Bankruptcy
42(1) A debtor commits an act of bankruptcy in each of the following cases:
(a) …he makes an assignment of his property to a trustee for the benefit of his creditors generally;
(b) …the debtor makes a fraudulent gift, delivery or transfer of the debtor’s property or of any part of it;
(c) …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 null as a fraudulent preference;
(d) if, with intent to defeat or delay his creditors, he departs out of Canada, or…remains out of Canada, or departs from
his dwelling-house or otherwise absents himself;
(e) [essentially, if you allow a judgment debt to go unsatisfied even after seizure of as much of your property as court
officials can find, this unsatisfied judgment will constitute an act of bankruptcy]
(f) [if at a meeting of creditors he admits in writing that he is insolvent or presents accounting records to that effect];
(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.
Notes on the Acts of Bankruptcy
42(1)(a) There are provincial acts allowing general assignments for the benefit of creditors. This provision allows a creditor to convert
a provincial general assignment into a (federal) bankruptcy.
42(1)(b) This section refers to actions targeted by provincial Fraudulent Preference/Conveyance Acts. Because those statutes require
proof of insolvency, it will be necessary to prove insolvency here too.
42(1)(c) This subsection covers transactions reviewable under the BIA, rather than provincial law. Because one of the conditions for a
reviewable preference is insolvency, that will need to be proven here too.
42(1)(h) Technically subsection (h) applies even if the debtor is solvent, and is choosing not to pay debts intentionally… but at the
bankruptcy order hearing, the debtor can counter with the defense that he is capable of paying his debts under 43(7).
42(1)(j) Atlas: subsection (j) is by far the most common act of bankruptcy used in Canada.
Six Month Limit and subsection (j): Re Barrie Sound Concepts: “The ceasing to meet obligations does not have to commence in
the six month period. It is sufficient that a cessation occur at some time and continue during the six months”
A Strict Approach to 42(1)(j) (quoted in Re 484030 Ontario Ltd): “In Re Hugh M. Grant Ltd., the Ontario Supreme Court adopted
the proposition established in Re Shirley (1927), 8 CBR 235 affirmed (1927), 8 CBR 612 (NBCA): where a debtor pays some of his
creditors, and makes partial payments to others, and pays nothing to others, he has committed an act of bankruptcy as defined by the
section.” [namely, failing to meet his obligations as they generally come due – Mike]
A Loose Approach to 42(1)(j) (quoted in Re 484030 Ontario Ltd): “I am not satisfied with the proof. In saying that, I have not
overlooked that the debtor has obvious financial difficulties. Financial difficulties do not necessarily indicate an act of bankruptcy. If
they did, the case load in this court would be even heavier than it is. Nor have I overlooked that in coping with those financial
difficulties there has been, on the part of the debtor, what I might term some selective payment of debts. That is a situation in no way
surprising where financial difficulties exist and is not something at which any material criticism can be levelled, unless the debtor is
insolvent or on the eve of insolvency.”
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First City Trust Co v Omni-Stone Corp (1991), 4 OR (3d) 636: This is the most common act of bankruptcy. The word "generally"
does not mean "entirely" but means "in most cases" or "on the whole" and it is necessary to decide on the facts of each case whether
this is so.
Failure to Pay a Single Creditor: Re Holmes (1975), 20 C.B.R. (N.S.) 111 at 133: “I have carefully considered [the relevant]
decisions and it is clear that the Courts, in Ontario at least, have granted a receiving order on the basis of a default to one creditor in
special circumstances. These circumstances are:
(a) The creditor is the only creditor of the debtor; and the debtor has failed to meet repeated demands of the creditor; in these
circumstances he should not be denied the benefits of the Bankruptcy Act by reason only of his unique character; or
(b) The creditor is a significant creditor and there are special circumstances such as fraud on the part of the debtor which
make it imperative that the processes of the Bankruptcy Act be set in motion immediately for the protection of the whole
class of creditors; or
(c) The debtor admits that he is unable to pay his creditors generally, although they and the obligations are not identified.”
CL – Re Electronetic Systems Corp, 1994 OCJ (Gen Div) [single creditor petition]
Facts: Telenex asks for a receiving order against Electronics Systems. T had made repeated demands for payment from ES, which did
not result in payment. Eventually ES’s sole shareholder admitted that it was insolvent in a letter. ES also transferred its main source
of income, two service contracts, to a related company in exchange for rent rebates, since the related company was its landlord.
Issue: Has ES committed an act of bankruptcy?
Holding: Yes – ceasing to meet its obligations as they generally come due.
Reasoning: ES alleges that the affidavit filed with the petition was not by someone with personal knowledge of the matter. However,
here the act of bankruptcy is ES’s written admission of bankruptcy, and the deponent had personal knowledge of the letter. ES
challenged the timing of the act of bankruptcy, but the judge gets around this by using an inference. The judge then applies the Re
Holmes test for special circumstances, finding that all three are present. Telenex is the only arms length party with debts from ES; ES
acted suspiciously when it transferred its assets to a related company before paying off Telenex; and ES admitted it was insolvent.
Ratio: Adoption of the Re Holmes factors for allowing a single creditor’s unpaid debts to trigger bankruptcy.
2.2.3 Automatic Involuntary Bankruptcies
Various other situations (typically failed attempts to avoid bankruptcy through proposals!) can trigger an automatic assignment into
bankruptcy. This can be thought of as “bankruptcy by operation of law.”
50.4(8) Missing timelines to file a proposal creates a deemed general assignment of your property in favour of creditors.
57 Where a proposal is voted down by creditors, you are deemed to have made a general assignment to creditors.
61(2) If a proposal is not approved by the court, the debtor makes a deemed general assignment to creditors.
63(4) If a proposal is annulled by the court, the debtor makes a deemed general assignment to creditors.
Note that failed CCAA plans do not lead to automatic bankruptcies!
CHAPTER 3: Effects of Being Bankrupt
Recall that “bankruptcy” is the legal consequence attached to (factual) “insolvency.” This section sets out the precise effects of this
legal status, beginning with the role of the trustee, then discussing bankruptcy’s effects on the person and property of the debtor.
Section 3.1: Trustee’s Powers and Duties
The trustee acquires a number of powers once the debtor is bankrupt. The most important is that all of the debtor’s property vests in
the trustee (71), but the trustee also gains a general power to assign contracts (84.1(1)). Trustees must immediately notify creditors of
the bankruptcy and arrange a meeting of creditors (102). Being bankrupt also prevents others from terminating contracts with you or
accelerating payment on the basis that you’re bankrupt (84.2).
General Powers
30 Trustee can do a number of things with inspectors’ permission, including borrowing (g); carry on the debtor’s business (c); initiate
lawsuits in relation to the debtor’s property (d-e); settle or compromise debts and lawsuits (h-i); disclaim leases/contracts (k). Atlas:
although section 30 is framed as “trustees need inspector permission to do these things” it is also a direct grant of authority/power to
26
do these things. It both creates powers in the trustee and subordinates the exercise of those powers to the inspectors.
71 Property of the bankrupt passes to the trustee.
84 Trustee can pass full legal/equitable title to third parties when bankrupt’s property is sold.
84.1(1) “On application by a trustee and on notice to every party to an agreement, a court may make an order assigning the rights and
obligations of a bankrupt under the agreement to any person who is specified by the court and agrees to the assignment.” There are
some restrictions to this (2-4). In particular 84.1 does not apply to eligible financial contracts and union contracts.
84.2(1) 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.
84.2(2) similar provisions, but with leases. 84.2(3) similar provisions, but with public utilities. 84.2(6) court can lift this section.
16(3) Trustee takes possession of books and records
17 Anyone who has possession of the bankrupt’s property must deliver it to the trustee if they don’t have a right to retain it against the
bankrupt or the trustee.
73(4) trustee can get back property seized for nonpayment of rent or taxes, but costs of seizure become a first-ranking security on it.
35 Redirection of mail for up to 3 months if an individual, longer if corporation or with court permission.
33(1) Trustee can ask court for directions/advice on any issue if needed.
Duties towards Creditors and Bankruptcy Officials
102(1) The trustee must contact all creditors and the Superintendant of the bankruptcy within five days of appointment.
102(1.1) Creditors advised by registered mail that the bankruptcy has taken place.
102(2) other notification
28 Trustee must make certain reports to the Superintendant as soon as possible.
16 Trustee must give security for his own good behaviour; this is enforceable by subsequent trustees or any creditor.
163(1) If asked by a resolution of creditors, the trustee must examine the debtor under oath.
Duties with Respect to Property and Debtor
21(d) Trustee verifies debtor’s statements that were given in accordance with 158(d) of the BIA.
24(1) Trustee will take out insurance on property to the extent necessary, or to extent inspectors desire.
82 Trustees can sell patented items free and clear of licensing terms or other restrictions. The owner of the patent can object to this, in
which case the owner must repurchase the items for their original sale price, minus reasonable depreciation.
83 Special provision allowing copyrights held by bankrupt to revert to authors.
Section 3.2: Effect on the Person of the Debtor
Undischarged bankrupts cannot serve as directors of corporations (specified in corporations legislation, not the BIA). They can also be
barred from practicing certain professions, notably law and accounting (again this is specified in the professional legislation). The
notion being that bankrupts are not qualified to act as fiduciaries and may be subject to particular temptations due to their status.
A number of summary criminal offenses exist which regulate the behaviour of undischarged bankrupts: 198 deals with fraudulent
acts against creditors or the bankruptcy system; 199 prohibits engaging in business without disclosing bankrupt status to other parties
in transaction or obtaining more than $1,000 in credit without disclosing bankrupt status; 200 failing to keep adequate accounting
records if you are in a business person during the two years prior to your bankruptcy.
The debtor also has to assist in the bankruptcy process as set out in BIA 158. The responsibilities are: answer some official
questions, provide a statement of his finances (158(d)), provide all books and records to trustee (158(a.2)), help take an inventory of
assets (158(e)), disclose all potentially-suspicious dispositions of assets within the last year (158(f)), disclose all gifts or trust
settlements given within the last five years (158(g)), cancel all credit cards (158(a.1)). Generally help the trustee to administer the
bankruptcy: 158(h-p), including a “provide all reasonable help” clause (158(o)). Where the debtor is a corporation, a director or officer
performs all the duties set out in 158 (typically the one who executed the bankruptcy assignment, unless the official receiver
designates another one).
Non-criminal arrest powers are dealt with by sections 166 and 168. Bankrupts can be arrested for failing to attend meetings or
examinations (166). They can be arrested if, after the filing of a general assignment or after a bankruptcy order is filed against them,
they have left or are planning to leave Canada to avoid the bankruptcy process or to delay or frustrate it (168(a-c)… but not proposals
27
weirdly enough). A bankrupt can be arrested if after an assignment or bankruptcy order there are reasonable grounds to believe they
are hiding property or about to destroy records (168(c-d)). Finally, failure to obey court orders can result in arrest (186(e)). 168 also
allows seizure of books, records, and property in general.
BIA Provisions
71 When a bankruptcy order is made or a general assignment is filed, the bankrupt ceases to have any capacity to deal with his own
property, which passes, subject to the rights of secured creditors, to the trustee.
72 BIA doesn’t change law of property or civil rights any more than necessary, and trustees have access to all normal civil remedies in
addition to BIA remedies. This includes most obviously provincial fraudulent conveyances/preferences regimes.9
166 Failure to attend required meetings can result in arrest.
175 Statutory disqualification of the bankrupt to participate in various activities ceases only when the bankrupt obtains a certificate of
discharge which must include a statement that the bankruptcy was caused by the misfortune and not misconduct.
CL – McNamara v Pagecorp, 1989 ONCA
Facts: M was an undischarged bankrupt. He traded some of his existing assets for shares in Pagecorp. Pagecorp accidentally
registered these shares in the name of M’s wife, rather than M. M now sues for damages because he did not receive his shares.
Issue: (1) Does M have capacity to commence the action? (2) How should Pagecorp’s wrongful conduct be handled?
Holding: (1) No; (2) Appeal is dismissed, but without prejudice to having trustee bring an action in M’s name.
Reasoning: “The scheme of the Bankruptcy Act is that all property of the bankrupt owned at the date of bankruptcy and which is
acquired by the bankrupt prior to his discharge vests in the trustee. There is no doubt that an undischarged bankrupt cannot bring
action to enforce property claims… Nonetheless, we consider it unjust assuming the alleged facts to be true that Pagecorp and
National Trust could act as they did and escape responsibility by a technical application of the provisions of the Bankruptcy Act. The
appeal is dismissed but without prejudice to any rights of the appellant to proceed under s. 19 or any other provision of the Bankruptcy
Act to compel the trustee to pursue the respondents to account for their actions.”
Ratio: (1) Because all property of the bankrupt passes to the trustee, the bankrupt lacks any property rights to enforce against others;
(2) Actions by bankrupts that are dismissed for lack of capacity should be done without prejudice to other remedies by trustee.
Comment: Presumably M is estranged from his wife, otherwise why he couldn’t just ask her to give the shares back?
Section 3.3: Effect on the Property of the Debtor
The bankrupt’s property passes to the trustee in bankruptcy, who gains “seizen” of it. The trustee takes the property subject to the
interests of secured creditors. Atlas: There was a long-running debate about whether trustees were assignees or successors, but this has
been solved by muddling-through… courts will adopt one theory or the other depending on what seems most just/workable in a given
case, so the debate no longer really matters.
BIA Provisions
71 When a bankruptcy order is made or a general assignment is filed, the bankrupt ceases to have any capacity to deal with his own
property, which passes, subject to the rights of secured creditors, to the trustee.
74 Bankruptcy orders can be registered against title of property. This makes the trustee owner of the property and clears all “all
judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal
hypothecs of judgment creditors, executions or other process against the property of a bankrupt”
17 Anyone who has possession of the bankrupt’s property must deliver it to the trustee if they don’t have a right to retain it against the
bankrupt or the trustee.
18(b) Trustee can carry on debtor’s business prior to first meeting of creditors and take conservatory measures.
40 Property that cannot be sold must be returned to bankrupt, with permission of inspectors. Otherwise court decides what to do.
78 Banks with accounts in the name of undischarged bankrupts must notify trustee once they become aware of bankruptcy and refuse
to pay money out of the account without the trustee’s permission.
73(1) Good faith purchaser for value of the bankrupt’s property at a judicial sale is protected, and has property interests
superior to those of the trustee.
75 Limited protection for good faith purchaser/mortgagor for value of immovables.
80 Trustee not liable for sale of property affected by third party interests unless the trustee had notice or was negligent. But the estate
is still liable even if the trustee is not.
84 A sale by the trustee vests buyer with all legal and equitable interests that were held by the bankrupt.
99(1) All transactions by a bankrupt with any person dealing with the bankrupt in good faith and for value in respect of property
28
acquired by the bankrupt after the bankruptcy, if completed before any intervention by the trustee, are valid against the
trustee, and any estate, or interest or right, in the property that by virtue of this Act is vested in the trustee shall determine and pass in
any manner and to any extent that may be required for giving effect to any such transaction.
99(2) For the purposes of this section, the receipt of any money, security or negotiable instrument from or by the order or direction of
a bankrupt by his banker and any payment and any delivery of any security or negotiable instrument made to or by the order or
direction of a bankrupt by his banker shall be deemed to be a transaction by the bankrupt with his banker dealing with him for value.
16(4) Trustee is in same position with respect to property as a court-appointed receiver would be.
16(5) No one can withhold accounting records and books from the trustee.
83 Special provision allowing copyrights held by bankrupt to revert to authors.
65.11(7) Even if the bankrupt disclaims an intellectual property license contract, the licensee can keep using it, if the licensee upholds
its part of the contract.
3.3.1 Property that Vests vs Exempt Property
General rule is the automatic vesting of all property in the trustee, with certain exceptions that are mostly found in sections 67-68.
Other exceptions beyond those listed in section 67 are: purely personal rights of action like alimony, tort causes of action, punitive
damages, and merely possessory rights (like adverse possession, or bailment-based property rights). Note that while all of the
bankrupt’s property passes to the trustee, but if it is disposed of to a good faith purchaser for value, the trustee loses any claim to it
(99(1)).
Section 67 inclusions: Note that (d) captures any interest less than ownership and is extremely broad. It also includes beneficial
interests (i.e. property held in trust for the bankrupt).
(c) all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the
bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar
year - or the fiscal year of the bankrupt if it is different from the calendar year - in which the bankrupt became a bankrupt, except the
portion that
(i) is not subject to the operation of this Act, or
(ii) in the case of a bankrupt who is the judgment debtor named in a garnishee summons served on Her Majesty under the
Family Orders and Agreements Enforcement Assistance Act, is garnishable money that is payable to the bankrupt and is to be
paid under the garnishee summons, and
(d) as might have been exercised by the bankrupt for his own benefit.
Section 67 exclusions: The following property does not pass to the trustee: (a) property held in trust for others; (b) property that is
exempt from seizure in the province in which it is located and in which the bankrupt resides; (b.1) GST tax credits; (b.2)
prescribed (by regulation) payments that are related to the essential needs of a physical person that are made to the debtor [i.e. child
support]; (b.3) RRSPs.
Section 68 exclusions: The Supreme Court has held that anything falling in section 68 is not part of the 67 inclusions. Wallace v
United Grain Growers Ltd, [1997] 3 SCR 701: Payments for successful wrongful dismissal claims fall under section 68. Thus they
are not included in section 67.
In Re Cadieux (1952), 33 CBR 15 at 16 (quoted in Paccar Financial Services): Property of the debtor includes leasehold interests.
Re Actman [1967] CCS NO 64: Example of garnishment order against bankrupt’s salary.
Marzetti v Marzetti, [1994] 2 SCR 765: “A bankrupt's interest in a post‑bankruptcy income tax refund can be considered "property"
for the purposes of s. 67(c) of the Bankruptcy Act. Even if a taxpayer who makes overpayments has no right to compel a refund prior
to filing a return, that taxpayer has at least a future and contingent interest in the ultimate tax refund which would come within the
definition of "property" in s. 2 of the Act.”
Re Kirk, 36 CBR (NS) 10 (summarized in section 5.1.2): Where the bankrupt’s has an interest under any will, this interest vests in
his trustee. The trustee can require the bankrupt to make an assignment certifying this fact.
Other BIA Provisions
68 This section deals with surplus income and garnishment of salary over and above basic needs. Atlas: Garnishment is rare. SCC:
This section is a “complete code” with respect to salary/wages, so it excludes them from 67.
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98.1 If you are engaged in business and make a general assignment of your book debts, the trustee can reverse this with respect to
debts not yet paid at the date of the bankruptcy. This does not apply if the assignment was registered under provincial law.
99(1) All transactions by a bankrupt with any person dealing with the bankrupt in good faith and for value in respect of property
acquired by the bankrupt after the date of the bankruptcy, if completed before any intervention by the trustee, are valid against
the trustee, and any estate, or interest or right, in the property that by virtue of this Act is vested in the trustee shall determine and pass
in any manner and to any extent that may be required for giving effect to any such transaction.
After-acquired Property
Older decisions (and Atlas in class!) drew a distinction between property the bankrupt held on the date of the bankruptcy, and property
acquired by the bankrupt after the bankruptcy. Under this dual approach, the trustee got automatic rights over all property held on the
date of the bankruptcy, but had to “intervene” somehow to get control over “after-acquired” property. Some judges believed that this
dual approach was incorporated into the BIA by section 99(1).
However, the Supreme Court rejected any special treatment of after-acquired property in Wallace v United Grain Growers, [1997] 3
SCR 701. The Supreme Court declared that section 67 was the domination rule, and according to its plain meaning, all property vests
in the trustee, whether before- or after-acquired. Section 99(1) creates a protection for bona fide purchasers for value of after-acquired
property, but that is all - it does not create a general distinction between before- and after-acquired property, it just creates an
exception which happens to apply only to after-acquired property:
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Consequently, in this context, I cannot agree with the Court of Appeal’s finding that the courts have
developed a common sense principle which permits an undischarged bankrupt to deal with assets acquired after the
assignment in bankruptcy provided the trustee has not intervened. In my opinion, the ability to deal with such assets is
restricted to those situations involving good faith third-party transactions for value with an undischarged bankrupt
regarding the after-acquired property of the bankrupt [i.e. section 99(1)]. The plain meaning of the Act indicates that
outside of these very narrow circumstances (or the exception created by s. 68(1), which I will discuss below), the
bankrupt loses the ability to deal with his or her property regardless of whether it was acquired before or after the
assignment in bankruptcy.
3.3.2 Trustee’s Powers Over Property
The trustee has an obligation to insure (24) and protect the debtor’s property.
Powers related to Property
18(a) Power of trustee to sell perishable goods.
18(b) Power to carry on business until first meeting of creditors; but doesn’t have to do so (BIA 32).
19 Trustee can get legal advice and take court action as he considers necessary to protect the estate of the bankrupt.
20 Trustee can abandon real property and immovable rights with the permission of the inspectors.
24 Obligation to insure property as seems advisable until first meeting of inspectors. Inspectors determine insurance after.
30 Trustee can do a number of things with inspectors’ permission, including borrowing (g); carry on the debtor’s business (c);
initiate lawsuits in relation to the debtor’s property (d-e); settle or compromise debts and lawsuits (h-i); disclaim lease/contract (k).
76 Property shall not be removed from the province it which it was located at the date of the bankruptcy without a court order.
128(1) Where the trustee has knowledge of property that may be subject to a security, the trustee may, by serving notice in the
prescribed form and manner, require any person to file, in the prescribed form and manner, a proof of the security that gives full
particulars of the security, including the date on which the security was given and the value at which that person assesses it.
128(1.1) Failure to file proof of security within thirty days of notice leads to trustee being able to sell property free of security.
164 If someone is suspected to have property belonging to the bankrupt or to owe the bankrupt a debt that he won’t admit, the trustee
can examine them to verify this. Penalties for non-compliance.
165(1) If a debt is admitted during the 164 examination, the trustee can apply to the court for an order that the person pay the trustee.
165(2) If the person admits to having property of the bankrupt during 164 examination, trustee can apply to court for a delivery order.
Section 3.4: Effect on Creditors
3.4.1 Unsecured Creditors
The most important effect of a bankruptcy is a general stay of proceedings on your unsecured creditors (69.3(1)). A court can lift the
stay against one or more of these creditors, but this is rare (69.4). Atlas: Courts lift the stay for one of two reasons: either the creditor
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will suffer material prejudice, or it is otherwise equitable to do so (typically to allow registration of liens, or allowing claims against
insurers of the bankrupt, since they will be paying the claim but you need to sue the bankrupt). In general the unsecured creditors will
need to file proofs of claims and participate in the asset distribution process in order to recover their claims. See section 4.1.5.
3.4.2 Secured Creditors
Secured creditors are not affected by the general bankruptcy stay of proceedings (69.3(2)). However, on application by the debtor, a
court can delay realization on security by up to six months (69.3(2)(a-b)). Regardless of whether there is a stay, the trustee must also
be given a reasonable opportunity to inspect the property subject to security and exercise the right of redemption if desired (79). All
secured creditors have to provide reasonable notice at common law before exercising their security. There are additional conditions for
secured creditors planning to realize on a security that comprises all or substantially all of the debtor’s property which apply regardless
of whether there is a bankruptcy or not (244).
Speaking of 244, often when a secured creditor gives the required ten day notice, this often results in an NOI being filed and an
automatic stay of proceedings coming into place (69). Secured creditors must prove their security and estimate value of asset (128(1))
failure to do so results in loss of security (128(1.1)). Trustees can also redeem the asset for the estimated value if they wish (128(3)).
Secured creditors can also apply to have stays lifted 69(4).
BIA Provisions
69.3(2) Subject to subsection (3), sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a
secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been
entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the
court shall not postpone the right of the secured creditor to realize or otherwise deal with his or her security, except as follows:
(a) in the case of a security for a debt that is due at the date the bankrupt became bankrupt or that becomes due not
later than six months thereafter, that right shall not be postponed for more than six months from that date; and
(b) in the case of a security for a debt that does not become due until more than six months after the date the bankrupt
became bankrupt, that right shall not be postponed for more than six months from that date, unless all instalments of
interest that are more than six months in arrears are paid and all other defaults of more than six months standing are cured,
and then only so long as no instalment of interest remains in arrears or defaults remain uncured for more than six months, but,
in any event, not beyond the date at which the debt secured by the security becomes payable under the instrument or law
creating the security.
69.3(2.1) Subsection (2) orders cannot be made if they would prevent secured creditors from realizing on “financial collateral.”
50.3 If someone goes bankrupt after making a proposal, the secured creditors need to refile proofs of claim.
70(1) Bankruptcy orders and assignments take precedence over most other judicial orders, but not the rights of secured creditors.
79 Trustee may give notice to secured creditors that the secured property is being inspected. Creditor cannot realize on that property
until trustee has had a reasonable time to inspect and possibly exercise trustee’s right of redemption.
128(1) Trustee can require secured creditors to prove their security, and give an estimated value of the security. (1.1) Failure to reply
by creditor within thirty days gives trustee power to sell property free of security. (3) Trustee can redeem security for value provided
by creditor.
132 Creditor can amend estimated value.
129-130 Trustee’s power to sell secured assets if not satisfied by creditor valuation. Court supervision of trustee actions.
244
(1) A secured creditor who intends to enforce a security on all or substantially all of
(a) the inventory,
(b) the accounts receivable, or
(c) the other property
of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person shall send
to that insolvent person, in the prescribed form and manner, a notice of that intention.
(2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the security in respect of
which the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an
earlier enforcement of the security.
(2.1) Can’t obtain consent to a shorter notice period/waiver of notice prior to sending the notice itself.
(3) This section does not apply to secured creditors: (a) whose right to realize or otherwise deal with his security is protected
by subsection 69.1(5) or (6); or (b) in respect of whom a stay under sections 69 to 69.2 has been lifted pursuant to section
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69.4.
(4) This section does not apply where there is a receiver in respect of the insolvent person.
252 In any proceeding where it is alleged that a secured creditor or a receiver contravened or failed to comply with any provision of
this Part, it is a defence if the secured creditor or the receiver, as the case may be, shows that, at the time of the alleged contravention
or failure to comply, he had reasonable grounds to believe that the debtor was not insolvent.
3.4.3 Creditors’ Role in the Bankruptcy Process
Meetings: First Meeting of Creditors
Besides proving their claims, creditors need to meet and decide some administrative matters. There is a first meeting with the goal of:
considering the affairs of the bankrupt; either affirming or changing the trustee; electing inspectors; and giving trustee directions as
needed with reference to the administration of the estate (102(5)). There can be additional meetings, either called by the trustee on his
own initiative, or when asked by a majority of inspectors, or by creditors representing 25% in number and 25% in value (103). The
first meeting is chaired by the official receiver, all other meetings are chaired by the trustee (105). There is also a meeting of
inspectors (116). For more information on inspectors, see section 1.1.4.
Meetings: General
Quorum for any meeting is one creditor (106(1)). If there is no quorum the trustee is automatically confirmed and adjourns the
meeting till later (106(2)). Only creditors with proven claims can vote (109). The meeting’s chair can admit or reject claim for voting
purposes subject to court appeals (108). Each class votes individually at meetings (107). Secured creditors only vote if they have
unsecured claims (112). Unless otherwise noted, votes are by ordinary resolution. An ordinary resolution is a simple majority vote,
with each creditor receiving the one-vote-per-dollar basis(2, 115).
Other
Creditors can apply to the court to have the bankrupt examined by a court official under oath (161(2)).
Section 3.5: Effects of CCAA Proceedings
Atlas: Many of the major advantages of the CCAA have been extended (at least in part) to bankruptcy proposals as well (e.g. stays of
secured creditors; DIP financing). However, it is extremely flexible, and this represents a significant advantage for debtors compared
to bankruptcy proceedings, since the CCAA grants a general power to the supervising judge to make whatever orders the court sees fit
(CCAA s 11).
This power was used, for example, by judge Farley to remove uncooperative directors from their positions in a CCAA company. This
usage was subsequently overturned on appeal by the ONCA, but Parliament put it into the CCAA via statutory amendment, indicating
that the powers conveyed on the CCAA court were intended to be that wide (CCAA s 11.5(1)). Other examples include ordering stays
or DIP financing against solvent subsidiary companies of the debtor company (although that one is still controversial) and including
third-party releases in the CCAA plan.
The CCAA is controversial in many ways, since the high costs tend to favour insolvency professionals like accounting firms,
consultants, and lawyers, while the option to pay creditors in stock favours management at the expense of shareholders and creditors.
For an example, see the very harsh criticism of the Hollinger Inc CCAA process at http://www.nameandshame.ca/.
General CCAA Order Power
11 Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under
this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the
restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers
appropriate in the circumstances.
3.5.1 Effects of Initial Order
The initial order “may” (but in practice always does) come with a 30-day stay of proceedings under the BIA or WRA (11.02(1)(a)),
or any other suit or proceeding of any kind (11.02(1)(b)-(c)). The stay may also affect claims against directors if the applicant so
requests, and if the court grants this request (11.03(1)), but this director stay does not affect guarantees given by directors, nor does it
preclude injunctive relief against directors (11.03(2)). Remember that there will typically be a come-back order, presumably at the end
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of the 30-day period.
The rest of the effects of the CCAA kick in immediately, but are treated under the next section.
3.5.2 Ongoing Effects of CCAA Protection
This section first deals with the stay of proceedings, then moves on to other powers/protections granted by the CCAA protection
regime: DIP financing (11.2), critical supplier status (11.4), contract termination powers (32-34), contract assignment powers (11.3),
director removal (11.5), directors’ indemnification charges (11.51), sale of asset provisions (36). Note that each of these powers can
be accessed, or not, according to the debtor’s preference, which is all part of the flexibility of the CCAA.
Renewing CCAA Stays
The initial stay can be renewed [not clear what time period the renewal lasts for… presumably 30 days like the initial application Mike] (11.02(2)). Like the initial stay, the renewed stay affects BIA, WRA, or any other proceedings. It both stays existing proceedings
and prevents the initiation of new ones. To renew the stay the applicant must convince the judge that it is appropriate and that the
applicant is acting in good faith and due diligence to complete the CCAA process (11.02(3)).
11.02(2) The initial stay can be renewed and continues to prevent continuation or institution of proceedings vs debtor company.
11.02(3) The court shall not make the order unless
(a) the applicant satisfies the court that circumstances exist that make the order appropriate; and
(b) in the case of [renewal of the stay] the applicant also satisfies the court that the applicant has acted, and is acting, in good
faith and with due diligence.
Re 843504 Alberta Ltd, 2003 ABQB 1015: This is a good example of the kinds of factors judges look at in extending CCAA stays
[33]. The judge in this case also pointed out that the test requires the good faith of the debtor company, not the Monitor [32].
1. An extension gives the Monitor a better opportunity to formulate and present a plan to the creditors, meeting the purpose
and intent of the legislation;
2. With sufficient controls in place, an extension will prevent creditors from maneuvering for a better position (Rio Nevada,
and cases cited at para. 36)
3. There is no evidence about whether the anticipated costs of these proceedings will be similar to costs anticipated in a
receivership. What is known is that Skyreach is expected to suffer a $337,000 deficit by the end of January 2004. PIMSI and
mortgage creditors want EdgeStone to pay all of CCAA costs. However, it would be inappropriate to allocate costs now since
there is no certainty about what benefits will accrue to any given party. That can be done later.
4. The extension Order is only until December 19th. At that time a further assessment of good faith, due diligence, and the
appropriateness of the circumstances can be made.
5. I cannot conclude that a liquidation sale is inevitable or the most likely outcome at this stage of the proceedings. The
Monitor is offering shares for sale.
6. The prospect of a tax loss sale may have value for unsecured creditors. A tax loss sale is apparently easier to facilitate in
CCAA proceedings than other insolvency proceedings;
Halbsury’s Law of Canada - Bankruptcy and Insolvency: The following factors militate in favour of lifting the stay [368]
• a plan is likely to fail;
• the applicant demonstrates hardship caused by the stay and independent of any pre-existing condition of the applicant;
• the applicant demonstrates necessity for payment where the creditor's financial problems are created by the stay order or
where the failure to pay the creditor would cause it to close and therefore jeopardize the debtor's existence;
• the applicant would be significantly prejudiced by a refusal to lift the stay, and there would be no resulting prejudice to the
debtor company or the creditor's positions;
• it is necessary to permit the applicant to take steps to protect a right that could be lost by the passage of time;
• after the lapse of a significant time period, the debtor is no closer to a plan than at the commencement of the stay;
• there is a real risk that a creditor's loan will become unsecured during the stay period;
• it is necessary to allow the applicant to perfect the right that existed prior to the commencement of the stay period;
• it is in the interests of justice to lift the stay.
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Exceptions to CCAA Stays
11.01 Suppliers can always demand up-front payment in cash for new deliveries, despite any stay.
11.04 Stays under 11.02 don’t affect the guarantors of the company’s obligations, or anyone else other than the company who is
obligated under a guarantee or letter of credit.
11.06 Members of the Canadian Payments Association may refuse to act as clearing houses for the debtor company.
11.07 There is a special exception for security interests in aircraft objects. The holders of these interests may seize the aircraft
notwithstanding the CCAA stay if: (a) the aircraft holder fails to maintain and repair the aircraft at any time; (b) if during the 60 days
after the CCAA proceeding start the debtor does not remedy all defaults and promise to carry out all obligations except those to not
become insolvent or to maintain a certain financial status; (c) if during the period starting 60 days after the CCAA filing [i.e. after (b)
expires - Mike] to the end of the CCAA protection, the debtor company defaults on any part of the agreement except an obligation not
to become insolvent.
So effectively, this section keeps aircraft security interests unaffected by the CCAA, which means they have no incentive to
accept any compromise of the value of their loans. Pro tip: You can use the CCAA interim financing regime to force a DIP
loan onto the aircraft that will have priority over the original lender. This removes the aircraft lender’s leverage and forces
them back to the bargaining table.
11.08 Stays do not affect Superintendant, powers exercised by the Minister of Finance under the Canada Deposit Insurance
Corporation, or the Attorney General of Canada under the Winding-Up and Reorganization Act.
11.09 Stays may affect government claims related to the Income Tax Act, Canada Pension Plan, or Employment Insurance Act
(11.09(1)(a)(i-v)) but the stay expires under various circumstances, mostly related to misbehaviour by the company (11.09(2)).
11.1(1) In this section, “regulatory body” means a person or body that has powers, duties or functions relating to the enforcement
or administration of [any federal or provincial Act and includes organizations defined as regulatory bodies by CCAA regulations].
11.1(2) CCAA stays do not stop investigations or other activities by regulatory bodies; they only stay orders for payment of money
initiated by the regulatory body, either on its own authority or via the courts.
11.1(3) Subsection 11.1(2) does not apply [i.e. the CCAA stay will affect non-monetary actions by the regulatory body - Mike] if
the debtor company obtains an order to that effect from the supervising judge. The judge will grant such an order only if the debtor
company can prove that: (a) a viable compromise or arrangement could not be made unless the stay is extended; (b) it is not contrary
to the public interest to grant the order.
11.1(4) If it is unclear whether an action taken by a regulatory body is caught by 11.1(2) or not, the debtor company can apply to the
court for a declaration by the supervising judge to clarify the matter.
34(7) Instruments defined as “eligible financial contracts” are exempt from stays of proceedings in CCAA matters.
DIP Financing
The CCAA allows Debtor-in-possession (DIP) financing. These are high-interest, high-risk loans made to insolvent companies in order
to allow them to restructure. In order to reduce the risk to a manageable level, the DIP lender will request a secured loan. But if the
debtor company already has security interests affecting its property, the lender will probably be deterred from advancing any funds.
To solve this problem, the CCAA allows the “priming” of the DIP loan, so that it takes precedence over any secured creditors. This
approach was pioneered by Justice Farley and has become extremely popular, since it makes it relatively easy for debtor companies to
find emergency financing.
Secured lenders obviously hate it, because they effectively become unsecured, since someone else has a security interest that outranks
theirs (remember, secured creditors are paid in order of priority, so if the interest(s) above yours account for more than 100% of the
value of the asset, you get nothing and have to file an unsecured claim).
DIP financing can’t be used to repay loan obligations that existed prior to the CCAA filing, and must instead be used to finance
ongoing operations. Authorization of DIP spending is discretionary, and may be refused by the court.
11.2(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or
charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge — in
an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the company
an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge
may not secure an obligation that exists before the order is made [so no using it to give a pre-existing lender a preference - Mike].
11.2(2) The security charge may [at judge’s option, but who would agree otherwise? - Mike] be ordered to rank over any existing
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charge.
11.2(3) A second or subsequent DIP charge cannot outrank another DIP loan under 11.2(3) unless the first DIP lender agrees.
11.2(4) In deciding whether to approve a DIP loan, the court must consider, among other things,
(a) the period during which the company is expected to be subject to proceedings under this Act;
(b) how the company’s business and financial affairs are to be managed during the proceedings;
(c) whether the company’s management has the confidence of its major creditors;
(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the
company;
(e) the nature and value of the company’s property;
(f) whether any creditor would be materially prejudiced as a result of the security or charge; and
(g) the monitor’s report referred to in paragraph 23(1)(b), if any.
Critical Supplier Status
This is another unique feature of the CCAA not available under the BIA. The court can order that a given supplier continue to provide
goods and services to the debtor company. In return for being forced to provide goods/services to an insolvent company, the supplier
gets a secured charge over some or all of the company’s property. This charge can be primed to outrank other security interests.
11.4(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or
charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the
person is a supplier of goods or services to the company and that the goods or services that are supplied are critical to the
company’s continued operation.
11.4(2) If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any goods
or services specified by the court to the company on any terms and conditions that are consistent with the supply relationship or
that the court considers appropriate.
11.4(3) If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of the
company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal to the value
of the goods or services supplied under the terms of the order.
11.4(4) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
Contract Termination Powers
Similar to the BIA, the CCAA allows the debtor to terminate contracts, which then become provable claims in the CCAA process.
32(1) A company can disclaim or resiliate any contract by giving notice to the other party, but must have the Monitor’s approval.
32(2) Within 15 days of receiving the notice, the other party can apply to the court to stop the resiliation/disclaimer.
32(3) If the monitor does not approve, the company can apply to the court for an order allowing resiliation.
32(4) Factors for the court to consider under 32(3).
32(5) When the contract is resiliated.
32(6) This is a very interesting provision that says that if an intellectual property license is resiliated/disclaimed, the ability of the
other party to use the IP is not affected. This includes the ability to enforce any exclusive use, so if you are the exclusive licensee, you
can still sue people for using the IP, including the debtor company! However, the other party must continue to fulfill its obligations
under the contract. I think this provision exists mostly to allow software licenses to continue despite the resiliation of any attached tech
support/service contracts.
32(7) Any loss caused by the resiliation is a provable claim.
32(9) Certain contracts cannot be resiliated: (a) an eligible financial contract; (b) a collective agreement; (c) a financing agreement if
the company is the borrower [i.e. a loan - Mike]; or (d) a lease of real property or of an immovable if the company is the lessor
33 Collective agreement regime. They can’t be resiliated, but you can serve notice to bargain early.
Contract Assignment Powers
These were pioneered by the CCAA, then added in the BIA much later. The two regimes are substantially identical.
11.3(1) On application by a debtor company and on notice to every party to an agreement and the monitor, the court may make an
order assigning the rights and obligations of the company under the agreement to any person who is specified by the court and agrees
35
to the assignment.
11.3(2) Subsection (1) does not apply in respect of rights and obligations that are not assignable by reason of their nature or that
arise under
(a) an agreement entered into on or after the day on which proceedings commence under this Act;
(b) an eligible financial contract; or
(c) a collective agreement.
11.3(3) In deciding whether to make the order, the court is to consider, among other things,
(a) whether the monitor approved the proposed assignment;
(b) whether the person to whom the rights and obligations are to be assigned would be able to perform the obligations; and
(c) whether it would be appropriate to assign the rights and obligations to that person.
11.3(4) The court may not make the order unless it is satisfied that all monetary defaults in relation to the agreement — other than
those arising by reason only of the company’s insolvency, the commencement of proceedings under this Act or the company’s failure
to perform a non-monetary obligation — will be remedied on or before the day fixed by the court.
11.3(5) The applicant is to send a copy of the order to every party to the agreement.
Director Removal
Justice Farley had ruled that he could issue an order removing an uncooperative director using the general “any order it sees fit” power
of section 11. This was overruled by the ONCA, but the 2005 amendments added this power explicitly to the CCAA.
11.5(1) The court may, on the application of any person interested in the matter, make an order removing from office any director of a
debtor company in respect of which an order has been made under this Act if the court is satisfied that the director is unreasonably
impairing or is likely to unreasonably impair the possibility of a viable compromise or arrangement being made in respect of
the company or is acting or is likely to act inappropriately as a director in the circumstances.
11.5(2) The court may, by order, fill any vacancy created under subsection (1).
Directors’ Indemnification Charges
The court can create a secured charge for the benefit of directors to protect them from liability that they may incur as part of their
management of the insolvent company.
11.51(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or
charge, the court may make an order declaring that all or part of the property of the company is subject to a security or charge —
in an amount that the court considers appropriate — in favour of any director or officer of the company to indemnify the director
or officer against obligations and liabilities that they may incur as a director or officer of the company after the commencement
of proceedings under this Act.
11.51(2) The court can order that the indemnification charge outranks any other security interest.
11.51(3) No order for a director’s charge can be made if the company could obtain insurance for a reasonable price.
11.51(4) The charge will not protect a director against his or her gross negligence or wilful misconduct.
Administrative Charges
This provision is on the one hand necessary to give the monitor, outside law firms and other outside experts the confidence to expect
that they will be paid for their services despite their client being insolvent. On the other hand, some point out that it makes bankruptcy
insiders almost immune to the failure of the insolvency process, so they have little incentive to actually achieve successful outcomes
for clients.
11.52(1) On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order
declaring that all or part of the property of a debtor company is subject to a security or charge — in an amount that the court
considers appropriate — in respect of the fees and expenses of
(a) the monitor, including the fees and expenses of any financial, legal or other experts engaged by the monitor in the
performance of the monitor’s duties;
(b) any financial, legal or other experts engaged by the [debtor] company for the purpose of proceedings under this Act;
(c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or
charge is necessary for their effective participation in proceedings under this Act. [not sure what this covers - Mike]
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11.52(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
[in practice this will always be ordered, since a subordinate charge would be worthless - Mike].
Sale of Asset Provisions
Once a company goes into CCAA protection, it is barred from disposing of its property outside of the ordinary course of business
(36(1)). To make such a disposition, the company will require a special order from the court under section 36. Importantly, this order
can allow it to sell the property free and clear of any existing security interest.
36(1) Ban on sale of assets outside the ordinary course of business. Possibility of such sale with court approval. Court approval
of sale will allow sale notwithstanding any provision in the corporation’s constating instrument which requires shareholder approval
for such a sale.
36(2) When applying for a sale order, the company must give notice to secured creditors likely to be affected by the sale.
36(3) In deciding whether to grant the authorization, the court is to consider, among other things,
(a) whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
(b) whether the monitor approved the process leading to the proposed sale or disposition;
(c) whether the monitor filed with the court a report stating that in their opinion the sale or disposition would be more
beneficial to the creditors than a sale or disposition under a bankruptcy;
(d) the extent to which the creditors were consulted;
(e) the effects of the proposed sale or disposition on the creditors and other interested parties; and
(f) whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.
36(4) If the property is being disposed of to a related party, the court may only grant authorization if, after considering the factors in
subsection 36(3), it also finds both that:
(a) good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the company;
(b) the consideration to be received is superior to the consideration that would be received under any other offer made in
accordance with the process leading to the proposed sale or disposition.
36(5) Broadens the definition of related persons to include: (a) directors and officers of the corporation, (b) any person who has direct
or indirect control over the corporation, and (c) anyone related to someone listed in (a) or (b). The normal related parties rules also
apply.
36(6) The court can order the sale free of any charge/security interest in the property, but if it does so, it must order that a charge
of equal value attaches to either the proceeds of the sale, or to the other assets of the company in favour of the secured lender
whose security was wiped out by the sale. [obviously the creditor will prefer a charge over the money, since this means it is as good as
paid off, while the debtor company will prefer a charge over its other assets, since it presumably needs the cash - Mike]
36(7) The sale can be approved only if the court is convinced that the company will be able to meet its obligations under CCAA
6(4)(a) and 6(5)(a) [priority payment of certain government claims and of employee wages - Mike].
Other Provisions
34(1) No one break a contract or accelerate payments only because the debtor company commenced CCAA proceedings.
34(2) Extended protection similar to 34(1) but for leases.
34(3) Public utilities can’t cut off service.
34(4) Nothing in the CCAA prevents suppliers or utilities from requiring cash up front or refusing to extend credit.
34(7)-(10) Regime for eligible financial contracts. Section 34(1) does not apply, but other things do.
34(11) No order may be made under this Act if the order would have the effect of subordinating financial collateral.
3.5.3 CCAA Plans of Arrangement
The whole point of CCAA protection is to arrange a Plan of Arrangement and Compromise. This is why extensions to the CCAA stay
are contingent on showing that the debtor has been working towards the plan in good faith and due diligence (CCAA 11.02(3)).
The court can order a meeting of the secured (5) and unsecured (4) creditors, and also the “shareholders if the court so determines” (4)
in order to vote on the plan proposed by the company. The plan will be approved if there is a vote in favour of the plan by a
majority in number and two-thirds in value of the creditors (6(1)). If the creditors have been divided into classes, then each class
must satisfy the double majority requirement (6(1)). There are also some statutory requirements that must be met before the plan can
be approved by the supervising court (6(3)-6(8)).
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Additionally, the court maintains discretion to refuse the plan if it is not “fair and reasonable.” This power is derived from the
wording of 6(1), which states that the court “may” sanction the plan if it receives the required double majority of votes. The “fair and
reasonable” standard is a fairly loose one, since the courts recognize that by their nature, CCAA plans are compromises made under
difficult conditions, and that it is impossible for them to please everybody. Some factors that have been considered in approving plans
under the “fair and reasonable” requirement include ():
• whether any creditors or classes of creditors have been afforded a particular advantage not manifested in the terms of
the plan itself;
• whether planned distributions to creditors under the plan exceed those that would otherwise be anticipated through a
bankruptcy or other liquidation of the debtor, which typically requires that the monitor has prepared and shared the
results of a comparative analysis;
• whether alternatives to the plan are available and whether other attempts to restructure the debtors have been attempted;
• whether any creditors’ rights are being subjected to oppression, as defined under applicable corporate law legislation;
• whether, based on the reasonable expectations to which shareholders are entitled, the plan is unfair to shareholders
considering that shareholders cannot generally reasonably expect to hold significant pecuniary interests in an insolvent debtor
faced with the prospect of bankruptcy liquidation; [this seems ridiculous… why discuss their reasonable expectations when
you have just established that those expectations are zero? - Mike]
• whether the plan is in the public interest, considering that preserving a viable business employing many provides
important public benefits. [This would make it more difficult to use the CCAA as a liquidation vehicle - Mike]
Summary for CCAA approval: You need a vote in favour by half or more of your creditors, and these vote must also represent 2/3 of
the total value of your debts; The plan must satisfy the statutory requirements at 6(3)-6(8); the court must be satisfied that your plan is
“fair and reasonable.”
CCAA Provisions
6(1) If a majority in number representing two thirds in value of the creditors, or the class of creditors, as the case may be - other
than, unless the court orders otherwise, a class of creditors having equity claims, - present and voting either in person or by proxy at
the meeting or meetings of creditors respectively held under sections 4 and 5, or either of those sections, agree to any compromise or
arrangement either as proposed or as altered or modified at the meeting or meetings, the compromise or arrangement may be
sanctioned by the court and, if so sanctioned, is binding
(a) on all the creditors or the class of creditors, as the case may be, and on any trustee for that class of creditors, whether
secured or unsecured, as the case may be, and on the company; and
(b) in the case of a company that has made an authorized assignment or against which a bankruptcy order has been made
under the Bankruptcy and Insolvency Act or is in the course of being wound up under the Winding-up and Restructuring Act,
on the trustee in bankruptcy or liquidator and contributories of the company.
6(2) If necessary, the court can order a change to the constating instrument (articles of incorporation, essentially) of the debtor
company in order to implement the plan, as long as the changes “may lawfully be made under federal or provincial law.”
6(3) The plan must, unless the government consents otherwise, provide for payment in full within six months of the government’s
claims under the Income Tax Act, Canada Pension Plan, Employment Insurance Act.
6(5)(a) The plan must provide to employees compensation at least as good as they would have gotten under 136(1)(d) of the BIA if the
company had gone bankrupt. (b) The court must be satisfied the company can and will actually carry through with this plan.
6(6)(a) The plan can be approved only if pension plans of the debtor company receive certain levels of payment. (b) The court must be
satisfied the company can and will actually carry through with this plan.
6(7) Section 6(6) does not apply if the parties agree to some other arrangement and the pension regulator approves the plan.
6(8) The plan must provide that equity claims are paid only if all other claims are paid in full.
3.5.4 Effects of Success/Failure of Plan
A successful plan discharges all of the company’s debts according to the payment scheme of the plan. So the provable claims covered
by the plan are discharged and replaced with whatever fractional recovery is provided for in the plan. This fractional recovery is paid
via the payment methods (stock vs cash for example) that are proposed in the plan. The company exits CCAA protection, although
some orders may have effects that continue after the end of the CCAA protection period (such as an order removing a director or
amending the constating instrument of the debtor company). Any special conditions attached to the plan, like third-party releases, take
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effect. The plan is binding on all creditors, whether they voted for or against the plan, and whether they chose to submit their claims or
not. If the debtor company was bankrupt when it entered CCAA protection, a successful plan will lead to the bankruptcy being
annulled (Greenstone Value Investments v Greenstone Resources, [2007] OJ 2630, 30 CBR (5th) 89 (SCJ)).
A failed plan has no effects, other than the end of your CCAA protection. There is no automatic bankruptcy on the failure of a
CCAA plan, unlike the failure of a BIA proposal. However, creditors typically ask for, and receive, a suspended bankruptcy order
against the debtor company. Thus if the plan fails, the CCAA stays end, and the bankruptcy order kicks into effect, sending the
company straight from CCAA to bankruptcy.
Also, if the plan is successful, but the debtor company fails to perform its obligations under the plan, it can be petitioned into
bankruptcy (paragraph [404] of HLC’s BIA text).
CHAPTER 4: Distribution of Assets
Section 4.1: Types of Claims and Creditors
4.1.1 Structure of BIA Categories
The general order for the payment of claims is: super-priority secured claims>secured claims>preferred claims>unsecured
claims>deferred claims. Technically secured creditors aren’t even part of the hierarchy, since their claims attach to particular pieces of
property, but in a way this means that they go first – only property/money left after all secured creditors are paid will be available to
the unsecured creditors. All unsecured claims are paid proportionately (sometimes termed “rateably” or “on a pari pasu basis” or “on
a pro rata basis”). This just means that everyone recovers fractionally (e.g. 20% or 40%) and that they all recover the same fraction.
Example: A debtor has $100 in assets, and owes debts of $40, $100, and $160 to three different unsecured creditors. Thus total debts
are $300 and total assets are $100. So each debtor will recover 33% of the debt. The $40 debtor will receive $13 ($40*0.33), then
$100 debtor will get $33 ($100*0.33), and the $160 debtor will receive $53 ($160*0.33). This totals $100, resulting in a full pay out of
the debtors assets to all creditors in proportion to their debts.
4.1.2 Super-priorities
There are a limited number of super-priorities in the BIA. They are secured claims that are imposed on top of existing secured
creditors (they have to be secured, because otherwise they’d merely become first in the preferred claims list). The regimes for the
most of the super-priorities is explained in Section 4.1.7: Special Categories of Claimants, below. Here is what appears to be the
ranking of the super-priorities as amongst themselves (same number means tied):
1. Environmental cleanup liability (immovables only) under 14.06(7-8).
1. Unpaid supplier repossession right 81.1 (movables only) (technically not a claim, but applies despite the rights of secured
creditors).
2. DIP Financing charge 50.6 (proposals) (technically the judge could choose not to accord super priority, but no one would
lend without one).
3. Farmer/Fisherman secured charge (81.2).
4. Employee charge for unpaid salary/wages/etc of up to $2,000 on current assets (cash, receivables, inventory) (81.3/81.4).
5. Pension plan claims (81.5/81.6).
6. The following could all be given super priority status, but not necessarily. They also can’t outrank the other superpriorities: directors charge (64.1); trustee/administration charge (64.2); 47.2 (Interim Receiver fees); Directors and officers
charge (64.1(2)). It’s unclear how they rank relative to each other.
Note that these super priorities can only apply to the property of the bankrupt, so property belonging to other persons that is claimed
under section 81 BIA can’t be subject to a super-priority. Nor can property under a real trust or a valid deemed trust under 67(3).
4.1.3 Secured Claims and Creditors
This section deals with secured creditors’ participation in the distribution of assets. If everything works correctly, a secured creditor
doesn’t participate in the distribution, since distribution is the process by which unsecured claims are paid. But if a secured creditor
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voluntarily reduced its security, or there was a problem with the validity of the security, or if the security asset fell in value, the
balance of the secured creditor’s claim will be unsecured. These unsecured claims are treated like all other unsecured claims, unless
they would be preferred claims for some reason (like 136(1)(d.01-d.02)). For information on how secured creditors realize on security,
see section 3.4.2. Secured creditors prove the unsecured balance of their claims in the same manner as ordinary creditors.
BIA Provisions
127(1) Where a secured creditor realizes his security, he may prove the balance due to him after deducting the net amount realized.
127(2) Where a secured creditor surrenders his security, he may prove his whole claim.
133 Creditor that fails to comply with 127-132 cannot receive a dividend (payment of unsecured claims from bankruptcy estate)!
135(2) Secured creditors must prove their security to the trustee, who may disallow it if unsatisfied by proof.
135(4) Appeal to court.
4.1.4 Preferred Claims and Creditors
Preferred claims are unsecured claims that are paid before other unsecured claims out of property left after secured creditors are paid.
So the order of payment is: secured claims>preferred claims>unsecured claims>deferred claims. Within preferred claims the ones
listed first in the section are paid first, then if money remains the next one on the list is paid. Remember that preferred claimants are
still unsecured, and so they are subject to the general bankruptcy stay in 69.3 and are paid rateably (141).
Section 136 sets out the preferred claims system under the BIA. This is the full and complete list – anything not listed here is not a
preferred claim. Note that if the preferred claim is only a portion of the creditor’s claim (like if unpaid wages or rent exceed the
amount allowed in the section) then the balance of the creditor’s claim is unsecured (136(3)).
BIA Provisions
136 (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of
payment as follows:
(a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses;
(b) the costs of administration, in the following order,
(i) the expenses and fees of any person acting under a direction made under paragraph 14.03(1)(a),
(ii) the expenses and fees of the trustee, and
(iii) legal costs;
(c) the levy to support the bankruptcy system payable under section 147;
(d) section 81.3/81.4 claims for wages/commissions/compensation/disbursements that were not paid by the secured charge;
(d.01) the amount lost by a secured creditor due to operation of 81.3-81.4.
(d.02) the amount lost by a secured creditor due to operation of 81.5-81.6.
(d.1) liabilities listed in 178(1)(b)-(c) (family law payments), if provable under 121(4), for periodic amounts accrued in the
year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable;
(e) municipal taxes assessed or levied against the bankrupt, within the two years immediately preceding the bankruptcy,
that do not constitute a secured claim against the real property or immovables of the bankrupt, but not exceeding the value of
the interest or, in the Province of Quebec, the value of the right of the bankrupt in the property in respect of which the taxes
were imposed as declared by the trustee;
(f) landlords are entitled to 3 months arrears in rent (if there is any) and three months of accelerated rent (if there is an
accelerated rent clause in the lease). Any occupation rent paid by the trustee is deducted from the accelerated rent portion.
Also, the total preferred claim “shall not exceed the realization from the [movable] property on the premises under lease.”
(g) legal costs referred to in subsection 70(2) but only to the extent of the realization from the property exigible thereunder;
(h) in the case of a bankrupt who became bankrupt before the prescribed date, all indebtedness of the bankrupt under any
Act respecting workers’ compensation, under any Act respecting unemployment insurance or under any provision of the
Income Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld (the latter
means payroll taxes) rateably;
(i) insurance monies for on the job injuries not covered by workers’ compensation;
(j) in the case of a bankrupt who became bankrupt before the prescribed date, claims of the Crown not mentioned in
paragraphs (a) to (i), in right of Canada or any province, rateably notwithstanding any statutory preference to the contrary.
(2) Subject to the retention of such sums as may be necessary for the costs of administration or otherwise, payment in accordance with
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subsection (1) shall be made as soon as funds are available for the purpose.
(3) A creditor whose rights are restricted by this section is entitled to rank as an unsecured creditor for any balance of claim due him.
4.1.5 Unsecured Claims and Creditors
Remember that unsecured creditors are subject to the automatic bankruptcy stay (69.3). Claims are paid proportionately from
remaining funds after all preferred and secured creditors have been paid (144)
4.1.6 Deferred Claims and Creditors
The most common category of deferred claim is the claim of people who are owed money after the reversal/cancellation of
transactions at undervalue (137). Section 139 also creates a “silent partner” deferred claim, applicable to a lot of venture capitalists
(presumably this is deferred because it’s a lot like an equity claim). Atlas: This can be structured around with smart drafting. Another
important category is equity claims (140.1) which are below even all other deferred claims. Also, interest accruing after the date of
the bankruptcy is treated as a deferred claim, since only after all claims are satisfied will post-bankruptcy interest be paid (143).
As an example 137 claim: you are sold a care worth 20k for 5k by the bankrupt, the transaction can be reversed and you can be forced
to pay the estate 15k. This then becomes a deferred claim for 15k against the estate.
BIA Provisions
137(1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at
arm’s length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all
claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper
transaction.
139 Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower
that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the
trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in
respect of the loan until the claims of all other creditors of the borrower have been satisfied.
140.1 A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been
satisfied.
4.1.7 Special Categories of Claimants
This section deals with a variety of special categories of claims, many of which are super-priorities.
Crown Claims (67, 86, 87)
Historically, the Crown gave itself generous preferences and securities, including many deemed trusts that removed a lot of assets
from the bankruptcy estate. This was problematic for two reasons: (1) ordinary creditors needed the money more than the government
did; and (2) because there was so little to recover for ordinary creditors, they had little interest in participating in the bankruptcy
process or supervising trustees as inspectors. So the Crown scaled back its powers substantially. Proposals must uphold preferential
payment of certain Crown claims or they cannot be approved: 60(1.1-1.2), 69(1)(c), 69 (1.1)(1)(c).
Section 67(2) eliminates all government deemed trusts in a bankruptcy situation with two exceptions: money that would be actually
considered held in trust under provincial private law, and a list of specific payments that are deemed held in trust despite 67(2).
 67(2) “Actual Trust” Exception: Amounts that are actually held in a trust-like capacity will be deemed held in trust. So if the
debtor company kept sales taxes in a separate bank account, this would allow the deemed trust to take effect on that money.
But if the sales tax funds were mixed in with the debtor’s main account, 67(2) would not apply, since under normal
provincial law, if trust property is mixed with non-trust property, a trust cannot form.
 67(3) “Statutory List” Exception: These are [i] tax deductions under the federal Income Tax Act, [ii] employer’s deductions of
Canada Pension Plan contributions from payroll, [iii] employer deductions of EI premiums from payroll. Provincially, the
list includes QPP payments (67(3)(b)) and deductions under any provincial income tax act (67(3)(b)).
Section 86(1) eliminates all secured creditor rights created by statute for the Crown with three exceptions: ordinary secured
creditor rights; registered statutory securities; a list of statutory exceptions [deemed trusts mean the property was never the property of
the bankrupt, so they aren’t security interests, hence the need for a separate section –Mike]. 86-87 also applies to all payments due to
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workers’ compensation boards.
 86(2) Ordinary Secured Creditor Right: If the Crown became a secured creditor through standard channels that can apply to
everyone (like a contractual security clause) then it keeps this security right.
 87 Registered Statutory Securities: If the government registers an exceptional statutory security right in the same manner as a
regular commercial security right would be registered, then the exceptional statutory security right is preserved in
bankruptcy, but is subordinated to other security rights registered before it (87(2)(a)). The sums secured by registration
include only sums due at the time of registration, plus interest (87(2)(b)). This section is typically used for tax
liens/hypothecs registered against tax debtors.
 86(3) “Statutory List” Exception: A series of statutes that create security rights for the Crown are exempted from 86(1).
Again, much like 67(3), this list deals with CPP/QPP, EI, and income tax issues (this time, a provision allows the MNR to
intercept payments received by tax debtors).
For the CCAA, see section 37-40, which are substantially the same as what’s listed above.
Environmental Liability (14.06(7-8))
Claims by the government for environmental clean-up costs are super-priority secured charges on the property in question, and on all
adjacent property used for the same purpose. They are deemed provable claims. There’s also something in 14.06(6) about
environmental cleanup not being considered an administrative cost, but I’m not sure why it would have been considered that in the
first place. 14.06(8) allows these claims to be brought no matter when the damage occurred (like after the bankruptcy). This section
applies to receivers too.
14.06(7) Any claim by Her Majesty in right of Canada or a province against the debtor in a bankruptcy, proposal or receivership for
costs of remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor is
secured by security on the real property or immovable affected by the environmental condition or environmental damage and on any
other real property or immovable of the debtor that is contiguous with that real property or immovable and that is related to the
activity that caused the environmental condition or environmental damage, and the security
(a) is enforceable in accordance with the law of the jurisdiction in which the real property or immovable is located, in the
same way as a mortgage, hypothec or other security on real property or immovables; and
(b) ranks above any other claim, right, charge or security against the property, despite any other provision of this Act or
anything in any other federal or provincial law.
14.06(8) Despite subsection 121(1), a claim against a debtor in a bankruptcy or proposal for the costs of remedying any environmental
condition or environmental damage affecting real property or an immovable of the debtor shall be a provable claim, whether the
condition arose or the damage occurred before or after the date of the filing of the proposal or the date of the bankruptcy.
For the CCAA, see sections 11.8(3),(5)-(8). Similar, but not quite the same.
Unpaid Supplier Claims (81.1)
Technically not a claim, since it’s actually a right to take back certain property. But I’ve included it here because it defeats the rights
of secured creditors in the property. This applies to receivers too.
81.1(1) Suppliers of goods that have been delivered to the bankrupt or someone who filed a proposal/NOI, but not yet paid for in full,
can repossess the goods subject to the following conditions:
(a) the supplier presents a written demand for repossession to the purchaser, trustee or receiver…within 15 days after the
day on which the purchaser became bankrupt;
(b) the goods were delivered within 30 days of the date of the bankruptcy or receivership (or of the proposal/NOI (81.1(4))).
(c) at the time when the demand referred to in paragraph (a) is presented, the goods
(i) are in the possession of the purchaser, trustee or receiver,
(ii) are identifiable as the goods delivered by the supplier and not fully paid for,
(iii) are in the same state as they were on delivery,
(iv) have not been resold at arms’ length, and
(v) are not subject to any agreement for sale at arms’ length; and
(d) the purchaser, trustee or receiver does not pay to the supplier the entire balance owing after receiving the demand.
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81.1(2) If the goods were paid for in part, the fraction that can be repossessed is equal to the fraction of the payment still owing.
81.1(6) This claim ranks above any other claim created by federal or provincial law. Only a good faith purchaser for value who did not
have notice of the repossession request cannot be forced to return the goods.
81.1(10) If you repossess goods you waive any right to payment for them.
Unpaid Farmer/Fisherman Claims (81.2)
Setting aside the question of what “inorganic life” means (see BIA 81.2(2) def “products of the seas, lakes, and rivers”), this section
gives farmers and fishermen a special secured claim for the products of their farming and fishing. It’s different from the unpaid
supplier claim because it’s an actual claim, not a right to repossess. It applies only to sales for use in business (81.2(1)), and while
fishermen are only those whose principal occupation is fishing, farmers have a broader definition (see definitions in 81.2(2)).
The farmer/fisherman gets a secured charge on the inventory of the purchaser that existed on the day the purchaser went bankrupt
or was placed in receivership (note: unlike 81.1, not triggered by a proposal!). There appears to be personal liability of the trustee or
receiver if the inventory is sold without paying the farmer/fisherman, with the trustee being subrogated to the rights of the
farmer/fisherman against the estate to the extent of the personal liability (81.2(1) final part of section).
Employee Claims For Unpaid Wages (81.3, 81.4)
These sections both deal with unpaid wages for employees. 81.3 is the general section, while 81.4 deals with receiverships. Under
81.3, an employee gains a secured claim on the current assets of the employer (inventory, accounts receivable, and cash – in other
words, the assets that are the easiest to find and liquidate). The charge covers wages/salary, commissions, and vacation pay
(81.3(1,9)), but it does not include severance pay (81.3(9)). The charge takes priority over any secured creditors charges, and any other
charges or securities except those created by 81.1, 81.2, and 67(3) of the BIA (81.3(4)).
This secured claim is for a maximum of $2,000 per employee, minus any amounts paid to the employee by the trustee for the
employee’s services during this time (81.3(1)). Travelling salespersons can get an additional $1,000 for expenses during this period
(81.3(3)). Directors and officers cannot use this section (81.3(6)). Someone dealing with the trustee, but not at arms length, can only
use this section if the trustee thinks the claim is commercially reasonable (81.3(7)). This prohibition against directors and officers
using this section is repeated at BIA 140. If the secured claim doesn’t bring in the full amount, any remaining claims become
preferred claims. Secured creditors who lost out due to the employee claims also get preferred claims to the extent of their loss
of secured claims (136(1)(d.01).
This provision interacts with the WEPPA. Employees can get $3,250 from the government in exchange for transferring their secured
claim to the government. Yes, the government pays them more than they give up! The government is then subrogated in their rights
(only up to the $2,000 claim, not the $3,250 payout) and can recover the employee claims for itself.
Pension Payments by Employers (81.5, 81.6)
These provisions cover missed pension contributions by employers. 81.5 is the general provision, 81.6 is the receivership provision.
They create a secured charge on all the assets of the bankrupt that equal to either: the total of all amounts that the employer
deducted from payroll for the pension plan but never paid to the plan (81.5(1)(a)) or some technical amount described in the Canada
pension plan (81.5(1)(b-c). Note that 81.5(1)(a) is not limited to a specific time period before the bankruptcy – it covers all missed
payments. There is also the possibility of personal liability by the trustee (81.5(3))
This security outranks all other claims, secured or not, except for claims under 81.1, 81.2, 81.3, 81.4, or 67(3) (81.5(2)).
Section 4.2: Provable Claims and the Claims Process
Because one of the main objectives of bankruptcy law is the fair and orderly payment of debts, the provable claims process is arguably
the heart of the BIA, and the goal towards which the entire bankruptcy process leads. Provable claims are the mechanism by which
creditors identify themselves and the trustee determines the amount of the bankrupt’s indebtedness – both to individual creditors and
overall. Provable claims are also important because they determine the scope of the discharge (since only provable claims are
discharged).
A provable claim is a claim against the bankruptcy estate whose existence and quantum are sufficiently certain that it should be
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included in the bankruptcy process. If a claim is ruled non-provable, it will not be paid during bankruptcy, but can still be brought in
the civil courts after the bankrupt is discharged or the bankruptcy is annulled (although these outcomes are unlikely for corporations,
so non-provable claims against corporations typically won’t be paid). Where the claim is contingent (i.e. it not clear if it will ever
happen, like if the bankrupt is guaranteeing the obligation of another person) or if the claim is unliquidated (e.g. a bodily injury claim
or breach of contract claim with an uncertain value prior to litigation) then the trustee has to determine if it is sufficiently certain to be
admitted, and if so, what the best estimate of its value would be.
Proving claims is an administrative process, but it can become a judicial process if there is disagreement between the trustee and a
would-be creditor. Creditors present proof of their claim to the trustee (124(1-2)), including secured creditors for the unsecured
balance of their claims (127). The trustee determines whether it’s a legitimate debt/liability and determines its quantum (121, 135). For
unliquidated and contingent claims, this will be largely guesswork, since trustees are typically accountants rather than lawyers, and the
BIA provides no guidance for valuing claims (135(1.1)). Unsecured claims that were previously proved under failed proposals are
admitted automatically to the bankruptcy (122(1)). Although secured creditors have to refile their claims (50.3).
If the trustee agrees, the claim is admitted for voting and distribution purposes. If the trustee disagrees, the claim is referred to a court
for determination. Atlas said that typically the parties come to a reasonable compromise, since litigating a provable claim issue is
rarely worth it.
Secured creditors must prove their security, their claim, and provide an estimate of the value of their security asset. They gain an
unsecured claim for the difference between the claim and their estimated value. Example: $200 debt secured by an asset estimated to
be worth $130, resulting in an unsecured claim of $70. Secured creditors have an incentive to estimate the value accurately: if they
estimate it too low, the trustee can redeem the asset for the estimated value; if they estimate it too high, they miss out on the chance to
have an unsecured claim in addition to their secured claim.
Originally, only contracts could be proved in bankruptcy, while tort claims and other types of damage claims were excluded.
Eventually the system was opened up to all kinds of claims, but the legislation was never re-drafted to reflect this, so a lot of the
wording is ambiguous when applied to non-contractual situations. For example, if a tort is committed prior to the bankruptcy, but the
damage arises only after the bankruptcy, is this “a debt or liability to which the bankrupt is subject on the day of the bankruptcy”? The
CCAA defines claims provable as anything provable under the BIA, so it suffers from the same problem.
Section 3 of the Bankruptcy and Insolvency General Rules also provide that “In cases not provided for in the Act or these Rules, the
courts shall apply… their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules.” This
will apply equally to the provable claims process.
BIA and CCAA General Provisions for Provable Claims
CCAA 2 “claim” means any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of
section 2 of the Bankruptcy and Insolvency Act.
121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes
bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before
the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.
121(2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be
made in accordance with section 135.
121(3) Creditors can prove debts that exist but that aren’t payable yet on the date of the bankruptcy "and may receive dividends
equally with the other creditors, deducting only thereout a rebate of interest at the rate of five per cent per annum computed from the
declaration of a dividend to the time when the debt would have become payable according to the terms on which it was contracted."
124 Process for proving claims.
125 Claims containing wilful misrepresentations or known falsehoods result in disqualification of entire claim.
126 Everyone who has filed a proof of claim can examine proofs of claim of all other creditors. Can challenge them in court 135(5)
122(1) Claims of debtors under proposal become claims in bankruptcy (except for secured creditors, who must refile), minus any
payments already received.
122(2) Rules for interest rates on all provable claims that don’t specify an interest rate. [No idea why 122(1) and 122(2) are together…
122(1) deals with proposals, but the rule in 122(2) seems to be of general application. Strange bedfellows. –Mike]
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135(1-2) Trustee examines proof of claim/proof of security, can accept, reject, or ask for more proof.
135(4) Appeal to court over disallowance of claim value/security. Typically registrar hears appeal 192(n).
135(5) Creditors can appeal another creditor’s claim value/security if trustee doesn’t appeal.
Secured Creditors
127 Secured creditors can prove the balance of their claim if the security is not sufficient to cover the debt, or where security was
surrendered.
128(1-1.1) Trustee can require proof of security and secured creditor’s assessment of the value of the security.
128(2) Secured creditor is entitled to unsecured claim equal to difference between estimate value of asset and debt secured by asset.
128(3) Trustee can redeem security for its estimated value
131 Where secured creditor realizes on security, the value obtained is treated as the estimate value.
132 Secured creditor can amend estimated value.
50.3 Secured creditors’ proof of claim filed under a proposal does not carry over to bankruptcy and must be re-filed.
Section 4.3: Claims for Return of Property
There is a special regime for getting property that belongs to you, but which is merely in possession of the bankrupt. It is the only way
to recover property from the bankrupt’s possession or establish property rights to property held by the bankrupt… but only if that
property was possessed by the bankrupt at the time of the bankruptcy. See also BIA 81.1 and 81.2 for rights of suppliers and
farmers/fishermen to repossess goods. Atlas has a great story about repossessing a film reel from a bankrupt cinema. Make sure he
tells it.
BIA Provision
81(1) Where a person claims any property, or interest therein, in the possession of a bankrupt at the time of the bankruptcy, he shall
file with the trustee a proof of claim verified by affidavit giving the grounds on which the claim is based and sufficient particulars to
enable the property to be identified.
81(2) Trustee has 15 days from date of claim filing, or within 15 days of first meeting of creditors, whichever is later, to either admit
the claim and hand over the property, or deny the claim and provide reasons for the denial to the claimant. The claimant then has 15
days to appeal to the local bankruptcy court, and if there is no appeal, the claimant is deemed to have abandoned any right to the
property.
81(3) The onus of establishing a claim to or in property under this section is on the claimant.
81(4) The trustee can also put people on notice on his own initiative by sending them a notice to prove their property claim. If they fail
to do so within 15 days, the trustee can sell the property free of any other property rights with court permission.
81(5) Only section 81 can be used to establish or exercise property rights in property possessed by the bankrupt at the time of
bankruptcy.
81(6) Nothing in this section shall be construed as extending the rights of any person other than the trustee.
80 Trustee not liable for sale of property affected by third party interests unless the trustee had notice or was negligent. But the estate
is still liable even if the trustee is not.
Section 4.4: Liquidation of the Property of the Bankrupt
AL Lando, “Sale of assets by a trustee: The fundamental pragmatics” (1991) 3 CBR (3d) 179: Choice of sale method usually
made by trustee in practice, although inspectors have oversight and their particular knowledge of debtor and debtor’s business is often
helpful. Tender sale is the most common method, using newspaper ads to attract tenders. For tender rules, the article refers to
Bankruptcy Rule r 114, as does our syllabus, but that rule no longer exists. Public auctions are used to sell smaller estates or batches of
goods. Private negotiations can also be used for assets with sentimental or personal value (gives the example of life insurance
policies), or works-in-progress, but should always be supported by outside appraisals. Notes that trustees are not bound by notice
requirements in provincial Personal Property Security Acts. The article ends with an interesting case study.
BIA Provisions
30(1)(a) with inspectors’ permission, the trustee can “sell or otherwise dispose of for such price or other consideration as the
inspectors may approve all or any part of the property of the bankrupt, including the goodwill of the business, if any, and the book
debts due or growing due to the bankrupt, by tender, public auction or private contract, with power to transfer the whole thereof to any
person or company, or to sell the same in parcels” [the reference to goodwill means a business can be sold as a going concern -Mike]
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30(4) Sales to parties related to the bankrupt require court permission. 30(5) definition of related parties. 30(6) Factors for court.
DC – Re Pretty Fashions Inc, 1951 QCSC
Facts: The bankrupt business was sold via sealed bids. A third party bid $4,300. Despite being the highest bidder, he was not sold the
business. Instead, the second-highest bidder, who was known and trusted by the inspectors, was given the chance to raise his bid to
$4,300. The inspectors then passed a resolution choosing the second-highest bidder over the third party. They claims that the second
highest bidder, because of a close relationship with a current director of the company, was best-placed to run it.
Issue: Should the sale of the business be reversed?
Holding: Yes.
Reasoning: The inspectors owe a duty to the creditors as a whole, not to the bankrupt business. They sacrificed the interests of
creditors and the integrity of the bidding process by favouring a director – someone who practically was the bankrupt! “Moreover, the
practice of allowing a tenderer to increase his bid at the demand of the inspectors, after all the bids have been examined, besides being
unfair, constitutes a vicious and dangerous practice which would tend to discourage tenders.”
Ratio: (1) Inspectors owe duties to the creditors generally; (2) In pursuit of maximizing the value of the bankrupt’s assets, neither the
inspector nor the trustee can undermine the integrity of the bankruptcy system as a whole.
Comment: I think that even if the second bidder had increased his bid to $4,301 – or $4,500 for that matter – the outcome would have
been the same. Hence I think this case shows that public policy/the structural integrity of the bankruptcy system wins out over
maximizing asset values. The Lando article also cites cases that place a high emphasis on the integrity of the tendering process.
Section 4.5: Distribution under BIA
Distribution is fairly simple. It is not necessarily an “all-at-once” procedure, and can take place in steps. So a trustee could make an
initial distribution to preferred creditors, then as more cash came in, could start making payments to unsecured creditors, and could
spread these payments out over multiple installments if needed.
BIA Provisions
136(2) Preferred claims are paid as soon as funds are available, subject to withholding money for administration costs.
148 Distributions happen from time to time, as determined by inspectors. Trustee must retain money for contested claims.
149 Procedures for final dividend payment.
Section 4.6: Distribution under CCAA Plans of Arrangement and Compromise
Recall that the CCAA has the same definition of a provable claim as the BIA (CCAA 2). The proof of claim process is similar as well: a
would-be creditor receives a notice of the impending CCAA process and is invited to submit any provable claim, with a warning that
failure to submit a claim will result in it being barred and extinguished forever. Creditors submit a proof-of-claim package to the
Monitor, who either allows or disallows the claim, or allows it but for a different quantum than what the creditor had put down. If the
creditor disagrees with the disallowance/reduction in value, he can argue with the Monitor, and if they can’t reach a mutually
satisfactory solution, they can appeal to the court system.
However, whereas BIA claims appeals go from the trustee to a judge, the CCAA contains an intermediate step: the “Claims Officer”
(generally an arbitrator or retired judge). The Claims Officer will hear disputes about the quantum or validity of claims that the
Monitor has disallowed or reduced in value. The decision of the Claims Officer can then be appealed to a judge.
Once a Plan of Arrangement and Compromise is approved, each claimant will be paid a fractional amount of their claim (in the
Abitibi-Bowater CCAA process, this amount varied from 3% to 47%, depending on which of the Abitibi companies in question you
had a claim against - claims against holding companies received the smallest amount of money, while claims against the operating
companies had the best recovery rate).
An interesting aspect of CCAA payouts is that they are sometimes made not in cash, but in stock of the newly-reorganized entity. This
is great from the company’s perspective, because it costs the company nothing - it just swaps one set of owners (the old shareholders)
for new ones (its creditors). Existing shareholders hate this approach, because their shares are wiped out in the process. Creditors don’t
really like it either, because normally they would rather be paid in cash. Sometimes existing shareholders are given a small ownership
stake in the reorganized entity just to palliate them (i.e. “It could have been worse - be happy you get 10% and not 0%”).
CCAA Provisions
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2 Adopts the BIA definition of provable claim. And presumably, by implication, that of “creditor” as well.
20(1)(a)(iii) Value of an unsecured claim is the value that might have been proven under the BIA, and if there is a dispute about the
value of the claim, it is to be determined by a “summary application to the court.”
20(1)(b) Value of a secured claim is determined under the BIA rules, with the court to determine value of disputed claims.
19(2) Excluded types of claims, same as BIA rules (fraud, sexual assault, etc).
12 The supervising court may fix deadlines for distributions.
Crown Claims under the CCAA
This is substantially the same as the BIA regime for government claims.
37(1) Deemed trusts won’t count as deemed trusts under the CCAA unless it would have been considered a real trust under provincial
private law.
37(2) Exceptions for trusts create by the Income Tax Act, Employment Insurance Act, or Canada Pension Plan
38(1) Claims by the government or any worker’s comp board are unsecured claim, unless a CCAA statutory exception applies.
38(2) If the gov/WCB claim is secured by a valid private law security interest or a registered gov interest, it will be a secured claim.
38(3) Secured claims under the Income Tax Act, Employment Insurance Act, or Canada Pension Plan will count as secured.
39 Crown can register its statutory securities to obtain secured creditor status for the registered claims.
40 The CCAA is binding on the Crown in right of Canada or a province.
Environmental Claims under the CCAA
11.8(3) Monitors are liable for environmental damage arising under their tenure if and only if it results from their gross negligence or
wilful misconduct (b). They are never liable if the damage arose before their tenure (a).
11.8(5) Additional immunities for Monitor with respect to environmental matters.
11.8(8) Cleanup costs of environmental damage are secured against the property that is cleaned up, and this takes priority over any
other charge of any kind, notwithstanding anything in the CCAA or any other act, federal or provincial.
11.8(9) Claims against the debtor company for cleanup costs are provable claims, regardless of when they arose.
Section 4.7: Set-off and Compensation
I’ve included a much longer discussion of set-off than what Me Atlas gave us in class, because it’s an important topic, yet one that we
didn’t really have time to cover. I also think that the jurisprudence has overtaken some aspects of what M e Atlas told us, since set-off
is most relevant for litigation and he’s not a litigator.
Set-off is a defense. It allows you to reduce debts you owe to someone else by the amount of a debt that they owe to you. Example:
your trucking company is owed $15,000 for a shipping contract it just completed. But it turns out you broke some of the merchandise,
causing $5,000 in damage. If one of you sued the other, the two debts would be set-off, so that the net debt was that you were owed is
$10,000 ($15,000-$5,000=$10,000). Equally, if you caused $50,000 in damage, you could use set-off to reduce your total liability to
$35,000 ($50,000-$15,000=$35,000).
Set-off gets interesting in bankruptcy because it represents 100% recovery in a way. Continuing the example of $5,000 in damage,
suppose the trucking company’s client goes bankrupt, with unsecured creditors only getting 10% recovery. Then the $15,000 contract
will only pay out $1,500, and of course the trucking company remains liable to pay $5,000. But set-off allows you to wipe out $5,000
in damages, with no fractional reduction (because you go from being owed $15,000 to being owed $10,000). After applying set-off,
you recover 10% of the remaining $10,000 or $1,000. This is like getting $6,000 total (you save $5,000 in damages from set-off and
recover $1,000 in cash). Now imagine a scenario without set-off. If the trucking company recovered 10% of the $15,000, then got
sued, it would actually lose money ($1,500 cash - $5,000 from lawsuit = loss of $3,500). The contrast between making $1,000 and
losing $3,500 shows how set-off becomes very valuable when you and a bankrupt company both have claims against each other.
Statutory Provisions
BIA 97(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions
instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt
were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions
of this Act respecting frauds or fraudulent preferences.
CCAA 21 The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for
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the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as
the case may be.
4.7.1 Compensation
As always, Québec uses a dozen codal articles to deal with a subject about which books are written in the common law. 1672 explains
what compensation is. 1673 explains what kinds of debts can be used for compensation (“certain, liquid, and exigible”). The second
paragraph in section 1673 allows a debtor whose debt is not certain/liquid/exigible to apply to a court in order to make it
certain/liquid/exigible (by establishing a fixed quantum of damages in a breach of contract case, for example).
CCQ Articles
1672 Where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are
extinguished by compensation, up to the amount of the lesser debt. // Compensation may not be claimed from the State, but the
State may claim it.
1673 Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the
object of both of which is a sum of money or a certain quantity of fungible property identical in kind. //A person may apply for
judicial liquidation of a debt in order to set it up for compensation.
1674 Compensation is effected even though the debts are not payable at the same place, provided allowance is made for the expenses
of delivery, if any.
1675 A period of grace granted for payment of one of the debts does not prevent compensation.
1676 Compensation is effected regardless of the cause of the obligation that has given rise to the debt. // Compensation does not take
place, however, if the claim results from an act performed with intention to harm or if the object of the debt is property which is
exempt from seizure.
1677 Where several debts subject to compensation are owed by one debtor, the rules of imputation of payment apply.
1678 One of the solidary debtors may not set up compensation for what the creditor owes to his co-debtor, except for the share of that
co-debtor in the solidary debt. //A debtor, whether solidary or not, may not set up compensation against one of the solidary creditors
for what a co-creditor owes him, except for the share of that co-creditor in the solidary debt.
1679 A surety may set up compensation for what the creditor owes to the principal debtor, but the principal debtor may not set up
compensation for what the creditor owes to the surety.
1680 A debtor who has acquiesced unconditionally in the assignment or hypothecating of claims by his creditor to a third person may
not afterwards set up against the third person any compensation that he could have set up against the original creditor before he
acquiesced. // An assignment or hypothec in which a debtor has not acquiesced, but which from a certain time may be set up against
him, prevents compensation only for debts of the original creditor which come after that time.
1681 Compensation may neither be effected nor be renounced to the prejudice of the acquired rights of a third person. [this is
going to prevent the trustee from setting off pre- and post-bankruptcy debts, much like in common law, since creditors or the trustee
could be prejudiced by allowing such compensation –Mike]
1682 A debtor who could have set up compensation and has nevertheless paid his debt may not afterwards avail himself, to the
prejudice of third persons, of any priority or hypothec attached to his claim.
4.7.2 Set-off
Common law set-off is fairly complex. First, there are three kinds: conventional set-off (created by contracts between parties), legal
set-off (actually created by statute, but often called “common law set-off”; fairly similar to civil law compensation); and equitable setoff (very fuzzy case law, allows setting off of debts in a broader array of circumstances than legal set-off would). If you want more
information, there’s a slim but very informative book The Law of Set-off in Canada by Kelly R Palmer.
Conventional Set-off
Parties can agree by contract to allow set-off of debts (this is fairly common for transactions between groups of corporations who may
owe multiple cross-cutting debts to different subsidiaries, so for convenience it may make sense to allow different companies to set-off
these debts).
Legal Set-off
Legal set-off is a statutory creation, typically under a province’s Courts of Justice Act (see Ontario’s act at s 111) or in the rules of a
particular court (see Newfoundland Supreme Court Rules). Or in British Colombia, set-off is imported from English law by the Law
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and Equity Act (which deems the starting point for BC private law to be the laws of England in 1858, subject to subsequent
amendment). There are two requirements for legal set-off:
(1) both debts are liquidated: for a determinate sum of money. This excludes a damages claim prior to judgment.
(2) there is mutuality between the two debts: a tricky concept that for our purposes basically means the debts are between the
same two people acting in the same capacity – a lawyer couldn’t set off his personal debts against debts owed to a law
partnership to which he belongs, for example. Because the trustee acquires the bankrupt’s property, mutuality is broken by
the act of going bankrupt. Pre-bankruptcy obligations can be set-off against post-bankruptcy obligations, since the trustee
acquires the bankruptcy estate subject to any existing rights of set-off. But post-bankruptcy claims cannot be set-off
backwards against pre-bankruptcy obligations. Note that this does not apply to CCAA proceedings, since the Monitor is not
acquiring the debtor company’s property. Hence there is no change in mutuality. The mutuality requirement prevents
creditors from buying obligations against the debtor to use for set-off purposes after the bankruptcy occurs, but if they buy
them before the bankruptcy this is a smart strategy to reduce any liabilities they have to the bankrupt. To summarize
mutuality:
(a) A debt arising before bankruptcy can be raised as a defence via set-off against a debt arising after bankruptcy.
(b) A debt arising after bankruptcy cannot be raised as a defense against a debt that arose prior to the bankruptcy.
(c) Two pre-bankruptcy debts can be set-off against each other, as can two post-bankruptcy debts.
(d) These rules apply to trustees and creditors under the BIA.
(e) CCAA proceedings do not affect mutuality at all, nor do proposals under the BIA for that matter.
Equitable Set-off
Equitable set-off is broader than legal set-off, allowing more different kinds of debts to be set-off against each other, but it is
discretionary. The requirements for equitable set-off were explained by the Ontario Court of Appeal in the CCAA case of Algoma Steel
v Union Gas, as follows:
1. The party relying on set-off must show some equitable ground for being protected against the adversary’s demands.
2. The equitable ground must go to the very root of the plaintiff’s claim.
3. The cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the
plaintiff to enforce payment without taking into consideration the cross-claim.
4. The plaintiff’s claim and the cross-claim need not arise out of the same contract.
5. Unliquidated claims are on the same footing as liquidated claims.
Based on the case law I’ve read, the first three requirements are extremely vague: everyone repeats the above phrases, but no one
explains what they actually mean. The first two requirements are hard to distinguish, and seem to jointly require that the set-off be
“fair” in the circumstances. The third requirement of a “sufficiently close connection” is equally vague, but seems to again go back to
the idea of promoting fair dealing between the parties.
The most important effect of equitable set-off is that unliquidated claims can be set-off against liquidated claims or against other
unliquidated claims. The second important difference between legal and equitable set-off is that non-mutual claims can be set-off,
since there is no mutuality requirement. In a bankruptcy context, this could allow post-bankruptcy claims to be set-off against
pre-bankruptcy claims.
CHAPTER 5: Discharge and Release of Debts
One someone is bankrupt, this status can come to an end in four ways: automatic discharge (168.1 and 172.1), discharge granted upon
application to the court (169), successful proposal (61(1)), or annulment of the bankruptcy (181). The first two methods are detailed in
the following sections. Proposal anullments are dealt with in the proposal section. Courts can annul bankruptcies on the basis that the
original assignment or order should not have been made (181(1)). I would assume this is pretty rare. If this happens there is no
discharge and hence no release of debts. Not sure what other effects annulment has (if the trustee sold your property or a transaction
was reviewed under 95/96 for example).
Section 5.1: BIA Discharges
Discharge means that the bankrupt is no longer bankrupt, thus regaining full civil rights and full economic participation in society. It
also involves the discharging of all debts against the bankrupt that existed prior to the bankruptcy (essentially, all debts which could
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give rise to provable claims).
5.1.1 Procedure
General Procedure for Unopposed Automatic Discharges of First- and Second-time Bankrupts (168.1)
Automatic discharges are absolute and immediate 168.1(5).They are available to first- and second-time bankrupts (no jurisdictions
have been prescribed by regulation, so only Canadian bankruptcies are counted to determine whether you are a first- or second-time
bankrupt). Despite being automatic, there are some preconditions:
 Before being discharged, the bankrupt must be examined under oath by the official receiver about the reason for the
bankruptcy, his conduct during the bankruptcy, etc (161). There is a list of questions prescribed by regulation that must be
used. Fifteen days before your automatic discharge, your trustee must notify the Superintendant and all of your creditors with
proven claims of the impending discharge.
 The automatic discharges under 168.1(1) is not available to debtors who refused or neglected to get financial counselling
(157.1(3)). Those who refuse counselling must therefore make applications to the court under 168.1(2). Presumably courts
will not take the refusal of counselling lightly.
 Time before your automatic discharge depends on whether it is your first or second Canadian bankruptcy (168.1) and on
whether you are making payments under section 68.
 If your discharge is opposed, there is no automatic discharge, and you have to make an application for discharge.
Bankrupts can apply for earlier discharge (168.1(2)). This does not result in a loss of the automatic discharge if you are an individual
who has never been bankrupt before (1168.1(3)). And by implication, if you aren’t such a person, you do lose your automatic
discharge by making an application, so if the application is refused, you don’t get an automatic discharge and can only escape
bankruptcy via the application process under 169. Once granted an automatic discharge, your trustee files paperwork with
Superintendant and gives you a certificate of discharge (168.1(6)).
Automatic Discharge Procedures
168.1(1) (a) in the case of a bankrupt who has never before been bankrupt under the laws of Canada or of any prescribed
jurisdiction, the bankrupt is automatically discharged
(i) on the expiry of 9 months after the date of bankruptcy if no opposition to the discharge was filed during those nine
months, and no payments under section 68 were required to be made by the bankrupt’s estate, or
(ii) on the expiry of 21 months after the date of bankruptcy in all other cases, unless an opposition was filed before
discharge
(b) in the case of a bankrupt who has been a bankrupt one time before under the laws of Canada or of any prescribed jurisdiction,
the bankrupt is automatically discharged
(i) on the expiry of 24 months after the date of bankruptcy if no opposition to the discharge was filed during those 24
months, and no payments under section 68 were required to be made by the bankrupt’s estate, or
(ii) on the expiry of 36 months after the date of bankruptcy in all other cases, unless an opposition was filed before
discharge.
Procedure for Opposed Automatic Discharges (168.2)
168.2 (1)(a-c) Superintendant, creditors, trustee can all oppose. They must give notice to bankrupt and each other before the
automatic discharge would have taken effect in order to oppose.
(2) If there is opposition, a hearing for discharge takes place (see below), unless the opposition is mediated under 170.1.
Special Procedure for Massive Income Tax Debtors (172.1)
This section applies to bankrupts owing $200,000 or more in income tax debt, and whose bankruptcy debts are composed of 75%
or more income tax debts. The timelines in 172.1 prevent applications for discharge prior to the given date; they do not establish an
automatic discharge. So even after X many months, you still have to apply to the court for discharge. The trustee must apply for
discharge when asked by the bankrupt (172(2)). Absolute discharges are not available under 172.1 (unlike 172).
172.1(1) In the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt
represents 75% or more of the bankrupt’s total unsecured proven claims, the hearing of an application for a discharge may not be held
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before the expiry of:
(a) if the bankrupt has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction,
(i) 9 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68 to
the estate of the bankrupt at any time during those 9 months, or
(ii) 21 months after the date of bankruptcy, in any other case;
(b) if the bankrupt has been a bankrupt one time before under the laws of Canada or of any prescribed jurisdiction,
(i) 24 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68
to the estate of the bankrupt at any time during those 24 months, or
(ii) 36 months after the date of bankruptcy, in any other case; and
(c) in the case of any other bankrupt, 36 months after the date of the bankruptcy.
172.1(3) On hearing the application for discharge, the court can (a) refuse; (b) suspend the discharge; or (c) grant a conditional
discharge. The court may combine suspended and conditional discharges 172.1(7).
172.1(4) In choosing the order under 172.1(3), the court must consider: (a) how the tax debt was acquired; (b) what efforts the
bankrupt made to pay off the debt; (c) whether the debtor paid off other debts while failing to make reasonable efforts to pay off
government debts; (d) the bankrupt’s future financial prospects.
172.1(6) Court may review order after one year if the bankrupt shows no reasonable probability he will be able to satisfy order.
172.1(8) Definition of personal income tax debt.
Applications for Discharge
Applications for discharge are the only way debtors with three or more bankruptcies can leave the bankruptcy process.
Applications also occur when an automatic discharge is opposed under 168.2. They are also the only way to leave the process
faster than the timelines set out in 168.1. Anyone who is not covered by the automatic discharge provisions makes a deemed
application for discharge when they enter bankruptcy (169(1)) and their trustee must bring an application for discharge within 3-12
months of this deemed application date (169(2)).
If none of the 173 factors are present, the court can grant an absolute discharge. If any section 173 factors are present, it can only
refuse, suspend, or impose conditions on the discharge. Importantly, 172(1)(c) specifically provides for conditions based on payment
of after-acquired property to creditors.
169(4) Corporations cannot apply for discharge unless all obligations are satisfied in full. This almost never happens.
169(1-2) Trustees must apply to discharge the debtor before their own discharge, and in any event within 3-12 months of bankruptcy.
169(6) Trustee must notify creditors of discharge hearing.
170 Trustees prepare reports about debtors prior to discharge. Report deals with why the bankruptcy occurred, how the bankrupt
behaved during the bankruptcy, any bankruptcy offenses, future outlook, etc. The report’s contents are presumed true during the
discharge hearing unless disproven. Bankrupt must stated disagreement with report; creditors opposing discharge on grounds other
than those in the report must likewise state opposition before hearing. 171 if the Superintendant requests it, the trustee must prepare a
more elaborate report.
172(1) On the hearing of an application of a bankrupt for a discharge, [other than under 172.1], the court may
(a) grant or refuse an absolute order of discharge;
(b) suspend the operation of an absolute order of discharge for a specified time; or
(c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may
afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property.
172(2) The court shall, on proof of any of the facts referred to in section 173, which proof may be given orally under oath, by
affidavit or otherwise,
(a) refuse the discharge of a bankrupt;
(b) suspend the discharge for such period as the court thinks proper; or
(c) require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments
or comply with such other terms as the court may direct.
172(3) This can be modified after a year if the bankrupt shows he cannot reasonably comply with the order.
172(4) Discharges may be both suspended and conditional.
173 This is a list of acts or situations that, if performed by or applicable to a bankrupt, disentitle the bankrupt to an absolute
discharge. [Note that some are bankruptcy offenses/punishment for poor conduct, others deal with the reason the bankruptcy
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occurred, while (j) prohibits absolute discharges for anyone who went bankrupt before or ever made a proposal to his creditors, and
(n) prohibits discharges if a debtor could have made a proposal, but chose bankruptcy instead].
(a) bankrupt’s assets are valued at less than 50% of the total value of unsecured claims. Unless the bankrupt proves that
the reason for the imbalance between debts and assets “has arisen from circumstances for which the bankrupt cannot justly be
held responsible.”
(b) bankrupt failed to keep proper accounting records according to the standards of the industry in which he operated
during a period starting three years before the initial bankruptcy event and ending at the date of the bankruptcy.
(c) bankrupt continued to trade after becoming aware that he was insolvent.
(d) bankrupt cannot satisfactorily account for missing or lost assets.
(e) “the bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable
extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs.”
(f) bankrupt opposed frivolous or vexatious defenses to his creditors, resulting in unnecessary expenses.
(g) bankrupt has incurred unjustifiable expenses due to starting frivolous or vexatious lawsuits in the period from three
months prior to the initial bankruptcy event and ending at the date of the bankruptcy.
(h) the bankrupt, being unable to meet his obligations as they became due, gave an undue [fraudulent? – Mike] preference to
a creditor during the three months before initial bankruptcy event and up to the bankruptcy.
(i) at any point during the three months prior to the initial bankruptcy event and ending on the date of the bankruptcy, the
bankrupt incurred additional obligations such that that bankrupt’s total assets fell to 50% of less of total unsecured
liabilities.
(j) bankrupt was on a previous occasion bankrupt or made a proposal to creditors [even if successful! – Mike].
(k) bankrupt “has been guilty of fraud or fraudulent breach of trust.”
(l) bankrupt committed any bankruptcy offense.
(m) bankrupt did not comply with ongoing payment requirements under s 68.
(n) the bankrupt, if the bankrupt could have made a viable proposal, chose bankruptcy rather than a proposal to
creditors as the means to resolve the indebtedness.
(o) failure to comply with duties under the BIA (especially s 158) or failure to observe court orders.
5.1.2 Types of Discharge
Absolute Discharge
Automatic discharges are absolute (if unopposed). An absolute discharge may be granted by a court under 172(1), unless there has
been an act listed in 173. An absolute discharge is not available under 172.1, or if the bankrupt has committed one of the acts listed in
173.
Conditional Discharge
If there is proof of one of the factors listed in section 173, the court has discretion to make a conditional discharge as one of the
possible sanctions under 172(2). A conditional discharge is one that requires the bankrupt to do or not do something in order to qualify
for the discharge. This will often be a requirement to pay money to the trustee for distribution to creditors.
176(1) Where an order is granted on terms or conditions or on the bankrupt consenting to judgment, the bankrupt shall, until the terms,
conditions or judgment is satisfied,
(a) give the trustee such information as he may require with respect to his earnings and after-acquired property and income,
(b) file reports with the court at least once a year relating to property/income acquired after discharge. May be examined too.
(2) Failure to provide reports or attend examinations under 176(1), or giving dishonest answers, can result in revocation of discharge.
(3) Trustee continues to receive any money that was to be paid by the bankrupt to his creditors, and distributes it to creditors.
Suspended Discharge
If there is proof of one of the factors listed in section 173, the court has discretion to suspend the discharge as one of the possible
sanctions under 172(2). A suspended discharge leaves the bankrupt in that state for an additional period of time. Any garnishment
orders will obviously continue in force for that period, as will all the civil consequences of bankruptcy. Based on the cases in the
syllabus, the suspension is usually a few months at most.
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172(2) The court shall, on proof of any of the facts referred to in section 173, which proof may be given orally under oath, by
affidavit or otherwise,
(b) suspend the discharge for such period as the court thinks proper;
Case Law
CL – Re Stafford, 1959 Ont HCJ [Absolute, suspended, 50% rule, negligent bankruptcy]
Facts: Stafford is a bankrupt whose assets were worth less than 50% of his liabilities. There is some evidence that he will be heir to
his father’s estate. The bankrupt asks for an absolute discharge, while the creditors suggest a discharge conditional on the bankrupt
paying a sum of money to the trustee for distribution to creditors. Stafford did not really assist with the administration of the
bankruptcy, although his wife did. However, for some time he failed to inform his trustee of his address.
Issue: (1) Should Stafford receive a discharge? (2) If yes, what kind?
Holding: (1) Yes; (2) Suspended by one month.
Reasoning: The presumption of fault raised by the 50% asset-liability rule has been rebutted. Stafford’s bankruptcy came about due to
factors beyond his control. The sum of money condition proposed by creditors seems to be based on Stafford’s potential inheritance of
money through his father. However, there is no evidence of how much Stafford would inherit, nor is his father so old that Stafford is
likely to inherit within a reasonable time, nor is there any guarantee that Stafford will remain in his father’s will. So this matter should
not be taken into account by the court. While Stafford was quite passive, his wife’s cooperation counts as his cooperation, since she
was presumably acting as his agent. The failure to inform his trustee of his address represents a violation of a duty imposed by the
BIA, and such a failure prevents an absolute discharge under [the equivalent of s 173]. However, because Stafford’s breach was
technical in nature and did not cause prejudice, the suspension of the discharge should be nominal. Nor will the discharge be
conditional on payment of money, since Stafford has little income beyond what is needed for living expenses.
Ratio: (1) Technical breaches of the act should be punished with only nominal suspensions of the discharge; (2) Inheritances will be
taken into account only where they are sufficiently certain and will likely be paid out in the immediate or near future; (3) Cooperation
of an agent of the bankrupt counts as the cooperation of the bankrupt; (4) Conditional discharges based on payment of money to
creditors will be ordered only if the bankrupt has sufficient income to make such payments.
CL – Re Kirk, 1980 Ont HCJ [Suspended, conditional, 50% rule, negligent bankruptcy]
Facts: Kirk owes $173,000 to Royal Bank, which objects to his absolute discharge. Kirk owned a business that encountered financial
difficulties. In order to obtain financing from Royal Bank in this difficult situation, Kirk made a personal guarantee of the business’
debts. However, at the time he made the guarantee, he had neither the income nor the assets to satisfy the business’ debts. His assets
are less than 50% of his liabilities.
Issue: (1) Should Kirk receive a discharge? (2) If yes, what kind?
Holding: (1) Yes; (2) Suspended by two months and conditional on payment of his inheritance to the trustee.
Reasoning: Kirk’s guarantee of his company’s debts was the sole cause of his indebtedness. It was imprudent, if not dishonest, to
make such a guarantee when he knew that he lacked the assets to support it. Thus he has failed to rebut the presumption of negligence
raised by the 50% assets-liabilities rule. However, Kirk has fully cooperated in the bankruptcy process. His discharge will be
suspended for 2 months. On the issue of a conditional payment of his inheritance, it seems clear that Kirk’s inheritance under the will
vested in his trustee, given the BIA’s definition of property. Thus the trustee can require Kirk to make a document certifying that his
inheritance is now owned by the trustee for the benefit of creditors. Kirk’s discharge will be contingent on providing his trustee with a
satisfactory assignment of his interest in the estate to the trustee.
Ratio: (1) The bankrupt’s interest in any inheritance will vest in the trustee; (2) Suspended discharges for negligent bankrupts will be
fairly lenient as long as they cooperate in the bankruptcy process.
Comment: This case contradicts the approach to inheritances in Stafford.
CL – Kozack v Richter, 1975 SCC [conditional, suspended, 50% assets-liabilities rule]
Facts: Kozack was a passenger in Richter’s car. Richter’s “wilful and wanton misconduct” resulted in a car accident that caused
damages of $13,000 to Kozack (including $1,100 in legal costs). Since Richter was a relatively poor wage earner, he declared
bankruptcy in response to the judgment against him. Richter’s discharge was suspended by 3 months, and later made conditional on
his agreeing to pay $1,800 in monthly installments of $50.
Issue: (1) Should Richter receive a discharge? (2) If yes, what kind?
Holding: (1) Yes; (2) Conditional on payment of 50% of outstanding unsecured liabilities at the rate of at least $50 a month.
Reasoning: Here the payment of $1,800 in legal costs will barely allow Kozack to recover her legal costs. This is not an appropriate
response to serious physical injuries caused by gross negligence of the bankrupt, since it leaves Kozack without recovery. To allow
Richter to escape liability here would mean that any relatively poor person could avoid being sued for motor accidents by pointing out
to the plaintiff that even if he won, the defendant could just make an assignment into bankruptcy, in which case the plaintiff would at
best recover legal costs. To ensure adequate recovering for Kozack, and adequate punishment of Richter, the amount that must be paid
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before a discharge will be granted should be increased to 50% of total unsecured liabilities.
Ratio: (1) Where bankruptcy is caused by a judgment for intentional misconduct the bankrupt will not be granted a discharge under
the 172(a) 50% asset-liability rule; (2) Where a bankruptcy is precipitated by a judgment for damages, there is a public policy of not
allowing bankruptcy as a means of avoiding payment of those damages.
Comment: Based on the case law quoted by the SCC, 50% repayment seems to be a popular figure.
DC – Re Racette, 1974 QCSC [conditional discharge; misconduct; 50% asset-liability rule]
Facts: The application of the bankrupt for a discharge was opposed by one creditor who had sold to him his furniture business in 1963
for $40,000. Both the debtor and the company bearing his name went into bankruptcy in 1969. His liabilities were $55,229 of which
$20,169 were to secured creditors. His assets, purported to be $23,410, yielded only $914 which ultimately were reduced to $33. Two
days after the assignment into bankruptcy, the debtor formed a new company with his wife as president and himself as a secretary
earning $100/week.
Issue: (1) Should Racette receive a discharge? (2) If yes, what kind?
Holding: (1) Yes; (2) Conditional.
Reasoning: Given the poor recovery on Racette’s assets, and the large unpaid debts that remain, Racette should not be discharged
absolutely. Instead, he should be required to make the following payments as part of a conditional discharge: (1) all secured creditors
be paid in full; (2) the unsecured creditors 15 per cent; (3) the costs of the proceedings and of the trustee be paid by the debtor.
Ratio: Where there is severe debtor misconduct or where the debtor’s assets are woefully insufficient to pay his debts yet he has a
high future income, a conditional discharge will require payment of a substantial amount of the debtor’s debts before any discharge
will be granted.
CL – Re Wortsman, 1973 Ont SC [suspended, conditional. debtor misconduct]
Facts: The bankrupt is a wealthy businessman. His indebtedness exceeds $2 million, and arises from guarantees he gave to creditors
of businesses that he owns. He has a net income of $17,000 a year. “He still lives comparatively well but to earn his income he must
maintain a decent standard of living and entertain rather extensively” [wtf? - Mike]. While he lost most of his assets as part of the
bankruptcy process, it has been proven that he also concealed other assets. The debtor has been bankrupt for four years and the trustee
never attempted to garnish his earnings
Issue: (1) Should Wortsman receive a discharge? (2) If yes, what kind?
Holding: (1) Yes; (2) Suspended for two years.
Reasoning: The lack of full disclosure of his assets means that Wortsman is not entitled to an absolute discharge, and will instead
receive a suspended one. The creditors ask for a conditional discharge requiring payment of money to the trustee. This seems futile,
since the bankrupt’s income is tiny compared to the size of his debts. Indeed, the trustee has not attempted to garnish the bankrupt’s
income despite a four year bankruptcy, which suggests that the trustee was also aware of the futility of attempting repayment of $2
million in debts on an after-tax income of $17,000.
Ratio: (1) Conditional discharges requiring payment of debts will not be made if the debtor’s income is manifestly insufficient to pay
down a reasonable portion of his debts; (2) Long periods of suspension for suspended discharges are appropriate as punishment of
debtor misconduct.
Comment: Given that the judge is not going to order any salary garnishment, I do not understand what purpose it serves to extend the
bankruptcy for two more years. Apart from punishing the bankrupt perhaps.
DC – In re Lalonde, 1952 SCC [conditional, 50% assets-liabilities, debtor misconduct]
Facts: Lalonde went bankrupt, primarily as a result of guaranteeing the debts of his business. Total debts were $92,000 and realization
on his assets was only $22,000, so assets were worth less than 50% of liabilities. He did not pay large amounts of his salary to his
trustee, despite a garnishment order. The trial judge also found his answers evasive when he was examined.
Issue: (1) Was Lalonde entitled to a discharge? (2) If yes, what kind? (3) What portion of Lalonde’s salary was seizable?
Holding: (1) Yes; (2) Conditional; (3) All of Lalonde’s salary is seizable, subject only to provincial non-seizability laws.
Reasoning:
(1-2) Lalonde is bankrupt due to his guarantees of his business’s debts. As the sole director and shareholder of his business, the
conduct of the business is relevant to assessing whether he is bankrupt for reasons beyond his control or not. Based on the evidence,
the failure of his business was not beyond his control. So Lalonde is not entitled to an absolute discharge. Instead, he must pay a
certain amount to his creditors, especially since he failed to fulfill the existing salary garnishment. Hence the discharge will be
conditional on payment of $5,000 to creditors in three tranches over three years. The trustee may garnish his salary to achieve this.
(3) The Québec Court of Appeal was also wrong to draw a distinction between salary earned in the business the bankrupt carried on
before the bankruptcy and salary earned in a new business. There is nothing in the BIA that would justify such an approach. Lalonde
was required to pay to his trustee whatever portion of his salary was not exempt from seizure under provincial law.
Ratio: (1) Salary garnishment must respect the rules on maximum garnishment of the province in which the salary was earned; (2)
There is no reason to distinguish between salaries earned in the business that the debtor carried on prior to bankruptcy and those
earned elsewhere; (3) Where the bankrupt has sole control over a company and goes bankrupt due to guarantees of that company’s
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obligations, the conduct of the company should be examined to determine whether the bankruptcy was due to the fault of the bankrupt
under 173(1)(a); (4) The refusal or granting of a discharge should not be varied on appeal, absent an error of principle, but the
conditions attached to the order may be varied by the appellate court
Comment: Lalonde was petitioned into bankruptcy by his own father. Ouch!
5.1.3 Refusal to Grant Discharge
This seems to be fairly rare. The “refusal” is usually a repackaging of an absolute discharge into a suspended or conditional one. In
fact, the case listed for this part of the syllabus did not actually refuse the discharge - it merely substituted a conditional discharge! I
substituted the only case we have in which a discharge was refused.
CL – In re Roy, 1963 QCSC [Absolute, Refusal, 50% rule]
Facts: The debtor is a government biologist who has a fairly small income and who incurred moderate personal debts. But because of
the small size of his income, the interest on these debts quickly outpaced his ability to pay. He currently owes $15,000 to ordinary
unsecured creditors and $45 to preferred creditors. He went bankrupt and now applies for a discharge. Gosselin, a creditor who was
owed $10,000, opposes the discharge. He has almost no assets. He is the father of two children.
Issue: (1) Should Roy receive a discharge? (2) If yes, which kind?
Holding: (1) No; (2) N/A.
Reasoning: The judge beings with a general survey of the law. A discharge hearing is a litigation case like any other. The bankrupt
takes the position of the plaintiff and thus bears the burden of proof. The information in the trustee’s report will also be considered as
prima facie proof of a fact until there is contradictory proof made to the contrary. Discharge, particularly absolute discharge, is a
privilege and not a right: “Ainsi un débiteur honnête et malchanceux, dont la faillite est due à des causes qui lui sont étrangères, aura
droit à une libération absolue alors que le débiteur malhonnête se verra refuser toute libération. Le débiteur honnête mais négligent ou
téméraire pourra obtenir une libération mais sujette à des conditions proportionnées à son degré de responsabilité personnelle et aussi
en tenant compte de sa possibilité de réhabilitation.”
Here, the bankrupt’s assets are worth less than 50% of his debts, so there is a presumption that his bankruptcy was due to
negligence, and this presumption must be rebutted. Roy’s actions were at the least negligent, since he took little care in documenting
his own finances or controlling the level of his debts. The argument that Roy paid the capital sums of his debts is not relevant, since he
owed the interest as well. Roy’s attempt to claim that Gosselin demanded usurious (i.e. banned by the Criminal Code) rates of interest
was uncorroborated and shows bad faith attempts to blame others for his trouble. There’s also evidence that Roy was involved in a
shady commercial deal in which he defrauded his partners; while not fully proven this scheme should still be taken into account. There
is no reason to liberate Roy from bankruptcy.
Ratio: (1) The bankrupt bears the burden of proof for his discharge; (2) The trustee’s report is prima facie proof of its contents; (3)
Payment of the capital sum of a debt is not sufficient if there remains outstanding interest or other charges on that debt; (4) Evidence
of fraudulent or other suspicious conduct by the bankrupt is relevant to the decision of whether the bankrupt should be discharged.
Comment: The case as a whole is short but provides a good summary of the discharge process.
5.1.4 Review or Annulment of Discharge Order
Annulment
BIA 180 allows discharges to be annulled if conditional discharges are not complied with (180(1)), or if a discharge was obtained
by fraud (180(2)). However “An order revoking or annulling the discharge of a bankrupt does not prejudice the validity of a sale,
disposition of property, payment made or thing duly done before the revocation or annulment of the discharge” (180(3)). So you
become bankrupt again, but all acts you did between your discharge and its revocation that affect third parties will be valid.
DC – Re De Grandpré, 1969 QCSC
Facts: The Superintendant of Bankruptcy is attempting to set aside a discharge order for DG. DG had been given a discharge
conditional on payment of $100/week to his trustee for a year. After the discharge was made, it came to light that DG had been
concealing significant assets and had made fraudulent transfers to one creditor.
Issue: Should DG’s discharge be revoked?
Holding: Yes.
Reasoning: By deliberately concealing assets the bankrupt deliberately and fraudulently interfered with the bankruptcy process. This
fully justifies revoking the discharge, since it was obtained by fraud.
Ratio: None really, this is a factual application of 180(2)
Amendment of Discharge
172(3) and 172.1(6) allow a court to amend a discharge order, beginning one year after the order is issued.
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172(3) Where at any time after the expiration of one year after the date of any order made under this section the bankrupt satisfies
the court that there is no reasonable probability of his being in a position to comply with the terms of the order, the court may
modify the terms of the order or of any substituted order, in such manner and on such conditions as it may think fit.
172.1(6) Equivalent to 172(3), but for massive income tax debtors under 172.1.
5.1.5 Effects of BIA Discharge
All provable claims are released by the discharge (178(2)). Some exceptions given in 178(1) and reproduced below. Note that this
means claims that were judged not provable can now be litigated, if the bankrupt exists (individuals and corporations that somehow
miraculously paid off their debts). This obviously affects only litigious claims that were deemed too speculative to be admitted into
bankruptcy. Claims that were clearly invalid (because they were prescribed for example) aren’t in any way rehabilitated by the
discharge. Guarantors are not released by a discharge (179). This discharge does not release bankrupts from any personal duties they
had under 158 or otherwise.
List of Non-discharged Debts
178(1) (a) fines/penalties for a criminal or regulatory offense, and fines for breach of bail or recognizance.
(a.1) damage awards in tort/ECO for intentional bodily harm, sexual assault or intentional infliction of wrongful death.
(b-c) alimony, child support, and similar family law claims.
(d) debts arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity.
(e) debts arising from obtaining property/services by intentional misrepresentation or fraud, other than an equity claim.
(f) debts that would have been provable claims, but that were not revealed to the trustee by the debtor, unless the
creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim.
(g) student loans in certain contexts: only specified loans, and date of bankruptcy must occur either before you cease to be a
student or within seven years after you cease to be a student.
(h) interest owed on an amount referred to in any of paragraphs (a) to (g).
Atlas pointed out that for the purpose of 178(1)(f) the creditor can only claim what they would have gotten if they had been included.
Example: Suppose $100 in claims reported, $10 in assets, so 10% recovery. But there was $100 creditor who was left out. That
creditor can sue for $5. It’s $5 instead of $10 because if the extra creditor had been included, there would be $200 claims, $10 assets,
and hence 5% recovery, so his claim is 100*5%=5.
Section 5.2: CCAA Discharge
A CCAA discharge is more-or-less the same as a BIA discharge, but without any of the preconditions or requirements. If the plan is
approved by creditors and the courts, it discharges the company of all claims that were included in the plan. This includes claims that
were not brought forward by creditors through negligence or a tactical decision to wait until the plan was passed, then sue the
reorganized company. Failure to bring a claim forward will be excused only if occurred due to the negligence of the debtor company
(failing to tell the Monitor of that particular claim), or negligence of the Monitor (failure to notify the claimant of the CCAA process)
or through excusable inadvertence by the creditor. See Re Blue Range Resources, 2000 ABCA 285, leave to appeal dismissed [2000]
SCCA No 648 for the leading case on late claims and CCAA.
Of course, only claims that can validly be included in the plan are discharged. So these must be claims arising from obligations
incurred before the date of the CCAA application (CCAA 19(1)). And certain types of claims are not discharged, unless specifically
included in the plan and the creditor consents (CCAA 19(2), same as BIA - sexual assault, fraud, etc).
CHAPTER 6: Reviewable (Fraudulent and Undervalue)
Transactions
Section 36.1 of the CCAA incorporates by reference BIA sections 38, and 95-101. So essentially the entire regime applies to both
statutes.
Section 6.1: Remedies under the BIA
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The BIA contains two kinds of review procedures for transactions that are considered suspect. Section 95 targets unfair preferential
treatment of one creditor over the others. This includes payment of debts, grants of security over assets, etc, if the transaction is
motivated not by ordinary business concerns but rather by an attempt to improve the position of that creditor. Section 96 targets
transactions that occur well below market value. The two remedies are distinct: a fraudulent preference could occur at fair market
value, for example, which would trigger 95 but not 96. The reviewable transaction remedies apply to proposals as well as to
bankruptcies, unless the proposal indicates otherwise. Atlas: Anyone who tries to exempt their proposal from the reviewable
transaction rules is waving a huge red flag for creditors. BIA remedies are cumulative with provincial remedies (72(1)), and often the
provincial remedies have advantages. The opportunity to exercise 95/96 is prescribed under standard provincial timelines.
Section 98 Tracing Rules: If a property transfer is void/voidable/null under the BIA, the trustee can either retake the property, or, if the
property has been sold by the recipient, can take the cash received by the recipient after the sale of the property 98(1). The trustee can
even go after third parties who the property from the recipient 98(2). Example: if A is bankrupt, makes a voidable transaction to B,
then B sells the property to C, then A’s trustee can go after either B for the money or C for the property. However, third parties who
acquire the property for value in good faith are protected from 98(2). Example: If C was a good faith purchaser for value, then the
trustee could only go after B for the money. Where the payment for the property is partial or won’t happen until some future date (like
if the property was re-sold on credit or on installment payments) then the trustee is subrogated to the rights of the recipient. Example:
if B sold the property to C (assume C is in good faith) on a “half now, half in one month” basis, then A’s trustee could claim the 50%
payment B already has, and steps into B’s shoes to compel C to pay the other 50% to the bankruptcy estate in one month.
6.1.1 Fraudulent Preferences under the BIA
Certain transactions are considered void/null as against the trustee, and can be reversed by the trustee as fraudulent preferences. The
idea of fraudulent preferences is that an insolvent debtor is paying one creditor while ignoring others, which is unfair and potentially
fraudulent. This concern about depleting or devaluing the bankruptcy estate underlies the list of transactions that trigger this section.
Note that “void as against the trustee” has been interpreted by courts as meaning “voidable” rather than “void ab initio.” Another
definitional concern is “giving that creditor a preference over another creditor.” If a debtor pays secured or preferred creditors, it may
not actually constitute a preference, since they were entitled to receive funds first anyways.
Hudson v Bennalleck (1976 SCC): “The object of the bankruptcy law is to ensure the division of the property of the debtor rateably
among all his creditors in the event of his bankruptcy. Section [95] of the Act provides that, subject to the Act, all claims proved in the
bankruptcy shall be paid pari passu. The Act is intended to put all creditors upon an equal footing. Generally, until a debtor is
insolvent or has an act of bankruptcy in contemplation, he is quite free to deal with his property as he wills and he may prefer one
creditor over another but, upon becoming insolvent, he can no longer do any act out of the ordinary course of business which has the
effect of preferring a particular creditor over other creditors. If one creditor receives a preference over other creditors as a result of the
debtor acting intentionally and in fraud of the law, this defeats the equality of the bankruptcy laws.”
Main BIA Provision
95(1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred
or a judicial proceeding taken or suffered by an insolvent person
(a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with
a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up
against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that
is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and
(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor,
that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be
set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the
day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.
Note that (a) is “with a view to giving a preference” (interpreted by jurisprudence as a question of intent, with a mixed
objective/subjective determination) while (b) is “that has the effect of giving a preference” (no longer a question of intent, just effects,
so intent need no longer be proven).
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Requirements to Invoke BIA s 95
 Transaction Must be Listed in BIA 95: transfer of property, a provision of services, a charge on property, a payment, an
obligation incurred, or a judicial proceeding taken or suffered.
 Transaction Must be Made by Insolvent Person: self-explanatory. Note: not bankrupt, just insolvent. See BIA s 2 definitions.
 Transaction Must Occur in Three- or Twelve-month Period: 12 months for related parties, 3 months for arms-length.
 Transaction Must be Effected with a View to Giving a Preference (arms length): Subjective and objective determination –
what was the debtor’s intention, and what would a reasonable business person have thought about the transaction? Debtor’s
intent, not creditor’s intent, is what matters (Hudson v Benalleck, 1975 SCC). If there is ever a question of primary/secondary
intent, only the primary intent matters. There is a presumption that if the transaction resulted in a preference for the creditor,
it is was taken with a view to giving the creditor a preference (95(2)). Evidence of pressure by the creditor is not admissible
to rebut this presumption.
 Transaction Must have the Effect of Giving a Preference (Related Parties): There is no question of intent here, so the
objective/subjective test above is not used. The only question is whether the pool of assets available for the mass of
unsecured creditors was decreased following the payment to the other party. In general, unless that person is a secured or
preferred creditor, this is impossible to prove (unless the deal was so good that you made money from it or something).
The Objective/Subjective Test under 95(a)
Because the test has objective and subjective components in 95(a), it can be avoided by disproving either component.
Transaction made in normal course of business: If you can show that the preference was part of your industry’s normal
commercial dealings, then there was no intention to create a preference. This makes sense, since otherwise any payment to a supplier
or public utility, or any service contract undertaken with a customer, would be a fraudulent preference. This standard refers to industry
custom, not the particular habits of the debtor company. The test is whether a reasonable business person in the industry would have
conducted the transaction as part of the ordinary course of business.
Disproving intention to give a preference: This is the subjective component, and looks into the debtor’s motivation. There
may be other ways to show that you had no intention of creating a preference. One textbook I read stated that proof of “no particular
intention” was sufficient!
DC – Re Pacific Mobil Corp, 1982 QCCA
Facts: Pacific went bankrupt on 24 October 1977, resulting in a review period of 24 July 1977 onwards for arms length parties. On 14
June 1977 Pacific received an invoice from a supplier payable within 30 days. Pacific issued a cheque for $9,000 dated 9 July 1977,
and the cheque was received and cashed by the suppliers 12 August 1977 (almost a month late). The trial judge found that Pacific was
insolvent on 9 July 1977, the date the cheque was issued. Since the payment occurred within the review period, section 95 could
apply. The trial judge held that because the payment was late, it was not made “in the ordinary course of business” and was fraudulent.
Issue: Was the payment to the supplier made with an intent to create a fraudulent preference?
Holding: No.
Reasoning: Although there was a dissent on the facts, both sets of reasons seem to be in agreement on the law. After reviewing the
authorities, the judge said “Il ressort de ces autorités, me semble-t-il, que, d’une part, la notion qui nous concerne est une notion
abstraite et que, d’autre part, les tribunaux ont pour mission d’apprécier les circonstances propres à chaque espèce afin de déterminer
la qualification d’une transaction donnée. C’est, en somme, le va-et-vient perpétuel entre le droit et le fait.” Hence the test has
objective and subjective components (see ratio). Objectively, applying industry standards, the facts reveal that payment between 30
and 60 days of a 30-day invoice was standard in the industry. So the transaction occurred in the ordinary course of business. Thus
there was no intent to create a fraudulent preference.
Ratio: The test for a fraudulent preference has two steps: the objective “ordinary course of business” component, which asks whether
the transaction was made in the ordinary course of business in the industry of the debtor, and the subjective intention component,
which asks whether the debtor had an intent to create a fraudulent preference. If the objective step is satisfied, there is no need to
proceed to the subjective step.
Comment: On appeal, the SCC quotes the paragraph reproduced in the reasoning section above, and endorses the majority’s ruling.
6.1.2 Transactions at Undervalue
Transactions at undervalue are sales of assets from the debtor’s estate/patrimony at suspiciously low prices. Transfers at undervalue
allow trustees to either sue for the difference between fair value and the actual price, or to reverse the transaction. Typically trustees
prefer to get the money for the estate. If the trustee recovers the difference in value, the recipient gets a deferred claim against the
estate for that amount (see section 4.1.6), but because it’s deferred, it will probably never be paid.
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Section 96 breaks transactions at undervalue into two categories: (a) for arms length parties, there is a one year review period to
reverse transactions made by an insolvent debtor with an intent to defraud creditors (applies even if recipient is in good faith); (b) for
non-arms length parties there are two review periods: a one year review period for any transaction with a related party and a five year
period for transactions made while insolvent and with intent to defraud creditors.
96(1) On application by the trustee, a court may [i] declare that a transfer at undervalue is void/null as against the trustee or [ii]
order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the
difference between the value of the consideration received by the debtor and the value of the consideration given by the
debtor, if
(a) the party was dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial
bankruptcy event and that ends on the date of the bankruptcy,
(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
(iii) the debtor intended to defraud, defeat or delay a creditor; or
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial
bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial
bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
96(2) To activate this section, the trustee must state what the fair market value of the property was and what the actual price paid for
the property was. This creates a presumption that both values are correct. In the absence of evidence to the contrary, they are used.
96(3) In this section, a “person who is privy” means a person who is not dealing at arm’s length with a party to a transfer and, by
reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person.
6.1.3 Other Reviewable Transactions (ss 97, 98.1, 101)
Section 101 allows review of dividends or stock repurchases by a currently bankrupt (not just insolvent!) corporation. However, the
transaction had to have occurred when the corporation was insolvent, or the transaction had to render the corporation insolvent
(101(2)). There are very harsh consequences for directors if this section is triggered, unless they prove due diligence or that they
opposed the transaction (101(2.1),(3)). Shareholders related to directors can also be required to repay the value they received
(101(2.2)). The burden of proof for due diligence and non-insolvency of corporation at the time of the dividend is on the directors
(101(5)). There are often company law prohibitions on issuing dividends while insolvent or bankrupt, so that additional remedies may
be available under corporate law.
Section 98.1 only applies to general assignments of book debts or of classes of book debts. 98.1(1) The assignment is void as against
the trustee for any debts not paid at the date of the bankruptcy, as is any charge over book debts (98.1(4)). 98.1(2) exempts general
assignments of book debts from the application of this section if they were registered under the province’s Personal Property Security
Act. 98.1(3) exempts general assignments of book debts if they were made as part of the sale of a business.
Section 97 affects all transactions between the initial bankruptcy event and the date of the bankruptcy. All such transactions are
“invalid” [voidable/null presumably – Mike] unless: (i) the transaction is listed in section 97; (ii) it is made in good faith; (iii) it
doesn’t otherwise contravene BIA rules for transactions at undervalue or execution of judgments; (iv) if the transaction is a transfer of
property, the bankrupt receives fair and reasonable compensation.
97(1) No payment, contract, dealing or transaction to, by or with a bankrupt made between the date of the initial bankruptcy event and
the date of the bankruptcy is valid, except the following, which are valid: if made in good faith, subject to the provisions of this Act
with respect to the effect of bankruptcy on an execution, attachment or other process against property, and subject to the provisions of
this Act respecting preferences and transfers at undervalue:
(a) a payment by the bankrupt to any of the bankrupt’s creditors;
(b) a payment or delivery to the bankrupt;
(c) a transfer [of property] by the bankrupt for adequate valuable consideration; and
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(d) a contract, dealing or transaction, including any giving of security, by or with the bankrupt for adequate valuable
consideration.
97(2) The expression “adequate valuable consideration” in paragraph (1)(c) means a consideration of fair and reasonable money value
with relation to that of the property assigned or transferred, and in paragraph (1)(d) means a consideration of fair and reasonable
money value with relation to the known or reasonably to be anticipated benefits of the contract, dealing or transaction.
6.1.4 Undervalue and Fraudulent Transfers and the CCAA
Section 36.1(1) of the CCAA imports the BIA’s fraudulent transfer/preference regime. As Atlas points out, while it is possible to
exclude this regime, any plan that does so will set off huge alarm bells for creditors! I would imagine that the CCAA cannot exclude
provincial remedies, since they aren’t mentioned expressly…
36.1(1) Sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act apply, with any modifications that the circumstances require,
in respect of a compromise or arrangement unless the compromise or arrangement provides otherwise.
36.1(2) For the purposes of subsection (1), a reference in sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act
(a) to “date of the bankruptcy” is to be read as a reference to “day on which proceedings commence under this Act”;
(b) to “trustee” is to be read as a reference to “monitor”; and
(c) to “bankrupt”, “insolvent person” or “debtor” is to be read as a reference to “debtor company”.
Section 6.2: Remedies under Provincial Law
Provincial laws protecting creditors have been held valid as interacting with the BIA (Robinson v Countrywide Factors). See section
1.2 for more information on the inter-relationship between provincial and federal laws in bankruptcy.
DC – Re Koko Enterprises, 1979 QCSC
Facts: Koko and some other related companies all went bankrupt. The trustee is now trying to annul a hypothec and a payment made
by Koko to a related party. The transactions occurred before the BIA review period, so they fall under provincial law. The trustee
invokes the Paulian action on the basis that Koko is a Québec company and the bankruptcy is being administered in Québec. Koko
argues that because the transactions occurred in an Ontario bank, they are governed not by the CCQ but by the Fraudulent
Conveyances Act, and are valid under that act.
Issue: (1) Which provincial law governs the transactions? (2) Under that law ware the transactions valid?
Holding: (1) Québec; (2) The payment is valid, but the hypotheque is not.
Reasoning: (1) The jurisprudence and doctrine on this issue is divided. The best solution seem to be applying a “most closely
connected test.” Of the two possible forums, the judge prefers Québec law because: the company is headquartered in Québec, the
bankruptcy is Québec, the companies debts are in Québec, Paulian Action is public order, and forum shopping by fraudulentlypreferred creditors should be deterred [that last point is begging the question though! –Mike]. The fact that the bank is located in
Ontario is not enough to counterbalance these factors. (2) Because the inter-corporate payments were made with knowledge of the
insolvent status of the debtor, there is a presumption of fraud, but it has been rebutted here on the facts. The hypothec however is
invalid… but I don’t understand the judge’s reasoning on this point.
Ratio: Adoption of “most closely connected” test for the application of provincial fraudulent preference laws.
Comment: Atlas thinks this case was wrongly decided, but that it can be useful.
6.2.1 Common Law: Fraudulent Preferences Acts & Fraudulent Conveyances Acts
The Ontario Fraudulent Conveyances Act is summarized below as an example common law statute. Note that is has a much longer
review period, and that the transactions are void not just against the trustee but against creditors in general. “Conveyance” in the act is
defined to include gifts, sales, charges or other grants of security… pretty much any dealing with the asset that lowers its value or
removes it from the debtor’s control.
Ontario Act Provisions
2 Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter
made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts,
damages, penalties or forfeitures are void as against such persons and their assigns.
3 Section 2 does not apply to good faith purchasers for value who were unaware of the fraudulent intent at the time of purchase.
4 Section 2 does apply to purchasers for value if they had notice of the fraudulent intent at the time of purchase.
5 Opposability of transaction limited to creditors
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There is also a 1571 English Act, the Statute of Elizabeth which apparently is still in force in some provinces. The Supreme Court
refused to comment on the issue when it came before them as part of a more complicated case (Royal Bank of Canada v North
American Life Assurance Co, [1996] 1 SCR 325). While this case is listed in our syllabus, I’m assuming that the Statute of Elizabeth is
beyond the scope of this course.
6.2.2 Civil Law: Paulian Action
Paulian Action is the civil law equivalent to the various common law acts. It can be brought by a creditor or a trustee. Interestingly, if
brought by a creditor it does not affect other creditors. Rather than voiding a transaction, a Paulian Action renders the transaction
unopposable to the creditor moving the Paulian Action, or against all creditors if brought by the trustee.
The oblique action (CCQ 1627-1630) is a separate action, and is not concerned with fraudulent preferences/conveyances. It doesn’t
deal with what the debtor did, but rather with what the debtor is not doing. It allows a creditor to exercise the debtor’s rights in the
debtor’s name, if inaction by the debtor is causing prejudice. Any property recovered this way will become part of the debtor’s
patrimony and benefit the creditors as a whole.
CCQ Provisions
1626 A creditor may take all necessary or useful measures to preserve his rights.
1631 A creditor who suffers prejudice through a juridical act made by his debtor in fraud of his rights, in particular an act by which he
renders or seeks to render himself insolvent, or by which, being insolvent, he grants preference to another creditor may obtain a
declaration that the act may not be set up against him.
1632 An onerous contract..is [rebuttably] deemed to be made with fraudulent intent if the contracting party or the creditor knew the
debtor to be insolvent or knew that the debtor, by the juridical act, was rendering himself or was seeking to render himself insolvent.
1633 Any gratuitous contract…is deemed [absolutely] to be made with fraudulent intent, even if the contracting party or the creditor
was unaware of the facts, where the debtor is or becomes insolvent at the time the contract is formed or the payment is made.
1634 To bring a Paulian Action, a creditor must have a claim which is certain [not contingent] at the time the Paulian Action is
instituted, and that is liquid [reduced to a money sum] and exigible [due now] when judgment is rendered. The claim must also have
existed prior to the juridical act being attacked.
1635 Action must be brought within one year from date of creditor’s discovery of the injury from the impugned transaction, or if the
action is brought by a trustee, within one year from trustee’s appointment.
1636 Where it is declared that a juridical act may not be set up against the creditor, it may not be set up against any other creditors
who were entitled to institute the action and who intervened in it to protect their rights; all may have the property forming the object of
the contract or payment seized and sold and be paid according to their claims, subject to the rights of prior or hypothecary creditors.
DC – Banque Nationale c SS et CB, 2000 QCCA [From Ferland’s Preuve Civil class]
Facts: SS and CB got divorced. They came to an agreement under which CB would transfer many assets to SS and would pay her
money once he found a better job. However, having done this CB was effectively bankrupt. BN discovered this, it sued for nonpayment of his large debts, and was disappointed to learn that most of his assets were now held by SS. BN claims that CB and SS
conspired together to deprive it of CB’s assets by transferring them to SS. CN relies on 1632 CCQ.
Issue: (1) Is the presumption of fraud created by 1632 absolute or simple? (2) If it is simple, did SS successfully rebut it?
Holding: (1) Simple, and thus rebuttable; (2) Yes.
Reasoning: Majority: The record shows that CB’s separation agreement rendered him bankrupt. It also shows that SS was in perfect
good faith. Thus BN needs 1632 to creates an irrebuttable presumption in order to win the lawsuit. In general, “deemed” (reputé)
indicates an absolute presumption. However, this is not an infallible rule. Doctrinal writers are unanimous that the legislator erred by
using the word “deemed” for 1632. In the context of Paulian actions, fraud is a necessary mental element, and an irrebuttable
presumption would remove the traditional need to prove this fraudulent intent. It would also lead to absurd consequences like good
faith creditors being deemed fraudsters. Thus the use of the word “deemed” was tantamount to a drafting error, which courts may
correct. The legislator could not have intended an absurdity, so 1632 should create a simple presumption.
Dissent: Courts must respect the legislator’s wishes, and by using the word “deemed” the legislator indicated an intent to make 1632
an irrebuttable presumption. The judge makes a clever legislative history argument at para 66 to show that this was not an accident or
oversight. The majority opinion effectively rewrites article 1632, and also undermines the coherence of 2847 para 2, by introducing
uncertainty into the interpretation of the words “deemed” and “presumed” in all statutes. If the CCQ is in error, why not others too?
Ratio: (1) 1632 creates a simple presumption; (2) The words deemed/presumed do not always create absolute/simple presumptions.
Comment: This is from Civil Evidence, but I think it’s worth knowing about because it shows that 1632’s presumption is not absolute.
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CHAPTER 7: International Bankruptcy
An important part of international bankruptcy law is the concept of “centre of main interests” or COMI. The COMI is the jurisdiction
with which the insolvent person is most closely related. It is presumed to be an individual’s country of residence, and a corporation’s
country of registration (CCAA 45(2), BIA 268(2)). Bankruptcy proceedings in the COMI jurisdiction are designated “foreign main
proceedings” and take precedence over Canadian proceedings, with Canadian courts playing a supportive role. In this scenario,
Canadian courts create a stay of Canadian proceedings (BIA 271) and issue other orders that are part of the foreign main proceedings,
and handle local claims processes (272). If Canada is the COMI, then foreign proceedings are secondary and Canadian courts take the
lead. If there is a conflict between two foreign orders, the order from the foreign main proceeding wins (278(1)). If the conflicting
orders are both from non-main proceedings, they are harmonized by reference to the section 272 order (278(2)).
The crucial first step is that a foreign trustee/monitor/official must contact Canadian courts and become recognized as the debtor’s
representative. The foreign representative is whoever is authorized under a foreign insolvency proceeding to either supervise the
debtor company’s reorganization, or who has authority to represent it in bankruptcy.
For some history and theory of cross-border insolvencies, as well as a review of late 1990s case law, see Corporate Groups and
Canada-US Cross-Border Insolvencies: Contrasting Judicial Visions, Jacob Ziegel, (2001) 25 C.B.R. (4 th) 161. Since the article dates
to 2001, and we didn’t really discuss this aspect of bankruptcy in class, I’m not sure what the state of the jurisprudence is now on the
topic.
BIA Provisions (267-284; “Part XIII”)
268(2) COMI is presumed to be place of ordinary residence for individuals and registered head office for corporations.
282 A copy of a foreign bankruptcy, insolvency, or reorganization order is sufficient to prove insolvency and authorized rep’s status.
284(1) General common law and equity rules of private international law are maintained to the extent they don’t conflict with BIA.
284(2) Courts can still refuse to carry out orders that are against public policy.
269 Application by foreign representative to be recognized.
270 Automatic recognition of foreign insolvency proceedings if brought to the court by the foreign representative. Court must specify
if foreign proceeding is main or non-main in the recognition order.
271(1) Protective insolvency regime opens, including blanket stay, once foreign main proceeding recognized.
271(2) The regime in 271(1) does not apply if there are already Canadian proceedings under the BIA/CCAA/WRA.
277(b) If BIA/CCAA/WRA proceedings open, 271(1) order is cancelled.
271(3) Despite 271(1), the debtor company can begin Canadian proceedings under the BIA/CCAA/WRA.
272 In addition to the mandatory 271 order, after recognition of foreign proceedings the court can issue various other orders.
273 Court can impose terms and conditions on granting of orders as it sees fit.
274 If an order recognizing a foreign proceeding is made, the foreign representative may commence or continue any proceedings
under sections 43, 46 to 47.1 and 49 and subsections 50(1) and 50.4(1) in respect of a debtor as if the foreign representative were a
creditor of the debtor, or the debtor, as the case may be.
275 Once the foreign proceeding is recognized, main or not, courts have a duty to cooperate with foreign courts.
276 Foreign representative must keep court informed of significant changes, publish certain notices in newspapers.
277 Proceedings under the BIA inconsistent with orders under 272
278(1) Orders made in foreign main proceedings take precedence over conflicting orders made in foreign non-main proceedings.
278(2) Conflicting orders from two non-main proceedings are harmonized by reference to the Canada 272 order.
283(1) Any Canadian bankruptcy dividend must take account of the foreign payments due to or already received by creditors “as if
they were part” of the Canadian distribution. 283(2) Imports preferred creditor scheme into the international insolvency regime.
CCAA Provisions (44-61)
44 Sets out purpose of CCAA cross-border regime provisions, including greater legal certainty and fair treatment of creditors.
46 Regime for recognizing foreign bankruptcy orders, who has standing to bring this request.
47 Automatic recognition of foreign proceedings with minor prerequisites.
48 If foreign proceeding is main proceeding, Canadian courts take a supportive, not leading, role. Stays of proceedings in Canada.
49 Ability of court to make any order considered appropriate as part of international coordination.
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50 Court can impose terms and conditions on orders that it sees as necessary.
52 Canadian courts will cooperate with foreign courts.
54-55 Proceedings under CCAA must be consistent with section 49 orders
CL – Re Matlack Inc, 2001 ONSC
Facts: This is an application under the CCAA to have Chapter 11 US reorganization proceedings recognized in Canada. In particular
Matlack wants the stay of proceedings issued in the US to apply in Canada, since a Canadian creditor has already seized some assets.
Matlack is a US transport company with a large facility in Ontario that is well integrated into its North American operations.
Issue: (1) Should the US proceedings be recognized? (2) Should the stay be enforced in Canada?
Holding: (1) Yes; (2) Yes.
Reasoning: “The objective of [international bankruptcy] coordination is to ensure that creditors are treated as equitably and fairly as
possible, wherever they are located. Harmonization of proceedings in the U.S. and in Canada will create the most stable conditions
under which a successful reorganization can be achieved and will allow for judicial supervision of all of Matlack's assets and
enterprise throughout the two jurisdictions.” This will prevent unfair piecemeal action by individual creditors. The judge characterizes
recognition of the stay of proceedings as a private international law issue, noting that “determination of whether a sufficient
connection exists between a jurisdiction and a matter should be based on considerations of order, predictability and fairness rather than
on a mechanical analysis of connections between the matter and the jurisdiction.”
Ratio: (1) Recognition of foreign bankruptcies is a private international law issue determined by the real and substantial connection
test; (2) “Where a cross-border insolvency proceeding is most closely connected to one jurisdiction, it is appropriate for the Court in
that jurisdiction to exercise principal control over the insolvency process in light of the principles of comity and in order to avoid a
multiplicity of proceedings.”
Comment: This case occurred before the CCAA’s dedicated international insolvency rules were added.
CHAPTER 8: Non-Liquidation Admin. of Insolvent Estates
This section deals with the administration of an insolvent person/corporation’s estate under bankruptcy legislation, but without the
intention of liquidating the estate.
Section 8.1: General
CCAA
Since the CCAA is designed to keep the company solvent and a going concern, companies under CCAA protection typically spend a lot
of time under the Act. One judge typically supervises a single CCAA-protected company for the length of the proceedings, and issues
orders as required. The Monitor supervises the company during this period and provides periodic reports to that judge.
Winding Up and Restructuring Act
Section 19 of the WRA allows the liquidator to carry on business of the company for as long as is necessary for the beneficial winding
up. Plans under the WRA must receive the support of a majority of creditors representing 75% of the value of the debts (both
requirements count only for creditors present and voting at creditors’ meetings). If so, a court-appointed liquidator may be appointed
by the court. There do not appear to be receivership provisions in the WRA.
Section 8.2: Receivers
We didn’t talk too much about this, so the summary here is very basic. If I recall correctly, Atlas said that these receivers had fallen
into disuse because of liability issues for receivers where there is a union. The receivers discussed here are not interim receivers, and
are not appointed in reaction to fraud or suspected fraud. Instead they take over a business and either liquidate it (receiver) or manage
it for the benefit of creditors until the debts are paid off (receiver-manager). The BIA’s receivership rules are superimposed onto
provincial receivership laws (which include both the common law and certain provisions of the Personal Property Security Acts). You
need to comply with both sets of rules.
There are two kinds of receiver: court-appointed ones who are officers of the court, and contractual ones, who are appointed as part of
a secured lending contract. Contractual receivers are used because once a secured lender crystallizes a floating charge over all of the
assets of a business, it’s as if the secured lender owns the business, so there is a need for an agent to supervise the assets and either
liquidate or manage them. This form of receivership is a common law concept, and doesn’t really exist in civil law.
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Receiverships
Receivers are third parties who take over a business and either liquidate it (called a receiver) or manage it (called a receiver-manager).
The goal in either case is to try and pay off the debts of the debtor. If a receiver-manager were successful in doing so, the company
would then be returned to its original controllers. Receiverships can be either contractual or court-ordered. Contractual receiverships
were often added into secured loan contracts by banks, but have fallen out of favour due to the perceived liability of receivers for the
debts of the company they are managing that arose even before the receiver took over [I tend to agree with Atlas that this is a terrible
legal rule – Mike]. The institution of receivership does not exist in civil law, although there is the idea of an “agent” which is a very
similar function. Atlas: often debtors will file for bankruptcy as a way to avoid receiverships.
The BIA regime basically imposes a 10 day waiting period before a receiver can be appointed if the receiver will manage all or
substantially all of the debtor’s assets. As Atals pointed out for the 10-day notice before a secured creditor can seize assets, this period
is almost always used by the debtor to get a BIA/CCAA stay of some kind.
For more on receivers, see the leading case of Royal Bank of Canada v Soundair Corp, [1991] OJ 1137 (ONCA).
BIA Provisions
243 Appointment provisions for receivers, but only if the receiver will manage all or substantially all of the company’s assets. Must be
by a secured creditor. 10 day notice period required.
245 Receivers must give notice to official receiver within ten days of taking over the business.
246 Receivers must prepare accounting and information statements
247 Imposes duties of good faith and commercial reasonableness on receivers.
248 Court can supervise receivers.
249-250 Receivers can apply to court for directions.
251-252 Limited defenses given to receivers.
CHAPTER 9: Special/Miscellaneous Issues
These are three issue-areas that seemed important enough to deserve their own section, if only to group the relevant BIA provisions
together. Since I wasn’t sure where else to put them, I put them here.
Section 9.1: Directors and Officers under the BIA and CCAA
“director” in respect of a corporation other than an income trust, means a person occupying the position of director by whatever name
called and, in the case of an income trust, a person occupying the position of trustee by whatever name called;
Officers are not defined, interestingly enough. The provisions on directors, below, typically include officers unless it wouldn’t make
sense in the circumstances. There don’t seem to be any provisions just about officers. It’s either D&O or just directors.
Proposals
50(13) Proposals can include provisions on comprising claims against directors that arise under law from their capacity as directors.
50(14) Claims by creditors directly against director by contract cannot be compromised, not can misrepresentation or oppression
claims be compromised.
50(15) Court can declare that claims against directors shall not be compromised, if this would be "inequitable" in the circumstances.
50(16) Claims against directors are proven under the normal claims process of 122. Binding on all creditors as part of approved
proposal.
50(18) If all directors resign/removed, then acting directors are deemed directors for the purpose of this section.
64(1) Directors can be removed on the application of any person to the court after NOI or proposal filed if the director is unreasonably
impairing or likely to unreasonably impair the possibility of a viable proposal being made, or is acting/likely to act inappropriately as a
director.
64(2) Court can then fill a vacancy created by 64(1) via an order.
64.1 Creation of directors/officers charge on application to court. Can be ordered to outrank existing securities. Can't be ordered if
directors could get liability insurance at a reasonable cost.
69.31 Stay covers directors too, except with respects to guarantees they gave on corporation's obligations.
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Other BIA Provisions
83.1/140 Directors can't claim under 81.3/81.4 nor vote on plans under these claims. 140 seems redundant.
101(2) Directors can be personally liable for payment of dividends or stock redemptions while corporation is insolvent.
CCAA Director Provisions
5.1(1) CCAA plans can compromise claims against directors if the claims arose prior to CCAA filing and the claims arose from acts the
directors undertook in their capacity as directors.
5.1(2) But you can’t compromise claims against directors that relate to the contractual rights of creditors or misrepresentations by
directors, “wrongful or oppressive conduct.”
5.1(3) Claims against directors can be compromised only if the judge thinks that the compromise would be fair and reasonable in the
circumstances.
11.03 Stays for directors.
11.5 Removal of directors.
11.51 Security/charge related to directors indemnification.
Section 9.2: Related Party Rules under the BIA and CCAA
BIA Sections 4(1)-(4), set up various presumptions about being a related party. These presumptions are activated by 4(5), which
creates a presumption that all related parties do not deal at arm’s length with each other. Despite the use of the word “deem”
this is actually a presumption, so it merely reverses the burden of proof. This presumption can be rebutted, but that will typically be
difficult.
Section 4(4) allows for proof that unrelated parties are not dealing at arm’s length; in the absence of proof they will presumably
be held to be dealing at arm’s length [otherwise there would be no need for the presumptions for related parties - Mike].
The reason we care about related/unrelated is the impact this has on a finding of arm’s length/not arm’s length dealings. The reason
we care about arm’s length/not arm’s length dealing is that this will affect the lookback period under BIA 95(1)(b) or 96(1)(b) and
what needs to be proved to trigger the reversal of the transaction. Related parties also have voting restrictions placed on them in the
context of BIA proposals and CCAA plans.
Section 2(2) CCAA imports the BIA section 4 related party rules into the CCAA. Additionally, the CCAA has “affiliated company”
at section 3 that have effects similar to those involving related parties for voting purposes.
BIA Provisions
4(1) [definitions]
“entity” means a person other than an individual; [i.e. individual means a physical person - Mike]
“related group” means a group of persons each member of which is related to every other member of the group;
“unrelated group” means a group of persons that is not a related group.
4(2) For the purposes of this Act, persons are related to each other and are “related persons” if they are
(a) individuals connected by blood relationship, marriage, common-law partnership or adoption;
(b) an entity and
(i) a person who controls the entity, if it is controlled by one person,
(ii) a person who is a member of a related group that controls the entity, or
(iii) any person connected in the manner set out in paragraph (a) to a person described in subparagraph (i) or (ii); or
(c) two entities
(i) both controlled by the same person or group of persons,
(ii) each of which is controlled by one person and the person who controls one of the entities is related to the
person who controls the other entity,
(iii) one of which is controlled by one person and that person is related to any member of a related group that
controls the other entity,
(iv) one of which is controlled by one person and that person is related to each member of an unrelated group
that controls the other entity,
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(v) one of which is controlled by a related group a member of which is related to each member of an unrelated
group that controls the other entity, or
(vi) one of which is controlled by an unrelated group each member of which is related to at least one member of
an unrelated group that controls the other entity.
4(3) For the purposes of this section,
(a) if two entities are related to the same entity within the meaning of subsection (2), they are deemed to be related to
each other;
(b) if a related group is in a position to control an entity, it is deemed to be a related group that controls the entity whether
or not it is part of a larger group by whom the entity is in fact controlled;
(c) a person who has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely
or contingently, to, or to acquire, ownership interests, however designated, in an entity, or to control the voting rights in an
entity, is, except when the contract provides that the right is not exercisable until the death of an individual designated in the
contract, deemed to have the same position in relation to the control of the entity as if the person owned the ownership
interests; [i.e. you can’t get out of the related party rules by using contingent or future interests - Mike]
(d) if a person has ownership interests in two or more entities, the person is, as holder of any ownership interest in one of
the entities, deemed to be related to himself or herself as holder of any ownership interest in each of the other entities;
(e) persons are connected by blood relationship if one is the child or other descendant of the other or one is the brother
or sister of the other;
(f) persons are connected by marriage if one is married to the other or to a person who is connected by blood
relationship or adoption to the other;
(f.1) persons are connected by common-law partnership if one is in a common-law partnership with the other or with a person
who is connected by blood relationship or adoption to the other; and
(g) persons are connected by adoption if one has been adopted, either legally or in fact, as the child of the other or as the child
of a person who is connected by blood relationship, otherwise than as a brother or sister, to the other.
4(4) It is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s
length.
4(5) Persons who are related to each other are deemed not to deal with each other at arm’s length while so related. For the
purpose of paragraph 95(1)(b) or 96(1)(b), the persons are, in the absence of evidence to the contrary, deemed not to deal with each
other at arm’s length. [this should be “presumed” not “deemed” - Mike]
Section 9.3: Protection of Third Party Purchasers under the BIA
Section 99(1) establishes a general protection for good faith purchasers for value of property from the bankrupt. However it only
applies to after-acquired property, and then only if the trustee does not intervene in the transaction prior to its completion. There are
very limited protection for pre-bankruptcy transactions (73, 75). And for some pre-bankruptcy transactions, there is an additional
hurdle in the form of section 97. Section 97 voids most transactions between the bankrupt and third parties between the initial
bankruptcy event and the date of the bankruptcy, with very few and limited exceptions. The trustee is also protected from liability to
third parties in most cases involving sale of their property (80), so at best the third party has a claim against the estate of the bankrupt.
Section 97 affects all transactions between the initial bankruptcy event and the date of the bankruptcy. All such transactions are
invalid [voidable/null presumably – Mike] unless: (i) the transaction is listed in section 97 (see below); (ii) it is made in good faith;
(iii) it doesn’t otherwise contravene BIA rules for transactions at undervalue or execution of judgments; (iv) if the transaction is a
transfer of property, the bankrupt receives fair and reasonable compensation.
Section 98.1 only applies to general assignments of book debts or of classes of book debts. 98.1(1) The assignment is void as against
the trustee for any debts not paid at the date of the bankruptcy, as is any charge over book debts (98.1(4)). 98.1(2) exempts general
assignments of book debts from the application of this section if they were registered under the province’s Personal Property Security
Act. 98.1(3) exempts general assignments of book debts if they were made as part of the sale of a business.
73(1) Good faith purchaser for value of the bankrupt’s property at a judicial sale is protected, and has property interests
superior to those of the trustee.
75 Limited protection for good faith purchaser/mortgagor for value of immovables.
80 Trustee not liable for sale of property affected by third party interests unless the trustee had notice or was negligent. But the estate
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is still liable even if the trustee is not.
97(1) No payment, contract, dealing or transaction to, by or with a bankrupt made between the date of the initial bankruptcy event and
the date of the bankruptcy is valid, except the following, which are valid if made in good faith, subject to the provisions of this Act
with respect to the effect of bankruptcy on an execution, attachment or other process against property, and subject to the provisions of
this Act respecting preferences and transfers at undervalue:
(a) a payment by the bankrupt to any of the bankrupt’s creditors;
(b) a payment or delivery to the bankrupt;
(c) a transfer [of property] by the bankrupt for adequate valuable consideration; and
(d) a contract, dealing or transaction, including any giving of security, by or with the bankrupt for adequate valuable
consideration.
97(2) The expression “adequate valuable consideration” in paragraph (1)(c) means a consideration of fair and reasonable money value
with relation to that of the property assigned or transferred, and in paragraph (1)(d) means a consideration of fair and reasonable
money value with relation to the known or reasonably to be anticipated benefits of the contract, dealing or transaction.
99(1) All transactions by a bankrupt with any person dealing with the bankrupt in good faith and for value in respect of property
acquired by the bankrupt after the date of the bankruptcy, if completed before any intervention by the trustee, are valid against
the trustee, and any estate, or interest or right, in the property that by virtue of this Act is vested in the trustee shall determine and pass
in any manner and to any extent that may be required for giving effect to any such transaction.
180(3) “An order revoking or annulling the discharge of a bankrupt does not prejudice the validity of a sale, disposition of property,
payment made or thing duly done before the revocation or annulment of the discharge”
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