LAW 601 Lecture Notes - Lecture 10: Pro Rata, Secured Creditor, Unsecured Creditor
19 Feb 2017
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Lecture 12
Chapter 24 – Bankruptcy & Insolvency
PARTS OF THIS CHAPTER:
1. Authority to regulate Bankruptcy & Insolvency
2. Bankruptcy & Insolvency Law
3. Corporate & Consumer Bankruptcy
4. Officials Involved
5. Process of Bankruptcy
6. Proposals
7. Other Statutes
** Note: many businesses fail; within the first five years 80% of small businesses fail **
AUTHORITY TO REGULATE BANKRUPTCY & INSOLVENCY
Canada’s constitution assigns the power to enact bankruptcy to the federal government. The
federal BIA (Bankruptcy and Insolvency Act) provides the framework to administer the bankruptcy
process. There are various forms of bankruptcy that we will look at later in this chapter:
• Assignments
• Applications by creditors
• Non-bankruptcy alternatives (proposals)
Purpose of BIA:
• Fair distribution of bankrupt’s assets
• Not forgive certain debts (e.g. student loans, family support payments)
• Punish – fraudulent transfers & preferences
• Rehabilitation of debtor
• Certainty & confidence is system
BIA does not apply to banks, insurance companies, trust companies, railways, fisherman and farmers.
-Why???
BANKRUPTCY AND INSOLVENCY LAW
Before modern bankruptcy laws were put in place, a debtor could be sued for non-payment and
eventually more creditors would try to claim against debtor. Banks had a tough time determining which
claims were valid and which creditors would rank ahead of others.
find more resources at oneclass.com
find more resources at oneclass.com
Bankruptcy and Insolvency under BIA
Two concepts generally important to distinguish are bankruptcy and insolvency:
• Insolvency – is an inability of a debtor to meet their financial obligations as they become due;
many businesses operate in a state near insolvency. Formal definition of insolvency under BIA:
o The debtor does not pay its liabilities as they come due
o Debtor stopped paying current obligations in the ordinary course of business
o The aggregate of debtors property is not sufficient enough to pay its debts
• Bankruptcy – a person has either made an assignment into bankruptcy or had a bankruptcy order
made against them
o An assignment is a procedure by which a debtor voluntarily becomes bankrupt
o A debtor can become involuntarily bankrupt by a court or other official based on a
creditors application. They must prove that the debtor has committed an “act of
bankruptcy” → usually involves the the debtor being insolvent BUT the simple fact that a
debitor is insolvent does not legally qualify for them to be insolvent (several other factors
come into play?) creditors have to wait way beyond insolvency in order to begin
bankruptcy proceedings look at figure 24.1
Corporate and Consumer Bankruptcy
• In 2008 the total liabilities for bankrupt corporations amounted to $7.1 billion
• Since the there is a large difference between size and scope of consumer and corporate
bankruptcy there are two different rules applied to proceedings:
Proposal
Discharge from Bankruptcy
Corporate
Proposals by corporations to their creditors need a
majority approval in each class of creditors who
represent at least 2/3 of the value of the claims in
that class
Rare unless pays back all debts
Personal
Proposal needs approval by majority of creditors
Usually within 9 months of your
1st
OFFICIALS INVOLVED IN BANKRUPTCY
1. Superintendent of Bankruptcy & Official Receivers:
• chief administrative official in bankruptcy in Canada
• they are a federal government appointee
• the superintendent is represented in each province by an Official Receiver whose office
o receives voluntary assignments
o examines bankruptcies
o chairs first meeting of creditors
2. Trustee in Bankruptcy:
• represents creditors
• takes control of bankrupts assets for eventual distribution to creditors
• makes initial determination of regarding proof of claim
find more resources at oneclass.com
find more resources at oneclass.com
