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Canada (511,049)
LAW 603 (121)
Gil Lan (28)

Chapter 24 Dealing with Bankruptcy and Insolvency.docx

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Law and Business
LAW 603
Gil Lan

Chapter 24 Dealing with Bankruptcy and Insolvency • Insolvency- when their debts exceed their assets and they cannot meet their liabilities as they come due • Bankrupt- either assign themselves into bankruptcy or as a result of a creditor applying to a court for a bankruptcy order against them • Stay- is a suspension of legal proceedings against a debtor • Liquidation- is the sale of assets in return for money and can be distributed to the bankrupts creditors • Discharge- is the release of debtor from bankruptcy status • Proposal- is a court approved arrangement between a debtor and its creditors providing for a restructuring of the debtors debts and other financial affairs outside of formal bankruptcy • Goodwill-is a business favourable and valuable public reputation Authority to regulate bankruptcy and insolvency • Canada constitution assigns the power to enact bankruptcy legislation exclusively to the federal government • The federal and bankruptcy and insolvency act provides a framework to administer the bankruptcy process Bankruptcy and insolvency law • Adebtor can be sued by a creditor for non-payment • Asingle suit often triggered a legal stampede amongst creditors who all want the same asset • Court would require a liquidation of assets, once this process occurs no more claims could be brought up for debts previously incurred Advantages • All creditors treated on the same basis by a single judge • Creditors have an incentive to work together • Avoid multiplication of enforcement costs for creditors and provided orderly disposition of the debtors assets in a way that will maximize recovery of amount owed • Debtor was exposed, to only one set of legal proceedings, its assets were not depleted • Bankrupt rehabilitation can start soon as they are discharged The bankruptcy and insolvency act is the most important statute relating to bankruptcy • Tries to achieve a number of objectives • Provide timely orderly and equitable distribution of bankrupt’s assets • Provide rehabilitation of debtors through a discharge that frees them from prior debts and obligations in appropriate circumstances • Limit the possibility of discharge for certain debts that are considered socially important, such as family support obligations and student loans • Promote confidence and certainty in the credit system • The BIAapplies to all Canadian business, does not apply to banks, insurance/trust companies or railways • Farmers and fishers cannot be placed into bankruptcy, due to high volatile nature of the farming and fishing industries • This act is the most looked to statue concerning financial distress and failure in Canada • The federal companies creditors arrangement act (ccaa) allows a debtor to seek a stay of all claims pending the acceptance of a reorganization plan that restructures the debt and other financial aspects of the debtors business • Restructuring may also be accomplished through proposals under the (BIA) Bankruptcy and insolvency under the bankruptcy and insolvency act • Insolvency- is an inability of a debtor to meet its financial obligations to its creditors • Many business operate in or near the state of insolvency • Insolvency defined in the (BIA) as • The debtor is unable to meet its liabilities as they become due, the debtor has ceased paying its current obligations in the ordinary course of business they usually do, the debtors fair valuation of property is not/ would be sufficient to enable payments of all obligations due and accruing due • Assignment- is a procedure by which a debtor voluntarily becomes bankrupt • The fact that a debtor is insolvent is not sufficient, creditors are prepared to wait well beyond mere insolvency to begin bankruptcy proceedings Corporate and Consumer Bankruptcy • There are different rules for each type of bankruptcy proceedings • Proposals by corporations to their creditors settle their obligations require the approval of a majority of creditors in each class of creditors, who represent atleast 2/3 of the value of the claims • Corporate debtors are rarely discharged from bankruptcy unless they pay all of their debts • First time consumer debtors are usually discharged in nine months if they have responsible behaviour Officials involved in bankruptcy procedures (look at figure 24.2 pg 596) The process of bankruptcy • Has to be voluntary (by assignment of debtor), or involuntary (by application of creditors for a bankruptcy order against the debtor) Assignment into bankruptcy by the debtor • If the debtor is a corporation the directors must call a meeting to assign itself into bankruptcy • Debtor must be insolvent to file an assignment • Assignments filled with official receiver , who then appoints a trustee who helps with the preparations of documents needed for assignment • Trustee meets with the debtor to prepare a long form statement of affairs and a notice of the first meeting of the creditors Application for a Bankruptcy order • To obtain a bankruptcy order against a debtor a creditor or creditors acting together must prove that the debtor owes a debt of atleast $1000 • Must also prove that the debtor committed the act of bankruptcy within the last 6 months • Acreditor filling an application makes a fresh demand from the insolvent debtor • Need to obtain info from other creditors that debtor has stopped paying, since it is out of court creditors do not need to cooperate Submitting an application for a bankruptcy order • must be filled in court having jurisdiction in the location of the debtor • the bankruptcy act supersedes all individual actions by creditors • affidavit included in bankruptcy order made under oath • an undisputed application for bankruptcy order may be heard by the registrar who, after examining documents may grant the application if satisfied under the BIArequirements • disputed applications are heard by the bankruptcy judge • main issues before judge are if alleged act of bankruptcy was committed and whether the debts claimed by creditors are valid • Case brief 24.1 pg 599 imp for understanding locality The receiving order Receiving order- is a command to the debtor to release all of its assets to the court or to a court appointed agent, usually a trustee in bankruptcy • Allows the trustee to take control of alm
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