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Law 2101 - Apr. 3.docx

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Western University
Law 2101

Law 2101 Thursday April 3 Bankruptcy Requires a Choice: • Insolvency is the root of commercial and financial law because it obliges the law to choose • There is not enough money to go around and so the law must choose who to pay • The choice cannot be avoided or compromised • The law must always decide who will bear the risk (there is always a winner and loser) o If one creditor is paid out, there is less to pay other creditors Canadian Consumer Bankruptcy Statistics: • 1966 – 1903 bankruptcies • 1976 – 10,049 bankruptcies • 1986 – 21,763 bankruptcies • 1996 – 80,000 bankruptcies • 2008 – 90,610 bankruptcies • 2009 – 116,381 bankruptcies (the financial crisis hit hard) o There was a 28.4% increase from 2008-2009 • What happens after the financial crisis? o Bankruptcies have dropped in 2012, and there are about 80,000 bankruptcies each year • Why have bankruptcies increased since the 1960’s? o Credit is more freely available (they give people gifts to sign up, people get unsolicited credit card applications in the mail) Celebrity Bankruptcies: • Kim Basinger, • Francis Ford Coppola • M.C. Hammer • Walt Disney • Mike Tyson • Peter Pocklington • Abraham Lincoln Corporate Bankruptcies: • General Motors • Worldcom • Washington Mutual Inc. • Lehman Brothers Holdings Inc. (an investment bank) o Had $768,000,000,000 worth of debt History of Bankruptcy Law • Henry VIII was in power when the first bankruptcy statute was passed in 1542 • The statute in 1524 was a criminal statute – bankrupts were known as criminals o It provided a way to collect the assets of the debtor and distribute them to creditors o It did not apply to release of debts – there was no discharge of a debtor • 1604 Statute: o Frauds and deceits were described as “new diseases” • 1623 Statute: o Allowed for corporal punishments on bankrupts in some circumstances o eg. some were put into the pillory • 1705: Allowed for a discharge o When the debtor goes through bankruptcy, their debts will be released o However, the bankrupt could be punished as a felon “without the benefit of clergy” (they could be executed) o There was a low conviction rate because juries were reluctant to convict. They found capital punishment was not a deterrent to people finding themselves in debt. Modern Statutes: • The framework provides for liquidation OR reorganization • Liquidation o The debtor’s assets are sold and distributed to creditors o Governing statute is federal: The Bankruptcy and Insolvency Act o Applies to individuals and corporations • Reorganization o Alternative to bankruptcy/liquidation o The debtor may make a proposal to creditors (make a deal)  Individuals: Proposals are governed by the Bankruptcy and Insolvency Act (BIA) • It is a commercial or consumer proposal  Corporations: • Either governed by the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangements Act Bankruptcy vs. Insolvency • Bankruptcy: o A coercive procedure where the assets are brought into the control of the trustee in bankruptcy for the benefit of creditors (the debtor loses control over their property) o The debtor is relieved through a discharge (cancellation of debts)  This is done for rehabilitation – to rehabilitate the debtor socially and economically • Insolvency: o The inability to meet obligations as they mature o You can be insolvent but not yet bankrupt  In order for bankruptcy to occur, you either have to file for bankruptcy, or the creditors have to force you into bankruptcy (a formal legal proceeding where the status of the debtor changes from a debtor to a bankrupt) Objectives of Bankruptcy Law: Re Hover 1. To permit debtors to obtain a discharge from their debts 2. To provide for the distribution of the assets of the bankrupt among the creditors • The act tells us which creditors get paid in what order 3. To ensure that there is uniformity throughout Canada (we have a federal statute that applies no matter where the bankrupt resides) 4. It is a collective regime - Creditors can no longer pursue ordinary remedies by suing the debtor – they have to file a proof of claim in the bankruptcy, hoping they will get some money in the distribution 5. Rehabilitation without being held back by past debts Objectives of Bankruptcy Law: Senate Report  Opportunity to obtain a discharge and become productive and useful citizens to get a fresh start o If the debtor isn’t released of their debts, they will become an unproductive member of society  It is an inexpensive way that insolvent debtors can give their non-exempt property to a trustee o There are certain types of property not available for distribution to creditors (food, fuel, residential property in some provinces, a motor vehicle in some provinces, household furniture, tools of trade)  The trustee of bankruptcy will engage in an investigation of the bankrupt and examine the transactions they have made before the bankruptcy o eg. if the debtor gives all of his assets to a family member with no consideration as a way to keep it away from creditors (this would be fraud) Defeating the Equality Principle:  One of the objectives of bankruptcy law is to give creditors equal share, but it isn’t equal if one creditor is paid more  Example: o Fred has five unsecured creditors: A, B, C, D, and Wilma o A, B, C, and D are all trade creditors, and Wilma is Fred’s wife o Each of the five debts is for $100. Fred’s total assets are $200. o Fred pays Wilma $100, which means there are only $100 to distribute amongst the other creditors. o The transaction cannot stand because Wilma has been given a preference.  The Trustee in Bankruptcy has the power to set aside the transaction under s. 95 of the BIA o eg.
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