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Lecture

Chapter 31 - Creditors and Debtors.docx

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Department
Business
Course
BU451
Professor
Charles Davidson
Semester
Winter

Description
Chapter 31: Bankruptcy and Creditor Protection Terminology we need to know: - Trustee o Owes a duty to the creditors o Court-appointed - Fraudulent Preference o If you’re insolvent and you pay a creditor for no real reason, it’s an offence… if solvent, can pay them in any way you want - Fraudulent Transfer o Relevant IFF you’re in bankruptcy o Relevant only within a certain time period of bankruptcy - Fraudulent Conveyance o Regulated by an independent act called “Fraudulent Conveyance Act”  Any conveyance that is undertaken for a fraudulent reason may be set aside  If a conveyance happens and a 3 party purchases it, the Act won’t help creditors because they can only attack the initial conveyance o Time period really doesn’t matter… key question is why was that transfer made? “duhhh I wanted to be judgement proof” o Any transaction within a reasonable time will be looked at and decided whether or not to set aside - Fraud must be proven “beyond a reasonable doubt” - Companies’ Creditors Arrangement Act CCAA (don’t need to know much in detail) How to get paid: - Payment in cash first - Get partial payment first (points of payment  work is done 75%, I’ll pay you 75%) - Get a personal guarantee (from the principal)  so that you can get extra access to assets o However, if they are insolvent, you’re getting into the world of preferential creditors and it might not be helpful - An interest in some form of collateral (ie. mortgage) - Letter of credit or a 3 party – both firms can give them stuff Difference between insolvency and bankruptcy - Insolvency: being unable to meet debts as they fall due – it’s a fact (you can jump in and out of it) - Bankruptcy: the court must declare you bankrupt; it is a legal state - Winding up: corporate death – cease to exist o Might be because the shareholders just don’t want to run it anymore…liquidate it and wind up – remember, dissolved doesn’t mean bankrupt - You can be bankrupt and not insolvent…can be bankrupt from: o Any assignment to a trustee will be an act of bankruptcy o Fraudulent preference of creditors o If a proposal is agreed to and you fail to meet one of the terms  A proposal comes down to a debtor saying they can’t pay, so the creditor can either plunge them into bankruptcy and get nothing for it, or keep them alive to get better…if a debtor cannot meet the terms from the proposal, they bankrupt  Then, debtor no longer has control, trustee comes in o Failure to meet debts (insolvency) - “Assignment in bankruptcy” is voluntary by the debtor o All legal proceedings are “stayed” (stay of proceedings) for a moment when bankrupt o If you really have no assets to satisfy a judgement, you might as well say you’re “judgement proof” and take bankruptcy  Another perspective: if you tell a creditor you have no assets, they won’t believe you but they’ll believe the trustee - As a director, your potential liability when the business is insolvent is your own personal liability o Someone can claim oppression remedy on you  Your conduct when the corporation was insolvent was oppressive to your interests as a creditor Bankruptcy and Insolvency Act - There used to be no formal way of giving an honest debtor a formal discharge from his obligations once all his assets had been distributed to his creditors (they could keep pursuing him for payment) - BIA established a uniform practice in bankruptcy proceedings throughout the country and does it as inexpensively as possible o Provides equitable distribution of debtor’s assets among creditors o Provides framework for preserving and reorganizing debtor’s business/affairs by working out arrangement with creditors in order to avoid a total liquidation of a debtor’s estate o Provides for release of an honest but unfortunate debtor from his obligations and permits him to make a fresh start free of debts Competing Policy Issues - Creditors usually just want to get paid ASAP; don’t care about debtor’s business - Bankruptcy law contains provisions whereby creditors may be encouraged/compelled to accept arrangements that save a business (and the jobs it provides) - Creditors might want to cut their losses and not waste time/$ to recover something, but an aim of bankruptcy legislation is to promote an atmosphere of confidence in business relations o To that, the Act has provisions to punish dishonest debtors and prevent them from reengaging in business activities - Best protection for creditors is still to be careful in granting credit Government Supervision - Act creates a Superintendent of Bankruptcy; keeps record of all bankruptcy proceedings in CA - Investigates the character and qualifications of persons applying for licenses to act as trustees and has power to suspend or cancel a trustee’s license…can intervene in any court proceeding, investigate situations where a bankruptcy offence may have been committed - Each division has 1+ “official receivers” appointed  are officers of the court and report to the Superintendent all bankruptcies in their divisions - Highest trial court in each province hears bankruptcy proceedings  “Bankruptcy Court” (no separate tribunal exists) o Courts hear creditors’ petitions for the bankruptcy of their debtors and determine whether or on what terms certain debtors should be discharged after their affairs have been wound up - Actual administration of debtor’s estate is placed in hands of a licensed trustee in bankruptcy  normally an accountant, appointed by court, and appoint a few inspectors to instruct and supervise the trustee Who does the Act Apply to? Bankrupt and Insolvent Persons: - Debtors who are individuals, partnerships, and corps o Bankrupt: person who has made an assignment or against whom a receiving order has been made  a formal legal step must be made to declare someone bankrupt  there’s a distinction b/w debtors who voluntarily declare bankruptcy and those who are petitioned into bankruptcy by their creditors - Applies to insolvent persons too: o A person who is not bankrupt o Liabilities to creditors amount to at least $1000 o Is unable to meet obligations as they become due o Ceased paying obligations in the ordinary course of business as they become due o Has debts due and accruing due, the aggregate of which exceeds the realizable value of his assets - Can be insolvent without having been declared bankrupt, and bankrupt may turn out not be insolvent Consumer Debtors: - Natural person who is insolvent but whose aggregate debts do not exceed $75 000 (soon to be changed to $250 000) - Consumer bankruptcies represent the vast majority of all bankruptcies Corporations: - Individuals can form a corporation with small capital sum, and if they go bankrupt, they can just form a new corporation - Worst abuses (transactions) can be reviewed and set aside - If corporation commits bankruptcy offence, directors/officers who authorized/acquiesced/participated in offence are liable to punishment for the offence - Bankruptcy and insolvency protection are available to income trusts  trustees are similar liability to directors Procedures Under the Act - 3 types of procedure: proposals, assignments, receiving order Proposals - Procedure to avoid formal liquidation of the debtor’s estate (at least temporarily) by giving the debtor time to attempt to reorganize and save a viable business or reorganize his affairs - 2 types of proposals: commercial proposals (Div 1) and consumer proposals (Div 2)…Division 2 is a simplified procedure for individual consumer debtors… CCAA also helps corporations avoid liquidation - Commercial proposals: o Is an offer from the debtor to his creditors, providing for the orderly repayment of his debts over a period of time o If sufficient number of creditors accept it, can apply to the court to make it binding on all creditors o Proposal must be filed with the official receiver in the debtor’s district and include their financials o Need approval of majority in number, and 2/3 in value, of each class of secured/unsecured creditors  Secured creditors not included in the proposal, or whose class rejects the proposal, continue to have protection provided by their security o Generally the courts approve the proposal, but it usually requires debtor to repay at least 50 cents on the dollar to unsecured creditors, or if debtor is guilty of bankruptcy offence - Consumer proposals: o Provisions do not apply to individuals who are already declared bankrupt o Div 2 proposal must be prepared with assistance of an “administrator”, a licensed trustee  procedures are simplified, formal meeting of creditors isn’t required unless requested by creditors representing 25% in value of the proven debts o If no meeting requested, proposal is deemed accepted by the creditors – doesn’t need court approval o Debtor gains protection against lease terminations, acceleration of instalment payments, having utilities shut off Assignments - By making an assignment, insolvent people voluntarily declare themselves bankrupt (initiate bankruptcy proceedings rather than wait for creditors to do so) - Makes earlier rehabilitation possible  also, carrying on a business he knows is insolvent might be a bankruptcy offence - Estate of a bankrupt is administered in the same manner as one administered under a receiving order Receiving Orders - Creditors can file petition with the court to have the debtor declared bankrupt if owed more than $1000 and debtor has committed an act of bankruptcy (prescribed act of debtor that must be proved before de
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