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Chapter 24 LAW 603.doc

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Law and Business
LAW 603
Andre Serero

Chapter 24 Dealing with Bankruptcy & Insolvency  • One procedure 4 dealing w. bus failure is bankruptcy. When a person’s debts exceed their assets/ they cant meet their liabilities as they come due, often described as being insolvent, they may become formally bankrupt, either by assigning themselves into bankruptcy/ as as result of a creditor applying to a court 4 a bankruptcy order against them. o Upon bankruptcy, all legal proceedings against a debtor r subject to a stay – suspension of legal proceedings against a debtor. o Then bankrupt’s assets r then liquidated – sale of the debtor’s assets in return 4 $, which is liquid & can be distributed to the bankrupt’s creditors. Once distribution has occurred, law prohibits new claims 4m being launched against the bankrupt 4 any pre-existing debt. Eventually a debtor may be either discharged or in case of corp, its existence terminated. Discharge – release of a debtor 4m bankruptcy status. After discharge, debtor is free of all of their pre- bankruptcy debt, to certain limited expectation o One goal of this procedure is to provide 4 orderly & predictable distribution of the debtor’s assets amongst their creditors. Another is to provide debtors who r indiv w. a fresh start through their discharge 4m bankruptcy. One way the risk of bus activity r mitigated 4 entrepreneurs. Significant costs remain 4 debtors going bankrupt. Corporate & consumer bankrupts will usually find it difficult to re- establish their credit. But bankruptcy may not mark the end of a debtor’s career, as it often did in the past. Bankruptcy law tires to bal rehabilitation of the debtor w. protecting the legitimate int of creditors in getting paid • Another method is 4 the debtor to make a proposal to creditors. Proposal court approved arrangement btwn a debtor & their creditors providing 4 a restructuring of the debtor’s debts & other financial affairs outside of formal bankruptcy. If proposal is successful, debtor continues to operate their bus., if not debtor is placed into bankruptcy. Proposals r used to provide time & a process by which a bus can be restructured under court supervision in situation where the creditors r more likely to recover more of what is owed to them if the debtor continues their bus thn if the assets r sold in a liquidation. • When in financial diff, both debtors & creditors must make strategic choices. Creditors must assess whether it is more likely that they will get paid if the debtor is allowed to continue their bus than if their assets r liquidated & the proceeds r shared among all creditors. • Creditors maintain significant monetary & non monetary costs in pursuing debtors. The aggravation & expense of collecting overdue debts can cause creditors to hesitate b4 strictly enforcing their right to pmt & ultimately applying to have a bankruptcy order made against the debtor. • Creditors may also hesitate 4 fear of suffering intangible losses during the bankruptcy process, particularly the loss of bus synergies , established relationships GOODWILL. • Debtor in financial distress must decide whether to approach their creditors w. a restructuring proposal/to cut their losses & get a fresh start through bankruptcy. • Well-developed bankruptcy & insolvency laws help to reduce uncertainty 4 debtors & creditors & provide tools 4 RM. They give creditors a better sense of the risks that arise when they extent credit, by giving a detailed set of rules to govern the repayment of creditors when a bus. becomes bankrupt & the process through which insolvent businesses may be restructured to facilitate repayment. They also provide debtors w. several alternatives 4 their rehabilitation. To parties on both sides of the credit transaction, bankruptcy & insolvency laws provide predictability regarding what will happen in the event of financial failure. Authority to Regulate Bankruptcy & Insolvency • Canada’s constitution assigns the power to enact bankruptcy legislation exclusively to the fed gov. Fed Bankruptcy & Insolvency Act (BIA) provides a framework to administer the bankruptcy process, various kinds of proceedings in bankruptcy (assignments &applications by creditors 4 a bankruptcy order), non bankruptcy alternatives (proposals), detailed regulations concerning the admin & distribution of the debtor’s property, duties of a bankrupt, miscellaneous related matters. Bankruptcy & Insolvency Law Advantages: st 1. Single proceeding prevented a race to the courts w. the 1 creditor to obtain a judgment getting the right to execute their judgment against all the debtor’s assets while the next judgment creditor could execute only against what was left. All creditors were treated on the same basis by a single judge, who heard all the evidence of the debtor’s various debts. Creditors have an incentive to work co- operatively w. the debtor & 1 another maximize recovery of the amt owed, rather than trying to be the 1at one to make a claim. 2. Proceeding was efficient in that it avoided the multiplication of enforcement costs 4 creditors & provided 4 the orderly disposition of the debtor’s assets in a way that was more likely to realize their value than the uncoordinated disposition of assets as indiv creditors sought execution of their judgments. 3. b/c debtor was exposed to only 1 set of legal proceedings, their assets weren’t depleted by paying 4 lawyers to defend a variety of claims. Money that would have gone to the debtor’s lawyers went to creditors instead. 4. Bankrupt was given a fresh start. Bankrupt’s rehabilitation could being as soon as they were discharged. • BIA is the most impt statute relating to bankruptcy & insolvency. BIA tries to achieve a # of objective simultaneously. It aims to: 1. Provide 4 a timely, orderly & equitable distribution of the bankrupt’s assets to creditors in accordance w. clear rules establishing the priority of creditor claims 2. Provide 4 the rehabilitation of debtors through a discharge that frees them 4m prior debts & obligations in app. Circumstances 3. Limit the possibility of discharge 4 certain debts tht r considered socially impt, such as family support obligations & student loans. 4. Deter & redress fraudulent pre-bankruptcy transfers by debtors & transfers that prefer particular creditors over others 5. Promote confidence & certainty in the credit system 6. Promote national uniformity of laws in a field of impt to Can bus. • BIA applies to all Cad bus, subject to some impt expectation. It doesn’t apply to banks, insurance comp, trust companies/railways – key economic institutions tht r dealt w. under separate statutes. Farmers & fishers can’t be placed into bankruptcy. That reflects a policy decision based on the highly volatile nature of the farming & fishing industries. • 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 debts & other financial aspects of the debtor’s bus. • Restructuring under the CCAA preserves the bus by reducing/adjusting the claims of creditors through a reorganization of its debt. • Federal Winding up & restructuring act applies to the liquidation of federally incorporate corps, banks & insurance companies. • in case of conflict, BIA prevails. EX. Ont ESA purported to give priority to unpaid wages over all other claims. The applicable section of the act was held to be inapplicable in the event of a bankruptcy b/c it directly conflicted w. the BIA, which subordinates wage claims to the claims of secured creditors. Bankruptcy & Insolvency under the bankruptcy & insolvency act • insolvency – inability of a debtor to meet their financial obligations to their creditors. In the BIA it is defined as : 1. debtor is unable to meet their liabilities as they become due 2. debtor has ceased paying their current obligations in the ordinary course of bus as they generally become due 3. aggregate of the debtor’s property is not, @ fair valuation, sufficient or if disposed of would not be sufficient to enable pmt of all obligation due & becoming due. • Bankruptcy – legal status of a person who has either made an assignment in bankruptcy (procedure by which a debtor voluntarily becomes bankrupt) or had a bankruptcy order made against them by a court or other official based on a creditor’s application. • in order for a person to be the subject of a bankruptcy order, they must have committed an “Act of bankruptcy” that act of bankruptcy usually involves being insolvent. Simple fact that a debtor is insolvent is not sufficient, however for a person to be legally bankrupt. • Creditors r often prepared to wait well beyond mere insolvency to begin bankruptcy proceedings. May adopt that attitude to maintain bus relationships, preserve asset & avoid expense of legal action. Corporate & Consumer Bankruptcy • Some diff rules 4 consumer & corporations bankruptcy proceedings. 2 diff: 1. Proposals by corps to their creditors to settle their obligations require the approval of a majority of creditors in each class of creditors, & those creditors must rep @ least 2/3 of the value of the claims in that class. Consumer debtors can make a simplified form of proposal that needs to be approved by only a majority of all creditors. 2. Corporate debtors r rarely discharged 4m bankruptcy unless they pay all of their debts. But, 1 time consumer debtors who demonstrate responsible behaviour r usually discharged within 9m. Officials Involved in Bankruptcy Procedures ( page 615) Superintendent of Bankruptcy & Official Receivers • Chief admin official in bankruptcy in Cad is the Superintendent of Bankruptcy, a fed govt appointee who reports to the Minister of Industry. • Superintendent has wide powers to inspect & investigate bankrupts’ estates, to regulate & examine the work of trustees in bankruptcy & intervene in bankruptcy court proceedings across Cad. • Superintendent is represented by a number of Official Receivers, whose offices receive voluntary assignments, copies of bankruptcy orders against debtors, proposals & other bankruptcy docustnts 4m the bankruptcy court; tasks also incl examining bankrupts, chairing 1 meetings of creditors & monitoring trustees’ performance Trustee in Bankruptcy • Creditors in a bankruptcy r usually rep by a trustee who gathers in & liquidates the debtors’ assets & distributes the proceeds to creditors. Private person licenses by the Superintendent who assumes control of the debtor’s assets once appointed by a court ( cause of bankruptcy order) or by the Official Receiver (assignment). • Trustees r accountants/r employed by corp trustees & members of the Cad Association of Insolvency & Restructuring Prof. • Trusee is some1 who has possession of prop 4 the benefit of some1 else. • Bankruptcy, trustee becomes the legal owner of the bankrupt’s property. Trustee takes possession of the bankrupt’s assets & prepares essential docs in connection w the bankruptcy, reports on the bankrupt’s affairs, determines if creditors’ proofs of claim will be allowed & then after liquidation, distributes the proceeds to creditors in accordance w. the priority of their claims. • Trustee’s claim = preferred claim. Bankruptcy Court • Staffed by regular judges appointed 4 their skills in bankruptcy & commercial matters. Judges heard appeals 4m decision of the registrar in bankruptcy & makes decisions on disputed applications by creditors 4 a bankruptcy order against a debtor, on proposals & applications 4 discharge 4m bankruptcy by debtors & on motions relating to conflicts regarding the priority of claims. Registrar in Bankruptcy • Deputy judge w the power to i) hear unopposed app by creditors 4 bankruptcy orders & proposals ii) grant discharges iii) make interim orders in cases of urgency iv) heard disputes abt creditors’ proof of their claims & appeals 4m the decisions of a trustee v) deal w various admin questions related to the trustee’s admin of a bankrupt’s property. Inspectors • Under BIA, creditors have the right to appoint a max of 5 inspectors to supervise trustee. Inspectors r usually EEs of the largest creditors, but they have a fiduciary duty to act in the best int of all the creditors. Decision may be reviewed by bankruptcy court; fraud, partiality The Process of Bankruptcy • 2 ways: voluntarily (Assignment) or involuntarily (order) Assignment into Bankruptcy by the Debtor • Commonly used • If debtor is corp, directors must call a meeting to authorize the corp to assign itself into bankruptcy. Debtor must be insolvent to file an assignments • Filed w the Officstl Receiver in the locality of the debtor. Official appoints a trustee. Usually trustee 1 then helps w the docs to make assignment then official then appoints that person as trustee unless there is some objection 4m the debtor’s creditors. • After taking possession, trustee meets w the debtor prepare a long form statement of affairs & a notice of the 1 meeting of creditors, which is chaired by Official. At that meeting, trustee advises creditors on how they intend to liquate & distribute. Application by Creditors for a Bankruptcy Order • Must prove that debtor owes @least 1000. Must prove that the debtor committed an act of bankruptcy within the past 6m. Most common act of bankruptcy is insolvency of the debtor. • Creditor making an app often makes a fresh demand 4 pmt to provide clear evidence in support of the creditor’s app. Creditor also needs evidence 4m other creditors that the debtor has ceased to meet their liabilities “generally” and there4 will examine other creditors 4 that purpose. • Examination is informal, outside/prior to a court action, there is no guarantee that the other creditors will co-operate. Submitting an Application for a Bankruptcy Order • App must be filed in the court having jurisdiction in the locality of the debtor (PAGE 618 CASE) . Once submitted, it becomes an action on behalf of & binding on all the creditors. Bankruptcy action supersedes all individual actions by creditors. App 4 bankruptcy order will include an affidavit (sworn statement), voluntary written statement made under oath that supports the statements made in the app, as well as a notice that sets the date 4 the hearing of the matter b4 the registrar/bankruptcy judge. • App by a creditor 4 a bankruptcy order is often resisted by the debtor. If debtor is defending the app they may submit a notice disputing the allegations & cross- examine a rep of the creditor w. a view to showing that the allegations in the affidavit rnt true. • Undisputed app 4 a bankruptcy order may be heard by registrar in bankruptcy who after examining the doc may grant the app if satisfied that the requirements of the BIA have been met. • Disputed app 4 orders r heard by a bankruptcy judge. Main issues b4 the judge r usually whether the debtor has committed the alleged act of bankruptcy & whether the debts claimed by the creditors r valid. The Bankruptcy Order • Orders the debtor to release all of their assets to the court/to a court-appointed agent (trustee). Often accompanied by a notice directing the bankrupt/their re
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