Duplessis.SG.Chapter 27.doc

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 2275A/B
Professor
Henry Meredith
Semester
Winter

Description
CHAPTE27:BANKRUPTCY AND INSOLVENCY C HAPTER 27 B ANKRUPTCY AND I NSOLVENCY Objectives After studying this chapter, you should have an understanding of: • the legal aspects of business failure • the rights and obligations of debtors and creditors when a business fails • the stages in the bankruptcy process Learning Outcomes • Recognize the options available to creditors and debtors of a financially troubled business (page 685) • Understand the role of the trustee in bankruptcy (page 686, 691) • Understand when a debtor and a creditor should agree on a proposal, rather than bankruptcy (page 687) • Recognize the purpose of bankruptcy legislation (page 689) • Recognize acts of bankruptcy (page 690) • Understand bankrupts may hide assets through fraudulent preferences and conveyances (page 692) • Understand the priority system for payment of debts (page 694) • Understand the rights of secured creditors with respect to secured property (page 695) • Understand the implications of personal bankruptcy (page 697) • Recognize the impact of committing bankruptcy offences (page 698) Chapter Summary The provisions of the Bankruptcy and Insolvency Act and related legislation are complex and arise generally under circumstances of great business and personal turmoil. The role of skilled experts with ethical obligations is critical to the fair distribution of assets. Even with the best of motives debtors may treat the rights of creditors as arbitrary and unfair manner. The provisions of the act provide for certainty and equity. The key feature of the law providing for business failure is that the owners of the business have two alternatives: they can have the business continue in a reorganized fashion, or they can bring it to an end. In either case, the law provides the process for ensuring that the rights and obligations of both creditors and debtors are met. Furthermore, while understanding the basic steps in the process is important, in practice specialized professionals will provide the appropriate guidance. When there are secured assets, the most common consequence of a failure to pay a debt as it falls due is the secured creditor enforcing the credit agreement directly. If a debtor’s position is indeed hopeless, there is little point in spending good money attempting to recover what is not there. In practice, creditors usually resort to the proceedings provided for under the Bankruptcy and Insolvency Act only when they are seeking to reverse priorities 183 PART8:FINANCING THE BUSINESS or defeat other claims. Otherwise, the most they might do is participate if someone else bears the cost of initiating the process. Likewise, the businesses organized in the corporate form, under which there is no personal liability for the owners other than the loss of investment in the corporation, owners simply abandon the corporation. Secured creditors will take the assets in which they hold a security interest. For other creditors, there is generally little left over. When bankruptcy does occur, the legislation provides a comprehensive framework for all participants. Study Outline Use this outline to prepare a complete set of notes for this chapter. Business Failure – page 684 _______________________________________________________________________ _______________________________________________________________________ Debtor Options – page 685 _______________________________________________________________________ _______________________________________________________________________ Informal steps____________________________________________________________ Proceedings before bankruptcy___________________________________________ Estate_______________________________________________________________ Insolvent____________________________________________________________ Proposal_____________________________________________________________ Assignment in bankruptcy_______________________________________________ Creditor Options – 689 Secured creditors/Specific Assets________________________________________________________ _______________________________________________________________________ Petitioning into bankruptcy______________________________________________ _______________________________________________________________________ Bankruptcy – page 691 Purpose of bankruptcy legislation_________________________________________ _______________________________________________________________________ Bankruptcy officials____________________________________________________ Superintendent of bankruptcy_________________________________________ Official receiver____________________________________________________ Trustee___________________________________________________________ Inspector__________________________________________________________ Protecting assets_______________________________________________________ Fraudulent preferences_______________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE27BANKRUPTCY AND INSOLVENCY Reviewable transactions _____________________________________________ Fraudulent conveyances and settlements_________________________________ _______________________________________________________________________ Identifying debts______________________________________________________ Proof of claim_____________________________________________________ Priority of creditors _________________________________________________ Distribution to creditors ___________________________________________________ Discharge ___________________________________________________________ Personal Bankruptcy – page 697___________________________________________ _______________________________________________________________________ _______________________________________________________________________ Bankruptcy Offences – page 698 _______________________________________________________________________ SELF-ASSESSMENT Key Terms Briefly define each term in the space provided. Trustee in bankruptcy – page 685 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Estate – page 686 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insolvent – page 686 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Proposal – page 687 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Assignment in bankruptcy – page 687 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 185 PART8:FINANCING THE BUSINESS Bankrupt – page 669 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Petition – page 690 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Act of bankruptcy – page 690 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Receiving order – page 690 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Inspector – page 692 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Fraudulent preference – page 692 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Reviewable transaction – page 693 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Settlement – page 693 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Proof of claim – page 694 _______________________________________________________________________ _______________________________________________________________________ Preferred creditors – page 695 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPT27:BANKRUPTCY AND INSOLVENCY Discharge of bankruptcy – page 697 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Bankruptcy offences – page 698 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Matching Match the correct letter of the most appropriate term in the space provided before each sentence. Please note that you will use only 10 of the terms so you must choose the best term available to match with its description. A Act of bankruptcy N Interim receiver B Arrangement O Official receiver C Assignment in bankruptcy P Petition D Bankrupt Q Preferred creditors E Bankruptcy offences R Proof of claim F Bankruptcy order S Proposal G Composition T Receiver H Discharge of bankruptcy U Receiving order I Estate V Related person J Fraudulent conveyance W Reviewable transaction K Fraudulent preference X Scheme of arrangement L Insolvent Y Settlement M Inspector Z Trustee in bankruptcy 1. ____ A contract between a business and its creditors for the payment of debts that allows the business to continue. 2. ____ A debtor that owes more than $1000 and cannot pay its debts. 3. ____ A person who no longer has the authority to control his assets and debts. 4. ____ A payment made by an insolvent debtor to favour one creditor over another. 5. ____ A payment made by an insolvent debtor to a relative to give priority to the relative over another creditor. 6. ____ A transfer of assets, usually in the form of a gift, made by an insolvent debtor to a noncreditor, usually a relative, within 5 years of the bankruptcy order, if the debtor was unable to pay his debts at the time of the transfer. 7. ____ A formal notice provided by the creditor of the amount owed. 8. ____ The formal process releasing the bankrupt of most liabilities. 187 PART8:FINANCING THE BUSINESS 9. ____ The person appointed by creditors to act on their behalf and supervise the actions of the trustee. 10. ____ The court order following a creditor’s petition that formally declares the debtor to be bankrupt. Questions Write a short, point-form answer for each question in the space provided. To assist you in understanding the chapter, it is recommended that you also use additional paper to write a full and complete essay answer for each question. 1. What is often the first step before contemplating bankruptcy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 2. What is the key to a negotiated settlement? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 3. What is the value of having facilitators assist with developing a negotiated settlement? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 4. Discuss the role and requirements of a trustee. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 5. What can a debtor do if a trustee cannot be found? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE27:BANKRUPTCY AND INSOLVENCY 6. When is a person insolvent? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 7. What is a proposal? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 8. What is a potential alternative to a proposal? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 9. What are four possible outcomes for financially troubled businesses? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 10. What options does a debtor have if the proposal option does not work? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 11. What is the legal effect on property in an assignment in bankruptcy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 12. What formal action can a creditor take in bankruptcy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 189 PART8:FINANCING THE BUSINESS 13. What is the role of the receiver? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 14. How does a creditor petition a debtor into bankruptcy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 15. Outline ten acts of bankruptcy. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 16. What role does a receiving order play in bankruptcy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 17. What is the purpose of bankruptcy legislation? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 18. How is the bankruptcy process administered in Canada? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 19. Are trustees regulated in any way? Explain. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE27:BANKRUPTCY AND INSOLVENCY _______________________________________________________________________ 20. What role do inspectors play in the bankruptcy process? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 21. What does the trustee typically do when taking control of the estate? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ __________________________________________________
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