Management and Organizational Studies 2275A/B Study Guide - Unfair Preference, Secured Creditor, Personal Bankruptcy

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CHAPTER 27: BANKRUPTCY AND INSOLVENCY
CHAPTER 27
BANKRUPTCY AND INSOLVENCY
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
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PART 8: 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.
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CHAPTER 27: BANKRUPTCY 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
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
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