Textbook Notes (290,000)
CA (170,000)
U of G (10,000)
MCS (700)
MCS 3040 (200)
Chapter 27

MCS 3040 Chapter Notes - Chapter 27: Unsecured Creditor, Secured Creditor, Personal Bankruptcy


Department
Marketing and Consumer Studies
Course Code
MCS 3040
Professor
Joseph Radocchia
Chapter
27

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Two%primary%pieces%of%legislation%govern%insolvency%law%in%Canada%are:
Bankruptcy+and+Insolvency+Act
Companies'+Creditors+Arrangement+Act
There%are%a%number%of%other%statutes%and%common%law%rules%that%affect%
bankruptcy%and%insolvency%too%though
Bankruptcy+protection+in+Canada:
Informal+steps:
A%business%may%first%try%solving%its%financial%problems%by%way%of%a%negotiated%
settlement
To%do%so,%the%business%must%convince%its%creditors%that%the%business%can%
salvaged%and%that%they%should%accept%concessions%in%terms%of%payment
Creditors%only%agree%to%negotiated%settlements%if%they%believe%it%would%produce%
better%results%in%the%long%run%compared%to%legal%proceedings%or%having%the%
business%declare%bankruptcy
Proceedings+before+bankruptcy:
Should%a%negotiated%settlement%fail%and%the%business%decides%that%declaring%
bankruptcy%is%the%best/only%option,%they%will%need%the%services%of%a%trustee%in%
bankruptcy
These%are%professionals%who%are%licensed%by%the%Office%of%the%
Superintendent%of%Bankruptcy%and%have%legal%authority%to%administer%the%
bankruptcy%process
A%business%must%have%sufficient%assets%to%pay%for%the%trustee's%services
The%trustee%will%begin%to%assess%the%estate%(collective+assets+of+a+business+or+
individual)+and%prepare%a%preliminary%status%of%assets%and%liabilities
Insolvency:
When%a%business%is%unable%to%meet%financial%obligations%as%they%become%due%or%
having%insufficient%assets,%if%liquidated,%to%meet%financial%obligations
According%the%to%BIA,%if%a%business%owes%more%than%$1000%and:
Is%unable%to%meet%its%obligations%as%they%become%due,%or
Has%ceased%paying%its%obligations%as%they%become%due,%or
Has%assets%with%a%fair%market%value%less%than%its%liabilities
Then%it%is%able%to%be%classified%as%insolvent
Insolvency%and%bankruptcy%are%not%the%same:
Insolvency:%factual%matter%relating%to%a%person's%assets%and%liabilities% or%his%
ability%to%pay%his%debts
Bankruptcy:%legal%mechanism%whereby%the%assets%of%an%insolvent%person%
are%transferred%to%a%trustee,%liquidated,%and%the%net%proceeds%are%
distributed%to%creditors%in%a%manner%determined%by%the%BIA
Proposals+under+the+BIA:
Procedure%governed%by%the%BIA that%allows%a%debtor%to%restructure%its%debt%in%
order%to%avoid%bankruptcy
When%a%debtor%makes%a%proposal,%the%debtor%offers%creditors%a%percentage%of%
what%is%owed%to%them,%or%to%extend%the%time%for%payment%of%debts,%or%some%
combination%of%the%two
The%goal%being%to%restructure%debts%owed%so%that%the%debtor%is%able%to%pay%them
In%many%cases,%creditors%prefer%debtors%avoiding%bankruptcy
Division%1%Proposal:%available%to%individuals/corporations%with%no%limit%on%the%
total%amount%of%debt%that%is%owed
Division%II%Proposal:%available%to%individuals%with%total%debts%less%than%$250,000%%
(not+including+a+mortgage+on+a+principal+residence).%These%proposals%are%known%
as%'consumer%proposals'
In%either%case,%the%debtor%works%with%the%trustee%to%develop%a%proposal%which%is%
first%filed%with%the%Office%of%the%Superintendent%of%Bankruptcy%and%is%then%sent%
to%the%creditors%of%the%debtor
Once%the%proposal%is%filed,%the%debtor%stops%making%payments%to%its%
unsecured%creditors,%salary%garnishments%stop,%and%lawsuits%against%the%
debtor%by%creditors%are%stayed
Creditors%vote%on%whether%to%accept%or%reject%the%proposal
Agreements+under+the+CCAA:
The%CCAA may%be%used%by%corporations%that%have%total%debt%exceeding%$5M%and%
gives%insolvent%companies%protection%from%its%creditors%while%it%tires%to%
reorganize%its%financial%affairs
Unlike%the%BIA+however,%the%protection%afforded%by%the%CCAA applies%to%secured%
as%well%as%unsecured%creditors%and%even%to%lessors%and%critical% suppliers
The%company%continues%to%operate%while%attempting%to%negotiate%an%
arrangement%with%its%creditors
Air%Canada%once%reorganized%itself%under%the%CCAA
When%a%court%grants%the%initial% CCAA order%staying%the%creditors,%it%will%also%
appoint%a%monitor,%usually%a%major%accounting%firm,%that%will%oversee%the%
operations%of%the%company%while%it%attempts%to%reorganize
This%monitor%reports%to%the%court%on%any%major%events%that%might%impact%
the%viability%of%the%company,%assists%the%company%with%the%preparation%of%
its%reorganization%plan,%and%tabulates%the%votes%at%meetings%of%creditors
CCAA's%are%very%flexible% which%is%why%large%companies%are%attracted%to%it
Debtor+in+Possession+(DIP)+Financing:%(or+'interim+financing')
Secured%credit%provided%to%companies%during%the%reorganization%process%with%
priority%over%existing%secured%creditors
When%a%company%is%reorganizing%under%the%BIA or%the%CCAA,%it%will%need%to%
continue%funding%its%business%operations%yet%this%may%difficult%because%creditors%
will%be%reluctant%to%lend%money%to%insolvent%companies
However,%creditors%may%be%willing%to%provide%funding%if%the%debtor%has%sufficient%
assets%to%provide%as%collateral%and%the%creditors%are%given%priority%over%existing%
creditors
Remedies+for+Creditors:
First%step%is%to%determine%the%reason%for%the%debtor's%failure%to%pay
If%the%default%is%temporary,%the%creditor%may%decide%to%continue%doing%business%
with%the%debtor
However,%if%the%debtor%is%in%serious%financial%difficulty,%then%the%creditor%
will%want%to%take%action%before%it's%too%late
Choices%include:
Allow%the%debtor%extra%time%to%pay
Take%legal% action%for%the%recovery%of%the%debt
Secured%creditors%can%seize%collateral%and%sell%it%to%pay%down%debt%or%appoint%a%
receiver% to%take%control%of%the%debtor's%business
Unsecured%creditors%can%sue%the%debtor%and%try%to%obtain%judgement%which%can%
then%be%enforced%against%the%debtor
Creditors%with%a%guarantee%can%pursue%the%guarantor%for%payment%upon%default%
by%the%primary%debtor
A%supplier%can%threaten%to%discontinue%selling%to%the%debtor
Threatening%legal% action%may%also%persuade%the%debtor%to%bring%the%debt%into%
good%standing
Bankruptcy:
Legal%process%by%which%assets%of%the%bankrupt%are%automatically%transferred%to%a%
trustee%in%bankruptcy%for%liquidation%and%distribution%to%creditors
This%is%governed%by%the%BIA,%whose%purposes%are:
To%preserve%the%assets%of%the%bankrupt%for%the%benefit%of%creditors
To%ensure%a%fair%and%equitable%distribution%of%the%assets%to%creditors
In%the%case%of%personal%bankruptcies,%to%allow%the%debtor%a%fresh%financial%
start
There%are%three%methods%which%a%person%may%become%bankrupt:
i. Assignment%in%Bankruptcy:%occurs%when%a%person%voluntarily%assigns%her%
assets%to%a%trustee%in%bankruptcy
ii. Bankruptcy%order:%creditors%can%apply%for%this%which,%if%granted,%results%in%
a%person%being%declared%bankrupt
§Typically%granted%if%the%person%owes%the%creditor%at%least%$1000%and%
the%debtor%has%committed%an%act%of%bankruptcy
iii. Act%of%Bankruptcy:%one%of%a%list%of%specified%acts%the%debtor%must%commit%
before%the%court%will%grant%a%bankruptcy%order
§These%include:
Defaulting%on%a%proposal
Making%a%fraudulent%transfer%of%property
Preferring%one%creditor%over%another
Trying%to%avoid%or%deceive%creditors
Admitting%insolvency
Not%meeting%financial%obligations%as%they%become%due
Bankruptcy+Process:
Protection%of%Assets:
Following%an%assignment%in%bankruptcy%or%bankruptcy%order,%a%trustee%
gives%public%notice%of%the%bankruptcy%in%order%to%identify%and%protect%the%
assets%of%the%state%and%to%identify%all%liabilities.% Typically%the%trustee%will:
§Secure%the%business%premises%and%storage%facilities
§Conduct%a%detailed%examination%of%assets
§Prepare%the%appropriate%statements
§Ensure%that%assets%are%adequately%protected,%including%insurance%
coverage
§Establish%appropriate%books%and%accounts
§Sell%any%perishable%goods%immediately
The%protection%of%assets%requires%a%review%not%only%of%assets%in%possession%
of%the%debtor%at%the%time%of%bankruptcy%but%also%of%assets%that%were%
transferred%by%the%debtor%prior%to%bankruptcy
Transfers%at%Undervalue:
This%occurs%when%assets%are%transferred,%a%payment%is%made,%or%services%
are%provided%for%conspicuously%less%than%their%fair%market%value
Where%a%transfer%at%undervalue%is%found,%the%court%can%declare%the%
transfer%to%be%void%or%can%order%that%the%other%party%to%the%transaction%
pay%the%bankrupt%estate%the%amount%by%which%the%consideration%for%the%
transaction%was%less%than%fair%market%value
Parties%are%at%arm's+length when%they%are%independent%and%not%related.%If%
this%is%the%case%for%those%to%the%transaction,%the%transaction%can%be%
considered%undervalue%if:
§It%took%place%within%one%year%prior%to%bankrupt
§The%debtor%is%insolvent%(or+was+rendered+insolvent+by+the+
transaction)
§The%debtor%intended%to%defraud%or%delay%the%interests%of%a%creditor
If%the%parties%to%the%transaction%are%not at%arm's%length,%then%a%transaction%
is%a%undervalue%if%it%took%place%within%one%year%prior%to%bankruptcy.
§If%a%non-arm's%length%transaction%took%place%within%five%years%prior%
to%bankruptcy,%it%is%a%transfer%at%undervalue%if%the%solvency%and%
intent%criteria% (point%2%and%3%above)%are%satisfied
Preferences:
This%is%a%payment%that%benefits%one%creditor%over%another%and%can%result%in%
one%(or%more)%creditors%not%being%paid%at%all
The%BIA seeks%to%ensure%that%all creditors%are%treated%equally%and%fairly
One%can%defend%against%this%by%proving%that%a%payment%was%made%in%the%
ordinary%course%of%business%or%was%made%to%take%advantage%of%favorable%
payment%terms,%or%to%secure%the%continued%supply%of%goods%or%services%
needed%for%the%debtor%to%remain%in%business
Fraudulent%Conveyances:
Fraudulent+Conveyances+Act provides%that%every%transfer%of%property%that%
is%made%with%the%intent%to%defeat,%hinder,%delay,%or%defraud%creditors%is%
void
Bankruptcy%Offences:
For%the%BIA to%be%respected,%it%must%provide%penalties%for%those%who%
violate%its%provisions
Bankruptcy%offences%are%criminal%acts%that%can%be%committed%by%any%of%
the%key%participants,%including%debtors,%creditors%and%trustees
Most%common%offences%include:
§Fraudulently%transferring%property%before%or%after%bankruptcy
§Refusing%to%answer%questions%truthfully
§Providing%false%information
§Hiding/falsifying/destroying%records
§Hiding%or%concealing%assets
§Obtaining%credit%through%false%representations
Penalties%range%from%conditional%discharges%to%fines%up%to%$10,000%and%
prison%terms%for%3%years
Identification+of+debts:
Creditors%find%out%about%the%bankruptcy%through%a%notice%sent%by%the%trustee%in%
bankruptcy
Each%creditor%must%file%a%proof%of%claim in%respect%to%the%amount%that%it%is%owed.
The%trustee%then%examines%these%claims%and%either%accepts%or%rejects%
them%(ex.+Inadequate+proof+of+debt)
Distribution+to+Creditors:
Unpaid%Suppliers:
Given%protection%under%the%BIA
Allowed%to%recover%any%goods%shipped%in%the%past%30%days%which%were%not%
paid%for%provided%the%debtor%is%bankrupt%and%the%goods%are%in%the%same%
condition%as%when%shipped
Deemed%Statutory%Trusts:
Federal%government%has%passed%legislation%which%deems%property%to%be%
held%in%trust%in%regard%to%unremitted%payroll%deductions%and%GST/HST%
which%has%been%collected%but%not%remitted
These%amounts%are%considered%not%to%be%part%of%the%bankrupt%estate%and%
as%such%are%payable%ahead%of%all%creditors
Secured%Creditors:
Entitled%to%take%possession%of%their%collateral% and%dispose%of%it%regardless%
of%bankruptcy
A%secured%creditor%can%waive%its%security%and%elect%to%proceed%as%an%
unsecured%creditor%for%the%entire%debt%owed
Preferred%Creditors:
Paid%after%secured%creditors%and%before%other%unsecured%creditors%in%strict%
order%of%priority%as%set%out%by%s.136%of%the%BIA
Preferred%creditors%in%order%of%priority%include:
§Funeral%expenses
§Trustee%fees%and%expenses%including%legal%fees
§Arrears%in%wages%(up+to+$2000+per+employee+for+the+previous+six+
months)
§Municipal%taxes
§Arrears%of%rent%and%accelerated%rent%in%each%case%up%to%three%
months
Unsecured%Creditors:
Remaining%funds%in%the%bankrupt%estate,%if%any,%are%paid%to%the%ordinary%
unsecured%creditors%in%proportion%to%the%amounts%they%are%owed
Employees:
Employees%who%are%owed%wages%are%deemed%to%be%secured%creditors%with%
a%first%charge%on%the%current%assets%of%their%employer%for%up%to%$2000%per%
employee
Personal+Bankruptcy:
Division%II%(consumer)%Proposals%are%available%to%individuals%with%debts%under%
$250,000
Personal%bankruptcy%involves%assets%of%the%bankrupt%being%assigned%to%a%trustee%
in%bankruptcy%who%holds%those%assets%and%ultimately%disposes%of%them%fro%the%
benefit%of%creditors
Although%the%debtor%is%allowed%to%retain%certain%assets%to%support%
themselves%and%their%family%along%with%any%registered%retirement%savings%
(except+deposits+within+one+year+of+bankruptcy)I
During%the%bankruptcy%process,%the%debtor%will%usually%be%required%to%make%
payments%to%the%trustee%for%the%benefit%of%creditors
Provided%the%bankrupt%has%completed%all%of%the%steps%required%and%has%not%
committed%a%bankruptcy%offence%and%is%not%required%to%make%additional%
payments,%a%first%time%bankrupt%will%receive%an%automatic%discharge%of%
bankruptcy 9%months%following%bankruptcy
This%order%releases%the%debtor%from%bankrupt%status%and%from%most%
remaining%debts
Although,%fines,%penalties,%alimony%and%support%payments,%debts%arising%
from%fraud,%and%to%some%extent%student%loans%survive%the%discharge
(Chpt.'27)'Bankruptcy'&'Insolvency
Sunday,%March%12,%2017
1:03%PM

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Two%primary%pieces%of%legislation%govern%insolvency%law%in%Canada%are:
Bankruptcy+and+Insolvency+Act
Companies'+Creditors+Arrangement+Act
There%are%a%number%of%other%statutes%and%common%law%rules%that%affect%
bankruptcy%and%insolvency%too%though
Bankruptcy+protection+in+Canada:
Informal+steps:
A%business%may%first%try%solving%its%financial%problems%by%way%of%a%negotiated%
settlement
To%do%so,%the%business%must%convince%its%creditors%that%the%business%can%
salvaged%and%that%they%should%accept%concessions%in%terms%of%payment
The%more%creditors%a%business%has%though,%the%less%likely%they%will%succeed%
at%finding%success%with%a%negotiated%settlement%because%all%creditors%have%
to%come%to%an%agreement
Creditors%only%agree%to%negotiated%settlements%if%they%believe%it%would%produce%
better%results%in%the%long%run%compared%to%legal%proceedings%or%having%the%
business%declare%bankruptcy
Proceedings+before+bankruptcy:
Should%a%negotiated%settlement%fail%and%the%business%decides%that%declaring%
bankruptcy%is%the%best/only%option,%they%will%need%the%services%of%a%trustee%in%
bankruptcy
These%are%professionals%who%are%licensed%by%the%Office%of%the%
Superintendent%of%Bankruptcy%and%have%legal%authority%to%administer%the%
bankruptcy%process
A%business%must%have%sufficient%assets%to%pay%for%the%trustee's%services
The%trustee%will%begin%to%assess%the%estate%(collective+assets+of+a+business+or+
individual)+and%prepare%a%preliminary%status%of%assets%and%liabilities
Insolvency:
When%a%business%is%unable%to%meet%financial%obligations%as%they%become%due%or%
having%insufficient%assets,%if%liquidated,%to%meet%financial%obligations
According%the%to%BIA,%if%a%business%owes%more%than%$1000%and:
Is%unable%to%meet%its%obligations%as%they%become%due,%or
Has%ceased%paying%its%obligations%as%they%become%due,%or
Has%assets%with%a%fair%market%value%less%than%its%liabilities
Then%it%is%able%to%be%classified%as%insolvent
Insolvency%and%bankruptcy%are%not%the%same:
Bankruptcy:%legal%mechanism%whereby%the%assets%of%an%insolvent%person%
are%transferred%to%a%trustee,%liquidated,%and%the%net%proceeds%are%
distributed%to%creditors%in%a%manner%determined%by%the%BIA
Proposals+under+the+BIA:
Procedure%governed%by%the%BIA that%allows%a%debtor%to%restructure%its%debt%in%
order%to%avoid%bankruptcy
When%a%debtor%makes%a%proposal,%the%debtor%offers%creditors%a%percentage%of%
what%is%owed%to%them,%or%to%extend%the%time%for%payment%of%debts,%or%some%
combination%of%the%two
The%goal%being%to%restructure%debts%owed%so%that%the%debtor%is%able%to%pay%them
In%many%cases,%creditors%prefer%debtors%avoiding%bankruptcy
Division%1%Proposal:%available%to%individuals/corporations%with%no%limit%on%the%
total%amount%of%debt%that%is%owed
Division%II%Proposal:%available%to%individuals%with%total%debts%less%than%$250,000%%
(not+including+a+mortgage+on+a+principal+residence).%These%proposals%are%known%
as%'consumer%proposals'
In%either%case,%the%debtor%works%with%the%trustee%to%develop%a%proposal%which%is%
first%filed%with%the%Office%of%the%Superintendent%of%Bankruptcy%and%is%then%sent%
to%the%creditors%of%the%debtor
Once%the%proposal%is%filed,%the%debtor%stops%making%payments%to%its%
unsecured%creditors,%salary%garnishments%stop,%and%lawsuits%against%the%
debtor%by%creditors%are%stayed
Creditors%vote%on%whether%to%accept%or%reject%the%proposal
Agreements+under+the+CCAA:
The%CCAA may%be%used%by%corporations%that%have%total%debt%exceeding%$5M%and%
gives%insolvent%companies%protection%from%its%creditors%while%it%tires%to%
reorganize%its%financial%affairs
Unlike%the%BIA+however,%the%protection%afforded%by%the%CCAA applies%to%secured%
as%well%as%unsecured%creditors%and%even%to%lessors%and%critical% suppliers
The%company%continues%to%operate%while%attempting%to%negotiate%an%
arrangement%with%its%creditors
Air%Canada%once%reorganized%itself%under%the%CCAA
When%a%court%grants%the%initial% CCAA order%staying%the%creditors,%it%will%also%
appoint%a%monitor,%usually%a%major%accounting%firm,%that%will%oversee%the%
operations%of%the%company%while%it%attempts%to%reorganize
This%monitor%reports%to%the%court%on%any%major%events%that%might%impact%
the%viability%of%the%company,%assists%the%company%with%the%preparation%of%
its%reorganization%plan,%and%tabulates%the%votes%at%meetings%of%creditors
CCAA's%are%very%flexible% which%is%why%large%companies%are%attracted%to%it
Debtor+in+Possession+(DIP)+Financing:%(or+'interim+financing')
Secured%credit%provided%to%companies%during%the%reorganization%process%with%
priority%over%existing%secured%creditors
When%a%company%is%reorganizing%under%the%BIA or%the%CCAA,%it%will%need%to%
continue%funding%its%business%operations%yet%this%may%difficult%because%creditors%
will%be%reluctant%to%lend%money%to%insolvent%companies
However,%creditors%may%be%willing%to%provide%funding%if%the%debtor%has%sufficient%
assets%to%provide%as%collateral%and%the%creditors%are%given%priority%over%existing%
creditors
Remedies+for+Creditors:
First%step%is%to%determine%the%reason%for%the%debtor's%failure%to%pay
If%the%default%is%temporary,%the%creditor%may%decide%to%continue%doing%business%
with%the%debtor
However,%if%the%debtor%is%in%serious%financial%difficulty,%then%the%creditor%
will%want%to%take%action%before%it's%too%late
Choices%include:
Allow%the%debtor%extra%time%to%pay
Take%legal% action%for%the%recovery%of%the%debt
Secured%creditors%can%seize%collateral%and%sell%it%to%pay%down%debt%or%appoint%a%
receiver% to%take%control%of%the%debtor's%business
Unsecured%creditors%can%sue%the%debtor%and%try%to%obtain%judgement%which%can%
then%be%enforced%against%the%debtor
Creditors%with%a%guarantee%can%pursue%the%guarantor%for%payment%upon%default%
by%the%primary%debtor
A%supplier%can%threaten%to%discontinue%selling%to%the%debtor
Threatening%legal% action%may%also%persuade%the%debtor%to%bring%the%debt%into%
good%standing
Bankruptcy:
Legal%process%by%which%assets%of%the%bankrupt%are%automatically%transferred%to%a%
trustee%in%bankruptcy%for%liquidation%and%distribution%to%creditors
This%is%governed%by%the%BIA,%whose%purposes%are:
To%preserve%the%assets%of%the%bankrupt%for%the%benefit%of%creditors
To%ensure%a%fair%and%equitable%distribution%of%the%assets%to%creditors
In%the%case%of%personal%bankruptcies,%to%allow%the%debtor%a%fresh%financial%
start
There%are%three%methods%which%a%person%may%become%bankrupt:
i. Assignment%in%Bankruptcy:%occurs%when%a%person%voluntarily%assigns%her%
assets%to%a%trustee%in%bankruptcy
ii. Bankruptcy%order:%creditors%can%apply%for%this%which,%if%granted,%results%in%
a%person%being%declared%bankrupt
§Typically%granted%if%the%person%owes%the%creditor%at%least%$1000%and%
the%debtor%has%committed%an%act%of%bankruptcy
iii. Act%of%Bankruptcy:%one%of%a%list%of%specified%acts%the%debtor%must%commit%
before%the%court%will%grant%a%bankruptcy%order
§These%include:
Defaulting%on%a%proposal
Making%a%fraudulent%transfer%of%property
Preferring%one%creditor%over%another
Trying%to%avoid%or%deceive%creditors
Admitting%insolvency
Not%meeting%financial%obligations%as%they%become%due
Bankruptcy+Process:
Protection%of%Assets:
Following%an%assignment%in%bankruptcy%or%bankruptcy%order,%a%trustee%
gives%public%notice%of%the%bankruptcy%in%order%to%identify%and%protect%the%
assets%of%the%state%and%to%identify%all%liabilities.% Typically%the%trustee%will:
§Secure%the%business%premises%and%storage%facilities
§Conduct%a%detailed%examination%of%assets
§Prepare%the%appropriate%statements
§Ensure%that%assets%are%adequately%protected,%including%insurance%
coverage
§Establish%appropriate%books%and%accounts
§Sell%any%perishable%goods%immediately
The%protection%of%assets%requires%a%review%not%only%of%assets%in%possession%
of%the%debtor%at%the%time%of%bankruptcy%but%also%of%assets%that%were%
transferred%by%the%debtor%prior%to%bankruptcy
Transfers%at%Undervalue:
This%occurs%when%assets%are%transferred,%a%payment%is%made,%or%services%
are%provided%for%conspicuously%less%than%their%fair%market%value
Where%a%transfer%at%undervalue%is%found,%the%court%can%declare%the%
transfer%to%be%void%or%can%order%that%the%other%party%to%the%transaction%
pay%the%bankrupt%estate%the%amount%by%which%the%consideration%for%the%
transaction%was%less%than%fair%market%value
Parties%are%at%arm's+length when%they%are%independent%and%not%related.%If%
this%is%the%case%for%those%to%the%transaction,%the%transaction%can%be%
considered%undervalue%if:
§It%took%place%within%one%year%prior%to%bankrupt
§The%debtor%is%insolvent%(or+was+rendered+insolvent+by+the+
transaction)
§The%debtor%intended%to%defraud%or%delay%the%interests%of%a%creditor
If%the%parties%to%the%transaction%are%not at%arm's%length,%then%a%transaction%
is%a%undervalue%if%it%took%place%within%one%year%prior%to%bankruptcy.
§If%a%non-arm's%length%transaction%took%place%within%five%years%prior%
to%bankruptcy,%it%is%a%transfer%at%undervalue%if%the%solvency%and%
intent%criteria% (point%2%and%3%above)%are%satisfied
Preferences:
This%is%a%payment%that%benefits%one%creditor%over%another%and%can%result%in%
one%(or%more)%creditors%not%being%paid%at%all
The%BIA seeks%to%ensure%that%all creditors%are%treated%equally%and%fairly
One%can%defend%against%this%by%proving%that%a%payment%was%made%in%the%
ordinary%course%of%business%or%was%made%to%take%advantage%of%favorable%
payment%terms,%or%to%secure%the%continued%supply%of%goods%or%services%
needed%for%the%debtor%to%remain%in%business
Fraudulent%Conveyances:
Fraudulent+Conveyances+Act provides%that%every%transfer%of%property%that%
is%made%with%the%intent%to%defeat,%hinder,%delay,%or%defraud%creditors%is%
void
Bankruptcy%Offences:
For%the%BIA to%be%respected,%it%must%provide%penalties%for%those%who%
violate%its%provisions
Bankruptcy%offences%are%criminal%acts%that%can%be%committed%by%any%of%
the%key%participants,%including%debtors,%creditors%and%trustees
Most%common%offences%include:
§Fraudulently%transferring%property%before%or%after%bankruptcy
§Refusing%to%answer%questions%truthfully
§Providing%false%information
§Hiding/falsifying/destroying%records
§Hiding%or%concealing%assets
§Obtaining%credit%through%false%representations
Penalties%range%from%conditional%discharges%to%fines%up%to%$10,000%and%
prison%terms%for%3%years
Identification+of+debts:
Creditors%find%out%about%the%bankruptcy%through%a%notice%sent%by%the%trustee%in%
bankruptcy
Each%creditor%must%file%a%proof%of%claim in%respect%to%the%amount%that%it%is%owed.
The%trustee%then%examines%these%claims%and%either%accepts%or%rejects%
them%(ex.+Inadequate+proof+of+debt)
Distribution+to+Creditors:
Unpaid%Suppliers:
Given%protection%under%the%BIA
Allowed%to%recover%any%goods%shipped%in%the%past%30%days%which%were%not%
paid%for%provided%the%debtor%is%bankrupt%and%the%goods%are%in%the%same%
condition%as%when%shipped
Deemed%Statutory%Trusts:
Federal%government%has%passed%legislation%which%deems%property%to%be%
held%in%trust%in%regard%to%unremitted%payroll%deductions%and%GST/HST%
which%has%been%collected%but%not%remitted
These%amounts%are%considered%not%to%be%part%of%the%bankrupt%estate%and%
as%such%are%payable%ahead%of%all%creditors
Secured%Creditors:
Entitled%to%take%possession%of%their%collateral% and%dispose%of%it%regardless%
of%bankruptcy
A%secured%creditor%can%waive%its%security%and%elect%to%proceed%as%an%
unsecured%creditor%for%the%entire%debt%owed
Preferred%Creditors:
Paid%after%secured%creditors%and%before%other%unsecured%creditors%in%strict%
order%of%priority%as%set%out%by%s.136%of%the%BIA
Preferred%creditors%in%order%of%priority%include:
§Funeral%expenses
§Trustee%fees%and%expenses%including%legal%fees
§Arrears%in%wages%(up+to+$2000+per+employee+for+the+previous+six+
months)
§Municipal%taxes
§Arrears%of%rent%and%accelerated%rent%in%each%case%up%to%three%
months
Unsecured%Creditors:
Remaining%funds%in%the%bankrupt%estate,%if%any,%are%paid%to%the%ordinary%
unsecured%creditors%in%proportion%to%the%amounts%they%are%owed
Employees:
Employees%who%are%owed%wages%are%deemed%to%be%secured%creditors%with%
a%first%charge%on%the%current%assets%of%their%employer%for%up%to%$2000%per%
employee
Personal+Bankruptcy:
Division%II%(consumer)%Proposals%are%available%to%individuals%with%debts%under%
$250,000
Personal%bankruptcy%involves%assets%of%the%bankrupt%being%assigned%to%a%trustee%
in%bankruptcy%who%holds%those%assets%and%ultimately%disposes%of%them%fro%the%
benefit%of%creditors
Although%the%debtor%is%allowed%to%retain%certain%assets%to%support%
themselves%and%their%family%along%with%any%registered%retirement%savings%
(except+deposits+within+one+year+of+bankruptcy)I
During%the%bankruptcy%process,%the%debtor%will%usually%be%required%to%make%
payments%to%the%trustee%for%the%benefit%of%creditors
Provided%the%bankrupt%has%completed%all%of%the%steps%required%and%has%not%
committed%a%bankruptcy%offence%and%is%not%required%to%make%additional%
payments,%a%first%time%bankrupt%will%receive%an%automatic%discharge%of%
bankruptcy 9%months%following%bankruptcy
This%order%releases%the%debtor%from%bankrupt%status%and%from%most%
remaining%debts
Although,%fines,%penalties,%alimony%and%support%payments,%debts%arising%
from%fraud,%and%to%some%extent%student%loans%survive%the%discharge
(Chpt.'27)'Bankruptcy'&'Insolvency
Sunday,%March%12,%2017 1:03%PM
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