LAW 603 Lecture Notes - Lecture 5: Secured Creditor, Peter Munk, Unsecured Creditor
28 May 2018
School
Department
Course
Professor
Lecture 5 - Bankruptcy and Insolvency
Tuesday, February 27, 2018
3:12 PM
Terminology
• Bankruptcy and Insolvency Act, R.S.C. 1985, c. b-3
• A akupt eas a peso o usiess that has ade a assiget ito akupty o
against whom a bankruptcy order has been made, or the legal status of that person or business.
• To enter bankruptcy, a person must have debts that exceed his or her assets and be unable meet
these debts as they become due.
• A isolet eas a peso ho is:
o Not bankrupt;
o Whose liabilities to creditors provable as claims under the Bankruptcy and Insolvency Act
amount to at least $1000;
o Who is unable to meet its obligations as they generally become due;
o Who has ceased paying its current obligations in the ordinary course of business as they
generally become due; or
o The aggregate of whose property is not sufficient, or if disposed of at a fairly conducted sale
under legal process, would not be sufficient to pay of all its obligations, due and accruing
due.
• To be bankrupt is a legal status, whereas to be insolvent is a financial status.
o To be a bankrupt, however, a person or business must be insolvent.
• Liquidation
o A akupt’s assets ae sold ith the poeeds distiuted to editos.
• Discharge
o A debtor is released from its status as a bankrupt.
• Winding Up
o The commercial activities of a business are terminated so that it ceases to operate.
• Proposal
o A contractual arrangement between a debtor and its creditors for rearrangement of its
debts outside of bankruptcy;
o It permits the continued operation of the debtor;
o If the proposal fails, bankruptcy invariably results.
Bankruptcy Regulation
• Bankruptcy is federally regulated (Bankruptcy and Insolvency Act).
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• Objectives of the BIA:
o To provide for certainty in the credit system;
o To ensure euitale distiutio of a akupt’s assets;
o To identify those debts that may not be discharged (e.g., student loans, family support
payments, etc.);
o To punish unacceptable debtor behaviour (e.g., fraudulent conveyances);
o To provide for rehabilitation of the bankrupt (e.g., Peter Munk).
• Certain commercial activities are not covered by the BIA:
o Banks, insurance companies, trust companies, and railways have their own statutory
business failure regulatory regimes;
o Farmers, fishermen, etc., cannot be placed into bankruptcy.
• Other Debtor-related Statutes
o Federal Copaies’ Creditors Arrageet Act
▪ A debtor may seek a stay of creditor claims pending acceptance of a reorganization
plan.
o Winding-Up and Restructuring Act
▪ Provides for winding up of banks, insurance companies, etc.
o Various Provincial Creditor/Debtor Statutes
▪ The BIA prevails in the event of conflict.
Bankruptcy and Insolvent
• Bankrupt vs. Insolvent
o As already noted, a necessary qualification for being bankrupt is to be insolvent. However,
not all insolvents are bankrupt.
• Bankruptcy (as defined by the BIA)
o The bankrupt must be at least $1,000 in debt;
o It ust hae oitted a at of akupty. The BIA describes 10, although the usual act
of bankruptcy is failing to meet financial obligations as they become due;
o The court has approved an assignment (debtor-initiated) or petition (creditor- initiated) into
bankruptcy.
• In most instances, creditors are willing to make alternative payment arrangements with the
insolvent to avoid bankruptcy.
• This avoids a less favourable outcome, sustains ongoing business relationships, avoids the expense
of bankruptcy, etc.
• Assignment into Bankruptcy
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o The insolvent debtor initiates it;
o The debtor provides a detailed list of debts and creditors;
o The debtor transfers all assets to a trustee;
o The tustee eets ith the editos to adise of the pla fo liuidatio of the akupt’s
assets and the distribution to the creditors.
• Petition into Bankruptcy
o A creditor initiates an application to the bankruptcy court for a receiving order;
o The receiving order requires the debtor to release all of its assets to the court-appointed
trustee;
o The trustee takes control of the assets and notifies the creditors;
o The trustee prepares a detailed statement of account for the liquidation and distribution of
the bankrupt's assets.
Creditors
• Classes of Creditors
• Secured
o Interest is linked directly to a specific asset of the debtor. In the event of default, it can
realize its interest from the secured asset. If it cannot realize all of the outstanding debt
from the asset, it can claim the balance as an unsecured creditor.
• Preferred
o Ranks below secured and above unsecured. It is granted preferred status by law (e.g.,
employees for unpaid wages, government for unpaid taxes).
• Unsecured
o All other creditors, typically general suppliers of goods and services to the debtor.
• Creditor Equality
o Bankruptcy triggers a stay in any proceedings to collect a debt by unsecured or preferred
creditors. This includes all current and planned proceedings;
o All creditors in the same class recover on a pro rata (in proportion) basis.
• Proof of Claim
o The obligation resides with the creditor to prove its claim to the satisfaction of the trustee.
Prohibited Pre-Bankruptcy Transactions
• Any transfer of a debtor's assets at "undervalue" within one year prior to bankruptcy may be
voided by the court if:
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find more resources at oneclass.com
Document Summary
It permits the continued operation of the debtor; Insolvent: as already noted, a necessary qualification for being bankrupt is to be insolvent. However, not all insolvents are bankrupt: bankruptcy (as defined by the bia, the bankrupt must be at least ,000 in debt; Interest is linked directly to a specific asset of the debtor. In the event of default, it can realize its interest from the secured asset. If it cannot realize all of the outstanding debt from the asset, it can claim the balance as an unsecured creditor: preferred, ranks below secured and above unsecured. Prohibited pre-bankruptcy transactions: any transfer of a debtor"s assets at undervalue within one year prior to bankruptcy may be voided by the court if: The debtor was insolvent at the time, or made so by the transfer; and. If a debtor and another party are not at arms-length, any transaction between them at.
