The Bankruptcy and Insolvency Act ("BIA") (French: Loi sur la faillite et l'insolvabilité) is one of the statutes that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.
It also governs the Office of the Superintendent of Bankruptcy, a federal agency responsible for ensuring that bankruptcies are administered in a fair and orderly manner.
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Purpose and scope
The nature of the Act within Canada's legal framework governing insolvency was described by the Supreme Court of Canada in Century Services Inc. v. Canada (Attorney General):
With certain exceptions, the BIA covers a wide range of entities:
The Act governs bankruptcy proceedings, which are invoked:
The Act also governs receivership proceedings. Receivers may be appointed by a secured creditor under the terms of a general security agreement (where the debtor voluntarily agrees), or by the court where a secured creditor:
Provision is also made for dealing with cross-border insolvencies and the recognition of foreign proceedings.
Relationship with provincial law
Several notable cases known as the "bankruptcy quartet" stand for the following propositions about how the Act interacts with provincial legislation:
- provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s. 136(1) of the Act;
- while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred section 136(1) of the Act determines the status and priority of the claims specifically dealt with in that section;
- if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, an unacceptable situation; and
- the definition of terms such as "secured creditor", if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for purposes of the Act.
- in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly.
- there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.
However, there are instances where provincial law will continue to apply:
Issues concerning the extent of federal paramountcy continue to come before the Supreme Court of Canada. In the 2015 "paramountcy trilogy," the boundaries were further explored:
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History and development
Consolidation of pre-Confederation legislation
No specific legislation on bankruptcy and insolvency previously existed in New Brunswick and Nova Scotia.
Development of federal legislation
Bankruptcy process
Protective provisions
A secured creditor cannot enforce security on the business assets of an insolvent person without having given 10 days' advance notice in the prescribed form and manner.
No person may terminate or amend - or claim an accelerated payment or forfeiture of the term under - any agreement, including a security agreement, with a bankrupt individual by reason only of the individual's bankruptcy or insolvency. Similar provision is made with respect to any insolvent person upon filing a notice of intention or a proposal.
A notice of intention, a Division I proposal, or a Division II proposal, will automatically create a stay of proceedings and "no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy". Similar provision is also made on the bankruptcy of any debtor. Directors of insolvent companies that have filed a notice of intention or a proposal have similar protection.
Suspension of attachments
S. 70(1) of the BIA provides that bankruptcy orders and assignments take precedence over "all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt," but that does not extend to:
The Ontario Court of Appeal has ruled that, in the case of a "requirement to pay" under the Income Tax Act (Canada) that was issued after a notice of application to appoint a receiver (but before the court heard the application), supported by an ex parte "jeopardy order" issued by the Federal Court of Canada under s. 225.1(1) of that Act, the "requirement to pay" was considered to have been completely executed on the date of its issue, and thus took precedence over other creditors' claims.
Settlement of the insolvent person's estate
The trustee/receiver must first realize the amount of the proceeds from the property that is available for payment to the different classes of creditors, and different rules apply according to the type of proceeding. They are summarized as follows:
The estate is then settled, using the priority of claims outlined in the BIA.
The BIA's definition of property is quite broad:
As a consequence, the Supreme Court of Canada has ruled that direct payment clauses in contracts (allowing contractors to make payments to creditors of a bankrupt subcontractor) do not release the contractor from its obligations to the trustee of the estate.
Creditors
The resulting amount available from the estate is distributed to the creditors in the following order of priority (with each class/subclass paid in full before proceeding to the next):
There are several important notes to consider in assessing the above priorities:
Every creditor must prove his claim and a creditor who does not prove his claim is not entitled to any distribution of the proceeds from bankrupt's estate. The claim must be delivered to the trustee in bankruptcy and the trustee in bankruptcy must examine every proof of claim and can request further proof. The trustee may disallow, in whole or in part, any claim of right to a priority under the BIA or security. Generally, the test of proving the claim before the trustee in bankruptcy is very low, and a claim is proved unless it is too "remote and speculative". The rationale for such a low test is to discharge as many claims as possible to allow the bankrupt to make a fresh start after the discharge.
Creditors also have the ability, with the approval of the court, to take over a cause of action that the trustee has decided not to pursue.
Effect of discharge
Discharge does not extinguish claims that are provable in bankruptcy. It releases the debtor from such claims, and creditors cease to be able to enforce them.
Some liabilities are not released upon discharge, including:
- any fine, penalty, restitution or similar order imposed by a court,
- any award of damages by a court in civil proceedings arising from bodily harm, sexual assault or wrongful death,
- any debt or liability for alimony or alimentary pension,
- any debt or liability arising under a judicial decision or agreement relating to maintenance or support,
- any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity,
- any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation (other than one arising from an equity claim),
- liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee (unless the creditor knew of the bankruptcy and failed to take steps to prove his claim),
- any student loans where the date of bankruptcy occurs while the bankrupt is a student, or within seven years after ceasing to be so (but relief is available where the bankrupt acted in good faith during the bankruptcy and financial difficulties will continue so that such debt can never be paid off), plus
- any interest accrued with respect to any of the above debts.
Directors and parties related to the bankrupt may still be held personally liable for certain tax debts, and, if a clearance certificate is not obtained from the tax authorities prior to discharge, directors' liability will subsequently resume. Directors can also be held accountable for other liabilities arising from bankruptcy, regulatory and other statutory offences.
Preferences and transfers at undervalue
In 2009, the BIA was amended to reform the rules relating to setting aside any preferences, or transfers at undervalue, occurring before the initial bankruptcy event:
Recovery actions under ss. 95 and 96, as for other recovery actions with respect to collections, can only be initiated by the trustee, even when they may be of benefit only to a secured creditor (unless creditors seek court approval under s. 38 to pursue the matter directly).
The BIA already empowered the court to inquire into circumstances where a bankrupt corporation had paid cash dividends or redeemed shares where the corporation was insolvent, or where the transactions made it so, during the 12 months prior to its bankruptcy. In that regard,
S. 95(2) provides that, where a preference is given, the fact that it may have been given under pressure is irrelevant. However, the courts have ruled that a payment may withstand challenge by a trustee where it is made in furtherance of a reasonable business imperative.
Key actors in the procedure
Bankruptcy court
The provincial Superior Courts have "such jurisdiction at law and in equity" as will enable them to exercise bankruptcy process under the BIA. The decisions of the court are enforceable in the courts of other Canadian provinces and all courts and the officers of all courts must act and co-operate in all bankruptcy matters. Appeal from the court's orders lies to the provincial Court of Appeal where:
- the point at issue involves future rights;
- the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings;
- the property involved in the appeal exceeds $10,000;
- the aggregate unpaid claims of creditors exceed $500 (from the grant of or refusal to grant a discharge); and
- in any other case, leave has been granted by a judge of the Court of Appeal (but such appeal is not as of right).
Registrars of the provincial Superior Courts have significant powers in relation to procedural matters, unopposed proceedings and in other matters under the Act.
Office of the Superintendent of Bankruptcy
The Office of the Superintendent of Bankruptcy ("OSB") is designed to supervise the administration of all estates and matters to which the BIA applies. It grants licenses for the trustees in bankruptcy, inspects and/or investigates bankruptcy estates, reviews the conduct of the trustees in bankruptcy and the receivers, and examines trustee's accounts, receipts, disbursements and final statements. It has specific powers to intervene in any matter or proceeding in court as if the OSB were a party thereto, as well as to issue directives providing official interpretation of the bankruptcy process to the trustees in bankruptcy and the receivers.
Licensed Insolvency Trustee
Trustees -- either individuals or corporations -- are licensed by the Superintendent, and are appointed to administer an estate by virtue of the assignment, bankruptcy order or proposal that has been filed. By special resolution, the creditors of the estate may appoint or substitute another licensed trustee to assume the role. A trustee is not bound to accept an appointment, but, once appointed, he must perform all duties that are legally required until his discharge or removal. Otherwise, any licensed trustee can be appointed to act, subject to the following constraints:
The trustee acts as receiver for all the estate's property, and is entitled to see its books and records. All moneys he receives must be deposited into a separate trust account. When required, he is obliged to report on the estate's condition, moneys on hand, and property remaining unsold. He is not obliged to continue the business of the bankrupt, where there is no good business case for doing so. When he has completed the duties required of him for administering the estate, he shall apply to the court for a discharge, but any interested person may file an objection to having the discharge take place.
All property of the bankruptcy vests in the trustee from the date of the bankruptcy, and the trustee may register a bankruptcy order against any real property in which the bankrupt has any interest or estate. The courts have held that trustees should clearly communicate to the bankrupt their intent to make a claim against the non-exempt equity in the bankrupt's property at the time of the assignment into bankruptcy. Failure to do so may result in:
The Superintendent may undertake conservatory measures in order to protect an estate, as well as the rights of the creditors and debtors, in specified circumstances:
Inspectors
At the first meeting of the creditors, up to five individuals may be appointed to be inspectors of the estate (except where the creditors decide that that is not necessary). No inspector may be appointed if he is a party to any contested action or proceeding against the estate. Where the value of an individual debtor's property is under $15,000, inspectors are not appointed (except where the creditors decide otherwise).
The trustee is required to obtain the inspectors' permission before carrying out many of his responsibilities, such as the sale of property of the estate, the institution or defending of actions relating to the property of the bankrupt, settling any debts owing to the bankrupt and exercising trustee's discretion in retaining and assigning bankrupt's contracts. The inspectors must give their approval to the final statement of receipts and disbursements and trustee's fees.
Inspectors have a fiduciary duty to the creditors and should be impartial though acting in their interest. They should supervise the trustee's compliance with the BIA and the Superintendent's directives, and may apply for the removal of the trustee.
Receivers
The receiver must do what "practicality demands" to preserve the assets and must not go beyond what is necessary in the circumstances.
Interim receivers
The court may appoint an interim receiver:
In the first case, the applicant must give an undertaking with respect to the debtor's legal rights, and to damages in the event of the application being dismissed. The interim receiver can take conservatory measures and dispose of perishable property in order to comply with the order of the court, but the receiver cannot otherwise unduly interfere with the bankrupt in the carrying on of the debtor's business.
In the latter two cases, the court can only make the appointment if it is shown that it is necessary for the protection of the debtor's estate, or in the interest of the creditor(s).
The courts have set out the following factors to be considered in exercising discretion on whether to appoint an interim receiver:
Source of the article : Wikipedia
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