The procedures and legal consequences of consumer bankruptcy in Canada are governed by Canadian federal legislation.
Consumer bankruptcy is a legislative procedure under Bankruptcy and Insolvency Act
- (1) complemented by provisions of federal and provincial legislation
- (2) that allows an insolvent person, who cannot pay his debts and liabilities, and who assigns himself or petitioned by the creditors into bankruptcy, to surrender his property to a trustee in bankruptcy for the purpose of distribution among creditors in accordance with legislative priority of distribution scheme; and upon bankrupt’s compliance with bankruptcy procedures
- (3) allows a bankrupt to be discharged (excused) from paying all or part of his debts and liabilities.
The legislation may be complemented by regulations and Office of the Superintendent of Bankruptcy directives (OSB Directive(s)) (the latter provide guidelines to the trustees in bankruptcy on various aspects of the BIA).
The bankruptcy procedure is under reform. Bill C-12 is a comprehensive insolvency reform package by Parliament to modernize the BIA and related acts. the bill has received Royal assent but its legislative and regulatory amendments have not yet been proclaimed in force. The current status of Bill C-12 can be found at the Office of the Superintendent of Bankruptcy website and Parliament's website.
The bankruptcy process may be divided into three stages:
Initiation of the bankruptcy process
At this stage:
- An insolvent person considers the possibility of avoiding bankruptcy by filing a consumer proposal or making independent arrangements with the creditors. Filing a consumer proposal is a serious decision, because an insolvent person may be deemed "bankrupt" if he defaults on consumer proposal. ("consumer proposal", chapter III);
- If the consumer proposal is not accepted by the creditors or the consumer proposal is not a viable option, an insolvent person considers consequences of assigning himself into bankruptcy ("consequences of bankruptcy", chapter I(D)). An insolvent person may either voluntarily assigns himself into bankruptcy or is involuntarily petitioned into bankruptcy by his creditors ("initiating bankruptcy process", chapter II);
- The legal proceedings and creditor’s attempts to enforce the debts are stayed, no person is allowed to initiate or to continue existing legal actions against the bankrupt nor to enforce existing court orders (other than secured creditors who are allowed to enforce their security) ("stay of proceedings", chapter II(F)).
Between bankruptcy and discharge
At this stage:
- Bankrupt assigns his property to the trustee in bankruptcy for its further distribution among creditors under the priority of distribution scheme in the BIA ("vesting of property in trustee", chapter IV);
- The bankrupt assists the trustee in bankruptcy in collecting the property for the benefit of the creditors, cancelling the fraudulent preferences and transactions and attending meetings of the creditors ("duties of the bankrupt" , chapter IV);
- Attends mandatory counselling on managing financial affairs after discharge, and abides by duties and procedures under the BIA ("mandatory counselling", "duties of the bankrupt", chapter IV);
- Informs creditors on any changes in financial circumstances and acquired assets ("duties of bankrupt", "treatment of assets and surplus income", chapter IV);
- Transfers part of his surplus income and all property acquired before the discharge to the trustee in bankruptcy for the distribution among creditors ("treatment of assets and surplus income" , chapter IV).
Absolute or conditional discharge
At this stage:
- The first-time bankrupt is automatically discharged after 9 months if no notice of opposition to discharge is filed either by creditors, official receiver or the trustee in bankruptcy. The first-time bankrupt may apply for the discharge before 9 months period expires;
- The second-time or more than two-time bankrupt has the trustee in bankruptcy apply for order of discharge to the bankruptcy court between 3 months and a year from the date of bankruptcy or where the bankrupt has waived this application, the bankrupt applies himself ("application for discharge order" , chapter V);
- Where there is an opposition to discharge, the debtor defends himself against the opposing party which attempts to persuade the bankruptcy court that one of the facts listed in s.173(1) has occurred ("opposition to discharge", chapter V);
- The bankrupt either obtains certificate of discharge from the trustee in bankruptcy in cases of automatic discharge of first-time bankrupts; or order of discharge from the court in other cases. Under s.178(2), the discharge releases the bankrupt from all claims provable in bankruptcy, except the claims listed in s.178(1) of the BIA ("absolute, conditional discharge", "non-dischargeable debts", chapter V);
- Where conditional discharge is granted, the bankrupt is obliged to comply with the conditions imposed by the bankruptcy court. The failure to comply may result in annulment of the discharge and other punitive consequences. The bankruptcy court may refuse to grant a discharge ("conditional discharge", chapter V).
Purpose and objectives of the bankruptcy process
The purpose of the bankruptcy process is to introduce a legislative mechanism that would provide a fair and peaceful resolution of financial conflict between debtors and creditors, creditors competing among themselves for recovery of their loans and balance public interest in protecting financial security of creditors on one hand and public interest in allowing an insolvent individual to make a fresh start. Generally, the objectives of the bankruptcy process can be summarized as follows:
- To permit an honest, but unfortunate debtor to obtain a discharge of his debts and to make "fresh start";
- Not only to permit an honest debtor to make a fresh start, but also to rehabilitate such a debtor by counselling the bankrupt on managing his financial affairs after discharge in order to prevent subsequent insolvency of the bankrupt;
- To promote a sense of commercial responsibility of the bankrupt and to deter bankrupt from subsequent insolvencies by introducing stricter legislative and judicial treatment of second and ensuing bankruptcies;
- To permit an investigation of the financial affairs of the bankrupt by a mediator, a trustee in bankruptcy, who is given broad powers to facilitate settlement of the claims by way of consumer proposal, to require compliance with bankruptcy procedures, to set aside fraudulent transactions and preferences among creditors and to adjudicate various matters under the BIA;
- To protect the creditors from competing with each other and to secure the debtor from excessive pressure from the creditors attempting to collect their debts first by introducing a priority of distribution of bankrupt’s property scheme under which all creditors are treated equally in accordance with the scheme.
Consequences of Bankruptcy
- Bankrupt is discharged from all or a significant part of the existing debts and is able to make a "fresh start"; ("discharge", chapter V);
- Creditors are not allowed to start new legal actions or to continue existing ones against the debtor or the third parties in possession of bankrupt’s property ("stay", chapter II, also "stay in consumer proposals", chapter III);
- Collection agencies are not allowed to enforce the debts, meaning the collection calls will stop ("stay", chapter II);
- Bankrupt is entitled to keep certain property exempted from distribution among the creditors ("exempt property", chapter IV);
- Bankrupt gives up the legal title and control of non-exempt property ( definition of "property", chapter IV(B));
- Bankruptcy will be shown on bankrupt’s credit rating as long as seven years after discharge (Consumer Reporting Act s.9(3) (e));
- Bankrupt loses some professional and civil privileges, i.e. capacity to hold money in trust, capacity to be elected to certain civil positions;
- Bankruptcy still carries negative stigma, i.e. negatively influence bankrupt’s credibility in the community;
- Bankrupt loses part of any surplus income and all property received before the discharge is transferred to trustee for distribution among creditors ("treatment of pre-discharge income", chapter IV(C));
- Debtor is deprived of a part of the income and the property and as a consequence may have to lower his and his family standards of living;
- Debtor’s contractors may suspend and cancel the services where there is a contractual ipso facto clause allowing contractors to cancel the contract on bankruptcy ("executory contracts", chapter IV);
- Bankrupt has limited contractual capacity, debtor’s contracts are subject to a review by a trustee in bankruptcy;
- Debts that are listed in s.178(1) are not dischargeable debts and a bankrupt still has to repay them after discharge order is made ("non-dischargeable debts", chapter V(E));
- Bankrupt has duties to perform before the discharge ("duties of the bankrupt" chapter IV) and if the discharge is conditional, has some duties to perform after the discharge ("conditional discharge", chapter V(D)).
Actors In The Bankruptcy Process
For the purposes of the BIA, it is important to be able to distinguish between legal definition of "insolvent person" and one of "bankrupt". Generally, an insolvent person is one who cannot pay his debts and may subsequently become bankrupt, either by assigning himself into bankruptcy, being petitioned into bankruptcy by the creditors, or being deemed to assign himself into bankruptcy by defaulting on consumer proposal.
- Legal definition of "Insolvent Person" in s.2 of the BIA.
The person who is unable to pay his obligation is considered to be an insolvent person under the BIA. Under s.2 of the BIA "insolvent person" means a person who is not bankrupt and who resides, carries on business, or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and
- (a) who is for any reason unable to meet his obligations as they generally become due,
- (b) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.
The definition of "insolvent person" is essentially important in two main areas of the BIA. First, only an insolvent person may make an assignment in bankruptcy under s.49 of the BIA and essentially been petitioned into bankruptcy by creditors under s.49 of the BIA ("assignment into bankruptcy", chapter II(A)). Second, transfer of the property of the insolvent person to a creditor may be attacked as being a fraudulent preference under s.95 of the BIA ("fraudulent preferences", chapter IV(C) (4)).
- Legal definition of "bankrupt" in s.2 of the BIA.
Under s.2 of the BIA, an "insolvent person" can become "bankrupt" for the purposes of the BIA in three ways:
- by a voluntary assignment under s.49 of the BIA ("assignment into bankruptcy", chapter II(A));
- an application for a bankruptcy order under s.43 of the BIA ("application for a bankruptcy order", chapter II(B));
- by defaulting on consumer proposal under s.66.3(5) of the BIA ("default on a consumer proposal", chapter II(C) and chapter III(E)).
a) Priority of Claims
Section.2 of the BIA defines a "creditor" as a person having a claim, unsecured, preferred by virtue of priority under s.136 of the BIA or secured, that can be proved as a claims under s.124 of the Act. The creditors may be divided into four categories:
- Secured creditors are creditors, whose claims are guaranteed by some security in bankrupt’s property. The secured creditors are on the top of the bankruptcy priority of claims scheme. They still need to prove the claim to the trustee in bankruptcy or in the court, however they can always apply for an order to take possession of their security as soon as they give a reasonable notice of their intention to do so to the bankrupt or the trustee in bankruptcy.
- Preferred creditors are creditors, whose claims come second under priority of distribution in the BIA by virtue of s.136(1) of the BIA. The priority of claims is justified by necessity to protect vulnerable individuals (employee’s wages, spousal payments, child support), administration of the bankruptcy process (trustee in bankruptcy’s fees, cost of administration of the estate), public purse (municipal taxes) or other public policy rationales (landlord’s rent claims). If property of the bankruptcy estate is insufficient to compensate all preferred creditors, the property is distributed proportionally to the amounts of preferred creditor’s claims (pari passu principle in s.141 of the BIA). The preferred creditors become unsecured creditors for the rest of the uncompensated claim. Secured and preferred creditors must be fully compensated, where a consumer proposal is made to the unsecured creditors.
- Unsecured creditors are the creditors, whose claims are not guaranteed by some security in bankrupt’s property and do not have priority under s.136(1) of the BIA. If the property of the estate is insufficient to compensate all unsecured claims, the property is distributed proportionally to unsecured creditor’s claims (pari passu principle in s.141 of the BIA).
- Deferred creditors the creditors whose wages are deferred for public policy reason, i.e. family bonds to the bankrupt. Their claims can be compensated only after unsecured creditor’s claims are fully repaid. The deferred claims include back wages to bankrupt’s spouses (s.137(2)) and back wages to other relatives (s.138).
b) Proof of Claims
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 (s.124(1). 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". (Re Wiebe). 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.
Trustee in Bankruptcy
A trustee in bankruptcy is an individual or a corporation licensed by the official superintendent to hold in trust and, subsequently, to distribute bankrupt’s property among the creditors in accordance with distribution scheme under the BIA. The bankrupt and all other persons holding bankrupt’s property must transfer the property to trustee. The trustee may also assist individual in preparing and submitting a consumer proposal to creditors. The trustee must arrange mandatory counselling of the bankrupt. The trustee must follow the procedures under the BIA, call creditors meetings and send the parties required notices of proceedings and documents. The trustee is responsible for preparation of pre-discharge report and may oppose the bankrupt’s discharge.
Bankrupts often misunderstand the role of the trustee in bankruptcy in bankruptcy process considering him to be personal representatives and counsels of the bankrupts. In reality, despite the fact that the bankrupt pays for trustee’s services, trustees in bankruptcy are required to act in the interest of the creditors. The major duty of trustee is to arrange bankrupt’s compliance with the procedures under the BIA in order to distribute the estate among creditors, which is not always in the best interest of creditor, who is more interested in excluding as much property from distribution among creditors and been excused from as many debts as possible as a result of discharge order.
Office of Superintendent in Bankruptcy Licensed Trustee Database:
Office of the Superintendent of Bankruptcy
The OSB is designed to supervise the administration of all estates and matters to which the BIA applies. The specific duties of the OSG are to grant licenses for the trustees in bankruptcy; to inspect and to investigate bankruptcy estates; review the conduct of the trustees in bankruptcy and the receivers; to examine trustee’s accounts, receipts, disbursements and final statements. The specific powers of the OSB are to intervene in any matter or proceeding in court as if the OSB were a party thereto; and to issue directives providing official interpretation of the bankruptcy process to the trustees in bankruptcy and the receivers.
Office of Superintendent in Bankruptcy website:
Under s.183(1) of the GIA the provincial Superior Courts of Justice have "such jurisdiction at law and in equity" as will enable them to exercise bankruptcy process under the BIA. S.183(2) regulates appeals from bankruptcy court decisions unless otherwise provided in the BIA. Under s.188, the decisions of the provincial 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.
Under s.192 of the BIA, the registrars of the provincial Superior Courts have significant powers in relation to procedural matters, unopposed proceedings and in other matters under the Act.
Inspectors are individuals who are usually appointed at the first meeting of the creditors to perform functions described below. No inspector may be appointed if he is a party to any contested action or proceeding against the estate. No inspector is usually appointed under summary administration procedure, where the value of debtor’s property is under $10,000.
The trustee is required to obtain the permission inspectors before carrying out many of trustee’s 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 fiduciary duty to the creditors and should be impartial though acting in creditor’s interest. The should supervise trustee’s compliance with the procedures under the BIA and the Directives and may apply for the removal of the trustee (Re Bryant).
Where a creditor has made a petition for a receiving order, the court may appoint an interim receiver, if it is shown that it is necessary for the protection of the estate of the debtor at any time after filing of a petition.(s.46(1). The court may appoint the trustee in bankruptcy as a receiver of debtor’s property. The receiver can take conservative measures and dispose of perishable property, but the receiver cannot unduly interfere with the bankrupt in the carrying on of debtor’s business, except as is necessary for conservatory measures. The court may appoint a receiver where secured creditor enforces his security (s.47) or in cases of consumer proposal (s.47.1).
In Re Stuart and Sutterby, the court set out the factors, which should be considered in exercising discretion of whether to appoint an interim receiver:
- No person in control of the property;
- Debtor is acting in bad faith and giving preferences to other creditors;
- Debtor is fraudulently disposing and concealing his assets;
- Allegation of criminal offences are made;
- The property is in possession of third parties.
The receiver must to do what "practicality demands" to preserve the assets (Minister of Indian Affairs v. Curragh) and must not go beyond what is necessary in the circumstances (Re Insolvency of Big Sky Living Inc.).
- Re Bryant, Isard & Co. (1923) 4 CBR 41 (Ont. S.C.), at 48, 24 O.W.N. 597
- Execution Act, RSO, 1990, c. E-14
- Fraudulent Conveyances Act, R.S.O., 1990, c. F.29
- Assignments and Preferences Act, R.S.O., 1990, c. A.33
- Personal Property Security Act, R.S.O., 1990, c. P.10.