Petitioning a Debtor into Bankruptcy

One purpose of the Bankruptcy and Insolvency Act (“the Act”) is to provide for the fair and timely distribution of the belongings of a bankrupt not protected by the exemptions to his or her creditors.

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The Act provides a mechanism under which all non-exempt property vests in a bankrupt’s Trustee.

It also provides a summary method of inquiry into a bankrupt’s property and affairs to recover assets for the creditors’ benefit.

When may a creditor file a petition to place a debtor into bankruptcy?

A creditor may bring a Petition for a Receiving Order (i.e. an Order to adjudge someone bankrupt) where:

• It is owed over $1,000 on an unsecured basis – to achieve such status, security may be waived to the extent necessary; and

• There has been an act of bankruptcy by the debtor within the six months that precede filing of the Petition.

Acts of bankruptcy include the following:

•fraudulent conveyances, gifts, deliveries or transfers of property or the creation of charges thereon in circumstances which would constitute any such charge as a fraudulent preference;

• the absenting of oneself from one’s dwelling house if done with intent to defeat or delay creditors;

• the failure to satisfy a Writ of Seizure and Sale with the result that it is returned to the Court Registry marked “nulla bona” or “unable to locate assets”;

• the exhibiting to a meeting of creditors of any statement of assets and liabilities that shows the debtor to be insolvent or admits of an inability to pay debts generally;

• the secreting or removal of assets (or attempts thereat) with intent to defraud, defeat or delay creditors of any of them;

• the giving of notice to any creditor that the debtor has suspended or is about to suspend payment of debts generally; and

• the failure to pay liabilities generally as they become due.

• An individual creditor can utilize the Act to Petition someone into bankruptcy – without proof of failure to pay other creditors – using grounds (1), (2), (3) and (5) above.

Ground (7) above usually requires proof of at least 2 other creditors who are not receiving their payments in the agreement unless “special circumstances” pertain. “Special circumstances” have been held to pertain where there has been a trust breach, fraud or near-fraud has been committed or (in some cases) multiple requests for payment and repeated default have occurred.

When should a creditor petition a debtor into bankruptcy?

In petitioning a debtor one has to retain a lawyer to prepare the necessary documents, attend to service and seek the Receiving Order before the Registrar in Bankruptcy or a Judge in Chambers.

To avert such a prospect, arrangements are usually made to limit the petitioning creditor’s obligation to the Trustee to the amount of an agreed “retainer”.

Before deciding to launch a Petition the following should be considered:

• Existence and amounts of preferred claims that may rank in priority; (NOTE: the Bankruptcy and Insolvency Act, effective November 30, 1992, did away with the preferred status for statutory creditors such as Revenue Canada Taxation, provincial and federal government claims.)

• The quantum of unsecured claims which may rank pari passu;

• The occurrence of preferences, reviewable transactions and/or settlements within the three month to five year review periods prior to the filing of your Petition;

• Your receipt of payments beyond the “usual” amounts within the three months prior to filing of your Petition; and

• The validity of any security you may hold.

There are certain instances where petitions for Receiving Orders are particularly potent tools. Some of them are the following:

• Where the debtor has transferred property to another individual without fair consideration, such as transfer of house to related party for $1.00, settlement of debt, such as transfer of RRSP to insurance company or to prefer one creditor over all others;

• Where your debtor does not wish to lose a particular element of his property (a yacht, exotic car, shares in a Company, etc.) or does not wish his affairs and dealings to be scrutinized by a Trustee and/or his creditors;

• Where your debtor anticipates receipt of an inheritance;

• Where you are dealing with a debtor who needs to be a Director or Officer of one or more Companies. The interaction of the Bankruptcy and Insolvency Act and the Company Act result in such a person ceasing to be a Director and ceasing to be eligible to be an Officer upon being adjudged bankrupt;

• Where you are dealing with a debtor who may lose or have modified his professional accreditation as a result of being adjudged bankrupt; or

• Where your debtor is a person who is always “dealing” and doesn’t wish to disclose his status as an undischarged bankrupt when entering upon negotiations or where he might lose the benefit of a particular contract, lease or business prospect by being adjudged bankrupt.

Procedure For Petitioning a Creditor Into Bankruptcy

• Letter of demand stating a bankruptcy petition will be lodged;

• Letter from lawyer stating that endorsed draft bankruptcy petition will be lodged on a specific date if settlement of matter is not performed before;

• Have an agreement with a Trustee that he acts as the Trustee in the petition; and

• When petition is granted, a third party retainer is forwarded to Trustee.

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