Business Receiverships and Bankruptcy
Every security agreement spells out how the secured creditor will go about getting his or her money in the case of a default.
One way to do this is by appointing a receiver.
A receiver or receiver/manager is a person who has been appointed under the Bankruptcy and Insolvency Act to take possession of the inventory, accounts receivable, or other property of an insolvent company under a security agreement or an order of the court.
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The receiver or receiver/manager will take possession of the assets covered under the security or covered by the court order and will sell the assets.
After paying any priority creditors and the costs of the receivership, the balance of funds are paid to the secured creditor.
In some cases there is both a receivership and a bankruptcy.
For example, a landlord may seize and sell a company’s assets in order to make the company pay the rent arrears or settle with the landlord.
If there is another secured creditor, that creditor would then take priority over the landlord and be paid its debt before the landlord’s debt is paid.
A company can be placed into bankruptcy by any of the following methods:
* A creditor can petition the company into bankruptcy through the courts;
* The directors can assign the company into bankruptcy;
* A proposal to the creditors can be defeated at the first meeting of creditors;
* A proposal can be annulled by the trustee on creditor instructions for non-compliance;
There are a number of reasons why a company might be placed into bankruptcy.
These include the following:
* Landlord distraint (seizure of assets to pay for rent arrears).
If a landlord distrains and seizes a company’s assets, the company must pay the rent arrears or settle with the landlord.
The landlord may sell the assets after five days of the seizure. An assignment into bankruptcy or a notice of intention to file a proposal within the five-day period causes a stay of proceedings, which stops the rent distraint;
* The company is no longer viable and has free assets (i.e, assets with no security) that are available for the creditors;
* The company would not be viable even if a proposal to the creditors was filed;
* To rearrange the priority of statutory creditors;
* To formally bring the company to an end and supply a full accounting to the creditors so they do not suspect the principals of any wrongdoing.
In a corporate bankruptcy, the trustee takes possession of all the company’s assets and he or she deals with all the creditors.
The directors cooperate with the trustee and might assist the trustee in his or her duties, but they are relieved of all the pressures and frustrations of operating the company and dealing with customers and creditors.
Petitioning a Debtor Into Bankruptcy
If a creditor is unable to recover debt through any of the possible methods available, the creditor may choose to petition the debtor into bankruptcy.
The Bankruptcy and Insolvency Act provides for the orderly and fair distribution of the property of a bankrupt among his or her creditors.
Generally speaking, the Act is intended to operate for the benefit of both bankrupts and their creditors.
While the Act is not intended for use as a tool for collection of individual debts, in certain circumstances that use is allowed.
When is a Creditor Allowed to Petition a Debtor Into Bankruptcy?
A creditor may file a petition for a bankruptcy order (i.e., an order to adjudge someone bankrupt) where:
* The creditor is owed over $1,000 on an unsecured basis, and
* There has been an act of bankruptcy by the debtor within the six months that precede filing of the petition.
Note that it is possible for a debtor to waive security to the extent necessary in order to achieve this status.
Acts of bankruptcy include the following:
* Fraudulently conveying, gifting, delivering, or transferring property;
* Removing oneself from one’s place of residence in order to defeat or delay creditors;
* Failing to satisfy a Writ of Seizure and Sale;
* Removing or attempting to remove assets with the intent to defraud, defeat, or delay creditors;
* At a meeting of creditors, exhibiting a statement of assets and liabilities showing the debtor to be insolvent or admitting an inability to pay debts;
* Giving notice to a creditor that the business has suspended or is about to suspend payment of debts;
* Failing to pay one’s liabilities as they become due.
Note that in the first four cases above, the creditor does not need to prove that the debtor has failed to pay other creditors.
In the last case, the creditor must prove that at least two other creditors are not being paid, unless there are “special circumstances.”
Special circumstances could include a breach of trust, fraud or near-fraud, or (in some instances) repeated demands for payment and repeated default. It should, however, be kept in mind that strict proof of both your unsecured claim and an act of bankruptcy are necessary to have someone adjudged bankrupt.
Under What Circumstances Should a Creditor Petition a Debtor Into Bankruptcy?
Petitioning a debtor into bankruptcy is no small task. Before deciding to launch a petition, consider the following:
* The existence and amounts of preferred claims that may take priority over yours;
* The dollar amount of unsecured claims that rank on par with your debt (i.e, each creditor is paid pro rata in accordance with the amount of his or her claim);
* 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 from the debtor beyond the “usual” amounts in the three months prior to your filing your petition;
* The validity of any security you may hold.
There are certain instances where petitions for bankruptcy orders are particularly potent tools.
Consider the following examples:
* Where the debtor has transferred property to another individual without fair consideration (e.g., transfer of a house to a related party for $1) or has settled debt in a manner that prefers one creditor over all others (e.g., transfer of an RRSP to an insurance company);
* Where the debtor does not wish to lose a particular element of his or her property (e.g., a yacht, exotic car or shares in a company) or does not wish his or her affairs and dealings to be scrutinized by a trustee and/or creditors;
* If the debtor anticipates receipt of an inheritance;
* If the debtor needs to be a director or officer of one or more companies;
* Where the debtor may lose or have his or her professional accreditation modified as a result of being adjudged bankrupt;
* Where the debtor is a person who deals with financial transactions and doesn’t wish to disclose his or her status as an undischarged bankruptcy when entering upon negotiations or where he or she might lose the benefit of a particular contract, lease, or business prospect by being adjudged bankrupt.
How Does a Creditor Petition a Debtor Into Bankruptcy?
You will need to retain a lawyer to prepare the necessary documents to petition a debtor into bankruptcy. The documents include a letter of demand stating a bankruptcy petition will be lodged and a letter stating that the endorsed draft bankruptcy petition will be lodged on a specific date if the debt is not settled beforehand.
You will then need to attend to service of the documents, and seek the bankruptcy order before the Registrar in Bankruptcy or a judge in chambers.
The petitioning creditor must also make arrangements for a trustee to act and may be liable for payment of the costs incurred by the trustee where there are not sufficient realizations from the debtor.
To avoid this, arrangements are usually made for the petitioning creditor to pay the trustee an agreed retainer. When the petition is granted, the retainer is forwarded to the trustee.
By law, all actions against a bankrupt must cease once the documents petitioning a debtor into bankruptcy are filed (e.g., a landlord who is in the process of a rent distraint must cease the distraint).
Once a proposal is filed, it prevents a secured creditor from realizing on his or her security until a proposal has been dealt with.
If you have any questions about this or other aspects of bankruptcy or consumer proposals you can set up a FREE consultation with our trustees, who are in every province and territory in Canada: or call Bankruptcy Canada directly: 1-877-879-4770.