Meeting of Creditors in a Canadian Bankruptcy

Canadian Bankruptcies – Meeting of Creditors

In a consumer proposal or summary administration bankruptcy a creditor’s meeting is not held unless it is requested. A creditor’s meeting is mandatory for all other bankruptcies, both personal and commercial and for Division I Proposals. Once you have decided that filing for bankruptcy is the best course of action to resolve your financial situation, the trustee will prepare the documents for you to sign. You are officially bankrupt when the documents have been filed with the office of the Superintendent of Bankruptcy.

Purpose of the First Meeting of Creditors

The first meeting of creditors is a very important aspect of bankruptcy administration in that it sets the stage for creditor involvement and the direction to be taken by the trustee. It is the creditors who have suffered the financial loss, and it is important that they are aware of their rights and options to minimize this loss. Accordingly, the trustee must always be properly and fully prepared for the initial meeting with the creditors and have all relevant information at hand. It is the creditors who have suffered the financial loss, and it is important that they are aware of their rights and options to minimize this loss. Accordingly, the trustee must always be properly and fully prepared for the initial meeting with the creditors and have all relevant information at hand.

The trustee calls the first meeting of creditors for the following purposes:

* To consider the affairs of the bankrupt; * To affirm the appointment of the trustee or substitute another person in his or her place; * Appoint the inspectors; * To give such directions to the trustee as the creditors may see fit with reference to the administration of the estate.

Calling the Meeting

The trustee must send a notice of the first meeting of creditors within five working days after the date of his or her appointment to every known creditor, the Superintendent, and the bankrupt. The trustee is required to include the following with the notice: * A list of creditors with claims accounting to $25 or more, and the amounts of their claims; * The proof of claim in prescribed form; * A general proxy; * A statement of affairs. For all ordinary administration bankruptcies, the trustee must also publish a notice of the first meeting of creditors in a local newspaper. The first meeting of creditors is generally to be held within the 21 day period following the appointment of the trustee and normally provides creditors with a one- to two-week lead time to accumulate their documentation, assess their position, and file their proofs of claim. The meeting is usually held at the office of the trustee.

Meeting of Creditors – Quorum

In order for a creditors’ meeting to be held, there must be a quorum of creditors. A quorum exists where at least one creditor entitled to vote is present (in person or by proxy). Note that a quorum is not required for the appointment of the trustee or to adjourn the meeting. Particularly in smaller estates, there will often be situations where a creditor has proven its claim prior to the meeting and has appointed the trustee as its proxy. Where this occurs and no other creditors are represented, a quorum will exist. In this situation, the trustee can be expected to confirm his or her appointment by proxy and to make a motion that no inspectors are appointed. Certainly, the trustee does have the option to call another meeting where it is warranted.

The Role of the Chair

The chair of the first meeting of creditors is the official receiver or his or her nominee (often, this is the trustee). At all subsequent meetings, the trustee shall be the chair of the meeting, unless by resolution at the meeting some other person is appointed. In those situations where the official receiver chooses to chair the first meeting of creditors, it is required for the trustee to be in attendance and provide relevant information. The chair is responsible for deciding any questions or disputes arising at the meeting. Creditors have the right to appeal any such decisions to the court. If a situation arises at a meeting of creditors that cannot be immediately resolved, the chair may, with the consent of those at the meeting, adjourn the meeting. This may be a practical alternative to those situations where creditors wish to resolve or clarify certain matters but are not interested in becoming appointed as inspectors. Also, adjournments may be used to provide an opportunity to clarify a creditor’s position and its entitlement to vote.

What Happens at the First Creditors Meeting?

The chair of the meeting is responsible for ensuring that creditors attending the meeting have: * Filed a proper proof of claim; and * Are entitled to vote. To ensure that adequate information is available to creditors, the trustee must prepare a preliminary report on the debtor. The report gives background on the debtor and the reasons why the debtor filed bankruptcy. The trustee comments on the conduct of the debtor and whether the trustee is aware of any fraudulent preferences or review-able transactions he or she may have been party to. The preliminary report also includes an estimate of the money that will be available to pay the secured creditors and the estimate of trustee fees. This is usually reviewed at the first meeting of creditors once the meeting is called to order. The chair will then request a resolution confirming the appointment of the trustee or appointing a new trustee. The rest of the meeting should not be conducted until it is determined who will be acting as trustee.

The chair will table relevant documents including the following:

* Proofs of claim of creditors not present; * The Assignment for the General Benefit of Creditors and the Certificate of the Appointment of the Trustee or the bankruptcy order; * Proof of service of the notice calling the first meeting of creditors; * Proof of advertisement in the local newspaper, if applicable; * The statement of affairs; * A copy of the examination of the bankrupt by the official receiver, if held prior to the meeting. Examination are conducted at random, or more commonly at the request of the trustee or a creditor when there are contentious transaction that need further exposure. For example, the trustee may be aware that the creditors are suspicious of the debtor because the debtor received a large inheritance two years ago and is now broke. * If applicable, third-party deposit or guarantee agreements must be disclosed. It is common that the person going into bankruptcy has no money to pay the administration costs made up of filing fees, taxes, and trustee fees. A relative, for example, will put up funds that the trustee will hold in trust to be used to pay the administration costs if the bankruptcy estate does not generate enough to cover these costs. The chair will also call for a resolution for the appointment of inspectors. This resolution is usually called for near the end of the meeting, after the affairs of the bankrupt have been fully addressed.

Questioning the Bankrupt

After the affairs of the bankrupt have been discussed, the creditors can question the bankrupt directly. The Bankruptcy and Insolvency Act requires the bankrupt to attend the first meeting of creditors and submit to an examination. In practice, a formal examination of the bankrupt, under oath, does not occur at the first meeting of creditors, but the bankrupt is required to answer truthfully all proper questions of the creditors. However, as discussed above, a formal examination by the official receiver can be requested if thought necessary. The chair of the meeting needs to exercise judgement regarding the appropriateness of the questioning of the bankrupt, particularly where the issues raised are such that it would be advisable for the bankrupt to obtain legal counsel. In such circumstances, creditors should consider a formal examination of the bankrupt in which case the creditors can be invited to forward their questions to the trustee. It will be necessary for the chair to exercise his or her judgement as it relates to a proper balancing of the rights of the creditors and of the bankrupt.

Meeting of Creditors – Voting

Any matter requiring the decision of the creditors is decided by voting. For example, if more than the allowed number of inspectors (i.e, five) are nominated, the creditors must vote on the nominations. Creditors will also vote if a creditor who is known to be a personal friend of the bankrupt is nominated as an inspector and another creditor objects. A vote by special resolution is required where a creditor objects to the appointment of the existing trustee and proposes a replacement trustee. Where this resolution is not passed, it is still necessary to pass a vote by ordinary resolution confirming the appointment of the existing trustee.

The Bankruptcy and Insolvency Act sets out who may vote at the creditors’ meeting:

* The trustee, as a creditor or a proxy for a creditor, may vote at any meeting of creditors. However, the trustee is not entitled to vote on any resolution affecting his or her remuneration or dealing with his or her conduct. * Where a creditor has an un-liquidated claim, he or she may not vote until the claim has been proved and valued by the trustee. The claim is deemed a proved claim to the amount of its valuation. An example of an unliquidated claim is a claim a business landlord has for rent for the balance of the lease. The trustee would not allow the landlord to vote since the landlord is obligated by law and common sense to lease out the property as soon as possible, thereby reducing the claim. * A creditor is not entitled to vote at any meeting of creditors if the creditor did not, at all times, deal with the debtor at arm’s length. * If a person is a “related person” as defined in the Act, and therefore deemed not to have been dealing at arm’s length, that person is not entitled to vote at the meeting of creditors. * A secured creditor (i.e., a creditor who is guaranteed a portion of the debt owed to him or her) is entitled to vote only on the unsecured portion of his debt.

Subsequent Meetings

Usually, only one meeting of creditors is held. However, the trustee is required to call another meeting of creditors in any of the following circumstances: * When so directed by the court; * Whenever requested in writing by a majority of inspectors; * Whenever requested in writing by 25 percent in number of the creditors holding 25 percent in value of the proved claims. Subsequent meetings are called by sending a notice of the time and place of the meeting not less than 5 days before the time of each meeting to each creditor at the address given in the creditor’s proof of claim. Notices need only be given to those creditors who have proved their claims. As previously noted, subsequent meetings of creditors are rare. Generally, where ongoing creditor involvement is warranted, it is accomplished through the appointment of inspectors.