Preferred Creditors of the Bankruptcy and Insolvency Act

Understanding Preferred Creditors Under the Bankruptcy and Insolvency Act

Canada’s Bankruptcy and Insolvency Act (BIA) is a federal law that governs bankruptcy and insolvency processes within the country. One of the most pivotal aspects of this act is the concept of “Preferred Creditors,” which is particularly outlined in Section 136. This article will provide an in-depth understanding of Preferred Creditors of the Bankruptcy and Insolvency Act.

The Bankruptcy and Insolvency Act (BIA) Explained

The BIA is a comprehensive statute that regulates bankruptcy and insolvency across all Canadian provinces. It lays down detailed guidelines for bankruptcy procedures, receiverships, and commercial and consumer proposals.

The Act also defines the roles and responsibilities of the Office of the Superintendent of Bankruptcy, a governmental body that oversees the fair and proper execution of bankruptcy proceedings.

BIA Section 136: The Crux of Creditor Hierarchy

Section 136 of the BIA plays a crucial role in establishing the order in which creditors receive payments in a bankruptcy proceeding. It classifies creditors into three categories: secured creditors, unsecured creditors, and preferred creditors.

Secured Creditors under the BIA

Secured creditors are those who hold a claim to the debtor’s property as a form of security for a debt. This can take the form of a lien, pledge, or mortgage. If the proceeds from the asset sale are insufficient to cover the full claim, the secured creditor transitions into the category of an unsecured creditor.

The Concept of Preferred Creditors

Preferred creditors, also known as preferential creditors, receive their entitled payment amount from the earnings of the asset sale. If multiple claimants belong to the same class and funds are insufficient for full payment, these creditors will receive a pro-rata payment.

Unsecured Creditors and Their Rights

Unsecured creditors are those who cannot claim the debtor’s property under the debtor-creditor agreement. They, however, have a right to claim a sum of money owed by the debtor. Personal loan lenders and credit card companies are typical examples of unsecured creditors.

Understanding Payment Priority under Section 136

Section 136 of the Bankruptcy and Insolvency Act (BIA) outlines a specific order of payment to creditors. Secured creditors receive payment first, followed by preferred creditors, and finally unsecured creditors. Each class’s determination and proof of claim dictate the payment order within the preferred creditors’ group.

Scheme of Distribution List

Section 136(1) of the BIA provides a detailed scheme of distribution, stating the order of payment priority:

 

  • (a) Funeral and testamentary expenses in case of a deceased bankrupt;
  • (b) Costs of administration, including expenses and fees of any person acting under a direction, the trustee’s expenses and fees, and legal costs;
  • (c) The levy under section 147;
  • (d) Unpaid wages, salaries, commissions, compensation, or disbursements;
  • (e) Municipal taxes assessed or levied against the bankrupt in the two years preceding the bankruptcy;
  • (f) Arrears of rent for three months preceding the bankruptcy and accelerated rent for a period not exceeding three months following the bankruptcy;
  • (g) Fees and costs related to subsection 70(2);
  • (h) Indebtedness of the bankrupt under any Act respecting workers’ compensation, unemployment insurance, or provisions of the Income Tax Act;
  • (i) Claims resulting from injuries to employees of the bankrupt;
  • (j) Claims of the Crown in right of Canada or any province.

 

Considering Alternatives to Bankruptcy

Declaring bankruptcy is not the only way out of a financial crisis. There are alternatives to bankruptcy that individuals and businesses can consider. However, if bankruptcy is the only viable option, understanding the concept of Preferred Creditors of the Bankruptcy and Insolvency Act can provide clarity on how different creditors’ claims will be resolved.

The Takeaway

Understanding the nuances of the Bankruptcy and Insolvency Act, particularly the concepts of Preferred Creditors, can be crucial for individuals and businesses navigating bankruptcy. It provides a clear understanding of the hierarchy of creditors and how assets are distributed in bankruptcy proceedings.

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