Role of Creditors in a Canadian Bankruptcy

What are the Role of Creditors in a Bankruptcy?

The role of creditors is very important given that they control the administration of bankruptcies.

This control is exercised particularly at the first meeting of creditors by:

* Affirming the trustee’s appointment;


* Giving him or her instructions at that time; and


* Appointing a board of inspectors.

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What are the Role of Creditors in a Bankruptcy?Thereafter, the role of creditors is exercised through the inspectors, by way of inspector’s meetings, or directly at subsequent meetings of creditors.

People who are appointed to be inspectors are usually not familiar with the purpose and role of inspectors, and it is the responsibility of the trustee to advise them.

Keep in mind, however, that the trustee has some duties that are imposed by the Bankruptcy and Insolvency Act.

These responsibilities are obligatory and outside the scope of the creditors’ authorities.

For example, the calling of meetings of creditors and the submission of various reports to the court and Superintendent of Bankruptcy are the responsibilities of the trustee, regardless of directions from the inspectors.

The role of creditors regarding the appointment of inspectors

Inspectors are generally nominated at the first meeting of creditors.

Up to five inspectors can be appointed.

Anyone can be an inspector, even someone who is not a creditor.

A person who is a party to any contested action or proceeding by or against the estate is not eligible to be appointed or to act as an inspector.

The inspectors are appointed as the representatives of the creditors and occupy positions of trust.

They are expected to assist the trustee and to supervise certain aspects of the trustee’s administration.

On application by the trustee or any creditor, the appointment of an inspector can be revoked by the creditors at any meeting or by the court.

Another supervisor can be appointed in his or her place.

The Act does not define who is eligible to be appointed as an inspector.

The court has determined that an inspector does not have to be a representative of a creditor.

There is nothing to prevent the agent of a secured or an unsecured creditor from being appointed an inspector.

However, a person who represents a company against whom the bankrupt estate has a substantial claim may not be appointed as an inspector.

Clearly, there will often be situations where discretion will be required when dealing with the appointment of inspectors.

A common solution is to have persons appointed inspectors, as long as they withdraw from any discussions and decisions relating to matters that deal directly with their claim.

The role of creditors regarding duties and responsibilities of inspectors

The duties and responsibilities of inspectors are set out in various sections of the Bankruptcy and Insolvency Act.

Generally, these sections can be divided into three main areas of activity:


* Action: the taking of some specific action by inspectors;


* Authorization: giving permission to the trustee to perform certain acts;


* Supervision: Approving various reports, documents, and accounts and general supervision of the trustee’s administration of the estate.


The powers of the inspectors may be exercised by majority vote, with each inspector having one vote.

The amount owed to a creditor who has been appointed as an inspector is not relevant.

This is consistent with the notion that inspectors are appointed as representatives of the creditors and are expected to perform their duties impartially.

They should see that the trustee acts in accordance with the BIA (Bankruptcy and Insolvency Act) and if it is brought to their notice he or she has not done so, they should discipline the trustee, and if necessary, take steps to have him or her removed.

Inspectors must not permit their duty as inspectors to conflict with some other interest, and if they do, they will be disqualified from acting as inspectors.

As inspector must not act for his or her own personal advantage, but must make full and complete disclosure of his or her position to the trustee.

An inspector acts in his or her personal capacity, and therefore cannot delegate his or her responsibilities to another party.

Accordingly, it is not proper to appoint limited companies as inspectors.

The role of creditors in replacing inspectors

In the event that an inspector resigns the creditors or inspectors at any meeting may fill the vacancy.

Vacancies will often be filled at a meetings of inspectors, particularly where one inspector may be resigning with the specific intention of being replaced.

For example, where an employee of a creditor is acting as an inspector, and that employee leaves or is transferred, it would be possible for the employee to render his or her resignation and have the vacancy immediately filled by another employee of the creditor.

This would require the remaining board of inspectors to approve the filling of the vacancy.

The role of creditors regarding the meetings of inspectors

Inspectors do not have the power to hold meetings on their own, but the BIA provides that the trustee shall call a meeting when requested in writing by the majority of inspectors.

For practical purposes, the Act allows inspectors to meet by telephone or other communication facilities, as long as inspectors consent and all persons participating in the meeting can communicate with each other.

Disagreements on Decisions

Where a majority decision cannot be arrived at by the board of inspectors, the trustee has the power to decide the matter, unless it concerns the trustee’s personal conduct.

If an inspector is absent from the meeting, the board of inspectors may seek his or her opinion in order to reach a decision.

Where there is a conflict between the directions given by the creditors at any general meeting and directions given by inspectors, the Act states that the directions of the creditors will prevail.

Inspector’s supervisory role

The duties and responsibilities of inspectors include a supervisory function. They are expected to make sure that the trustee’s administration is satisfactory by examining certain documents and accounts connected with the administration.

The BIA specifically requires inspectors from time to time to do the following:


* Verify the bank balance of the estate;


* Examine the trustee’s accounts;


* Inquire into the adequacy of the security filed by the trustee (the estate bond).


Inspectors are also required to approve the trustee’s final statement of receipts and disbursements, dividend sheet, and disposition of unrealized property.

Before approving the final statement of receipts and disbursements, the inspectors must satisfy themselves that:


* All property has been accounted for;


* The administration of the estate has been completed as far as can reasonably be done;


* The disbursements and expenses incurred are proper and have been duly authorized; and


* Fees and remuneration are just and reasonable in the circumstances.


If any inspector is not satisfied, he or she must notify the trustee in writing. Further, any inspector may present his or her objections at court.

Inspector’s Remuneration

Inspectors are entitled to a modest remuneration (taken from the money received from the sale of assets), which is fixed by Rule 135 of the Bankruptcy and Insolvency Act.

Even where the inspectors perform considerable work, the court cannot permit additional remuneration. Inspectors are reimbursed for necessary travel expenses incurred in relation to the performance of their duties.

There are provisions in the Act for an inspector to be allowed a special fee for special services provided. However, these special services and the related fees must be authorized by the creditors or other inspectors, and are subject to approval of the court.

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