Overview of BIA Process

Bankruptcy Process

Bankruptcy is a four letter word for some small business owners and other individuals. For the creditor, it’s an annoyance when a debtor is unable to pay their debts then becomes bankrupt – resulting in the creditor receiving pennies on the dollar – or nothing at all. For the debtor, the bankruptcy process may provide an opportunity for a fresh start from their overwhelming debts. In this posting, the writer will provide a brief and simple overview of the bankruptcy process.

Bankruptcy only applies to unsecured debts. This means that secured debts – such as mortgages – are not forgivable and discharged in the bankruptcy process. To go bankrupt, an individual or company will hire a Licensed Insolvency Trustee (“LIT”) to make a voluntary assignment into bankruptcy. Upon assigning into bankruptcy, a stay of proceeds will be in effect, which prohibits any further collection action or execution by creditors against the assets of the debtor. The debtor’s assets will also vest in the LIT.

The LIT will then assist the debtor through the discharge process and investigate the financial affairs of the debtor. Subject to certain exemptions and exceptions in the Bankruptcy and Insolvency Act (“BIA”) and provincial law, the debtor’s assets are liquidated (converted into cash) for the benefit of the debtor’s creditors. These proceeds are distributed to the creditors in a proportional and orderly basis. When a person receives a discharge from bankruptcy, his or her debts are legally forgiven subject to exceptions set out in section 178(1) of the BIA and any orders that the court may make concerning the discharge. Corporate debtors will only receive a discharge if their debts are satisfied in full.

Alternatively, or instead of going bankrupt, a consumer or corporate debtor may hire a LIT to undergo a restructuring with a Division I proposal or consumer proposal under the BIA. In a proposal, a debtor would make an offer to all of his or her unsecured creditors for repayment of their debts over a period of time, usually five years. If the terms of the proposal are accepted by his or her creditors, the debts will be legally forgiven upon successful completion of the proposal. Again, certain debts may not be forgiven using a proposal such as secured debts and certain debts that fall into section 178(1) of the BIA, unless they are specifically dealt with in the terms of the proposal.

Bankruptcy or a proposal is not without certain risks to the debtor. For example:

  • LITs have powerful investigatory powers under the BIA to investigate the financial affairs of the bankrupt and to set aside transaction at undervalue (e.g. fraudulent conveyances and preferences)
  • Creditors can conduct an examination of the debtor or anyone with knowledge of the affairs of the bankrupt (or proposer) under section 163(2) of the BIA. This includes spouses, business partners and even the bankrupt’s solicitor, subject to solicitor-client privilege
  • Creditors can apply to the court for an order that they can pursue proceedings that LIT is unwilling or unable to pursue at their own risk under section 38 of the BIA.

In consumer insolvency situations, these rights and powers are less likely to be used. Depending on the kinds of debts incurred by the debtor, the debtor’s pre-bankruptcy conduct, and the debtor’s conduct during the bankruptcy process, a creditor, LIT or Superintendent of Bankruptcy may oppose a debtor’s discharge from bankruptcy, usually seeking conditions that the debtor make additional payments into their bankrupt estate for the general benefit of their creditors or that the debtor’s discharge is suspended for a period of time. In rare cases, a discharge from bankruptcy will be refused altogether.

If a debtor refuses or neglects to comply with their duties under the BIA, the Trustee may be required to oppose the debtor’s discharge from bankruptcy.

Prior to visiting a LIT or for ongoing advice during a bankruptcy, a debtor may wish to speak to a lawyer who focuses their practice on bankruptcy and insolvency, or debtor-creditor matters. It is recommended that debtors seek legal counsel when dealing with aggressive creditors, a discharge from bankruptcy is opposed, or if the LIT is pursuing assets transferred at undervalue.

Creditors’ remedies in the insolvency context is a complex area. Creditors are advised to contact a lawyer who focuses on bankruptcy and insolvency or debtor-creditor matters when dealing with insolvent or bankrupt debtors.