We've taken some of the questions we hear the most and made them available for you online so that you can feel more comfortable in your understanding of the process when we talk with you in person.
An Assignment in Bankruptcy is a legal document where the company transfers or assigns its assets to a Licensed Insolvency Trustee for the general benefit of the company's creditors. An Assignment in Bankruptcy, when filed with the Official Receiver is the starting point of a voluntary bankruptcy. The date of filing of the assignment is the effective date of bankruptcy.
Bankruptcy serves to transfer title and ownership of the company's assets to the Trustee. The bankrupt company no longer has any right to deal with these assets.
The Assignment in Bankruptcy also causes a "stay of proceedings", which prohibits all creditors from taking or continuing legal action against the company. Once the company is bankrupt, credit collection procedures must be terminated and creditors cannot continue with garnishees or lawsuits. Creditors must make their inquiries through the Trustee.
A proposal is a formal offer to settle all or a portion of the company's debts pursuant to the terms of the Bankruptcy and Insolvency Act. The settlement can involve payment over time and/or an absolute reduction in the amount of debt outstanding. The appropriate terms for a proposal will be dependant upon the particular financial circumstances of the company.
A Plan of Arrangement is a formal restructuring plan under the Companies' Creditors Arrangement Act (the "CCAA"). It is similar to a proposal under the Bankruptcy and Insolvency Act, however, the rules for restructuring under the CCAA are generally more flexible while the costs of a filing under the CCAA are also generally higher than a proposal. In addition, a restructuring under the CCAA is only available for companies that owe at least $5 million.
Prior to filing the formal proposal, a company can file a Notice of Intention to Make a Proposal (the "NOI"). The NOI is a very simple one page document accompanied by the consent of a Trustee to act in the proposal and a list of the company's creditors, addresses and amounts owed. Upon filing the NOI, all creditor actions against the company are stayed (i.e. no one can continue or take any new action against the company without the leave of the Court). The purpose of the NOI is to give the company some breathing room so that they can formulate the proposal. The initial stay of proceedings period is 30 days, although, subject to some qualifications, the Court may grant a further extension of the stay period before the proposal must be filed. If the company fails to file a proposal before the end of the stay period (or any Court-approved extension), the company will be deemed to have filed an Assignment in Bankruptcy.
In all company bankruptcies, the Trustee must send a notice of the bankruptcy to each creditor and must also publish a notice in the newspaper advising of the bankruptcy and giving notice of the date, time and place of the first meeting of creditors. In addition, the Office of the Superintendent of Bankruptcy maintains a permanent record of all bankruptcies and this record can be accessed by virtually anyone for a fee.
A notice of the proposal is only given to the company’s creditors. The company must disclose all creditors so that the notice of the proposal can be mailed to them. There is no notice published in the newspaper. In addition, the Office of the Superintendent of Bankruptcy maintains a permanent record of all proposals and this record can be accessed by virtually any party for a fee.
It is mandatory to have a first meeting of creditors for all non consumer bankruptcies. This meeting is held within 21 days after the filing of the bankruptcy. The purpose of the first meeting of creditors is to:
An officer of the bankrupt company must attend the first meeting of creditors in order to provide answers to creditor questions. The purpose of the meeting is not to interrogate the company officer or to conduct an examination rather it is intended to be a business like meeting where creditors can reasonably inquire into the affairs of the bankrupt company. It is possible, but unlikely, that there may be other meetings of creditors. If so, the officer of the bankrupt company may be requested to attend.
The Trustee will provide the creditors who attend the meeting with a report, either verbal or written, on the administration of the bankruptcy including an estimate of the realizations for the unsecured creditors.
The unsecured creditors can either affirm the appointment of the Trustee or substitute the Trustee. It is not common that Trustees are substituted.
Up to five inspectors may be appointed to represent the creditors and assist the Trustee with the administration of the bankruptcy.
It is mandatory to have a meeting of creditors to consider and vote on all non Consumer Proposals. It is common to have discussions with significant creditors prior to the meeting and, in many cases, creditors will vote for or against the proposal by letter, without attending the meeting. The purpose of the meeting is to hear and respond to creditor concerns and, if appropriate, amend the terms of the proposal before having a final vote on its acceptance or rejection. If there are significant concerns voiced or issues that require investigation, it is possible that the creditors will vote to adjourn the meeting to a later date in order to allow time to deal with their concerns or do necessary investigations.
In addition to voting on the acceptance or rejection of the proposal, the creditors can seek the appointment of up to five inspectors who are representatives of the creditors. The role of the inspector can be well defined or not and the specifics of the role will likely be dependant upon the nature of the proposal. The proposal may also provide for the inspectors to approve changes to the proposal terms without the need to call a full creditor's meeting.
When the final vote is held, the chairman of the meeting will tally the votes of the creditors who have filed their claims and who have voted in person, by proxy or by voting letter. If more than two-thirds of the creditors voting by dollar value and 50 plus 1% of the creditors voting by head-count vote in favour of the proposal then it is accepted and, subject to Court approval is binding on all creditors. If the proposal is accepted, after the meeting, the Trustee will obtain a Court date to seek Court approval of the proposal and will give notice of such date to the creditors who have filed claims. If anyone objects to the acceptance of the proposal, they must attend the Court hearing to make their arguments and issues known to the Court.
If the proposal is rejected by the creditors, the company is Bankrupt and the meeting becomes the first meeting of creditors in the matter of the bankruptcy of the company.
A proposal will be rejected by the creditors if, at the meeting of creditors to consider the proposal, more than 1/3 of the creditors voting by dollar value of claims or more than 50% of the creditors voting by head-count vote against acceptance of the proposal. If the proposal is rejected, the company is immediately deemed to have filed an Assignment in Bankruptcy and meeting turns into the first meeting of creditors in the matter of the bankruptcy of the company.
It is common, prior to the meeting of creditors to consider the proposal, to meet with major creditors in order to gauge their votes and understand their concerns. The debtor company can, prior to the formal vote, choose to amend the proposal in order to solicit a higher proportion of acceptance votes.
Firstly, it is important to understand that the Trustee has broad powers to examine virtually any party who has knowledge of the affairs of the bankrupt company or a company filing a proposal. In a voluntary bankruptcy situation, it is common for one officer of the company to be the key point of contact to provide information to the Trustee. If the company has been petitioned into bankruptcy, the Official Receiver may specify which officer of the bankrupt company will be designated to perform the duties described below.
The Bankruptcy and Insolvency Act sets out specific duties for the designated officer of the bankrupt company. In summary, this officer is required to:
It is the responsibility of the Debtor to disclose certain transactions to the Trustee. The Trustee typically reviews transactions involving the bankrupt company for a period of up to five years prior to the date of bankruptcy or filing of a proposal. The review is focused on transactions involving circumstances where the bankrupt transferred assets to any person(s) for other than fair value, or where any creditor(s) received preference over other creditors by payment or by the giving of security. Depending upon the results of the investigation, the Trustee may commence legal action to reverse these transactions or recover assets.
In a proposal, the Trustee may conduct a similar investigation and report the results to the creditors so that they can make an informed decision with respect to acceptance or rejection of the proposal. If the proposal does not address suspicious or offensive transactions, the creditors may be inclined to reject it, resulting in the bankruptcy of the company
The following are some examples of bankruptcy offences:
Any officer, director or agent of the company or any person who has had, directly or indirectly, control of the company who directed, authorized, or participated in the commission of any bankruptcy offence is liable on conviction to punishment including fines and imprisonment.
In a corporate bankruptcy, the fees and expenses of the Trustee are paid out of the funds remaining, after secured claims and costs of sale, from the liquidation of the company's assets. In circumstances where there may not be sufficient funds to pay the Trustee, the Trustee may seek a third-party guarantee or a fee retainer prior to accepting the engagement. The Trustee's fees are normally charged on an hourly rate basis for work done by the Trustee and Trustee's staff.
In a proposal, the Trustee's fees are typically paid out of the funds available for distribution to the unsecured creditors and are often charged on an hourly rate basis.
All Trustee fees are reviewed by the Office of the Superintendent of Bankruptcy and must be approved by the inspectors and the Court before the Trustee is discharged.
It is a common misconception that the company "hires" the Trustee. This attitude is quite often reinforced by the fact that the bankrupt or proposal debtor:
However, the Trustee has a responsibility to the creditors and the Court. In a proposal, the Trustee also is required to recommend acceptance or rejection of the Proposal by the creditors.
Once a company declares bankruptcy, files a Notice of Intention to Make a Proposal or files a proposal, a creditor cannot continue Court or other enforcement actions without leave of the Court. If a creditor commences or continues such an action against the company after such a filing, you should immediately inform the Trustee of the action.
When work on a bankruptcy file is complete, the Trustee must file a formal report with the Office of the Superintendent of Bankruptcy and the Court. This report includes an accounting of the liquidation of the assets, the various costs of the administration, details of the Trustee's fees and listing of the funds distributed to the unsecured creditors.
The Trustee notifies the bankrupt and the creditors of the time and place of the Trustee's discharge hearing. Anyone who takes exception to the Trustee's administration may make their objection to the Court, in which case a Court hearing will be scheduled to review their concerns.
When the Court finds the Trustee has satisfactorily completed the administration of the bankruptcy, it will grant the Trustee a discharge and the Trustee's duties are concluded.
Any insolvent company can file a Proposal. For a proposal to be acceptable to the company's creditors, it must give the creditors a greater return or payment on their outstanding accounts than they would receive in bankruptcy. The company must reasonably be able to make the payments in the proposal. There is no advantage to filing a proposal if the company cannot reasonably comply with its terms.
For a proposal to succeed, one of the following situations will normally have to exist:
Federal and provincial legislation impose personal liability on the directors of a company for certain government claims, the most common being:
In bankruptcy, the directors will be exposed to liability for some of these types of debt. The directors will need to obtain legal advice with respect to this exposure. Some of these claims can be settled or eliminated within a formal restructuring process but often they must be specifically addressed and relief is not automatic. For this reason, an insolvency professional will need to know the amountof the claims prior to filing the restructuring plan.
It is common for owners of a business to guarantee some of the business debt even if the business is incorporated. The existence of guaranteed debt can be a complicating factor in determining a course of action. In some cases, it may be necessary to restructure the personal financial affairs of the business owners at the same time as the business is being restructured or to make new arrangements with the creditor who holds the guarantee after the restructuring is completed.