There are a small number of cases where the government owns a company or an interest in a company that is expressly declared not to be an agent. In such cases the ordinary procedures of the BIA or CCAA would apply. Needless to say, this would be an embarrassment, so rea sonable oversight is maintained to ensure that problems are dealt with before they become notorious.
Are particular sectors dealt with differently Companies with more than $5 million in liabilities may use the provisions of CCAA or the BIA, but not both. All others, with the exception of financial corporations who would use the Winding Up and Restructuring Act, must use the BIA.
Other than that, no distinctions are made on a sectoral, geographical, or sole employer basis.
Do the provinces play any role Section 91(21) of the Constitution Act, 1867 assigns bankruptcy exclusively to the federal government.
However, it also assigns matters of property and civil rights to the prov inces. Where they tend to meet is in respect of the exemptions from sei zure in personal bankruptcies, where individual provinces (as states in the United States) may have somewhat different lists, and in some of the broader aspects of creditor debtor law. In these cases, courts will defer to the law most closely related to the constitutional basis on which it is erected. A large volume of case law provides a high degree of cer tainty.
Provinces will act as any interested creditor group when priorities are at issue in legislative amendments. They sought and won a super priority for environmental damage in 1997, and insist that their other Crown super priorities rank pari passu with the federal government.
Their protection does not, however, extend to their legislative creatures the municipalities, who must take their place in the dreary queue of or dinary creditors.
What about international conflicts in law and the recognition of foreign bankruptcy decrees This is a matter of evolving practice, prin cipally involving trans border bankruptcies where assets are located in both the US and Canada264, although other genuinely multi national The US side has given attention to practical procedures for such cases: cf. American Law Institute, Transnational Insolvency Project, “Principles of cooperation in transnation cases, such as those of the airlines, have been testing the framework lately. Under the BIA/CCAA reforms of 1997, the steps courts had been taking on a case by case basis to recognize and coordinate with pro cedures in other countries received statutory blessing. Canada has been an active participant in the United Nations Commission on Interna tional Trade Law (UNCITRAL) and its proposed model law on interna tional insolvencies may be adopted soon, perhaps on a basis of recip rocity.
What are the responsibilities of parent corporations toward fail ing subsidiaries and their creditors In general, these are defined as matters of contract law. The creditors of a failing subsidiary cannot call on the resources of the parent absent an explicit guarantee; indeed one of the reasons for elaborate corporate group structures is to isolate certain risks. Project finance agreements, for example, usually specify limited or no recourse beyond the resources of the project itself.
As a matter of good corporate governance, of course, a parent cor poration would normally exercise such oversight over the activities of a subsidiary as to take corrective measures before a risky situation de scended into bankruptcy. For most companies, reputational risk is con sciously planned for.
What are the personal liabilities of directors and officers of a company that is insolvent or in the vicinity of insolvency Directors are liable during a bankruptcy for unpaid wages, unremitted payroll deduc tions for taxes, Employment Insurance and the Canada Pension Plan, and for dividends paid or other transactions that do not meet a financial test if the company is insolvent. For all these matters a due diligence defence is available and would normally be covered by an indemnity from the company or by standard Directors’ and Officers’ liability insur ance. Directors are also liable for many other items in the ordinary course of business265, but these are the special ones that are likely to arise in the context of a bankruptcy.
als insolvency cases among the members of the North American Free Trade Agreement,” Philadelphia, 2000.
McCarthy Tetrault, Directors’ and officers’ liabilities in Canada, Butterworths, Toronto, 1997.
Annex A: The ten acts of bankruptcy According to Section 42 of the BIA, a debtor company commits an act of bankruptcy if, in the six months before the filing of the petition:
• in Canada or elsewhere it makes an assignment of its property to a trustee for the benefit of its creditors generally, whether it is an as signment authorized by the Act or not;
• in Canada or elsewhere it makes a fraudulent conveyance, gift, de livery, or transfer of its property or any part thereof;
• in Canada or elsewhere it makes any conveyance or transfer of its property or any part thereof, or creates any charge thereon, that would under this Act be void as a fraudulent preference;
• (for individuals:) with intent to defeat or delay its creditors, he de parts out of Canada, or, being out of Canada, remains out of Can ada, or departs from his dwelling house or otherwise absents him self;
• the debtor permits any execution or process issued against the debtor under which any of the debtor’s property is seized, levied on or taken in execution to remain unsatisfied until within five days from the time fixed by the sheriff for the sale thereof or for fifteen days after the seizure, levy or taking in execution, or if any of the debtor’s property has been sold by the sheriff, or if the execution of other process has been held by the sheriff for a period of fifteen days af ter written demand for payment without seizure, levy or taking in execution or satisfaction by payment, or if it is returned endorsed to the effect that the sheriff can find no property whereon to levy or to seize or take, but where interpleader proceedings have been insti tuted with respect to the property seized, the time elapsing between the date at which the proceedings were instituted and the date at which the proceedings are finally disposed of, settled or abandoned shall not be taken into account in calculating the period of fifteen days;
• it exhibits to any meeting of its creditors any statement of its assets and liabilities that shows that it is insolvent, or presents or causes to be presented to any such meeting a written admission of its inability to pay its debts;
• it assigns, removes, secretes or disposes of or attempts or is about to assign, remove, secrete or dispose of any of its property with in tent to defraud, defeat or delay its creditors or any of them;
• it gives notice to any of its creditors that it has suspended or is about to suspend payment of its debts;
• it defaults in any proposal made under this Act; and • it ceases to meet its liabilities generally as they become due.
Since 1997, the suspension by a regulatory authority of a securities firm for capital inadequacy has constituted an eleventh act of bank ruptcy.
As any of these acts are criminal in nature, the onus of proof lies on the petitioning creditor(s), and the judge must hold a hearing on the proof of statements in the petition if the matter is opposed.
Annex B: Powers and liabilities of trustees under the BIA The function of the trustee is to take possession of the deeds, books, records and documents and all property of the bankrupt as quickly as possible…and to make an inventory of all of the property of the bankrupt. The trustee should change the locks on the bankrupt’s property and redirect mail and in this regard, the trustee is in the same position as if he were a receiver of the property of the bankrupt ap pointed by the court. In addition, the trustee possesses various reme dies to recover property of the bankrupt that is in the hands of third par ties […subject to] the rights of secured creditors… [A] trustee in bank ruptcy may not oust a receiver appointed by a creditor with valid secu rity.
Once the trustee has gathered in the property of the bankrupt, the trustee is obliged to realize upon it and distribute the proceeds to the creditors of the bankrupt in accordance with the priority of distribution established in the BIA.
Prior to the first meeting of creditors, the trustee may dispose of property that is perishable or is likely to depreciate rapidly in value and may carry on the business of the bankrupt.
Subject to such extension as the court may grant, it is the duty of the trustee to prepare a list of creditors as soon as possible after the bank ruptcy and, within five days after the trustee’s appointment, to send to creditors and the Superintendent notice of a first meeting of creditors which in turn is to be held within twenty one days of the trustees ap pointment. At their first meeting [chaired by the Official Receiver], the creditors will vote upon the appointment of at least one and up to five inspectors of the estate of the bankrupt. The inspectors provide advice and directions to the trustee, subject to the authority of the creditors at a meeting or the bankruptcy court to override such directions… Following the first meeting of the creditors the trustee can, with the permission of the inspectors, sell the property of the bankrupt, lease real property, carry on the business of the bankrupt, bring or defend any action or other legal proceedings relating to the property of the bankrupt, engage a solicitor or agent to conduct business sanctioned by the inspectors, accept security from debtors of the estate, incur ob ligations, borrow money and give security on the property of the bank rupt, compromise debts and claims, divide property among the credi tors which cannot be easily sold, elect to retain, assign, surrender or disclaim any lease of any property of the bankrupt and appoint the bankrupt to aid in the administration of the estate on such terms as the inspectors may direct.
In carrying on the business of the bankrupt, it is possible for the trus tee to incur personal liability. For this reason, trustees will normally con tract in their capacity as trustees only, and specifically stipulate that they are not acting in their personal capacity. However, not all personal liability can be contracted out of… The trustee is not personally liable for environmental damage occur ring before the trustee’s appointment or after the appointment unless it was the result of the trustee’s failure to exercise due diligence; but, the trustee is obliged to make any report or disclosure required by federal or provincial legislation.
The bankrupt or any of the creditors or any other person aggrieved by any act of the trustee can apply to the court and the court may con firm, reverse, or modify the act complained of; but, the trustee is pro tected by the court against improper, frivolous and vexatious suits or proceedings arising out of the administration of the estate.
If a trustee refuses or neglects to take any proceeding which a credi tor requests the trustee to take…the creditor may obtain from the court an order authorizing the creditor to take the proceeding in the creditor’s name and at the creditor’s expense. In order to take such a step, all other creditors of the bankrupt must be afforded an opportunity to par ticipate in the proceeding. The fruits of such a proceeding, if any, be long to participating creditors to the full extent of the claim after ex penses. The balance, if any, reverts to the estate.
A trustee is a private professional. As such, it is up to the creditors to strike a bargain over fees and expenses, which are paid out of the es tate and therefore reduce the creditors’ recovery. As trustees’ risks and liabilities can be large and only partly mitigated by insurance, itself not cheap, their fees can be considerable. In this respect, the limitation of environmental liability in the 1997 amendments played an important role in moderating fees, and indeed in persuading trustees to take on certain cases at all.
Annex C: Statutory priorities in business insolvencies Section 136 of the BIA establishes the following priorities for the dis tribution of money from the bankrupt estate. All claims of a higher class are paid before any claims of the next class.
1. Super priorities:
(a) Compensation to the Crown for the costs of environmental damage.
(b) Unremitted wage deductions for Canada Pension Plan and em ployment insurance premiums, and for employee tax withhold ings.
(c) Fees and expenses of the trustee.
2. Secured creditors.
3. Preferred creditors.
(a) Funeral expenses of the bankrupt, if applicable.
(b) Costs of administering the bankruptcy (trustees’ fees and legal expenses).
(c) Levy on all estates to help defray the expenses of the Office of the Superintendent of Bankruptcy.
(d) Wage claims up to $2,000, plus $1,000 in salesmen’s ex penses.
(e) Alimony and maintenance claims.
(f) Municipal taxes.
(g) Landlords’ claims for rent.
(h) Costs of the creditor who first executed against the debtor, and (i) Claims of workers not covered by Workers’ Compensation.
4. Ordinary (other unsecured) creditors.
5. Preferred shareholders.
6. Common shareholders.
Conclusion The problem of protecting the rights of both the debtor and the creditors during the effectuation of bankruptcy procedures has a fun damental importance in terms of promoting the investment activity of Russian enterprises. Thus problem must be solved on a comprehensive basis, within the framework of the protection methods developed in the sphere of law of obligations (indirect protection of property rights), cor porate law, bankruptcy procedures, tax regulation, and execution pro ceedings.
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