Study Guide To Accompany Canadian Business And The Law

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Study Guide to accompany Canadian Business and the Law, 5th edition

Chapter 27

CHAPTER 27
BANKRUPTCY AND INSOLVENCY
Objectives
After studying this chapter, you should have an understanding of
• the legal aspects of business failure
• the rights and obligations of debtors and creditors when a business fails

alternatives to bankruptcy
• the stages in the bankruptcy process

Learning Outcomes
•
•
•
•
•
•
•
•

Recognize the options available to creditors and debtors of a financially troubled business
(page 668)
Understand the role of the trustee in bankruptcy (page 669)
Understand when a debtor and a creditor should agree on a proposal or an arrangement rather than bankruptcy (page 670)
Recognize the purpose of bankruptcy legislation (page 675)
Understand bankrupts may hide assets through preferences, fraudulent conveyances, and other means (page 678)
Recognize the impact of committing bankruptcy offences (page 679)
Understand the priority system for payment of debts (page 680)
Understand the implications of personal bankruptcy (page 682)

Chapter Summary
The BIA and CCAA govern situations in which debtors become insolvent. The purposes of the legislation are to ensure that all stakeholders are treated fairly, including debtors, creditors, employees, government, and the broader community. It is, however, a very difficult task to try to reconcile all these different interests. Before bankruptcy, debtors may be able to take informal steps to address their financial situation. Creditors will usually be willing to negotiate if they believe that they will fare better through an informal process than through a formal process, such as a proposal or bankruptcy. If informal steps are not an option, an insolvent debtor can make a proposal to creditors under the BIA. Individuals with less than
$250 000 in debt can make consumer proposals. Large companies with more than $5 000 000 in debt can reorganize under the CCAA. To be successful, the debtor will have to submit a plan of reorganization that creditors will approve. Secured creditors are in a much better position than unsecured creditors in the event of insolvency or bankruptcy, because they can generally enforce their security regardless of bankruptcy proceedings. Secured creditors become unsecured creditors for any deficiency owed. Bankruptcy is usually a last resort.
Bankruptcy is the formal legal process by which the assets of the debtor are transferred to a trustee in bankruptcy for the benefit of creditors. Bankruptcy can be either voluntary, by the
© 2014 Nelson Education Limited

485

Study Guide to accompany Canadian Business and the Law, 5th edition

Chapter 27

debtor, or involuntary, on an application by creditors. The BIA contains rules to ensure that creditors are treated fairly and that debtors conduct themselves appropriately, both before and during the bankruptcy process. In a bankruptcy, secured creditors will usually realize on their security first, leaving only unsecured assets for the trustee to deal with. The trustee will dispose of the remaining assets and distribute the proceeds to creditors in the specific manner and order of priority set out in the BIA. Personal bankruptcy differs from business bankruptcy in a number of important respects, including the ability of the bankrupt to be discharged from most debts after a period of time.

© 2014 Nelson Education Limited

486

Study Guide to accompany Canadian Business and the Law, 5th edition

Chapter 27

Study Outline
Use this outline to prepare a complete set of notes for this chapter.
Business Failure—page 668
______________________________________________________________________
______________________________________________________________________
Informal Steps—page 668
______________________________________________________________________
______________________________________________________________________
Proceedings before Bankruptcy—page 669
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