bankruptcy ramsay f03 6 by fZVBTJX




Bankruptcy and insolvency legislation serves several purposes, including:
    distribution of the bankrupt’s assets in an equitable manner (pari passu)
    punish fraudulent debtors where there are breaches of certain standards of conduct
    reform debtors whereby they can relieve themselves from financial debt
    maintain confidence in the credit system such that creditors can seek redress for the wrongdoings of debtors

In addition to the BIA, there alternative remedies for insolvent debtors under: the Winding-Up and Restructuring
Act; winding-up under the Business Corporations Act; and, the Companies’ Creditors Arrangement Act. The CCAA
is available to corporations with at least $5M in debts. It was popular in the ‘80s because at that time, the BIA did
not provide for a stay of proceedings against secured creditors, while the CCAA did. The CCAA offers great
latitude and flexibility in restructuring a debtor company.

While related, the two terms are distinct. Bankruptcy is the formal legal status of a person who has become
bankrupt under the BIA. Insolvency is a condition, short of bankruptcy, in which a person is unable to meet his or
her liabilities, or whose liabilities exceed his assets. Determining whether someone is (or was) bankrupt is easily
accomplished with certainty by performing a bankruptcy search; determining whether a person is insolvent is always
a fact-driven exercise in business judgement or judicial analysis.


Chief gov’t official appointed by the Governor in Council to be in charge of supervising the administration of all
bankrupt estates. Under the ’92 and ’97 amendments, the Superintendent was given increased powers of
investigation and inquiry where he believes that a person has committed an offence under the Act or any other act of
parliament. The Super is required to keep a public record of proposals, bankruptcies, licenses issued to trustees and
notices by receivers or receivership proceedings. The Office of the Superintendent of Bankruptcy (OSB) has three
areas of activity: (1) ensure soundly operating insolvency process supported by effective regulatory framework; (2)
ensure compliance with legislation by discouraging offences and frauds; and, (3) provide administrative
infrastructure required by the BIA.

The Official Receiver represents the Super in each of the provinces. His job is to generally administer the policies
of the Act with respect to bankruptcies, proposals and receiverships.

The trustee is a person or corporation that is licensed by the Super to perform the duties of a trustee set out in the
Act, Rules and Directives. The trustee is sometimes stated to be an officer of the court, but his role is to act as an
intermediary between the debtor and the creditors. He must act as an even-handed, neutral court officer in balancing
the rights of both the debtor and creditors. The trustee has several duties under the Act, including: (1) taking
possession of the debtor’s assets upon appointment; (2) converting the assets into cash; (3) assisting the debtor in
preparing documents and setting up first meeting of creditors; (4) reporting to the creditors; (5) reviewing and
finalizing claims against the bankrupt; (6) preparing a report to the court on the bankrupt’s discharge; and (7)
reporting to the court on the trustee’s discharge.

Section 136 sets out the priority amongst preferred creditors. s. 136(1) begins “…Subject to the rights of secured
creditors…” meaning that the preferred class of creditors only get to realize any assets AFTER all the secured
creditors have been compensated. The priorities for preferreds then goes:

s136(1)(a) funeral costs. The first claim is for the costs for a reasonable funeral for a
deceased bankrupt

(b) costs of administration (ie. to the trustee). This expense is justified on the basis that it is necessary in order to
find individuals who will administer the estate in a fair manner – without preference in pay, they may be tempted to
commit fraud

(c) the Superintendent’s levy. Subsection 147(1) provides for this levy (in order that the OSB be an economically
self-sufficient entity), and s. 136(1)(c) gives it preferred status. *5% of all payments made by the trustee

(d) wage earners. This is for 6 months’ wages up to a maximum of only $2000 (and includes vacation, etc). The
wage amount is capped at $2000 so that this claim will not eat up too much of the available assets. Of course, if an
employee is owed money above the $2000 limit, he can still make an additional claim as an unsecured creditor
(although by that time, there will probably be no assets left).
*Section 126 allows the gov’t to make such a claim on behalf of workers.

(d.1) support claims. This was introduced in the 1997 amendments and covers spousal/child support claims for the
year before bankruptcy. In addition, such claims are non-dischargeable under subsections 178(1)(b) and (c). The
policy reasons behind this claim are to highlight the importance of family obligation and to recognize women as a
vulnerable societal group (ie. spousal). *The fact that a a spousal-support creditor meets the definition of “creditor”
(under s.2 – definition section) means that they can petition a debtor-spouse into bankruptcy. In addition, they can
oppose the discharge of a bankruptcy (even though their claims are non-dischargeable)

(e) certain municipal taxes. cross-reference with s. 356 of the Municipal Act

(f) landlord’s claims. The landlord is given preference for three months rent prior to the bankruptcy and for three
months thereafter as accelerated rent (if so stipulated in the lease). However, the landlord’s claim is limited to
money realized as a result of the sale of assets ON THE PROPERTY. If the landlord has a claim more than this
realizable amount, it becomes an unsecured claim; ie. if the landlord is owed $3000 and the sale of assets (from the
property!) only realizes -$2000, the landlord only gets $2000 – the remaining $1000 becomes an unsecured debt.
*Landlord’s Right of Distraint: prior to a bankruptcy, a landlord may distrain for arrears of rent. Once the
bankruptcy occurs, however, if the distress has not yet been completed, the landlord must surrender all seized assets
to the trustee. The landlord does not become a secured creditor (but a preferred creditor under this section). The
result is that a secured creditor can petition a debtor into bankruptcy to defeat the priority of a landlord (even though
he may have seized the debtor assets already) if he has not completed the distress.

(g) costs of the first execution creditor. This seems to go against the underlying notion of bankruptcy as a collective
remedy in which there should be no race to the courthouse (says Ramsay), but I disagree. Since this section is
simply a re-imbursement for costs, the first creditor is simply being repaid for the costs of initiation. Not doing so
would place an unfair burden on him and allow subsequent creditors a free ride.

(h)&(j) certain Crown priorities. Under the amendments in 1992, the Crown’s preferred claim was abolished. In
addition, the amendments also abolished the statutory deemed trusts used by the Crown to maintain priority (except
in regards to Income Tax, CPP and EI). All other deemed trusts are not applicable in a bankruptcy or in a proposal.
Today, a Crown claim in bankruptcy is considered an unsecured claim (under sections 86-88), however the Crown
can nonetheless obtain security from the debtor for other debt in the same way as any other creditor, so long as the
security is registered in the appropriate PPSR.

A comparison of s. 136 to its equivalent in the US Bankruptcy Code (s. 507) shows some important differences. In
the US, there is a preference for consumers who put a down-payment to a subsequently bankrupt firm (up to $1800).
Interestingly, this type of creditor is given preference even to spousal-support creditors. Also, unpaid taxes are
given preferred status in the US, while landlord’s claims are not. Why the difference in the preference between two
such similarly-situated countries? Ramsay suggests that it is probably a direct result of interest-group politics.
Since the Bankruptcy Act has such a low visibility in day-to-day life, interest groups are able to sneak in desired
provisions without much controversy.


Section 81(1) permits a person or creditor to reclaim property from the trustee which was in the bankrupt’s
possession at the date of bankruptcy. Ordinarily, the claimant will be one who claims a proprietary interest, rather
than a security interest, in the property. This type of claimant would include a conditional sales vendor, an
equipment lessor, a consignor of merchandise, and a beneficiary of a contractual or statutory trust.

Section 81.1 deals specifically with unpaid suppliers. It provides an exception to the general rule in bankruptcy
proceedings that all unsecured creditors should rank rateably – it permits unpaid suppliers of goods to reclaim from
a purchaser, who went into receivership/bankruptcy, any unsold goods supplied within the last 30 days. *This
section obviously covers only unpaid suppliers of goods, since for unpaid suppliers of services there would be
nothing capable of being recovered. Nor does this section apply to lenders who advance money within the 30 days
preceding receivership/bankruptcy.
The problem of the unpaid supplier is an important one because debtors on the verge of bankruptcy would “juice the
trades” – that is, a debtor would order a quantity of goods on credit and then file for bankruptcy. The unpaid seller
would be out his merchandise, assuming that he would not have bothered to take out a security interest on the goods
(most suppliers are not in a bargaining position whereby they can demand a security interest). In addition, his claim
in bankruptcy would be an unsecured one. The debtor’s estate is thus unjustly enriched, to the benefit of the secured
creditors. Such a plan would be beneficial to a debtor who has personally guaranteed a loan from a secured creditor
– if the security (ie. his inventory) is not enough to cover the loan, he would personally have to pay; juicing the
trades allows him to increase his assets (ie. his inventory), thus lessening his own personal liability.

For this reason, s. 81.1 creates a “super-priority” for unpaid suppliers (ahead of even secured creditors holding a
security on AAP: s.81.1(6)). The conditions that must be met in order for a supplier to exercise his s. 81.1 rights are:

s. 81.1 (a) demand: the supplier must present a written demand for repossession to the trustee, purchaser, or
        receiver (“in prescribed form”) within 30 days after the deliver of the goods to the purchaser.
        This places a great restriction on suppliers right of revendication – the supplier has to present demand
        within 30 days of delivering the goods. If the supplier delivers goods 25 days before bankruptcy, but
        doesn’t find out about the bankruptcy until 15 days later, he will not be able to revendicate. It doesn’t
        matter that the goods were delivered 25 days before the bankruptcy, the time restriction is 30 days from the
        demand and therefore this supplier will fail (25 + 15 = 40 days). ***However, one important thing to
        remember is that the ct has the power to extend this 30 day limit pursuant to s.187(11), although it will
        often be reluctant to do so: re: Rizzo Shoes.
        ***The time consideration is important because while the trustee is under a duty to contact and inform all
        creditors, he can choose to do so by snail mail – thus, decreasing the unpaid sellers’ chances of complying
        with the time restrictions! *In re: Zachary’s Furniture Ltd., the BCSC held that if the supplier delivers the
        goods “subject to acceptance”, the time for calculating 30 days begins to run when they are actually
        accepted, not when they are delivered.

         (b) bankruptcy or receivership: at the time of the demand, the purchaser must be in bankruptcy or
         receivership. If the purchaser has filed a notice of intention or a proposal, for example, s.81.1 will not
         apply and the seller will not be able to reclaim the goods: Bruce Agra Foods. An interim receiver,
         appointed under s.47(1) after the filing of a notice of intention, is not a receiver (within the definition of
         s.243(2)) and therefore a seller cannot claim his right under s.81.1 to revendicate.

         (c) identifiable goods: at the time of the demand, the goods must be: (i) in the possession of the purchaser,
         trustee or receiver; (ii) identifiable as the goods delivered by the supplier; (iii) in the same state as
         delivered; (iv) have not been resold at arm’s length; and, (v) are not subject to any agreement for sale at
         arm’s length.
               The part about being resold at “arm’s length” simply refers to a bona fide purchaser. If the
                  receiver or trustee has sold the goods (or agreed to), the supplier loses his right to revendicate.
                  Furthermore, if the goods are in the hands of a third party who has an adverse interest to the
                  debtor, such as a warehouseman, the supplier cannot reclaim the goods: Thomson Consumer
                  Electronics v. Consumers Distributing.
               Goods must be in the same state as delivered: if the debtor has mixed or dismantled the goods, the
                  supplier will not be able to reclaim them. However, in Consumers Distributing, Farley J said that
                  removing goods from shrink wrap did not constitute “change of state” – it was simply changing
                  the packaging of the goods, not the goods themselves.
               Identification of goods: the supplier has the onus to identify the goods. A supplier does not need
                  to match serial numbers to identify goods – he can identify them using purchase orders, invoices,
                  or other such evidence. *One problem arises in cases where the supplier is in a continuous
                  commercial relationship with the debtor, and its goods are not easily identifiable. If the goods
                  supplied within 30 days are intermingled with goods supplied prior to 30 days, the supplier will be
                  unable to identify them and thus will be unable to reclaim them.

         (*) the seller’s right to revendication is nullified if the entire balance owed to him is repaid. If only a
         portion of the goods have been paid for (ie. a deposit), the seller may repossess a proportional part of the
         goods, or repossess all the goods and pay the trustee the amount he was paid (ie. the deposit): s.81.1(2).
         Also, the supplier’s right of repossession conferred by s.81.1 must be exercised within 10 days after the
         purchaser/trustee/receiver presents the supplier with a written notice admitting that right: s.81.1(5).
         However, the parties can extend the 10 day period by mutual agreement.

It seems as though s.81.1 has not provided what suppliers wanted. Unless you are a large supplier with access to
good lawyers, this section does not offer much protection. Even with good lawyers, the stringent requirements
(especially time limits) make revendication difficult.
The rights of the unpaid supplier have even been defined as “illusory”, in Re: Henry Birks & Sons Ltd – since the
s.81.1 rights only operate in the event of bankruptcy or receivership, an unpaid supplier has no recourse if the debtor
files a proposal (*this is on the basis that if the supplier were allowed to recover the goods, the debtor may not be
able to make a successful proposal). If the debtor files a notice of intention to make a proposal, the suppliers rights
are suspended until the proposal is dealt with – as a result, the supplier’s rights are illusory if the goods are no longer
in the possession of the debtor upon bankruptcy or receivership. Critics of some substantial (and failed)
restructurings of retail companies have suggested that the attempt to restructure was merely a scheme to reduce 30-
day goods claims by allowing the debtor an opportunity to ship, sell, repackage or commingle the inventory.

In Agro Pacific, the supplier applied to set aside a CCAA application, saying it was in bad faith. The essential
argument was that Agro had bulked up its inventory and was using this to pay off its secured creditors (“juicing the
trades”). The ct held that this was not in bad faith – while Agros decision to file under the CCAA (rather than the
BIA) had the effect of making s.81.1 inoperative, it was not Agros sole reason for doing so. The ct held that there is
“nothing morally or legally culpable” about gaining some advantage under one act that is unavailable under another.
While the ct said that it felt sorry for the suppliers, they also said that such risks are a cost of doing business and the
suppliers should have protected themselves better (ie. insurance, factoring off accounts, etc).
Another option tried has been to ask the ct to create a trust fund for the proceeds of sale of 30-day goods. This
approach was rejected by the ct in re: Woodward’s Ltd. on the basis that such a trust fund would give suppliers an
advantage over other creditors (contrary to the objective of maintaining the status quo) and would be detrimental to
the restructuring efforts of the debtor. In addition, the creation of a trust fund would eliminate any defence there
may be to 30-day goods claims because, at the time the dispute would proceed to resolve ownership to the trust
fund, the goods would have been sold (otherwise, there would not have been any proceeds to claim a trust over).
Accordingly, there would be no basis to question the various criteria necessary to establish a 30-day claim.
Finally, a third option available to the unpaid supplier would be to obtain an order terminating the stay of
proceedings in order to enforce any remedies he may have against the goods. In most cases, however, the cts will
not give such an order – the cts have consistently considered that providing the debtor with all possible opportunities
to restructure is the paramount concern in the restructuring process.

“Consumers as creditors” refers to a situation whereby the consumer puts down a deposit for merchandise, and the
retailer subsequently goes bankrupt. What remedies are available to the consumer? The consumer has the option of
suing the bankrupt debtor, but any judgment he receives will simply classify him as an unsecured creditor – thus, in
most cases, it would not be worth the expense. Alternatively, the consumer can argue that title to the goods had
passed to him, and was now his property, rather than the bankrupts’ estate. In order to decide whether title has
passed, you need to look at section 19 of the Sale of Goods Act, specifically rules 1 & 5 (*sections 17-19 of the
SGA deal with the passage of property):

rule 1 deals with “specific goods”, meaning goods identified and agreed upon. Examples of specific goods include
buying an automobile, specified by its colour, make and VIN. In the case of specific goods, title in the property
passes at the time that the contract is made.
rule 5 deals with “unascertained goods” and includes generic goods. An example of an unascertained goods is an
appliance – while the specific make and model of the appliance is chosen, the retailer is free to give you any one
from his inventory (ie. they can give you any Frigidaire freezer, they don’t have to give you the one on the
showroom floor). In the case of unascertained goods, title does not pass until the goods are “unconditionally
appropriated to the contract”.

Why would we want a consumer priority? Because of the information asymmetry between consumers and retailers
– a consumer doesn’t know the financial standing of its retailer when putting down a deposit. A consumer is an
involuntary creditor (it didn’t loan the debtor any money; it in essence loaned money involuntarily) and, as such,
deserves greater protection. Ramsay says that it is unlikely that consumers will ever get a super-priority because
there are no powerful consumer-interest lobby groups. Nonetheless, there are some forms of protection at the
provincial level (ie. BC has a buyers’ lien which creates super-priority).


Parliament has exclusive jurisdiction to set priorities in bankruptcy and insolvency matters, and by s.86(1), it has
decided to rank all Crown claims (including secured claims) as “unsecured” – except where federal legislation
provides otherwise. There is an exception in s.86 (found in s.86(3)), which says that s.86(1) does not affect the
operation of provincial legislation that is, or is substantially similar to, s.244(1.2) of the Income Tax Act (such as the
CPP or EI). This exception is limited to situations where the debtor has acted as a conduit for funds belonging to
the provincial Crown, such as deductions from employees’ wages (ie. the deemed trust argument).
Section 86 applies in a proposal with the result that all provable claims, including secured claims, of the Crown rank
as unsecured claims, subject to the exceptions in s.86(2)&(3): re: Lynn Holding Ltd.
Section 87 allows legislative security provisions whose sole purpose is to secure the claims of the Crown. Such a
security has to be registered before assignment or before the petition is filed. If the Crown does so, s.87(2) says that
its security is subordinate to all security interests registered before it and is only valid in relation to amounts owing
at the time of registration plus interest.


In defining what constitutes property, s.67(1)(a) specifically excludes property held in trust by the bankrupt for
another person. In determining whether or not property is trust property, the ordinary law of trust applies, and it is
necessary for the claimant to prove that a valid trust was in existence at the date of bankruptcy. For a valid trust, an
arrangement must have three certainties:
certainty of intent: in order for a trust to be validly constituted, there must be a clear intention to create it: re: Ont
Worldair Ltd.
certainty of subject matter: although the subject matter of a trust may take many forms, for a valid trust the subject
matter must be in existence (in whole or in part) at the date of bankruptcy.
certainty of object: the persons intended to be beneficiaries must be clearly identified as well as the manner in which
the property is to be applied: BNS v. Societe General. There must be no uncertainty as to whether a person is, in
fact, a beneficiary.

Because section 136 has downgraded the priority of the Crown, provincial legislatures have tried to get around the
federal priority rules (in the BIA) by creating special liens. The cts were initially against allowing this, but
compromise was reached and certain instruments were allowed.

s.67(2) says that deemed trusts in favour of the Crown are of no effect unless they would be regarded as trusts in the
absence of the statutory provision (ie. they would have been found to be trusts without the statutes that created them
anyway), but…
s.67(3) says that deemed trusts can be used for Income Tax , CPP, or Employment Insurance. Deemed trusts in
respect to CPP and EI are valid, even if the debtor did not keep the trust property separate and apart: Re: Kraemer.
With regards to income tax, the Income Tax Act gives the CCRA (Canada Customs and Revenue Agency) priority
even over secured creditors (“super-priority”).

The deemed trust issue arises because insolvent debtors are often tempted to use money remitted for taxes, CPP, etc.
for working capital. Upon bankruptcy, the government agencies attempt to recover that money by claiming that it
was held in trust for them. Section 67(3) allows them to do this for the mentioned Acts, or for any statutory deemed
trust similar to that imposed by s.227(4) of the Income Tax Act.
Except for the exceptions in s.67(3), the ct will not recognize any deemed trusts unless they are in fact real trusts
(not a provincial ploy to get around priority rules). For example, Husky Oil showed the strong stand that the cts
were willing to take against the provinces. Not only would the ct strike down fictitious deemed trusts, they would
also strike down provisions that had the effect of re-arranging the priority rules.
***For example, where provincial legislation deems money paid into a pension plan by an employer to be held in
trust for employees (but not CPP), s.67(2) has no application since the property is not held in trust for her majesty.
The deemed trust is ineffective because it conflicts with the provisions of the BIA (and would have the effect of re-
ordering the priorities): Continental Casualty Co.



Part II of the BIA (Receiving Orders and Assignments) describes how the Act may be invoked. In many cases, the
Act may be invoked in one of two ways. First, and unsecured creditor may file a petition for a receiving order
against a debtor. Second, the debtor can voluntarily file an assignment in bankruptcy. In both cases, the debtor is
then bankrupt, bringing in the administration of bankrupt estates under the BIA and other legislation.


Receivership is a remedy available to both secured creditors (under a security agreement) and by appointment of the
court. A receiver is basically a person appointed to run the debtor company. There are three types of receivers:
     private receiver: the security agreement will give the creditor the right to appoint a receiver. This power is
        confirmed by s.60 of the PPSA.
     court appointed receiver: the Courts of Justice Act give the ct the power to appoint a receiver, if so asked.
     interim receiver: can be appointed pursuant to s.46 & 47 of the BIA.

The private receiver offers a self-help remedy for secured creditors. The scope of his powers are defined by the
security agreement, which gave the secured creditor the right to appoint a receiver in the first place. His primary
duty is to the secured creditor, although the BIA has extended the scope of his duties.
Since the 1980s, the private receiver has had greater duties imposed of him because of a perception, at that time, that
financial institutions were too quick to appoint a receiver (who would liquidate the estate). Under the amendments
of 1992, the creditors and the trustee can monitor the appointment of a receiver and review his conduct.
A private receiver must comply with both the PPSA (ss.59-64; 66-67) and Part XI of the BIA – however, the BIA
only applies if the debtor is insolvent and uses its property in the business, and the secured creditor must be in a
position to enforce its rights against all (or substantially all) of the debtor’s property: s.243 BIA.

A court appointed receiver is an officer of the court and has a fiduciary duty to all parties involved in the
bankruptcy. While the private receiver is faster, cheaper and more responsive to the creditor’s needs, the ct-appt
receiver protects a creditor from allegations of impropriety and lawsuits. A ct-appt receiver is useful if a creditor
anticipates non-co-operation from a debtor (ie. hiding assets, etc) – because non-compliance with a ct-appt receiver
is a contempt of court.

When a debtor is petitioned into bankruptcy (involuntarily), and the debtor opposes the petition, there will be a
period of time between the filing of the petition and the matter actually being heard in court. The ct may appoint an
interim receiver, under s.46(1) of the BIA, to play a “watchdog” role in the conservation of the debtor’s assets (ie. to
ensure that they are not fraudulently conveyed or wasted). The interim receivers role is simply to be custodian of
the debtor’s property pending a determination of the petition – he is not to interfere with the debtor or the day-to-day
operations of the corporation [as defined by the “Powers of Interim Receiver” under s.46(2)]. If an interim receiver
is appointed, the appointment is usually made during the period of time between the issuance of the petition and the
making of the receiving order.
Section 46 confers a discretion on the ct as to whether it should appoint an interim receiver. This discretion must be
carefully exercised (since the appointment of a receiver will damage the reputation of the debtor in the public’s
eyes). In re: Stuart and Sutterby (1929), the ct set a high standard that had to be met in order for an interim receiver
to be appointed: (1) the creditor must show that a receiving order is almost certain; and, (2) the creditor must show
that there is a grave danger that the assets will not be recovered or accounted for when the receiving order is actually
made. Subsequent case law has perfected the requirements – so that in order to have an interim receiver appointed,
the petitioning creditor has the onus of proving that:

        there is a need for the protection of the debtor’s assets for the benefit of all creditors: re: Pure Harmonics
        the petitioning creditor has a strong prima facie case that the debtor will be put into bankruptcy: re:
         Imperial Broadloom Co. The evidence in support of the application (for an interim receiver) must establish
         that on the balance of probabilities, the petitioning creditor will likely succeed in obtaining a receiving
        there is a real danger, not one based on suspicion or speculation, that the assets will dissipate: re: LAT
         Macdonald Enterprises Ltd. The evidence must show that there is a grave danger that assets will disappear
         or that the estate will be adversely affected in some way.

Some situations in which an interim receiver has been appointed include: the debtor has been preferring certain
creditors (re: Stuart & Sutterby); the debtor has sold assets without accounting to creditors for proceeds (re: Weiss);
the debtor is disputing the petition and there is a bona fide dispute, but the ct nonetheless wants to protect the assets
(re: Coffey).

The rational for the limited role played by the interim receiver is based on the fact that the debtor has not yet been
petitioned into bankruptcy (in fact, he opposes such a petition). In such a case, the debtor should be allowed to keep
running his business, but should be prevented from making any fraudulent allocation of assets. If the interim
receiver has any doubts as to how he should act in carrying out the interim receivership, he should apply to the ct for
directions (re: Big Eddy Shops Ltd).
***LIABILITY OF INTERIM RECEIVER: an interim receiver is a custodian of the debtor’s property pending a
determination of the petition. During that period of time, the interim receiver does not incur personal liability with
employees, landlords, or suppliers of goods unless the receiver contracts in his own personal capacity.
***Section 47 applies only where a 10 day notice has been sent (or is about to be sent) pursuant to s.244 –
contrast with: Section 46, which applies after the filing of a petition for a receiving order***

Under the amended BIA, a secured creditor who intends to enforce security must give 10 days notice (pursuant to
s.244), in order that the debtor may have the opportunity to file a proposal (or to find alternative financing) – again,
this is an attempt by the legislation to promote re-organization (rather than liquidation). The secured party cannot
appoint a receiver until this 10 day period has lapsed, however in order to ensure that the assets are not fraudulently
dissipated by the debtor, the ct may appoint an interim reciver.
Originally, s.47 was meant to play a conservatory role (for instance, the s.47 interim receivership is limited to the
debtor’s property that is subject to the security interest), in much the same way as s.46 – but, the wording of
s.47(2)(c) (“…take such other action as the court considers advisable.”) has been used to expand the powers of the
s.47 interim receiver. Thus, the s.47 receiver has been transformed from an interim receiver to, in essence, a
standard receiver and manager. The benefits of using a s.47 receiver is that the test for appointment is less strict
than that required for a s.46 receiver: an interim receiver will be appointed only if it shown that it is necessary to
protect the debtor’s estate or the interests of a secured creditor who has delivered a s.244 notice to the debtor. This
test seems less onerous because in addition to appointing a receiver for the protection of the debtor’s estate
[s.47(3)(a)], the interim receiver can be appointed to protect the interests of the creditor who sent the s.244 notice
[s.47(3)(b)]. *The s.46 receiver can only be appointed for the protection of the estate. The test for s.47, while less
onerous, still requires that the creditor show that there is actual danger that the assets will dissipate if an order is not
made. It is not sufficient to show that the danger is based on suspicion and speculation: Royal Bank v. Zutphen
Brothers Construction.
In addition to a less onerous test for appointment, the s.47 receivers’ powers are much more expansive than the s.46
receiver. They are defined in s.47(2) and allow the receiver to take control of the debtor’s property, exercise control
over the business and property, and take such actions “as the ct considers advisable”. While a s.46 receiver is given
the power to take possession of the debtor’s property and exercise control of the business, he shall not unduly
interfere with the debtor in carrying on of the business. The powers of a s.47 receiver, on the other hand, have been
defined by the ct to include “…not only what ‘justice dictates’ but also what ‘practicality demands’…”: Canada
(Minister of Indian Affairs) v. Curragh Inc.
Finally, the creditor, in choosing a s.47 receiver, gets the benefits of both a private and court appointed receiver.
The expansive reading of s.47(2)(c) allow the creditor to ask the ct for any number of powers (such as a private
receiver would have), while at the same time the process is court-approved, thus sheltering the creditor from any
allegation of impropriety (such as a ct-appt receiver would).
For the most part, the cts have allowed the expansion of interim receiver powers by way of s.47 (see, for example,
Farley J in Bruce Agra), although some court have been reluctant to grant truly expansive powers (for example, the
Big Sky case in Alta). It is presently unclear at what point cts will draw the line.


Part XI was added to the BIA in 1992 to deal with receivers who were too quick to liquidate a corporation. This
concern arose with the greater use of demand debentures – loans that could be called in at any time. Often, banks
would call in a loan in the morning and have a receiver appointed by the afternoon. This propensity to liquidate
caused problems and, in fact, the 1992 amendments were meant to foster re-organization (which can’t be done if the
assets are immediately liquidated).
As a result of the 1992 amendments, a secured creditor who intends to enforce a security (ie. appoint a receiver)
must send notice to the debtor giving at least 10 days before doing so: subsections 244(1) & (2) BIA. This 10 day
notice requirement is a minimum and was obviously introduced to codify the law that developed from Lister v.
Dunlop. The 10 day notice seems to be redundant in the case of a court appointed receiver (since the court itself will
not appoint a receiver unless sufficient notice is given), but in applying to have a court receiver appointed, the
secured creditor has a duty to act in the utmost good faith and to make “full, fair and candid disclosure of facts”. If
the disclosure is misleading and there are serious defects in the affidavit material, the ct should not make the order
and the secured creditor will be liable in damages: Royal Bank v. Got.
In the 1980s, smaller unsecured creditors were worried about what happened when a private receiver took control –
thus, the rest of Part XI tries to create greater transparency for the receiver and sets out guidelines about appropriate
conduct. For example:
      s.246 says that the receiver must provide information to the Superintendent and to other creditors
      s.247 says that the receiver must act in good faith and deal with the property in a “commercially
          reasonable” manner
      s.248 allows an application to be made to the ct where a receiver is failing to fulfill his duties to act or cease

Section 37 confers a wide discretion on the court to reverse or modify an act or decision of the trustee. It provides a
summary and timely method during the administration of the bankrupt estate for reviewing and rectifying actions
and decisions of the trustee. This section is of general application and leaves open the circumstances under which
the court may vary the trustee’s decision. This section should be used to control the decisions and actions of the
trustee taken within the framework of the trustee’s administrative duties under the BIA.


Bankruptcy is often thought of as a collective action meant to “obtain an equal distribution of the debtor’s assets”
and it has been stated that “bankruptcy court should not be used as a collection agency”, however, in reality,
creditors will often use bankruptcy as a means to collect a debt.
Bankruptcy may be initiated by either a voluntary assignment (which is simply an administrative process) or by way
of an involuntary petition (which is costly and time consuming). Most bankruptcies are voluntary or quasi-voluntary
(ie. the creditor convinces the debtor to make a voluntary assignment). In both cases, the debtor is then bankrupt,
bringing in the administration of the bankrupt estate under the BIA and other legislation. Whether bankruptcy
results from the making of a receiving order or the filing of an assignment, there is no difference in what occurs after
the receiving order or the assignment: subsequent proceedings are identical.


The starting point for “petitioning for a receiving order” (ie. bankruptcy) is section 43(1). It states that one or more
creditors may file a petition against a debtor if:
     s.43(1)(a): the debt owing to the creditor(s) is over $1000; AND
     s.43(1)(b): the debtor has committed an “act of bankruptcy” within the last 6 months (of the date of the
         filing of the petition – important caveat: see below [ACTS OF BANKRUPTCY MUST HAVE BEEN

Interestingly, the $1000 threshold for a petition has remained unchanged since the 1960s – meaning that it has
become much easier to petition someone than it had been in the past.
***Once made, a petition shall not be withdrawn without the leave of the court: s.47(14).

If the ct accepts the petition, then a receiving order is made. The ct is given a wide discretion as to whether or not to
grant a receiving order. Section 43(6) uses the word “may, not “shall” – meaning the ct has the discretion whether
or not to make a receiving order, even if all the facts alleged in the petition are proved.
Once a receiving order is made, however, all the property of the bankrupt devolves upon the trustee (s.71(2)).
Furthermore, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue
any action/execution/proceeding for the recovery of a claim provable in bankruptcy (without the cts permission):

Section 43(1) provides that one or more “creditors” may file a petition for a receiving order. “Creditor” is defined
(in s.2(1)) as a person having a claim (preferred, secured or unsecured) provable as a claim under the Act. Sections
121-3 define what constitutes a provable claim. Claims may be filed by, amongst others, alimony/maintenance
creditors, judgment creditors, and receivers. Revenue Canada is not prohibited from bringing a petition and can use
the bankruptcy process to collect taxes even though there are other remedies available.

Where the creditor is a secured creditor, the creditor must either: (a) surrender the security entirely, or; (b) estimate
the value of the security and show that the debtor owes at least $1000 as an unsecured claim: s.43(2). The secured
creditor must follow one of the two options: it cannot, for example, offer to surrender its security to the extent of
$1000 in order to fall under the latter provision: BMO v. Scott Road Ent. Ltd.

Section 43(1) says that a creditor may file a petition against a “debtor”. A “debtor” is defined (in s.2(1)) as
including: (a) an insolvent person, and; (b) any person who commits an “act of bankruptcy” while residing or
carrying on business in Canada. The definition includes both and does not require both to be present.
“Insolvent person” is defined in s.2(1). It includes, amongst others, situations where the debtor’s assets exceed his
liabilities, but he is unable to pay his debts generally as they become due. In such a case, he is an insolvent person
and a petition can be filed against him: re: Calladine.
***If a wage earner is earning less that $2500 per year, he can make an assignment, but he cannot be petitioned. In
such cases, the onus is on the person alleging that he is a wage earner to prove it.
***A petition cannot be presented against an individual whose principal occupation is fishing, farming or tillage of
soil: s.48. Such a person can make an assignment [see WHO CAN MAKE AN ASSIGNMENT below], but they
cannot be petitioned into bankruptcy. The onus is on the petitioner to prove that the debtor is not entitled to the
benefit of s.48.

DEBT OF $1000
The petitioning creditor must have a debt or debts owing to him that amount to $1000. It is unnecessary to prove the
exact amount owing, so long as it can be proven that this amount is over $1000. If there is more than one petitioning
creditor, the aggregate of the debts owing to the petitioning creditors must amount to $1000: s.43(1)(a). This means
that a creditor who is owed less than $1000 cannot single-handedly petition a debtor simply because other creditors
are also owed moneys that would put the total over $1000 – it is necessary that the creditors petition together.
A debt is a sum payable in respect of a liquidated demand, recoverable by action. A contingent liability (ie. one that
is not yet ascertained as to the total monetary amount) or a claim for an unliquidated sum is not sufficient. Also,
whether a debt that is owing to the petitioning creditor but is not payable until a future time is a sufficient debt is
debatable – a number of cases have held that such a debt is sufficient, the reasoning being that s.43(1)(a) only
requires that a debt be “owing”, not that it be “payable”. There are, however, cases that have held that such a debt is
not sufficient.

It has been frequently said that bankruptcy proceedings are quasi-criminal in nature because of the serious
disabilities that flow from the making of an adjudication of bankruptcy. For this reason, the cts have insisted that
every allegation made in the petition be strictly proven. This requires that evidence be placed before the ct, by the
petitioner, to prove all the allegations of fact contained in the petition.

The “Acts of Bankruptcy” specify the conditions that must exist in a debtor’s affairs in order for a creditor or
creditors to be entitled to ask the court to declare him or her bankrupt (in addition, of course, to the $1000 debt
requirement). Section 42(1) contains ten acts of bankruptcy, some of which are rarely used. In addition, the alleged
act must have occurred within six months (see directly below).
The most common acts of bankruptcy are:
     s.42(1)(b) [the debtor makes a fraudulent conveyance of his property]. For example, transferring assets to
         one’s wife name in order to avoid creditors is a fraudulent conveyance and therefore an act of bankruptcy.
     s.42(1)(d) [the debtor departs out of Canada, or remains out of Canada, in an effort to defeat his creditors].
         It is an essential element of this act that the debtor acted with an intent to defeat his creditors. The onus is
         on the petitioning creditor to prove the intent.
        s.42(1)(e) [the sheriff has been unable to levy the execution against the debtor’s property]. This means, for
         example, that the sheriff has been unable to seize enough property to satisfy the debt.
        s.42(1)(g) [the debtor assigns, removes, or disposes of his property, or is about to do so, with the intent to
         defraud his creditors]. This involves two elements: the disposition of property, and; the intent to defraud.
         The intention to defraud is necessary to prove the commission of an act of bankruptcy.
        s.42(1)(h) [the debtor gives notice to any of his creditors that he has suspended or is about to suspend
         payment of his debts]. This notice can be given either written or orally.
        s.42(1)(j) [the debtor ceased to meet his or her liabilities generally as they became due]. The ceasing to
         meet obligations does not have to commence in the six-month period preceding the filing of the petition. It
         is sufficient that a cessation occur at some point and continue during the six months: re: Joyce. The word
         “generally” does not mean “entirely” – the debtor simply has to cease meeting his liabilities “on the whole”
         or “in most cases”: re: Hugh m Grant Ltd. The petitioner only needs to prove that the claims of other
         creditors are unpaid, in addition to his – it is not necessary that these other creditors also commence
         bankruptcy proceedings. Whether the failure to pay a single creditor can constitute a “failure to meet
         liabilities generally” has given rise to considerable jurisprudence: see [SINGLE CREDITOR
         BANKRUPTY] below.
         ***Once it has been proven that debtor has ceased to meet liabilities generally, the onus then shifts to the
         debtor to prove that he is capable of paying his debts (ie. clear proof that he is able to meet his liabilities
         generally as they fall due): re: Hayes.

The interesting thing about the ‘acts of bankruptcy’ requirement is that nowhere does it mention that the debtor has
to be “insolvent” – therefore, a petitioning creditor does not have to prove that a debtor is insolvent. Thus, for
example, a debtor can be petitioned into bankruptcy if he has the money to pay debts, but does not do so [under
s.42(1)(j)]: re: Calladine. In addition, proof that the debtor is insolvent is not a sufficient basis for making a
receiving order; there must be proof that the debtor has committed an act of bankruptcy: re: Gagnon. However,
proof of insolvency may assist the ct in finding that the debtor has committed one of the enumerated acts of
bankruptcy, such as ceasing to meet liabilities generally as they become due.

Section 43(1)(b) requires that the act(s) of bankruptcy must be committed within 6 months preceding the filing of
the petition. The purpose of this limitation is to prevent the filing of a petition for a stale default.
What constitutes a stale debt? In re: Bombardier Credit Limited, the debtor argued that he could not be petitioned
because the act of bankruptcy had occurred more than 6 months ago. In addition, he said, the creditor could not
resurrect a ‘stale debt’ by re-demanding it within the 6 month period. The ct disagreed, stating that a stale debt
could in fact be resurrected. To find otherwise would require the prudent creditor to bring countless petitions
against debtors in order not to be barred from future action. In addition to being wasteful and inefficient, such a
policy would be contrary to the 1992 amendments which lean towards re-organization – requiring immediate
petitioning would have an unwanted effect.
In a subsequent case (Malmstrom v. Platt) the Ont CA recognized Bombardier Credit and went on to say that a fresh
demand, although evidence of an act of bankruptcy, is not even necessary. Evidence of failing to meet liabilities
generally can be deduced without a fresh demand. In addition, a fresh demand (within 6 months) can be substituted
by a court judgement or order. Finlayson J stated that a judgement or order against a debtor (even if more than 6
months old) constitutes “…sufficient evidence of an act of bankruptcy having been committed within six months of
the filing date” – a judgment debt is a continuing debt. Houlden and Morawetz say that the case law in this area is
split, and the most prudent course is for the petitioning creditor to make a demand for payment in the 6 month period
before filing a petition.


If a debtor wants to oppose a petition, he can do so under s.43(7) which confers a broad power to deny a petition on
the ct. If the ct is not satisfied with the proof of the facts alleged in the petition, it may dismiss the petition under
s.43(7). [If the truth of the facts alleged in the petition are disputed, the court may, instead of dismissing the
petition, stay all proceedings on it: s.43(10). By staying the petition, the ct preserves the date on which the petition
was filed – of vital importance for ascertaining fraudulent conveyances, etc].
The ct can also dismiss the petition (under s.43(7)) if: it is satisfied that the debtor is able to pay his debts, or; for
any other “sufficient cause” (such as an improper use of the BIA). For example, in re: Arnco, the debtor argued
(unsuccessfully) that the petition should be dismissed because the creditor was using the BIA for an improper
purpose (ie. the collection of an individual debt). Another improper use of the BIA would be to file a petition for the
purpose of putting a competitor out of business. In deciding whether to exercise its discretion under s.43(7) and not
grant a petition, the ct must consider the necessity for preserving the integrity of the bankruptcy and insolvency
system and for preventing it from being brought into disrepute.
*s.43(11) gives the ct even greater powers to stay the proceedings – not only for a denial by the debtor of the alleged
facts, but for any “…other sufficient reason…”. This section gives the ct a general power to impose a stay. Even if
the ct is satisfied that the petitioning creditor has proved all essential facts for the making of a receiving order, it can
under s.43(11) grant a stay. Note also that the ct is not required to give a receiving order, even if all the facts alleged
in the petition are true – s.43(6) uses the word “may” not “shall”: the ct “may” grant a receiving order.


If the petitioning creditor alleges that the only act of bankruptcy is the debtor’s ceasing to meet liabilities generally
as they fall due, the petitioning creditor must lead evidence of other creditors to show that their debts are not being
paid, in addition to his own.
In re: Dixie Market, Houlden J said that a single creditor could initiate a bankruptcy by himself. In re: Holmes and
Sinclair, Henry J said that if there is only a single creditor, the petitioning creditor must show “special
circumstances” before the ct will grant a receiving order. In that case, special circumstances existed where:

        the single creditor is the only creditor and the debtor has refused repeated demands; or
        the single creditor is a significant creditor and there are special circumstances (such as fraud or suspicious
         circumstances) on the part of the debtor – the bankruptcy process is necessary to investigate the behaviour
         of the debtor; or
        prior to the filing of the petition, the debtor admits that he is unable to pay his creditors generally.

The reason that Henry J requires the “special circumstances” seems to be a concern that bankruptcy should be a
collective remedy and should not be used for individual debt collection except in exceptional circumstances.
***Remember: special circumstances are only necessary in single-creditor petitions; they are not needed where
debts are owing to a number of creditors.
In re: Mastronardi, the trial judge dismissed a petition on the basis that the BIA was being used as a collection
agency for a single creditor. In reversing the decision, the Ont CA said that the BIA was not being used as a
collection agency – and regardless if it was, the BIA was not a “fall-back” statute: it could be used to collect any
debt. Nonetheless, if there is no proof of special circumstances, the failure to pay one creditor will not be sufficient
for a petition under s.42(1)(j): re: Marcuzzi.
There has been tension in Canadian jurisprudence as to whether or not to allow single creditor bankruptcy, although
for the most part, Cdn cts have accepted that the BIA can be used as an individual creditor remedy. Why the
concern with the BIA as an instrument of single creditor collection? Because the cts are concerned that allowing the
BIA to be used in this way may shift the balance of power between debtor and creditor. Creditors’ powers may be
enhanced (vis-à-vis the debtor) because they now have the power to single-handedly bankrupt a debtor. As such, the
ct is unwilling to outright accept the absolute right of a single creditor to petition a debtor into bankruptcy – the ct
requires these special circumstances in order to ensure that the single creditor is not abusing his powers.


In Bank of Montreal v. Scott Road, the company was put into bankruptcy in order to reverse priorities, namely, to
put the secured creditor (the bank) ahead of wages owed to employees. The employees would normally have
priority pursuant to the Employment Standards Act (which creates a priority above book and debenture debts), but
by invoking the BIA, s.136 applies to give the bank (as a secured creditor) priority over employee wages. Since the
purpose of bankruptcy is to secure an equitable distribution of assets, the question was whether the ct should use its
discretion under s.43(7) to dismiss the petition as an improper use of the BIA. The ct, while sympathetic to the
plight of the employees, said that there was no basis upon which it could refuse a petition used to reverse priorities.
There are a line of cases that accept a creditor’s right to use the BIA in this way, and the ct was especially
enamoured by Laskin J obiter statement in Federal Business Development Bank v. Quebec, in which he upheld a
creditor’s right to strategic bankruptcy. The ct was aware of the effect that such an order would have on the
employee’s wages, however they felt that such a problem needed to be addressed by the legislatures who indeed set
the priorities.
***Notes: the protection afforded to employee’s wages in the BIA is often illusory because even though they are a
preferred creditor, there are often few assets left for them. Also, in this case, the directors of the company opposed
the petition. This was not for any altruistic reason but rather because under s.131(1) of Ontario’s Business
Corporations Act and s.119 of the Canada Business Corporations Act, they would be personally liable to the
employees. Therefore, the directors wanted the employee wages to have priority to the bank so that their own
personal liability would be reduced. **The effect of this ‘director liability’ is really to elevate the employee’s claim
to the status of secured creditor, since they are ensured of getting their money either from the corporation or its
Another important detail is the banks timing in filing a petition. Since the banks can call in a debenture at any time,
they will often wait until payday to do so – that way, they get maximum use out of the employees and the bankruptcy
means that they won’t get paid (thus bulking up the bank’s realizable assets).
Finally, while the problem here is in essence a competition between competing creditors, should we be concerned
with employee’s losing their right to compensation? On the one hand, the reason the companies often are able to
pay their employees is because they are using the bank’s credit (and thus the banks money). On the other hand, the
employees are often in the worst position to take the hit for such a shortfall. The ct does not seem to want to make a
hard decision and thus passes the buck to the legislature.

Another common instance of creditors using the BIA to reverse priorities is in regards to landlords and their right to
distraint. At common law, a landlord is allowed to seize and sell a debtor’s property for arrears in rent. A secured
creditor, who may have a charge over all of the debtor’s assets, may petition the debtor into bankruptcy in order to
gain priority over the landlord’s claim: landlord’s claims are covered by s.136(1)(f), which are of course subordinate
to the claims of secured creditors. The effect of bankruptcy on seizure of property for rent (distress) is dealt with in
s.73(4) of the BIA.
Houlden J dealt with this issue in re: Develox Industries Ltd. and decided that there was nothing improper in a
secured creditor using the BIA in this manner. It should be noted that a secured creditors right under the BIA
continue until the distress has been completed (and a completed distress means both seizure and sale) – thus, if the
landlord has seized the property, but not sold it by the time a petition is filed, the property vests in the trustee (and
the secured creditor gets priority): Clark’s Sporting Goods Inc v. Greystone Motel Ltd.

***The BIA can also be used strategically to reverse the priority of claims for: deemed trusts or liens arising under
provincial legislation (ie. CPP, WB, EI); and, for deemed trusts for provincial and federal sales taxes (such as PST
and GST).


There are two ways of becoming bankrupt under the BIA: involuntarily (as a result of the filing of a petition and the
making of a receiving order), and; voluntarily (as a result of a debtor making an assignment for the general benefit
of creditors). ***A debtor can also technically become bankrupt if he makes a proposal that fails, but such a debtor
is essential deemed to have made an assignment (and thus has the same repercussions).

The assignment is a one page document accompanied by a sworn statement of affairs, namely, a list of assets and a
list of creditors showing their names, addresses and amounts outstanding. The assignment is filed with the official
receiver in the locality where the debtor resides or carries on business. The assignment is a voluntary act by the
debtor, not an adversarial process. There are two types of assignments:
    1.   Ordinary Administration: Prior to filing an assignment, the trustee must make an assessment of the debtor
         (ie. a financial appraisal), and review with the debtor all options open to him. After that, an assignment
         may be made.
    2.   Summary Administration: If the realizable assets of the debtor, after deducting the claims of secured
         creditors, will not exceed $10 000, and the debtor is not a corporation, the provisions of the Act relating to
         summary administration apply (s.49(6) and s.155). Summary administration does not apply to
         corporations (s.49(6)) – they must use the Ordinary Administration to make an assignment. In
         determining the realizable assets of a bankrupt, after-acquired property or property that may devolve on the
         bankrupt after discharge is not considered: s.49(7).
         Again, the trustee must make an assessment of the debtor, and review all statutory and non-statutory
         options available to him. In a summary administration: the trustee does not have to deposit security; notice
         does not have to be published in the newspaper; and the trustee may use ordinary mail. In addition, no
         inspectors are usually appointed and (unless opposed) the first-time bankrupt is automatically discharged
         after nine months [see s.155 for the complete special provisions of a summary administration].
         ***In addition, in a summary administration, a joint assignment may be filed (ie. husband and wife), where
         the debts of the individuals making the assignments are substantially the same. This joint assignment saves
         time and expense.

Once an assignment is filed with the Official Receiver, a bankrupt ceases to have any capacity to dispose or
otherwise deal with his property: s.71(2). The property, subject to the rights of secured creditors, forthwith vests in
the trustee named in the assignment. An assignment is effective as of the actual time of day of filing with the
Official receiver.

To make an assignment, a debtor must be an “insolvent person” or the legal representative of such a person: s.49(1).
“Insolvent person” is defined in s.2(1) as a person (an expansive definition of “person”, which includes partnerships,
corps, unincorporated associations, etc) who can satisfy three requirements (all three must be met):

        the person cannot be a bankrupt
        the person resides or carries on business in Canada, AND
        the person has liabilities to creditors (provable as claims under the BIA) amounting to $1000. While this
         part says liabilities to “creditors”, the ct has held that it is sufficient if the debtor only has one creditor with
         a debt amounting to $1000: Canada (AG) v. Gordon (Trustee of).

If a person is already bankrupt and has not obtained a discharge, he or she cannot make an assignment.
***While a farmer cannot be petitioned (by s.48), he can make a voluntary assignment in bankruptcy.

Creditors don’t have the power to stop you from filing a voluntary assignment, but they can try to use s.181(1) to
annul it. Section 181(1) gives the ct power to annul the bankruptcy where in the opinion of the ct an assignment
ought not to have been filed. While s.181(1) grants the ct broad powers of discretion in deciding whether an
assignment should be annulled, there is no benchmark test for when annulments should be granted. The ct prefers to
decide the annulment issue on a case-by-case basis, keeping in mind that the s.181(1) power is an exceptional one
and should be used in only limited circumstances.
In Wale (Re), the ct granted an annulment on the basis that the motive behind the debtor’s claim was to defeat his
family law obligations (ie. divorce). While the ct acknowledged that motive is normally unimportant in a
bankruptcy filing, in this case it was clear that the debtor’s motives were to defraud and hide assets from the ct (and
his ex-wife). The ct said that there is no single test, but said that an annulment should granted only where: it is
shown that the debtor was not an insolvent person (which would seem impossible if he has debts over $1000 and
“ceases to pay his debts”); or, where it is shown that the debtor abused the process of the court; or, where the debtor
committed a fraud on his creditors.
The ct also elucidated a number of factors which it had taken into account, including:

        is the debtors situation genuinely overwhelming or could it have been managed?
        was the timing of the assignment related to another agenda or was it inevitable?
        was the debtor forthcoming in revealing his situation to creditors or did he hide assets?
        was the debtor’s relationship with his creditors a good one? had goodwill been destroyed?

In essence, the ct is trying to ascertain whether an assignment was truly necessary or whether there is some other bad
faith reason for making the filing. In re: Kergan, the ct said that if a debtor clearly comes within the provisions of
the BIA, he should be entitled to its protection (and thus be allowed to make an assignment), even if he is the
“author of his own misfortune”. Unless annulments are restricted to the most exceptional cases, it could open a
floodgate whereby deserving debtors will lose the protection afforded to them. The ct went on to say that instead of
moving to annul an assignment, creditors should perhaps wait and oppose the debtor’s discharge.

***In deciding whether there had been an abuse of process, the ct seemed to be swayed by the fact that the creditor
in this case was an ex-wife, as opposed to re: Allen (in which case the ct refused an annulment, where the party
seeking the annulment was the gov’t attempting to recover back-taxes).
***This case also seems contrary to the decision in Bank of Montreal v. Scott Road, where the ct said it was ok to
use bankruptcy in order to avoid paying employees. What is the difference between a strategic bankruptcy meant to
defeat creditors and what the husband did in Wale (Re)? It is difficult to see a difference between the two (even
though the ct clearly did).


One of the objectives of the BIA is to provide for the orderly and fair distribution of the property of a bankrupt
among his creditors on a pari passu basis. Sections 69, 69.1,69.2, and 69.3 are designed to prevent proceedings by a
creditor which might give the creditor an advantage over other creditors.
In R v. Fitzgibbon, the SCC said that the aim of the stay is to provide a means of maintaining control over the
distribution of the property of the bankrupt. In doing so, it reflects one of the primary purposes of the BIA – to
ensure an equitable distribution of assets on a pari passu basis. The stay avoids a multiplicity of proceedings and
prevents any single unsecured creditor from obtaining a priority advantage by bringing an action and executing
judgment against the debtor. Without the stay, the entire BIA could break down, with each individual creditor
following his own personal remedy – the protection the BIA is meant to provide (to both debtors and creditors)
would be merely illusory.
The stay also provides the debtor with some “breathing space” in order for him to begin making a fresh start,
although this objective of debtor protection is not stressed by Cdn cts (as it is by US cts).

        s.69 applies to stay of proceedings AFTER A NOTICE OF INTENTION
        s.69.1 applies to stay of proceedings IN A PROPOSAL
        s.69.2 applies to stay of proceedings IN A CONSUMER PROPOSAL
        s.69.3 applies to stay of proceedings IN A BANKRUPTCY (receiving order or assignment)

The stay stops all actions (initiating or continuing) by creditors against the bankrupt or the bankrupt’s property. No
creditor shall commence or continue any action, execution or other proceeding for the recovery of a claim provable
in bankruptcy until the trustee has been discharged. Sections 69, 69.1, 69.2 and 69.3 do not give the ct power to
order a stay – rather they create a stay ipso facto upon the filing of a notice of intention/proposal/consumer
proposal/bankruptcy (ie. ct does not have to grant a stay, it is automatic).
The stay begins with an assignment/petition into bankruptcy and continues until the trustee is discharged.
Knowledge that a notice/proposal/bankruptcy has been filed is unnecessary for a stay to be effective. For example,
if a creditor cashes a cheque that it has received after the debtor has filed a notice of intention, the money must be
repaid (even if he didn’t know about the filing).

Under s.69, no creditor (including a secured creditor) has any remedy against the insolvent person or his property, or
shall commence/continue any action/execution/proceeding for the recovery of a claim provable in bankruptcy:
        if the insolvent person has filed a notice of intention to file a proposal (s.69(1)), OR
        if the insolvent person has filed a proposal (s.69.1(1)) – Division I proposals

No creditors, including secured creditors, are allowed to realize on any of the debtor’s property in order that the
debtor be given some room and time to come up with a viable business proposal that will enable him to continue to
stay in business. The stay is effective upon the filing of a notice of intention, the filing of a proposal, or the filing of
a consumer proposal.
***Note: that the stay only prevents secured creditors from realizing on their security in a proposal; in a bankruptcy,
the secured creditor is allowed to realize on his security [see THE STAY OF PROCEEDINGS IN A

There are several exceptions to the stay of proceedings in a proposal. The stay will not apply:
       to prevent a secured creditor who has taken possession of property before the notice of intention or
          proposal has been filed
       to prevent a secured creditor from invoking a receivership under Part XI if 10 days have passed following a
          notice by the secured creditor (under s.244(1)), and the insolvent person has not filed a notice of intention
          or a proposal
       to prevent secured creditors who are not included in the proposal from exercising their remedies: s.69.1(5)
       to prevent secured creditors from exercising their remedies once they have rejected the proposal: s.69.1(6)
In these cases, any creditor who is affected by the stay of proceedings may apply to the ct (under s.69.4) for an order
lifting the stay, if the creditor is likely to be materially prejudiced by the continuation of the stay, or if it is
inequitable on other grounds.

***With regards to consumer proposals, no creditor can terminate an agreement simply because a consumer debtor
has filed a consumer proposal. Any clause in a contract (called an “ipso facto” clause) that purports to allow a
creditor to terminate an agreement because a consumer files a proposal is void. This does not apply to consumer
bankruptcies, however, only to consumer proposals.

s.69.3(1) says that (subject to subsection (2) and sections 69.4 and 69.5):
      “…on the bankruptcy of any debtor…” – bankruptcy is the point where the stay kicks in
      “…no creditor…has any remedy…” – including all actions, proceedings and executions
      “…until the trustee has been discharged.” – the stay continues only until the trustee is discharged,
                                                        not until the bankrupt is actually discharged

Similar to the provisions in a proposal, no creditor has any remedy against the bankrupt or his property, or shall
commence/continue any action/execution/proceeding for the recovery of a claim provable in bankruptcy, until the
trustee has been discharged. The stay is crucial to the orderly administration of the estate and ensures that a creditor
will not benefit or improve his position at the expense of other creditors. Once a bankruptcy occurs, there is a stay
of proceedings against all ordinary creditors (unless the creditor obtains an order lifting the stay pursuant to s.69.4)
or unless the bankruptcy is annulled under s.181. The stay is effective upon the bankruptcy of the debtor (ie.
receiving order or assignment). After the trustee is discharged, there is no need for the stay to continue, even though
the bankrupt may remain undischarged (because all his property will have been dispersed to the creditors).
The stay of proceedings in a bankruptcy does not apply to secured creditors. Once the insolvent person is in
bankruptcy, a secured creditor may proceed to realize on its security without the trustee interfering (except to review
the validity and enforceability of the security, and in reviewing the secured creditor’s realization of the property). If
the secured creditor wants to claim in the bankruptcy estate, the creditor may surrender his security for the benefit of
all the creditors, or he may simply file a proof of claim for the deficiency after realization (he will then be an
unsecured creditor). The reason that secured creditors are not covered by the stay in a bankruptcy is because the
secured property does not make up part of the debtor’s estate – it belongs to the secured party (upon default) and
therefore it does not matter (in the orderly administration of the estate) if he realizes upon it. [see Table below for
greater detail].
As in the case of proposals, a creditor who is affected by the operation of the stay may apply to the ct (under s.69.4)
for an order lifting the stay, if the creditor is likely to be materially prejudiced by the continued operation, or if the
stay is inequitable on other grounds.
There are many situations whereby it is difficult to discern whether a specific activity constitutes a breach of the
s.69.3(1) stay (ie. a collection agency contacting debtor to discuss repayment of debt). Important to keep in mind
when attempting to identify prohibited behaviour is the policy considerations underlying the stay. The stay is meant
to prevent creditors from jumping priority, so that if an action has the effect of re-arranging a creditor’s priority, it
will probably breach the stay. At the same time, it is important to remember the definition requirement of s.69.3(1)
– for example, when a bank closes a debtor’s account upon hearing of the bankruptcy will probably not fall under
the scope of s.69.3(1) because the bank is likely not considered a “creditor”. This means keeping in mind that the
stay only begins once the debtor is bankrupt and only lasts until the trustee is discharged.
However, the policy goals underlying the stay are not always accepted by the ct. In Vachon, the creditor (UI)
argued that it was entitled to recover a debt owed by retaining future benefits – because the UI benefits were exempt
from seizure under the BIA, no other creditors could get this money anyway, so retention of benefits did not, in
essence, allow the UI creditor to jump priorities. Even though the UI was getting paid, no other creditors were
prejudiced since they couldn’t get the money anyways. The SCC rejected this argument: the ct made light of the
fact that the stay had often been given a broad interpretation, and then broadly defined the term “remedy” to
encompass any retention of benefits. In its decision, the SCC said that an equal distribution of assets is not the only
purpose of the BIA (rehabilitation of the debtor –breathing room – is also a goal).
Therefore, it seems that the policy objectives of the BIA are important when deciding whether an action constitutes a
breach of the stay, but all objectives must be equally balanced. In addition, the ct will define the scope of the stay
very broadly. The reason for this is, for example in Vachon, the ct is not saying that retention of benefits can never
occur, but the permission of the ct is first required. The broad definition of the stay allows the ct to have a
supervisory role over what activities will be permitted.
***Other activities that the ct has found to contravene the stay include a creditor threatening to cut off natural gas
service if they are not paid (re: Plastiques Valsen Inc) and a telephone company threatening to cut off phone service
if they are not paid (re: Colonial Indus. Equipment Ltd). The ct will not allow a creditor who has control over an
essential service to obtain priority over other creditors by threatening to interrupt the essential service.

Although the sanctions for breach of the stay are not spelt out in s.69, it would not seem that a breach of the stay
would automatically result in the proceedings being nullified. Although nullity is a possibility, leave to lift the stay
may be granted retro-actively – therefore, any breach is curable. Thus, a creditor that has breached a stay could
successfully apply to have the stay lifted. Ramsay says that there is not much case law on this particular subject. If
a creditor commences or continues proceedings without obtaining leave from the ct (under s.69(4)), the proceedings
are not a nullity, but merely an irregularity: Trusts and Guarantee Co. v. Brenner. Since it is only an irregularity, in
appropriate circumstances, leave can be granted nunc pro tunc.
In the US, the consequences for a breach of stay include nullification, as well as a private right of action for damages
(by debtors), and possible contempt proceedings (since the stay is analogous to an injunction, any breach is
punishable by contempt sanctions).

By s. 69.4, a creditor affected by a stay imposed under ss. 69 to 69.31 or a person affected by the operation of s.
69.31 may apply to the court for a declaration that the sections no longer operate in respect of that creditor or person.
To obtain such an order, the court must be satisfied that (a) the creditor is likely to be materially prejudiced by the
continuance of the stay, or (b) it is equitable on other grounds that the stay be lifted (with the onus on the creditor in
both cases). In lifting the stay, the court is given a wide discretion (under s.69.4) to impose terms as it sees fit.
In re: Ma, the Ontario Court of Appeal summed up the law on granting of an order lifting the stay of proceedings
created by the Act. On an application to lift a stay, the onus, the Court of Appeal said, is on the applicant to establish
that there are sound reasons consistent with the scheme of the Act to relieve against the automatic stay. While there
is no requirement to establish a prima facie case, this does not preclude consideration by the court of the merits of
the proposed action. Thus, if it were apparent that the proposed action had little prospect of success, there would
likely not be a sound reason for lifting the stay.
The addition of s. 69.4 to the Act in 1992 did not change the test for lifting a stay. The test has always been the
existence of material prejudice or equitable grounds. The pre-amendment cases are therefore still persuasive. The
statement in re: Ma, that there must be sound reasons consistent with the scheme of the act for lifting a stay is simply
another way of expressing the relevant test.
***The financial ability of the bankrupt to defend the action while in bankruptcy is not a factor to be considered by
the court in deciding whether to grant leave. Likewise, the fact that the creditor is a financially strong organization
is immaterial. The “material prejudice” test in s.69.4(a) is an objective prejudice (not subjective) and refers to the
degree of prejudice suffered by the creditor in relation to the indebtedness and the security held. “Material
prejudice” means that the creditor will be treated unfairly or differently in the bankruptcy or in some way it will
suffer worse harm than other creditors.

Section 70(1) says that that stays made pursuant to a receiving order or assignment take precedence over all judicial
judgments. Judgement creditors who have not been paid do not become secured creditors (Cdn Credit Men’s Trust
Assn v. Beaver Trucking), rather they are reduced to the same status as general creditors (Ont Development Corp v.
IC Suatac Construction Ltd).

Secured Creditors and the Stay
The application of the stay to secured creditors depends on the circumstances in which it is imposed:
     After a Notice of Intention to Make a Proposal: if a notice of intention has been filed, a secured creditor
        cannot enforce its security. The stay continues in force until a proposal is filed or the debtor goes bankrupt:
        s.69(1). The stay imposed by s.69(1) does not apply if the secured creditor took possession of assets prior
        to the filing of the notice of intention: s.69(2)(a). It also does not apply if the secured creditor gave notice
        of intention to enforce its security (under s.244(1)) more than 10 days before the notice of intention was
        filed: s.69(2)(b). However, for this section to apply (ie. the ten-day notice creating an exception to the
        proposal/notice stay), the creditor must have a security over all (or substantially all) of the property of an
        insolvent person: London Life Insurance Co v. Air Atlantic.
     After the Filing of a Proposal: if a proposal is filed, a secured creditor cannot enforce his security. The stay
        continues until the trustee has been discharged or the insolvent person becomes bankrupt: s.69(1)(a). The
        stay imposed by s.69(1) does not apply if the secured creditor took possession of the assets prior to the
        filing of the proposal: s.69.1(2)(a). If the proposal does not deal with the claim of a secured creditor, then
        there is no stay (under s.69.1(1)(b)) applicable to him, and he can realize on his security: s.69.1(5).
     After the Filing of a Consumer Proposal and After Bankruptcy: the stay of proceedings as it applies to
        secured creditors is the same for consumer proposals (s.69.2(4)) and for bankruptcy (s.69.3(2)). The
        secured creditor does not require leave to proceed to realize upon his security, but he must first file a proper
        proof of claim with the trustee and give the trustee notice of his intentions to realize.

The policy of the Act in the case of bankruptcy is not to interfere with secured creditors except in so far as may be
necessary to protect the estate as to any surplus on the assets covered by the security. Any surplus that is (or should
be) realized by the security passes to the estate for the benefit of the remaining creditors. The purpose of s. 69.3(2) is
to give the trustee an opportunity to consider whether anything can be realized on the securities, over and above the
amount due the secured creditors, for the benefit of the estate. Sections 79-81 and 127-134 provide the machinery to
enable the trustee to obtain full particulars of the security, and the sale or redemption thereof. For example:
s.79 allows a trustee to serve a notice of inspection of property, during which time the secured creditor cannot sell
the property under the security until the trustee is given a reasonable opportunity to inspect the property and exercise
his right of redemption.
s.127-134 set out the requirements that secured creditors must meet in order to realize on their security. These
sections allow the trustee to request proof of the security (s.128), order the security to be sold where he believes a
greater value can be garnered (s.129), and exclude a secured creditor for non-compliance with s.127-132 (s.133).
s.135(2)(c) gives the trustee the power to disallow a security, for example, where the secured has not properly
registered the security under the PPSA. This power is subject to appeal.

Section 71(1) was repealed in 1997, so the sections dealing with preferences and reviewable transactions have been
redefined to refer to the “initial bankruptcy event”. Bankruptcy commences on the date and time of day that an
assignment is filed with the official receiver (Broadhead v. Royal Bank). In a non-voluntary bankruptcy, the initial
bankruptcy event is the making of the receiving order – prior to this, there is no bankruptcy and no stay is effective.
For example, a landlord may distrain for arrears of rent between the date of the petition for a receiving order and the
date the receiving order is made.


Section 97(3) says that the law of set-off applies to all claims made against the estate of the bankrupt. Thus, if a
creditor has a right of set-off, he will deduct the amount of the set-off and prove a claim in the bankruptcy for the
balance. This means, for example, that if a bank makes a $10k loan, and the debtor has an account for $3k, the bank
can keep the $3k and claim $7k in the estate (“after set-off”). This makes a huge difference in the amount of money
a creditor will actually recover. If the rate of recovery is 5%, then without set-off, the above creditor will get $500
on the $10k loan – with set-off, the bank will recover $3350 (ie. $3k from set-off, and 5% of remaining $7k).
The object of set-off is to avoid the perceived injustice to a man, who has had mutual dealings with a bankrupt, of
having to pay in full what he owes to the bankrupt while having to rest content with a dividend on what the bankrupt
owes him. At the same time, the effect of the set-off is to prefer one creditor over the general body of creditors
(contrary to traditional bankruptcy notions), and accordingly, it is confined within narrow limits. The principal
limiting requirement is that of “mutuality” – if there is not mutuality, there is no set-off.
In order for a creditor to use s.97(3), the set-off must exist at the date of bankruptcy. It cannot be acquired after
bankruptcy. Section 66(1) makes this set-off provision applicable to proposals.



The individual bankruptcy process begins when the debtor approaches a trustee. The trustee then makes a financial
assessment of the debtor (see Directive 6R issued by the OSB; on p.204). The assessment includes a complete
statement of the debtor’s financial affairs, including the debtor’s: assets; liabilities; monthly income and expenses;
and any conveyances or preferences made. The trustee must also discuss and explain to the debtor his legal and
non-legal rights, obligations and options available.

Section 157.1 requires that the trustee give individual debtors and bankrupts three counselling sessions about their
financial affairs. The first counselling session (“Consumer and Credit Education”) takes place before
bankruptcy/consumer proposal with a view to preventing the assignment from happening. The second session
(“Identification of Road Blocks to Solvency and Rehabilitation”) takes place at any time between the date set for the
1st meeting of creditors and 90 days after the bankruptcy/proposal. The third session may take place at any time
before discharge or the completion of the consumer proposal. ***All debtors/bankrupts must take the first two
sessions; the third one is optional.
***If a bankrupt refuses or neglects to receive counselling, the bankrupt does not get an automatic discharge:
s.157.1(3). He must apply to the ct for a discharge.

The trustee decides whether the debtor can make a viable proposal. This is an important decision because if the
trustee decides that a proposal is viable, but the debtor makes a petition anyways, the trustee must comment on this
in his s.170 report (and recommend that the debtor be given a conditional, rather than an absolute, discharge). In
determining whether the debtor could make a viable proposal, the trustee looks at:
      whether the debtor has sufficient property or surplus income
      the family/personal situation of the debtor
      the financial situation of the debtor
      the number and type of creditors (secured and unsecured)
      the likelihood of acceptance of a proposal by the creditors
      whether the return to creditors from a potential proposal would be greater than the returns from a
The trustee then fills out an “Assessment Certificate” and provides it to the Official Receiver.

Once a debtor decides to file an assignment, s.158 sets out a number of duties required of the bankrupt.
One important one is s.158(d), which requires the debtor to create a “Statement of Affairs”, which lists all of the
debtor’s assets and liabilities, as well as the names and addresses of his creditors. This document must be filed with
the trustee within 5 days.
In addition, s.71(2) says that once the assignment is filed, the debtor’s property vests in the trustee and the debtor
ceases to have any capacity to deal with his property. Also, once a debtor files an assignment, he is considered an
“undischarged bankrupt”, and he cannot have any business dealings without disclosing this fact – to do so would be
an offence of s.199 of the BIA (fine of $5000 and/or 1 year in jail).


Summary administrations are used in 96% of all bankruptcies in Canada. If the realizable assets of the debtor, after
deducting the claims of secured creditors, will not exceed $10 000, and the debtor is not a corporation, the
provisions of the Act relating to summary administration apply (s.49(6) and s.155). Summary administration does
not apply to corporations (s.49(6)) – they must always use the Ordinary Administration to make an
assignment. In determining the realizable assets of a bankrupt, after-acquired property or property that may
devolve on the bankrupt after discharge is not considered: s.49(7).
Again, the trustee must make an assessment of the debtor, and reviews all statutory and non-statutory options
available to him. Some important features of a summary administration include:
      the trustee does not have to deposit security: s.155(b)
      notice does not have to be published in the newspaper: s.155(c)
      trustee my use ordinary mail: s.155(d)
      no inspectors are appointed unless the creditors decide to appoint them: s.155(e)
In addition, in a summary administration, there is generally no meeting of creditors. A first meeting of creditors can
be called by the trustee if requested within 30 days of the date of bankruptcy by the official receiver or by creditors
having at least 25% of proven claims: s.155(d.1).
Finally, in a summary administration, the trustee can send a “notice of bankruptcy” and a “notice of impending
discharge” (ie. automatic after 9 months) together in a single notice.
***Also, in a summary administration, a joint assignment may be filed (ie. husband and wife), where the debts of
the individuals making the assignments are substantially the same. This joint assignment saves time and expense.

Once creditors are all notified and have decided as to whether they want to be involved in the bankruptcy
proceedings, the estate is administered and the assets are dispersed by the trustee. In most summary administrations
(which make up 96% of bankruptcies), there will rarely be any significant debtor assets. For this reason, most
creditors won’t even bother getting involved in the process.
The next major event is the preparation and distribution of the s.170 report by the trustee.

The s.170 report sets out the affairs of the bankrupt, the causes of his bankruptcy, the manner in which the bankrupt
has performed his duties, and the conduct of the bankrupt. The report brings the status of the debtor up-to-date,
basically for the benefit of the creditors so that they can decide whether or not to oppose his discharge. It must be
prepared and forwarded to the Superintendent of Bankruptcy and to the creditors within 8 months following the date
of the receiving order/assignment – therefore, before the discharge (which takes place automatically at 9 months):
In addition, the s.170 report allows the trustee to make a recommendation as to whether the debtor should be
discharged (under s.170.1). According to s.170.1(2), when making his recommendation in the s.170 report, the
trustee must look at three factors:

        the requirements imposed on the bankrupt under s.68 (and whether they have been met);
        the total amount paid to the estate by the bankrupt, taking into account the bankrupt’s indebtedness and
         financial resources
        whether the bankrupt could have made a viable proposal, but chose instead to make an assignment.

The trustee’s s.170 report will be considered carefully by the ct. Where a trustee makes a recommendation (in his
s.170 report) that the discharge be conditional, such a recommendation is deemed to amount to an opposition to the
discharge. If a bankrupt does not accept the trustee’s recommendations, he can request mediation or an eventual
court hearing (s.170.1(4) & (7)). If a bankrupt does accept the trustee’s recommendations, and complies with the
conditions, the certificate of discharge can be issued by the trustee and no court application is required: s.170.1(8).
***Section 170(6) allows a bankrupt to dispute the statements contained in a trustee’s report. The bankrupt is
required to give notice (in writing) of his intent to dispute the report, and this must be done prior to the application
for discharge.


A first-time bankrupt is entitled to automatic discharge after nine months, unless the trustee, Superintendent of
Bankruptcy, or creditors oppose it: s.168.1. If no one opposes the automatic discharge within the nine month period
(ie. by filing a notice of opposition or objection to the discharge), the bankrupt is automatically discharged. In
deciding whether to oppose the automatic discharge, the trustee/Super/creditors make light of the s.170 report
(which they must be given a copy of, within 8 months of the bankruptcy, under s.168.1(a)).
At least 15 days before the date for the automatic discharge (ie. 9 months after bankruptcy), the trustee must forward
a “notice of impending discharge” to the Superintendent, the bankrupt, and every creditor who has proved a claim:
s.168.1(a.1). The trustee will usually send the “notice of impending discharge” out earlier (with the “notice of
bankruptcy” in a summary administration; and, with the “notice of the first meeting of creditors” in an ordinary
administration), in order to give the creditors sufficient time to consider whether to oppose the bankrupt’s discharge.
If the discharge is not opposed and nine months elapse (since the date of bankruptcy), the bankrupt is automatically
discharged, and the trustee issues to the bankrupt a “certificate of discharge”, which has the same effect as an
absolute discharge: s.168.1(f). If the automatic discharge is opposed, then there is a “discharge hearing”.
***Because most bankruptcies are summary administrations (with rarely any significant debtor assets), most
creditors will not bother to get involved in the process. For this reason, there are rarely any oppositions to
bankruptcy. Ramsay says that the majority of oppositions are made by the trustee – who will oppose an automatic
discharge because he himself has not been paid.

A person who is not entitled to an automatic discharge nonetheless automatically makes an application for discharge
once they become bankrupt (assignment or receiving order): s.169. A corporation is not eligible for this provision –
a corporation cannot receive a discharge until all of its debts to its creditors have been repaid.

If a bankrupt is entitled to an automatic discharge, it can be opposed by any one of: the Superintendent
(s.168.1(1)(b)); the trustee (s.168.1(1)(d)); or, a creditor who has proven his claim (s.168.1(1)(c)). Similarly, if a
bankrupt makes an application for discharge (under s.169), the same parties are entitled to dispute the discharge.

        OPPOSITION TO AUTOMATIC DISCHARGE. The trustee is required to send a notice to every creditor
         (under s.168.1(a.1)), at least 15 days before the automatic discharge date (at 9 months), of the impending
         discharge. Such a notice has a paragraph informing creditors that if they intend to oppose the discharge,
         they must give notice of this, and must state their grounds for doing so (to the Superintendent, trustee and
         to the bankrupt). If this is done (ie. the creditor opposes), then the automatic process for discharge (under
         s.168.1) does not apply – instead, the discharge proceeds in the manner set out in s.169-173.
        OPPOSITION TO A DISCHARGE THAT IS NOT AUTOMATIC. If a bankrupt is not entitled to the
         benefits of automatic discharge (ie. he is a second-time bankrupt), then a creditor wishing to oppose the
         discharge need not give a notice of opposition unless he intends to oppose the discharge on grounds other
         than those set out in the trustee’s report: s.170(7). However, most creditors will do so anyways.
        OPPOSITION TO AN AUTOMATIC DISCHARGE BY A TRUSTEE. Section 168.1(1)(d) specifically
         give the trustee the right to oppose a discharge. If a trustee intends to oppose the discharge, the trustee
         must give notice of the intended opposition (in Form 80). The notice must be given to the bankrupt (and to
         the Superintendent) within 9 months following the making of a receiving order/assignment: s.168.1(1)(d).

Empirical studies suggest that creditors object to discharge in a very small percentage of cases (about 5%), and
trustees object to discharge in only a slightly higher percentage.

A trustee is allowed to oppose an automatic discharge under s.168.1(1)(d). In many cases, objections to discharge
are brought by trustees in an effort to recoup their fees. They will often ask the ct (in their s.170 report) for a
conditional discharge that requires the bankrupt to pay moneys into the estate sufficient to cover their fees. The ct
dealt with this in re: Georgina Weatherbee and re: Macumber, and held that a trustee will normally be allowed to do
this, except where the bankrupt’s income falls below the standards set by the Superintendent (Directive 11R)
necessary for the support of himself and his family. In re: Macumber, the ct said that income in excess of these
standards will be required in order to allow a trustee to make a recommendation under s.170.1(1). If a bankrupt’s
income falls short of these standards, the trustee cannot use his recommendation to extract payment of his fees.

The Superintendent can oppose an automatic discharge under s.168.1(1)(b). Although rare, the OSB did in fact
intervene in Morin. This intervention was premised on the fact that a single creditor may not oppose a discharge
because he will be unaware of a large pattern of abuse, only visible if the entire scope of actions of the bankrupt are
taken into account. Furthermore, an objection to discharge may be instituted where a trustee does not recognize
such a pattern of behaviour (in which case, actions may also be brought against the trustee).

The hearing on a bankrupt’s application for discharge is summary in nature. The hearing is to determine whether
the bankrupt ought to be discharged and, if so, what conditions (if any) should be imposed. In deciding whether to
grant a discharge, the cts will consider the rehabilitation of the bankrupt, the interests of the creditors and the
integrity of the bankruptcy system. This hearing is where any objections to the discharge are heard.
Section 172 sets out the orders that the ct may make on an application for discharge. Under s.172(1), the ct can
choose to either:
      grant an absolute order of discharge
      refuse an absolute order of discharge
      suspend the operation of the order for a specified time
      grant an order of discharge subject to conditions (with respect to any earnings/income that the bankrupt
          may get or with respect to his after-acquired property)
If, however, some facts are proven under s.173(1), then the ct may make any of the above orders, except it cannot
grant an absolute discharge: s.172(2). Other than this requirement, the kind of order to be made on an application
for discharge is a matter of judicial discretion. When exercising this discretion, the ct will take into account the
following underlying considerations:
      the interests of the creditors in obtaining payment of their claims, or generally, the protection of creditors,
      the interests of the bankrupt in obtaining relief from the financial obligations, or the rehabilitation of the
          bankrupt, and
      the integrity of the bankruptcy process and the public perception of the process

If no facts are proved under s.173(1), the ct may grant an absolute discharge. The ct will usually grant an absolute
discharge where the bankrupt has acted honestly and sincerely in his dealings, and in situations where the
bankruptcy was caused by circumstances beyond his control.

If any of the facts under s.173(1) [see SECTION173(1) below] are proven, then the ct will refuse to grant an
absolute discharge (according to s.172(2)). However, if no facts are proven, the ct still has a discretion to refuse a
discharge – but only in the most extreme cases. Cases where the ct has refused an absolute discharge include: where
the bankrupt has gone into bankruptcy for the third time or more (re: Hardy); where the bankrupt displayed a
flagrant and callous disregard for the rights of creditors (re: Messier); and, where the bankrupt did not comply with
the BIA, completely ignored his responsibilities as a bankrupt and took a casual attitude toward the bankruptcy
proceedings (re: Upham).

Although it is unusual to suspend a discharge, if no facts are proved under s.173(1), the ct may do so if it sees fit. If
facts are proved (under s.173(1)), the ct will normally order a suspension order where the bankrupt has acted
egregiously, but his income is not sufficient to permit the making of payments to creditors. In Visuvalingam, the ct
suspended the discharge for 4 months because of the bankrupt’s inappropriate conduct (ie. running up credit card
bills; gambling). In Morin, the ct granted a 1-year suspension where the bankrupt acted recklessly and disregarded
the loss to her creditors, even though the ct did not feel that she did so with the intent to “leave her creditors holding
the bag”.
If no facts are proved under s.173(1), the ct can grant a discharge conditional with respect to earnings or income
after bankruptcy and with respect to after-acquired property: s.172(1). It cannot, however, make the order
authorized by s.172(2)(c) (ie. that the bankrupt consent to judgment or comply with other terms as the ct may
Section 172(2)(c) applies to situations where a fact has been proven under s.173(1). In this situation, s.172(2)(c)
requires that the bankrupt (as a condition of his discharge) do one or more of the following:
      perform such act (ie. give an assignment of an interest in the estate of a deceased person)
      pay such moneys (ie. pay a fixed sum on a monthly basis)
      consent to judgment (this is usually done where the bankrupt is anxious to obtain a discharge)
      to comply with such other terms as the ct sees fit to impose (ie. to give monthly reports of earnings and
          expenses to the trustee)
Most conditional orders direct the payment of a sum of money. Generally speaking, an order for payment should
only be made if there is a surplus in income sufficient to permit payments for the benefit of creditors (after providing
for the adequate support of the bankrupt and his family). Once the conditions required by the ct have been met, a
bankrupt can apply for an absolute discharge. If the bankrupt consents to the judgement, he will be given an
absolute discharge at that time (and if he subsequently does not comply, the trustee can then bring enforcement
Examples of the conditional discharge include:
      In re: Raftis, the debtor was given a conditional discharge: although she was relatively unsophisticated and
          did not act in a truly egregious manner, the ct felt that to allow an absolute discharge would be contrary to
          the “public morality”. The bankrupt’s high income also required that they be required to pay some money
          towards the debt as a condition of discharging the bankruptcy.
      In re: Zourntos, the ct imposed a conditional discharge where it felt that the bankrupt was not an
          “unfortunate debtor” – he had ran up his credit card debt and failed to make a proposal when one was
          viable. In addition, the bankrupt continued to accumulate debt even when he was aware of the fact that he
          was insolvent.

According to s.172(2), if any of the facts under s.173(1) are proven, then the ct will be unable to grant an absolute
discharge (and must grant either a conditional discharge, refuse a discharge or suspend a discharge). Some of the
facts referred to under s.173(1), for which an absolute discharge will be denied include:

                 s.173(1)(a) – the assets of the bankrupt are not of a value equal to 50% of the bankrupt’s
                  unsecured liabilities, unless the bankrupt satisfies the ct that this is because of circumstances for
                  which he cannot justly be held responsible. This is the most common fact reported by trustees in
                  their reports to the ct (s.170 report).
                 s.173(1)(b) – the bankrupt has failed to keep proper books of account for the 3 years preceeding
                  the initial bankruptcy event.
                 s.173(1)(c) – the bankrupt has continued to trade after becoming aware of bankruptcy. This
                  section includes situations where the bankrupt has continued to use credit cards while aware of
                  being insolvent: re: Robinson.
                 s.173(1)(e) – the bankrupt has brought about the bankruptcy (or contributed to it) by rash and
                  hazardous speculation, extravagance, gambling, or neglect of business affairs.
                 s.173(1)(h) – the bankrupt has given an undue preference to any creditor during the three months
                  preceeding the bankruptcy event.
                 s.173(1)(j) – the bankrupt has on any previous occasion been bankrupt or made a proposal to
                 s.173(1)(n) – the bankrupt could have made a proposal but chose bankruptcy instead. ***This
                  section says “chose bankruptcy”, rather than saying “filed an assignment”: this would seem to
                  include a situation where the bankrupt could have made a proposal, but instead waited for his
                  creditor’s to get a receiving order against him!

There are numerous other reasons for which an absolute discharge will be refused, so be sure to check the facts
listed in s.173(1) thoroughly. Whether or not facts are proved under s.173(1), the ct has a discretion to refuse a
discharge. However, if no facts are proved under s.173(1), the bankrupt’s conduct would have to be most extreme
for the ct to make such an order: re: Geller.


Section 178(1) lists eight classes of debts which are not released by an order of discharge. These include: alimony;
fines imposed by the ct; and student loans. The exceptions are based on over-riding social policy concerns. They
are the kind of claim which society (through Parliament) considers to be of a quality which outweighs any possible
benefit in the bankrupt being relieved of them.

According to s.178(1)(g), a debt for a student loan is not released by an order of discharge where the date of
bankruptcy occurred: (i) before the date on which the bankrupt ceased to be a student, or (ii) within ten years after
the date on which the bankrupt ceased to be a student. The ten-year period runs from the date of termination of the
student’s studies, not from the date of bankruptcy.
Section 178(1.1) allows the student to apply for an order that s.178(1)(g) does not apply, but only after the 10 year
period has elapsed. In order to get such an order, the ct has to be satisfied on two counts:
     1. That the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the loan. Was
         the money used for the purpose of the loan? Did the applicant complete her education? Did the applicant
         derive economic benefits from the education? Has the applicant made reasonable efforts to repay the loan?
         Has the applicant made use of available options, such as interest relief, to reduce the burden of the loan?
         What is the timing of the bankruptcy? Does the student loan form a significant part of the bankrupt’s
         overall indebtedness?
     2. The bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt
         will be unable to pay the liabilities under the loan. The BIA provides no guidance to the ct as to the
         appropriate time in the future that the bankrupt need experience financial difficulty. In re: Kelly, the ct felt
         that the bankrupt did not experience financial difficulties because she managed to make payments on her


The purpose and intent of the BIA is to ensure that all property owned by the bankrupt at the date of bankruptcy, or
in which he may have (at that date) a beneficial interest in, will (with certain exceptions) vest in the trustee for
realization by him and distribution to creditors. The general rule is that the trustee “stands in the shoes of the
bankrupt”, except where statutory provisions otherwise decree: re: JWO Enterprises Ltd. Apart from statutory
provisions (such as those dealing with fraudulent conveyances), the trustee only succeeds to the rights of the
bankrupt and has no higher rights: McEntire v. Crossley Bros. It is the duty of the trustee to take possession of the
property of the bankrupt as soon as possible after the date of bankruptcy so that he may in due course realize on it
for the general benefit of the creditors.

“Property” is defined in s.2(1) of the Act very broadly. It includes money, goods, things in action, land and every
description of property (whether real or personal, legal or equitable), whether situated in Canada or not. It includes
obligations, easements and every description of estate, interest and profit from present to future. The definition of
“property” is wide enough to include assets in which the debtor has a contingent interest, such as a lease of furniture,
which is in reality a conditional sale: re: Cadieux. Property is defined under the Act to include “things in action”,
which in turn includes claims for breach of contract: re: Wallace. The ct distinguishes between claims “personal” to
the debtor (such as damages arising from bodily and mental suffering), which do not vest in the trustee, and
“property” claims (such as breach of contract) that do.
A life insurance policy (of which the bankrupt is the beneficiary) is not property. Nor is something that may
someday come into existence, such as a pending tort judgment. Property held in trust is excluded by s.67 from the
definition of property.
Section 67(1)(c) provides that the property of a debtor shall comprise all property, wherever situated, of the bankrupt
at the date of the bankruptcy, AND any property that may be acquired by or devolve on him before his discharge.
[***The date of bankruptcy is defined in s.2.1 as the date of (a) the granting of a receiving order; (b) the filing of an
assignment; or, (c) the event that causes an assignment to be deemed]. However, AAP is different from other
property of the bankrupt: until the trustee intervenes, all transactions by an undischarged bankrupt (with a person
dealing with the bankrupt in good faith and for value) are valid and the person acquiring the property receives good
title (this fact is covered by rule 99(1): see below).

Section 99(1) says that all transactions in good faith and for value in respect of property acquired by the bankrupt
after bankruptcy (ie. while he is undischarged) are valid if completed before the trustee intervenes. This section is
designed to act as a shield for the benefit of third parties who might otherwise be liable to lose property, to the
trustee, which they had purchased from the bankrupt in good faith and for value. To be protected by s.99(1), a
transaction must satisfy five requirements:
     1. must be between an undischarged bankrupt and a third party (third party means a party that has purchased
          property from the debtor: re: Wallace. It does not simply mean a third party in the dispute, such as an
          employer who wrongfully dismisses an undischarged bankrupt – the SCC held that such a third party does
          not constitute a third party as required by s.99(1)).
     2. must be in respect of after acquired property
     3. must be in good faith (this refers only to the conduct of a person dealing with the undischarged bankrupt; if
          the purchaser dealt in good faith, the fact that the bankrupt was not dealing in good faith is immaterial)
     4. must be for value (for example, if the bankrupt effected a life insurance policy and died while
          undischarged, the beneficiary would not be entitled to the proceeds from the policy because he will not
          have provided any value for what he has received: re: Bennett)
     5. must be completed before the intervention of the trustee (if a transaction has not been completed and the
          trustee intervenes, s.99(1) has not application)
In re: Wallace, the ct rejected the notion that s.99(1) gives an undischarged bankrupt free reign to deal with after-
acquired property provided the trustee does not intervene – the section is meant to provide protection to bona fide
third-party purchasers for value.

Section 99(1) simply provides a shield for bona fide purchasers for value, and protects their purchase from being
appropriated by the trustee. The section does not give an undischarged debtor free reign to deal with his after-
acquired property, and is inapplicable if there is not a third-party purchaser involved. In re: Wallace, for example,
the ct rejected the ability of the bankrupt to use this provision (to protect a claim for breach of contract) because
there was no third-party purchaser involved in the transaction.
Section 67(1)(c) says that all property, at time of bankruptcy and after acquired, comprises property of the bankrupt
that is divisible amongst his creditors. According to s.71(2), this property vests in the trustee (upon bankruptcy) and
the bankrupt loses all capacity to deal with it in any way. The result of combining these sections is that the
undischarged bankrupt loses his capacity to dispose of or otherwise deal with property that he may acquire after his
bankruptcy. The definition of property is broad, and includes things in action, which in turn means that a bankrupt
cannot bring an action to enforce a property claim. The ability to commence an action or proceeding is a property
right, and vests in the trustee.
The general rule, when combining these two sections, is that an undischarged bankrupt has no capacity to
deal with his property, and no distinction is made with respect to whether that property was acquired before
or after the assignment in bankruptcy. The bankrupt will generally not be able to deal with his property
outside the circumstances described in s.99(1) (ie. bona fide purchaser for value).

Section 68 carves out an additional exception to the general rule (above) where the property in question can be
characterized as “salary, wages or remuneration”. In essence, while s.67(1)(b) sets out certain exceptions to what
constitutes debtor property (of which the Ontario Wages Act would seem to make wages inclusive), in reality s.68
supersedes it. The trustee and ct must look exclusively at s.68 to determine what part of the bankrupt’s earnings are
Section 68 deals with surplus income. The trustee uses a number of factors (set out in Directive No.11; on p.211,
statutory material) to determine what portion of a bankrupt’s total income should be paid to a trustee for the benefit
of all creditors. The trustee compares the bankrupt’s budget in relation to the Superintendent’s standards to
determine what amount should be paid (it should be noted that the ct is not bound to follow the standards established
by the Directive “slavishly”; they are simply meant to provide guidance to the ct when making its decision: In the
Matter of Georgina Weatherbee). The undischarged bankrupt is allowed to keep whatever amount of his income is
necessary to support his family. Therefore, this portion of his “salary, wages or remuneration” does not vest in the

In re: Wallace, the ct made an analogy between this “necessary income” and actions for wrongful dismissal in order
to allow an undischarged bankrupt to retain his ability to bring an action for wrongful dismissal. The necessary
income provision (s.68) is meant to ensure that a bankrupt can continue to support his family. In a wrongful
dismissal, the claimant is suing for a failure by an employer to give sufficient notice (either in the form of a notice
period or severance pay). The ct said that this notice (in either form) is analogous to wages because the claimant
would either have continued to be paid or would have received a lump sum – in either case, the money would be for
wages. As a result, since a claim for wrongful dismissal is really a claim for lost wages, and since wages are
protected (to a certain degree) by s.68, a claim for wrongful dismissal does not entirely vest with the trustee. This is
because the trustee has to request the surplus income in order to be entitled to it – until he does so, he does not get
the employees income. Similarly, an action for wrongful dismissal (ie. a thing in action) vests in the trustee, but if
the trustee does not intervene the bankrupt may, by reason of s.68(1), bring the action in his own name.
The ct seemed to be swayed by the fact public policy concerns (ie. leaving the bankrupt enough income to support
his family) required giving s.68 a broad interpretation. In addition, the ct made light of the fact that there was not a
great possibility of this exception being exploited, since only a minimal necessary income is protected – the trustee
is still entitled to the rest. Therefore, if a bankrupt brings a wrongful dismissal action, the trustee will be able to
recover whatever amount is not necessary for the bankrupt to support his family.


s.71(2) says that upon a receiving order/assignment being made, a bankrupt loses the capacity to dispose of (or
otherwise deal with) his property – the property passes and vests in the trustee. One exception to this rule is if the
debtor enters into an agreement of purchase and sale before bankruptcy, in which case the trustee is bound by the
terms and conditions of that contract (re: Triangle Lumber & Supply Co). Furthermore, s.73(2) says that if the
sheriff has seized any property of the debtor, he must turn it over to the trustee upon receiving a copy of the
assignment or receiving order. And, s.73(4) says that a landlord who has seized property from a debtor under his
right of distress must turn the property over to the trustee upon the trustee producing a certified copy of the receiving
s.76 says that property can be removed from the province where it was at the time of the receiving order/assignment
without the cts permission. s.78 says that a banker must notify the trustee if he finds out that a person having an
account with the banker is an undischarged bankrupt.

Section 158 sets out the duties required of a bankrupt, including informing the trustee of all property under his
possession or control and delivery of said property to the trustee. If the bankrupt does not comply with these duties,
the bankrupt may be committing an offence under s.198(a). Under s.198(a), any bankrupt who makes a fraudulent
disposition of his property, is liable to a $5000 fine and imprisonment for one year.


Certain portions of the bankrupt debtor’s property are exempt from distribution to creditors in order to enable the
debtor and his family to meet their essential needs and maintain a minimum level of human dignity and personal
comfort. Section 67(1)(b) covers property exemptions. What is interesting is that instead of imposing a uniform set
of exemptions for debtors across Canada, the exemption is determined by the law of the province in whose territory
the property is situated and within which the bankrupt resides.

In the Execution Act, s.2(6) makes motor vehicles exempt up to $5000. In re: Fields, the issue was whether motor
vehicles worth more than $5000 were exempt. In his decision, Polowin J. said that they were not – in order to be
exempt, a vehicle must be worth less than $5k. In addition, if a vehicle was worth more than the exempted amount,
the debtor would not be able to recover the $5k upon the sale of the vehicle. He based this on the fact that there
were other provisions in that Act that made sale of an asset over the exempt amount possible, with the debtor getting
the exempt amount, but it was not explicitly made applicable to motor vehicles. Since the Act made explicitly said
that this was possible for other assets, but did not explicitly make it a possibility for vehicles, then Polowin reasoned
that the legislature must have intended the it not be available for vehicles.
With respect, his reasoning is flawed. The intentions of the exemptions found in the Execution Act are to ensure that
a debtor is able to maintain certain necessities of life. Since the legislature chose to include motor vehicles as
exempt property (albeit up to $5k), they must have been of the opinion that a motor vehicle is an essential of life in
modern-day society. As such, it makes no sense that a vehicle worth less than $5k is a necessity of life, while a
vehicle worth more than $5k is not. The $5k limit was obviously meant to ensure that the exemption was not taken
advantage of – ie. by a debtor claiming an exemption on an extravagant luxury car. That said, while a debtor should
not be allowed to retain an extravagant motor vehicle (ie. one worth more than the $5k limit), he should be entitled
to the first $5k from the sale of said vehicle, so that he may purchase a vehicle (ie. a necessity of life) whose value
falls below the exempt amount.

Pension benefits are not subject to execution, seizure or attachment and cannot be assigned or alienated. By
s.67(1)(b), pension benefits do not therefore form part of the property of the bankrupt. Accordingly, they cannot be
seized by a trustee in bankruptcy, nor can the trustee demand the collapsing or realizing of a pension plan entered
into by a bankrupt: Bonus Finance Ltd.

An RRSP is a retirement savings plan which has been accepted by the Minister of National Revenue for registration
for the purposes of the Income Tax Act. It is a tax deferral device. Unless it is exempt from execution, the
beneficial interest of the bankrupt in an RRSP comes within the meaning of property in s.2(1), and by s.71(2) vests
in the trustee. The test of whether an RRSP is exempt from execution is: if an RRSP is in the form of a contract
between the bankrupt and a life insurance company and the contract provides for payment of an annuity to the
bankrupt, and under the contract a designation of a beneficiary is made in favour of a spouse/child/grandchild/parent
of the bankrupt, the RRSP is exempt from execution (even if the designation is not irrevocable): re: Larocque. If an
RRSP contains no insurance element, the interest of the bankrupt in the plan is not exempt from execution and hence
can be seized by a trustee.
CONVERTING NON-EXEMPT RRSPs INTO EXEMPT FORM. If an RRSP that is not exempt from execution or
seizure is converted into an exempt RRSP within one year of bankruptcy, the transfer will be set aside as a
settlement under s.91: Ramgotra. If the transfer of a non-exempt RRSP into an exempt RRSP occurs within five
years of bankruptcy, it can be attacked as a settlement under s.91(2): Royal Bank v. Oliver. However, although the
transfers constitute settlements, since the property is exempt from seizure at the date of bankruptcy, the trustee is
prohibited from exercising his distribution powers: Ramgotra.
EFFECT OF EXEMPT RRSPs ON THE DISCHARGE OF THE BANKRUPT. Although the interest of a bankrupt
in an RRSP is exempt from execution or seizure, the ct may take the amount of the RRSP into account in deciding
what payments should be made by the bankrupt as a condition of discharge: re: Larocque. If the bankrupt has a
large RRSP, the ct may find that it is acceptable to require some monthly payments as a condition for discharge (as
they did in re: Larocque).

Section 68 is a substantive, separate regime in relation to salary, wages and remuneration (ie. it over-rules s.67). It
is meant to provide consistency throughout Canada. The rule of s.68 is that wages do not vest in the trustee until he
makes a successful application under s.68. Until an order (under s.68) is made, a bankrupt is free to dispose of his
wages: re: Chisick.
Under the previous wording of s.68, there were a number of cases dealing with wether a particular kind of payment
constituted salary/wages/remuneration. In the amended version, s.68(2) avoids the necessity of classification (by
simply referring to “total income”). “Total income” includes all revenues of the bankrupt of whatever nature or
source: s.68(2). The ct uses a broad definition of wages in interpreting s.68: re: Wallace v. United Grain Growers.
Falling under this definition of “total income” are: severance pay (re: Giroux); damages for wrongful dismissal in so
far as it relates to lost wages (re: Wallace) disability payments (re: Ali); and, disability payments made under the
CPP (re: Burton). In addition, in Marzetti v. Marzetti, the SCC held that post-bankruptcy income tax refunds are
“deferred wages” and therefore fall under s.68. The cts reasoning was that while a post-bankruptcy income tax
refund could be considered “property” of the bankrupt for the purposes of s.67(c), the bankrupt’s interest in the
refund did not automatically vest in the trustee. Since the refund also constituted “wages” of the bankrupt, it could
only be accessed by the trustee after an application under s.68(1) – which was not done in this case.
[see SECTION 68 directly below].

After s.68 was added to the BIA, there was still a conflict in cases as to whether there was scope for an application
by the trustee (under s.67(1)(c)) to seize the exempt portion of the earnings of a bankrupt. The SCC settled this
controversy (in Marzetti v. Marzetti), holding that s.68 is a complete code in respect of a bankrupt’s
salary/wages/remuneration -- such property does not constitute property of a bankrupt divisible among creditors
under s.67(1)(c). As a result, any proceedings to attach the earnings of a bankrupt can only be brought under s.68.
There were a number of cases which held that s.68 only applies to earnings of a bankrupt after the date of
bankruptcy and not to pre-bankruptcy earnings. In re: Landry, the Ont CA applied s.68 to a claim for wrongful
dismissal where the dismissal occurred four years before the date of bankruptcy. The ct held that a claim for
wrongful dismissal (in so far as it relates to lost wages) can be equated to actual wages. Therefore, s.68 applies to
earnings before and after the date of bankruptcy.
There had also been debate as to whether s.68 applied to money owing to the bankrupt for services rendered prior to
the bankruptcy, but the ct in re: Landry applied s.68 to a claim for services rendered prior to the date of bankruptcy.
Again, this was based on the fact that s.68 is a comprehensive code in respect of a bankrupt’s total income –
s.67(1)(c) has, therefore, no application to money owing to the bankrupt for salary/wages/remuneration, whether the
services were rendered before or after bankruptcy.

The ct dealt with this issue in re: Wallace: the bankrupt debtor did not want to use the exemption (for a motor
vehicle) and, in fact, expressly waived it; the issue was whether the creditor could claim the exemption on his behalf
(and therefore the trustee would not be able to claim the vehicle, but the creditor himself would be able to do so by
virtue of a conditional sales agreement). In his decision, the judge looked said that this depended on whether the
exemption was a right or a privilege. The exemptions were meant to ensure that debtors retained the minimal means
to support themselves and their families – as such, the exemptions provided must be claimed (ie. a privilege) and it
is only the debtor who is entitled to claim it. A creditor is unable to claim an exemption on behalf of a debtor. The
judge made light of the fact that had this been the legislature’s intention, they could have enacted such a provision in
the Exemption Act.


By s.121(1), all debts and liabilities, present or future, to which the bankrupt is subject on
      the day on which the debtor becomes bankrupt, or
      to which the bankrupt may become subject before his discharge (by reason of any obligation incurred
         before the day on which he became bankrupt)
are claims provable in bankruptcy.
The subsection formerly referred to “the date of bankruptcy”, but was changed in 1992 to “the day on which the
bankrupt becomes bankrupt”. The purpose of this change is to include every kind of claim in the definition of
“provable claim” so that when the bankrupt receives a discharge, he will be free of the claims or creditors and be
able to make a fresh start. For example, while the expression “day on which the bankrupt becomes bankrupt”
presumably refers to the date on which the assignment is filed or the receiving order is made, it is also ambiguous
enough to cover a debt incurred by the bankrupt after the filing of the petition but prior to the making of a receiving
Section 135(1) imposes a duty on the trustee to examine every proof of claim, and if the trustee sees fit, to require
further evidence in support of the claim.

To be a provable claim, a debt or liability must arise from an obligation incurred by the bankrupt before the day on
which the bankrupt becomes bankrupt: s.121(1). If an undischarged bankrupt has incurred a debt after the day on
which he became bankrupt, the debt is not a provable claim. This refers to debts which have arisen after bankruptcy,
not to debts that were incurred before bankruptcy and are simply payable after the bankruptcy.

A contingent claim is a claim which may or may not ever ripen into a debt, according as some future event does or
does not happen. A liquidated claim refers to the nature of the debt – the amount owed must be either already
ascertained (ie. a specific sum is owed) or capable of being ascertained as a mere matter of arithmetic (ie. a formula
is set out to determine amount owed). If the ascertainment of a sum requires investigation beyond mere arithmetical
calculation, then the claim is an unliquidated claim: re: A Debtor.
To be a provable claim under s.121(2) [Contingent and Unliquidated Claims], a claim must not be too remote or
speculative. There has to be an element of probability of liability arising from the court proceedings (ie. where the
bankrupt is being sued). If there are too many “ifs” about the action, the claim is not a provable claim under
s.121(2): re: Wiebe. In re: Confederation Treasury Services, however, the Ont CA was of the opinion that this
requirement (of probability) imposed too high a threshold for establishing a contingent claim. While there may be
claims, the ct said, that are so remote and speculative in nature that they cannot be properly be considered contingent
claims, a potential liability arising out of pending litigation does not fall in that category. Therefore, a debt arising
from pending litigation is not so remote as to be considered incapable of being a provable claim – such a debt can
fall under s.121(2).



The main basic principle of the BIA is that all ordinary creditors should rank equally. The provisions of s.95 (and
s.96) are a means of carrying into effect this principle by overturning any transactions that have the effect of
disrupting this equality.
Section 95(1) of the BIA permits the trustee in bankruptcy to recover property conveyed away by the bankrupt
within a certain time period prior to bankruptcy (three months under s.95; if the parties are related, the time period is
extended to twelve months under s.96). Section 95(2) declares that where a transaction has the effect of giving a
creditor a preference, then (in the absence of evidence to the contrary) it shall be presumed that the intention of the
debtor was to give such a preference.

Section 95, according to its wording, applies to five different kinds of transactions:
     Conveyances or Transfers of Property: a conveyance/transfer of property will normally be attacked as both
         a fraudulent preference and a fraudulent conveyance.
     Charge on Property: this means an encumbrance, lien or claim against the property of the debtor. The most
         common example is the debtor giving a security interest prior to bankruptcy.
     Payment Made: any amount paid.
     Obligations Inccurred: these words seem to contemplate a promise by the debtor to pay something or to do
     Judicial Proceedings Taken or Suffered: a distress by a landlord is a judicial proceeding suffered by a
         debtor. If a debtor (who is being pressed by his creditors) permits a landlord to proceed with a distress and
         obtain preference over other creditors, the distress is a fraudulent preference. The debtor could have
         prevented the landlord from obtaining a preference by making an assignment/consenting to a receiving
         order – if he refrained from doing so in order to give the landlord a preference, the transaction can be set
         aside under s.95(1).
Section 95(1) requires that in order to attack a transaction as a fraudulent preference, the trustee must prove that the
conveyance/charge/payment was made to a creditor. “Creditor” is defined in s.2(1) of the BIA as a person having a
claim (preferred/secured/unsecured) provable as a claim under the Act. If a debtor makes a
conveyance/charge/payment to a person who is not a creditor (ie. a family member), then the transaction cannot be
attacked using section 95.

Once it has been established that s.95 applies to the particular transaction, and that the conveyance/charge/payment
has been made to a creditor, it is up to the trustee to establish a prima facie case that there has been a fraudulent
To raise the prima facie presumption that there is a fraudulent preference, the trustee must establish three points:
    1. The conveyance/transfer/charge/payment took place within three months of bankruptcy. If the conveyance,
         etc. is in favour of a related person, the period is 12 months (s.96). The “transaction-reviewability” period
         begins three months prior to the “initial bankruptcy event”, and ends on the date that the insolvent person
         became bankrupt. In order to use s.95, a transaction must have occurred within this time period. The
         following list shows the relevant “initial bankruptcy event”:
                          i. Assignments – the initial bankruptcy event is the date of the filing of an assignment.
                         ii. Proposals – the initial bankruptcy event is the date on which a “notice of intention to file
                             a proposal” or a proposal is filed.
                        iii. Receiving Orders – the initial bankruptcy event is the date on which the “petition for a
                             receiving order” was filed.
    2. It must be proved that the debtor was an insolvent person at the date of the alleged preference. Section 95
         can only be invoked if the conveyance/charge/payment was made by an “insolvent person” as defined in
         s.2(1) of the BIA. The ct will not presume insolvency – it must be proved (and if it is not, then the
         applicant must be dismissed). In addition, the insolvency of the debtor must be proved on the date on
         which the alleged preference was given.
         Section 2(1) defines an “insolvent person” as a person who: is not bankrupt; resides/carries on business in
         Canada/has property in Canada; has liabilities to creditors provable as claims of $1000; and:
              a. …is unable to meet his obligations as they become due: “unable” does not mean “unwilling” – if a
                    debtor has ample funds to pay his debts but chooses not to do so, he is not insolvent under this
                    paragraph (but he will be under paragraph (b)).
              b. …has ceased paying his current obligations as they become due: this is the most likely paragraph
                    under which a debtor will be found to be insolvent.
              c. …whose total property is not sufficient (if liquidated) to enable payment of all his obligations: in
                    terms of a corporation, the starting point for this paragraph is looking at the balance sheets of the
    3. It must be shown that as a result of the conveyance/charge/payment, the creditor received a preference.
         The trustee must prove that the conveyance/charge/payment had the effect of giving the creditor a
         preference (in fact) over another creditor(s). This simply means that the result of the transaction was that
         some creditor had a preference over another.

In order to constitute a fraudulent preference, the conveyance/charge/payment must be entered into “with a view to
giving that creditor a preference”. However, once the trustee has proven the three essential elements necessary to
raise a prima facie case, then section 95(2) provides that the conveyance/charge/payment is presumed to have been
made with a view to giving the creditor a preference over other creditors.
At this point, it is up to the creditor to rebut the presumption.

Once the trustee has established a prima facie case, it is up to the creditor to rebut the presumption imposed by
s.95(2). The ct will examine all the evidence and, if satisfied on a balance of probabilities that the debtor was
pursuing a purpose other than that of favouring a particular creditor, the presumption will be rebutted and the
trustee’s application will be dismissed. It is important to remember that it is only the intention of the insolvent
person (and not the creditor) that is being examined: re: Townson. If the intentions of the insolvent person are not to
prefer the creditor, then the presumption will have been rebutted.
Some defences available for rebutting the presumption include:
      Ordinary Course of Business: if the ct, after examining all relevant evidence, concludes that a payment was
          made in the ordinary course of business (and not with an intent to prefer), the presumption will have been
          rebutted and the payment will stand.
      Diligent Creditors: the law does not penalize a diligent creditor. If the payment was made to get an
          aggressive creditor off the debtor’s back, and not with an intention to prefer, then the presumption will be
          rebutted: re: Houston and Thornton.
      Transaction Entered Into to Permit the Debtor to Remain in Business: if the creditor (who received the
          alleged preference) can show that the payment was made by the debtor in the bona fide expectation that this
          would enable the debtor to continue in business and to extricate himself from financial difficulties, this is a
          powerful circumstance in rebutting the statutory presumption. In such a case, the belief by the bankrupt
          that he could carry on his operations must be a reasonable belief: re: Spectrum Interiors. ***At the same
          time, it should be remembered that it is often easier to discern the reasonableness of a decision in hindsight
          – what the ct may find to be unreasonable in light of the circumstances may have seemed perfectly
          reasonable at the time. Nonetheless, the insolvent person will be judged in hindsight!
      Refusal to Perform an Act Unless Account Paid/Security Given: if a creditor refuses to perform a certain
          act for the debtor (ie. shipping goods) unless its account is paid or a security is given, the transaction will
          not be a preference since the payment/security was given to obtain performance (and not to give a
One argument incapable of rebutting the presumption is the argument for motivation. In re: Speedy Roofing, the
creditors claimed that the intention of the insolvent person, in giving them payment, was to discharge a personal
security, and not to prefer them in any way. The Ont CA rejected this argument – while the insolvent person’s
motivation may have been to discharge their security, the intention of their actions was to give a preference (and by
giving this preference discharging the security).

Note that if a debtor makes any conveyance/charge/payment that is found to be a fraudulent preference, then
that debtor has committed an “act of bankruptcy” (under s.42(1)(c)).


Similar to fraudulent conveyances legislation, the provincial Assignments and Preferences Act may be used by the
trustee to recover payments to creditors. This Act is ordinarily used by the trustee when the time limits under s.95
have expired. The trustee must prove that the debtor was insolvent when the payment took place (or knew that he
was in insolvent circumstances) and that the debtor intended to prefer that creditor over other creditors.
Under the Preferences Act, it is necessary to establish a concurrent intent – intent on the part of the debtor to give
and an intent on the part of the creditor to receive a preference.
***Under the APA, if an action attacking the transaction is brought within 60 days, then there is a presumption of
intent to give an unjust preference. If the action is brought after 60 days, then there is no presumption and the
burden is on the trustee to prove that the debtor intended to give a preference.


Until the amendments to the BIA in 1992, the term “settlement” was not defined. It was described as a transaction
whereby property was transferred to another with the intention that it should be retained or preserved for the benefit
of the transferee in such a form that can be traced: re: Bozanich. The Ont CA has said that this definition is too
firmly entrenched in the law to have been changed by the revised definition of “settlement” in the Act: re: Whalley.
The definition in section 2(1) makes it clear that a “settlement” includes a contract, covenant, transfer, gift and
designation – if such is made gratuitously or for merely nominal consideration.
If a settlement is declared void against the trustee, then the settled property reverts to the bankrupt’s estate and falls
into the possession of the trustee: Ramgotra.
It is important to distinguish between a settlement and a fraudulent preference. A settlement involves a gift to a
stranger to the bankruptcy (ie. someone not involved in the bankruptcy). A preference involves a transaction with a
creditor, whereby the creditor is preferred over other creditors. If the person receiving the benefit of the transaction
is a creditor, it is a preference; if he is not a creditor, then it is a settlement.

In Ramgotra, the SCC held that there is no room in the definition of settlement for a “settlement onto oneself”. This
is because a settlement must involve the transfer of property to be held for the enjoyment of another person. The cts
reasoning was based on the fact that there is no reason to bring a self-settlement under the scope of s.91 – in a self-
settlement, the property remains in the bankrupt’s estate and therefore vests with the trustee at the time of
However, this reasoning does not make light of the fact that a debtor can make a self-settlement by converting a
non-exempt asset into an exempt asset (ie. converting cash savings into an exempt asset). Nonethless, the ct rejected
a trustee’s ability to use s.91 to strike down a self-settlement – in order to use s.91, there must be a disposition to a
third party.

By s.91(1), any settlement of property made within the period beginning one year before the date of the initial
bankruptcy event, and ending on the day that the settlor becomes bankrupt, is void against the trustee (unless it is
protected by s.91(3)). [see INITIAL BANKRUPTCY EVENT CHART below].

By s.91(2), any settlement of property made within the period beginning five years before the date of the initial
bankruptcy event, and ending on the day that the settlor becomes bankrupt, is void against the trustee (unless
protected by s.91(3)), but only IF the trustee can prove either:

              i.that the settlor was, at the time of the making of the settlement, unable to pay all his debts without
                the aid of the property comprised in the settlement: the trustee must prove that at the date of the
                alleged settlement, the debtor was unable to meet his obligations generally as they became due: re:

              ii.that the interest of the settlor in the property did not pass on the execution of the settlement: the
                 trustee must prove that the settlor’s interest in the property did not pass on the execution of the
                 settlement. In Ramgotra, for instance, the ct held that the transfer of RRSPs to RRIFs by the debtor
                 (in which his wife was designated the beneficiary) did not allow his interest to pass because he
                 retained an interest in the RRIFs.

In Ramgotra, the ct held that the transfer of RRSPs to RRIFs by the debtor did not allow his interest to pass (since he
retained an interest in the RRIFs) and therefore were caught by s.91(2) as settlements. Nonetheless, the SCC did not
require that the property be taken from the debtor. Gontier J, for the SCC, did this by creating a two-part test which
divided the bankruptcy process into two stages (property vesting in trustee; and, administration of the estate) and
said that s.91 only applied to the first stage. This test does not seem to have a basis in law, but rather seems to be an
attempt by the ct to create a test to fit their desired result. In any case, the two-stage process weighs the importance
of s.91 (striking down settlements to ensure fair distribution of assets) against s.67 (exemptions necessary for debtor
to live and support family) – and comes to the conclusion that the exemptions (at least in the case of RRIFs) are of
greater importance.
The result of Ramgotra seems to be that if a settlement is made for exempt property (or creates exempt property), the
ct will find a way to uphold the transaction. **That said, the transaction may still be attacked by the trustee as a
fraudulent conveyance (under the FCA, for example).

By section 91(3), the settlement provisions of s.91 do not apply to any settlement that is made in favour of a
purchaser or incumbrancer in good faith and for valuable consideration (valuable consideration does not necessarily
mean fair market value: it can mean investment value, value to owner, liquidation value, etc: Standard Trustco). To
come within the exception, a purchaser must be both: a purchaser in good faith, and; for valuable consideration.
Both elements must be present and proved.
*To act in “good faith” means to act honestly.
*The payment of a nominal consideration does not make the transferee a purchaser for valuable consideration.


The Fraudulent Conveyances Act renders void a conveyance of property made with the intent to
defeat/hinder/delay/defraud creditors or others. The FCA makes an important distinction between conveyances that
were made gratuitously and conveyances that were made for good consideration.
If the ct finds a transaction to be a fraudulent conveyance, the trustee will be entitled to a declaration that the
conveyance is void as against him and that he is the owner of the bankrupt’s interest in the property.

If a conveyance is made gratuitously, it is only necessary to show the fraudulent intent of the grantor of the
conveyance (and not the receiver). The trustee only needs to prove that the grantor had the intent to
defeat/defraud/hinder/delay creditors.
If a conveyance is made without consideration, and the effect of the conveyance is that the grantor is unable to meet
his obligations, then the ct will presume that the grantor’s intention is to defeat/defraud/hinder/delay his creditors:
Freeman v. Pope. While this is a strong inference, it can be overcome by convincing evidence establishing that the
grantor had an honest purpose in making the transfer (ie. a purpose not designed to prejudice the rights of creditors):
Mandryk v. Merko. In that case, the grantor claimed (and the ct agreed) that he made the conveyance because he
was ill and brought evidence to support this contention.

If a conveyance is made for good consideration, proving the fraudulent intent of the grantor is not enough – it is
necessary to show the fraudulent intent of both parties to the transaction.
Since intention is difficult to prove, the ct may take the existence of one or more of the “badges of fraud” to infer the
intent to defeat/defraud/hinder/delay. These badges, like the presumption of fraud, may be rebutted by an
explanation from the defendant.
The existence of these badges simply requires the grantor to explain why they are present – they are of evidential
value and are not conclusive evidence of fraud.
Some of the badges of fraud include:
      secrecy
      generality of conveyance (ie. all or substantially all of debtor’s assets are conveyed)
      continuance in possession by debtor
      some benefit retained by the settlor under the settlement
      the value of property is grossly more than the amount paid
      cash taken in payment instead of cheque
      unusual haste shown in closing the transaction
      joint possession between the settlor and purchaser


By s.100, a trustee is given the right to set aside a transaction where the trustee can prove that within one year before
the date of the initial bankruptcy event, the bankrupt entered into a non-arms length transaction for the
sale/purchase/lease of property/services for a consideration that was conspicuously greater or less than fair market
In order to use s.100, the trustee must prove all of the following:
             i. the transaction took place within the time period specified by s.100 – transaction must have been made
               within the period beginning on the day that is one year before the initial bankruptcy event and ending
               on the date of bankruptcy; see INITIAL BANKRUPTCY EVENT CHART below.
            ii. the debtor made a sale, purchase, lease, etc. of property or services – there must have been a sale made
               in order to use s.100. In Avicom Industrial, a payment was made for the alleged purchase of shares;
               but, no shares were actually purchased. The ct refused to allow the trustee to use s.100 on the basis
               that there was no sale – there was simply a payment made to which the beneficiary was not entitled.
               The ct said that the trustee could have attacked the transaction as a fraudulent conveyance, but not as a
               reviewable transaction using s.100.
           iii. the sale/lease/purchase was made at a price conspicuously different from the fair market
                value of the property or services – “fair market value” has been defined as the highest price available
               in an open and unrestricted market between informed and prudent parties acting at arm’s length and
               under no compulsion to act: Skalbania v. Wedgewood Village Estates. The test as to whether or not
               the difference between consideration and market value is conspicuous is to be determined objectively
               by the ct, and not whether it was conspicuous to the parties at the time of the transaction.
           iv. the transaction is a “reviewable transaction” – “reviewable transaction” is defined in s.3(1). A person
               who has entered into a transaction with another person otherwise than at arm’s length is deemed to
               have entered into a reviewable transaction. Persons related to each other (as defined in s.4) are deemed
               not to be dealing with each other at arm’s length.

There is nothing in s.100 which requires that the disposal of property/services by the debtor be made at a time when
the debtor is insolvent (or in such a manner as to contribute to his insolvency). There is also no requirement for the
trustee to prove that the respondent knew or suspected that the bankrupt would be unable to discharge his liabilities.
Once the trustee has proven the four required criteria, the ct then has a discretion as to whether to give judgment (see
below) – it is in effect, a two-stage test for s.100 (ie. Is the transaction reviewable? Will the ct exercise its

In Standard Trustco, the Ont CA held that the wording of s.100 (ie. “the court may…inquire into…”) suggest that
the ct has a discretion as to whether or not to use s.100 and review a transaction. Once the trustee has proven the
four criteria necessary for s.100, the ct is then left with a residual discretion to decide whether to grant judgment.
This discretion is based on equitable principles, such as the good faith of the parties, their intentions, and whether
fair value has been given for the property (remember: fair value does not necessarily mean fair market value; it
could mean investment value, value to purchaser, etc). The onus of raising and proving these equitable
considerations is on the party asserting them (ie. the creditor wishing to save the transaction).
In Standard Trustco, the ct used made light of the fact that the reviewable transaction was made to a gov’t agency to
repay a loan that had been made earlier – a loan to help bail out the very creditors attacking the repayment!

                                   INITIAL BANKRUPTCY EVENT CHART
        Assignments – the initial bankruptcy event is the date of the filing of an assignment.
        Proposals – the initial bankruptcy event is the date on which a “notice of intention to file a proposal” or a
         proposal is filed.
        Receiving Orders – the initial bankruptcy event is the date on which the “petition for a receiving order” was


When a trustee is appointed in bankruptcy, there are some contracts that he will want to continue (because they are
beneficial to the estate) and others that he will not (because they are not beneficial; for example, it is no longer
profitable for the debtor to fulfill the contract). To a great extent, the trustee’s powers to assume/reject/assign a
contract are defined by the common law, but they have been modified to a degree by the BIA and the CCAA. There
are different rules if the debtor has gone into bankruptcy, or if there is a re-organization. This is because of the
difference in policy concerns that, while quite similar, are based on the notion of breathing room – in a proposal (ie.
re-organization), a non-debtor’s rights may be suspended in order to give the debtor some breathing room to come
up with a viable proposal; in a bankruptcy, the concern is to give the debtor some breathing room so that his assets
can be distributed in an orderly manner.


Section 65.1(1) makes it clear that after the filing of a “notice of intention” or a proposal, no person may terminate
or amend any agreement with the debtor (simply because of the debtor’s insolvency or the fact that he filed a
proposal). This is the case even if the parties have an explicit contractual term making this possible [see
TERMINATION PROVISIONS below]. That said, however, s.65.1(4) does not prohibit a creditor from requiring
immediate payment for goods/services provided after the filing of the proposal. Therefore, while a supplier of a
product must continue to supply to the debtor, it can demand that it be paid on a C.O.D. basis. In addition, while a
non-debtor may not terminate any contract with the debtor, he is not required to make any further advances of
money or credit (re: Com/MIT Hitech Services Inc).
***If a non-debtor party wishes to terminate a contract, but is prevented from doing so by s.65.1(1), it can make a
motion to have the section become inapplicable , if that party can satisfy the ct that the operation of s.65.1(1) would
cause significant financial hardship: s.65.1(6). The use of this section, however, is very rare.

Section 65.1(1) does not allow a non-debtor to terminate/amend any contract (or claim accelerated payments) simply
because of the debtor’s insolvency or because the debtor has filed a proposal. In many contracts, however, there
will be a clause that allows a non-debtor to terminate a contract upon the mere fact of bankruptcy (called “ipso
facto” clauses). Section 65.1(1) says that such provisions cannot be enforced until the proposal has been withdrawn,
refused, or annulled.

Section 65.1(2) prevents a landlord from terminating a lease simply because rent has not been paid. In addition, if
the lease agreement provides for an accelerated payment in the event of insolvency, the agreement is ineffective
where a “notice of intention” or a proposal has been filed: s.65.1(1).

Section 65.1(3) prevents discontinuation of service by a public utility simply because of insolvency or because of
non-payment for services (once a proposal has been filed). However, s.65.1(4) provides that the public utility can
require payment to be made in cash for services provided after the filing of the proposal (or notice of intention).

*** Section 65.1(5) prevents any party from contracting out of any of the above provisions (ie. s.65.1(1)-(3)). Any
clause that attempts to do so is of no force and effect ***


The starting point for the assumption of a debtor’s contract is (at common law) that the trustee “steps into the shoes
of the debtor”. Since the trustee is in the same position as the debtor was, he should be allowed to continue any
contract entered into by the debtor.

In Potato Distributors, the ct held that a trustee was entitled to continue (or assume) a contract entered into by the
debtor. The trustee was empowered to do so by s.30(1)(c) of the BIA, which says that a trustee may carry on the
business of the debtor insofar as is necessary for the “beneficial administration of the estate”. The ct in this case
said that under the powers given by s.30(1)(c), a trustee must not carry on the business with a view to making a
profit or with a view to saving the business for the bankrupt. They may only do so for the beneficial administration
of the estate.
***Section 30(1)(c) requires the trustee to get the permission of the inspectors before assuming any contract – the
inspectors, in essence, act as a creditors’ committee and oversee the activities of the trustee.
In re: Thomson Knitting, the ct re-affirmed the trustee’s right to assume a contract made by the debtor – the mere
existence of bankruptcy does not cancel a contract, therefore the trustee is free to assume it. However, the ct said
that the trustee must do so within a reasonable time – that is, the trustee must assume the contract before the first
creditor’s meeting (otherwise, the non-debtor is free to assume that the contract has come to an end; ie. been
repudiated). This decision is supported by the wording of s.18(b), which confers power on the trustee to carry on the
business of the bankrupt until the first creditors meeting: since the trustee is only allowed to carry on business until
this time, he must assume a contract within this time (ie. assuming the contract is carrying on business).


The trustee has no statutory right to disclaim a contract, but since he is stepping into the shoes of the debtor, he has
the same rights – namely, the freedom to breach the contract. If the trustee does choose to breach, then the non-
debtor will simply be limited to a claim for damages caused by the breach (ie. as an unsecured creditors). In essence
then, the trustee is capable of bringing a contract to an end by breaching it – he will not be as concerned with a
damages award (as would a normal party) because the debtor-corporation is already in bankruptcy, and any damages
award will simply be added to the provable claims.
***This raises the question: should non-debtor parties be allowed to get equitable remedies against the trustee, such
as specific performance? It is unclear as of yet.


When a trustee inherits a lease from a debtor, there are competing policy issues as to whether or not he should be
allowed to assume/disclaim/assign it. On the one hand, the trustee wants to be able to use the leased premises to
dispose of the debtor’s assets, and he may want to sell the lease as an asset of the bankrupt estate (with a minimum
of trouble and expense). On the other hand, the landlord wants to be compensated for any losses caused by the
bankruptcy, or he may want to have the freedom to select a new tenant. The legislation on commercial leases
attempts to balance these concerns.

Section 146 says that the right of a trustee to assign/disclaim/retain a lease is governed by provincial law. Section
30(1)(k) provides that the trustee may (with the permission of the inspectors) elect to retain the lease (either for the
whole or part of the unexpired term), or he may elect to assign, surrender, or disclaim it. Section 30(1)(k) is a
supplement to s.146 (ie. it is not in conflict with it) – s.146 says that the rights of the trustee to assign/disclaim/retain
a lease are governed by provincial law, but s.30(1)(k) gives the trustee the capacity to exercise those rights. In
Ontario, the relevant legislation that the trustee must follow is the provisions of the Commercial Tenancies Act.

The trustee has the right to retain the leased premises for the benefit of the bankrupt estate for a period of three
months following the date of bankruptcy. The right to retain the leased premises for three months is unqualified and
unconditional. The Commercial Tenancies Act says that the trustee has this 3 month grace period to decide whether
to retain/disclaim/assign the lease.

The trustee has the right to elect to retain the leased premises for the whole or any portion of the unexpired term of
the lease (or any renewal thereof). To acquire the right to retain the leased premises for any period after the
expiration of the three-month period, the trustee must comply with the all following requirements:

        the trustee must elect by notice (in writing) to retain the leased premise, for the whole term or a portion of
         the unexpired term (or any renewal thereof), and it must be upon the terms of the lease and subject to the
         payment of rent as provided in the lease.
        the “notice of election to retain” must be given by the trustee within the three-month period. In the case of
         a receiving order, the three months run from the date of the receiving order.
        “notice of election to retain” the leased premises must be given before the trustee has given notice of
         intention to surrender possession or disclaims the lease (ie. if he disclaims the lease, he cannot go back and
         elect to retain it).

If the trustee simply elects to retain the leased premises (without making an assignment of the lease), then he is
bound by all the terms of the lease: Micro Cooking Centres.

If the trustee desires to exercise the right to assign the lease, the trustee is required to do all of the following:

        the trustee must pay to the lessor all arrears of rent. The arrears only have to be paid on the date that the
         court gives its approval of the assignment.
        the trustee must obtain from the proposed assignee (i) a covenant to observe the terms of the lease, and (ii)
         an agreement to conduct upon the demised premises a trade/business which is not of a more
         objectionable/hazardous nature than that which was conducted by the bankrupt. The first part of this
         requirement requires that the assignee be bound by the terms of the lease (to which the bankrupt debtor was
         bound). This includes any “user clauses” (ie. restriction on what the premises can be used for) to which the
         bankrupt was bound – the trustee steps into the shoes of the bankrupt and is therefore bound by these
         clauses; he therefore has no power to eliminate them when assigning the lease. Any assignee is bound by
         all the terms of the lease (including the “user clauses”). The second part (the ct said in Micro Cooking
         Centres) is probably a means to supplement any “user clauses” in the lease (or lack thereof). The second
         part of this requirement allows the landlord to veto any activity by the assignee that will depreciate the
         value of his property or place him in jeopardy with the authorities or the community. The ct even went so
         far as to say that the second part of this requirement could be used by the landlord to veto any activity that
         he finds intolerable. The ct said that the extent to which the second part of this requirement must be
         decided on a case-by-case basis – for example, it is arguable whether the trustee can use this part to argue
         that certain provisions of the lease should be over-ridden (ie. over-ride a user clause because the assigned
         business is no more objectionable), although the ct rejected this argument in Micro Cooking Centres.
        the trustee must make an application to the ct for approval of the proposed assignee as a “fit and proper
         person” to be put in possession of the leased premises. The application is not made to the Bankruptcy
         Court, but is made in the ordinary civil courts. The purpose for this requirement is to protect the landlord –
         so that he won’t be put in a worse position under the lease than it would have been in vis-à-vis the lessee
         before bankruptcy. However, this application arises only after the landlord has refused to accept the
         assignment: the ct in Micro Cooking Centres said that if they (ie. the ct) authorize the assignment of the
         lease, then the trustee is not bound by any terms of the lease restricting assignment (such as a prior consent
         requirement by the landlord, etc). Ct approval over-rides any such lease-assignment restrictions.
         The ct, in deciding whether the proposed assignee is a fit and proper person, looks at five criteria:
                                  (i)      whether the proposed assignee is one who will be both motivated to and be
                                           able to honour the covenants in the lease and the covenants he is required to
                                           give by s.38(2) of the CTA;
                                  (ii)     whether the proposed assignee will make a fit and proper use of the
                                           premises (ie. will the assignee’s business be the same as the tenants or
                                           similar to it);
                                  (iii)    the proposed tenant’s reputation in the community (as both a tenant and a
                                  (iv)     evidence of the proposed tenant’s creditworthiness;
                                  (v)      the impact of approval (or non-approval) on the estate (ie. the dividends
                                           available to creditors).
         The onus is on the trustee to satisfy the court that the application should be granted, based on the fact that
         the assignment of the lease will allow greater realization for the bankrupt’s creditors, and that this policy
         consideration outweighs the landlord’s freedom to use his property to his best advantage (in this particular
         case). This can be done by showing that landlord will not be all that disadvantaged (making use of the
         evidence available from the five criteria (above): ie. the assignee has a good reputation in the community,
         etc.), and at the same time the assignment will greatly help the creditors by adding to the bankrupt’s estate.
         If the trustee cannot do so, then the ct will reject the application: in Micro Cooking Centres, the ct felt that
         since the assignee would not be able to comply with the user provisions of the lease (ie. the user clause
         prohibited the selling of food, while the assignee was a fast food outlet), they had no choice but to reject the
         application. In addition, non-compliance with the user clauses would affect the rent payable to the landlord
         (because tenant payed royalty on sales), would affect the merchandising mix in the mall (ie. the layout of
         the mall, which is designed for maximum efficiency, would be altered), and would adversely affect the
         other stores in the mall (ie. the assignee is a competitor of a pre-existing mall tenant). Therefore, the basis
         for the cts decision was that the evidence (from the five criteria) showed that the landlord would be
         disadvantaged to an extent that outweighed the benefit to the bankrupt’s creditors.
              o In Micro Cooking Centres, the ct stated that the considerations taken into account differ when the
                   commercial lease involves a single landlord/tenant and when the lease is in a shopping mall – in a
                   shopping mall, the lease arrangement must be viewed as inter-related with the mall’s other tenants.
                   The leases in a mall are created in a manner that will allow optimum efficiency of the total mall
                   enterprise – tampering with a particular lease will have side-effects that could adversely affect
                   other tenants, and therefore the landlord’s overall economic interests.

If a trustee elects to retain a lease, he is bound by all the terms of the lease. Similarly, if he is authorized to assign
the lease (by s.38(2) CTA), the assignee is also bound by the terms of the lease: Micro Cooking Centres.
*A trustee can apply for permission to assign a lease without first electing to retain it. If court approval is given to
the assignment, it will be made conditional upon the trustee giving the appropriate notice in writing to retain the
lease within the three-month period.
*If a trustee makes an assignment of a lease without following the proper procedure prescribed by provincial law,
the lessor will be entitled to forfeit the lease and to resume possession of the leased premises: re: York Beverages.
***There are cases in which the ct has expressed the opinion that a trustee who elects to retain leased premises and
makes an assignment of the lease becomes personally liable for the rent – if the assignee fails to pay the rent, the
trustee will be personally liable to pay it. On the other hand, there are a number of cases which have held that a
trustee who elects to retain leased premises and then assigns them is not personally liable for the rent because the
assignment terminates the privity of estate between the trustee and the landlord – and hence the trustee is no longer
liable for rent.

A “surrender” and a “disclaimer” of a lease are different things. A disclaimer is a unilateral act on the part of the
trustee terminating the lease; a surrender involves the giving up of the lease with the consent of the landlord.
Section 39(1) of the CTA gives the trustee the right to surrender or disclaim a lease. He can do so by giving notice
in writing to the landlord.

Section 136(1)(f) gives the landlord a preferred claim for rent three months before the bankruptcy and for three
months after the bankruptcy. By virtue of s.142 of the BIA, the nature and extent of the landlord’s claim for rent
and damages for the unexpired portion of a lease (ie. after three months after bankruptcy) are determined by the law
of the province in which the leased premises are situated. Under the CTA, when a trustee surrenders/disclaims a
lease, a landlord has no claim for the rent for the remainder of the term of the lease. The surrender/disclaimer
terminates all rights and obligations under the lease to pay rent: re: Vrablik. A claim for rent after bankruptcy is
restricted to the statutory three months flowing the bankruptcy (or for so long as the trustee elects to retain
possession of the property; although, the time after the three months that the trustee retains the property will be an
unsecured claim, not a preferred claim! For example, if trustee keeps lease for 12 months, the landlord will get 6
months preferred [ie. 3 before and 3 after bankruptcy] and 9 months unsecured [ie. 9 months after the 3-month
period expired]).


Under the BIA, section 65.2(1) gives a debtor who is a commercial tenant the right to disclaim a lease by giving 30
days notice to the landlord. The notice may be given at any time between the filing of a notice of intention and the
filing of a proposal, or on the filing of a proposal. This means that the insolvent person has to know on (or before)
filing, or soon thereafter, whether he wants to disclaim a lease.
Section 65.2(2) allows the landlord to apply to the ct for a declaration that s.65.2(1) does not apply in respect of the
lease; it must be made within 15 days after receiving the disclaimer. The ct is required to make such a declaration
(ie. that the debtor is not allowed to disclaim the lease) unless the insolvent person satisfies the court that he will not
be able to make a viable proposal without the disclaimer of the lease: s.65.2(3). The onus is on the insolvent person
to show that the proposal is not viable without the repudiation of the lease. In deciding whether the insolvent person
could have made a viable proposal, the ct will first look at whether the debtor’s proposal is viable, assuming that the
leases have been disclaimed – if the proposal is not viable (even after assuming that the debtor would not have to
make lease payments), then the ct will refuse to permit the disclaimer of the lease: re: Carr-Harris & Co.
***Where a lease is disclaimed, the proposal may permit landlord to file either proof of claim for actual loss or an
amount based on formula in 65(4)(b).

In re: Armbro Enterprises Inc, the ct said that while it is true that there is no specific provision in the CCAA which
explicitly gives the ct the power to sanction the termination of leases, there is also nothing in the CCAA which
precludes a ct from doing so. RA Blair J. went on to say that the ct may sanction the termination of a lease when the
requirements of a particular re-organization justify doing so.


The case law suggests that bankruptcy terminates all employment contracts (re: Rizzo & Rizzo). This is important
in situations where the employment contract has a provision for severance upon termination – if bankruptcy is
deemed to terminate the contract, then the employees will get severance. In re: Kemp Products, it was suggested
that bankruptcy caused by a petition does not constitute a dismissal, although bankruptcy caused by an assignment
might. In re: Optenia, the question was whether the corporation’s assignment constituted termination. The ct
seemed to conclude that the termination was due to an “operation of law”, but nonetheless gave the employees their
benefits (by implying a term in the employment contract that bankruptcy would constitute termination without


Much like employment contracts, it has been said that bankruptcy also terminates collective bargaining agreements.
However, in certain cases (such as WW Lester Ltd. v. UA Local 740), it has been held that collective bargaining
agreements should continue where there has been a substantial continuity of all the elements of a business so that in
effect a transfer of a business is used to void the certification of a bargaining unit. In re: Royal Crest Lifecare
Group, the ct seemed to suggest that this is the proper route for collective bargaining agreements in bankruptcy. In
this particular case, the ct said that the collective bargaining agreement was not terminated, but rather was put into
suspended animation – to be revived if a purchaser acquired the business. As a result, the collective bargaining
agreement was not terminated. The reason that the ct decided to suspend the CBA, however, was so as not to
impose heavy personal liability on the trustee – he was simply running the company in order to maximize the
bankrupt’s assets for the purpose of distribution to creditors (ie. in order that he would be able to sell the business as
a “going concern”) and any decisions directly affecting the CBA were simply incidental to him achieving this
mandate. To force trustee’s to assume a CBA would create a situation where no trustee would be willing to take the
position (for fear of incurring liability). The temporary-suspension solution allows the trustee to perform his duties,
without jeopardizing the rights of the employees under the CBA.


The purpose of the CCAA is to permit compromises or arrangements between insolvent companies and their
creditors without going into bankruptcy or liquidation. In contrast to the BIA, the CCAA does not have many
provisions (22 compared to 275), and is devoted entirely to restructuring a debtor company. As a result of having
less structure than the BIA, the CCAA is very flexible in its operation – the legislation simply provides a framework,
while the ct are given the power to make substantive decisions.

Section 3(1) of the CCAA says that the Act applies in respect of a “debtor company” with at least $5M in debt. A
“debtor company” is defined in s.2 of the CCAA as a company that: is bankrupt or insolvent; has committed an act
of bankruptcy; has made an assignment; or has had a receiving order made against it.
The CCAA applies to any company incorporated under the laws of Canada or any province, or to any company
having assets or doing business in Canada even though it may be incorporated outside Canada. The Act does not
apply to banks, railway or telegraph, insurance companies and trust companies.

On the initial application to the court for an order imposing a stay of proceedings, the debtor company is required to
file a projected cash-flow statement and copies of all financial statements (whether audited or unaudited) within one
year of the application. If there are no financial statements prepared in the prior year, the debtor company must
produce a copy of the most recent statement.
On the application, the court may grant an order not exceeding 30 days staying all legal proceedings that have been
taken (or that might be taken), restraining further proceedings in any action, and prohibiting the commencement of
any other action: s.11(3). The ct, in addition to these three general provision, may direct that the stay order applies
to prevent the Crown from exercising rights to garnish the company’s assets where the company is a tax debtor:
s.11.4. The ct’s power to impose a stay, together with the inherent jurisdiction of the ct, allows the ct to even make
orders against third parties who are not creditors (where their actions would potentially prejudice the success of the
plan): Norcen Energy Resources Ltd.


By s.11(3), the court may (on an application of an “interested person”) make a stay order for a period not exceeding
30 days (note that this does not mean that a 30-day stay is guaranteed; the ct can refuse to make a stay or it can make
a stay for a period less than 30 days).
In order to get a stay order under s.11(3), the onus is on the applicant to show that it is appropriate in the
circumstances for the order to be issued (re: Royal Oak Mines Inc).
In order to obtain an initial stay order, an application must be accompanied by a cash-flow statement and copies of
all financial statements prepared during the year prior to the application: s.11(2). A copy of the initial stay order
must be sent by the monitor to every known creditor who has a claim of more than $250 within 10 days after the
making of the order: s.11(5).

The purpose of the s.11 stay is to maintain the status quo for a period of time so that proceedings can be taken under
the CCAA (ie. re-organization). The stay order prevents also prevents any creditor from obtaining an advantage
over other creditors while the company is attempting to re-organize its affairs. The scope of the stay has
consistently been read as authorizing a stay of proceedings beyond the narrowly judicial. “Proceedings” include any
judicial or extra-judicial conduct against the debtor company, the effect of which could be to seriously impair the
ability of the debtor company to continue in business during the negotiating period: Nippon Steel.
The cts power to order a stay of proceedings has been interpreted so widely so as to stay the proceedings by a public
regulatory body. In TSE v. United Keno Hill Mines, the ct stayed proceedings (ie. a hearing into whether a
company should be listed on the TSE) by the TSE based on the fact that the proceedings posed a serious risk to the
survival of the debtor company if allowed to continue (ie. the argument is that continued listing on the TSE is
necessary in order to attract new financiers/investors). The ct held that the risk of impairing the company’s chances
of survival (which would be the result of any hearing or any suspension of trading on the TSE) outweighed the
allegations of prejudice to the regulatory body (if the stay was not lifted). The ct also made light of the fact that the
TSE failed to present any concrete evidence of harm to the public from the continuance of the trading of the
company’s shares. ***It seems that the ct wanted the TSE to show some factual foundation for believing that the
public interest is genuinely at risk (ie. the ct felt that in this case, the allegations were speculative and unproven)
before it would consider lifting the stay to allow a TSE hearing into possible de-listing of the stock.
[***The stay provided by the BIA would not, on its face, be applicable to preventing the TSE from holding a
hearing in order to possibly de-list a publicly traded corporation. The CCAA is much broader and far reaching].

Section 11(4) gives the court the power to make an order extending the stay for such a period as the court deems fit
(ie. there is not time limit as to how long a stay can be extended). In order to obtain an extension, the applicant must
establish three pre-conditions (as required by s.11(6)):

    1.   that circumstances exist that make the order appropriate (same requirement as that required to get an initial
         stay under s.11(3))
    2.   that the applicant has acted and continues to act in good faith
    3.   that the applicant has acted and continues to act with due diligence

Once the pre-conditions have been met, the question of whether the plan is doomed to failure is one consideration in
determining whether the order is appropriate. The onus is on the creditor to satisfy the ct that there is no reasonable
chance that any plan would be accepted: Rio Nevada.

The “initial order” made by the court is what gives effect to the stay – section 11 allows the court to grant an initial
order that imposes a stay of proceedings, subject to terms, while the company attempts to negotiate a restructuring of
its debt with its creditors.
In re: Royal Oak Mines Inc, the ct enunciated what the debtor should keep in mind when asking for an initial order
(and therefore what the cts position would be on various requests). The ct said that the nature of the initial order was
invariably one of short notice: many affected parties would have little, if any, notice of the proceedings. As a result,
debtors should attempt to use simple and uncomplicated language whenever this was possible. In addition, because
of the likelihood of little notice being given to affected parties, the debtor should keep the relief sought in the initial
order application confined to what is essential for the continued operations of the company during a negotiation
period. More extensive orders can be made later, if required, using s.11(4).
Finally, the ct in re: Royal Oak Mines Inc, said that extraordinary relief (such as DIP financing) in an initial order
will be restricted to what is reasonably necessary to meet the debtor’s urgent needs while a plan is being developed.

In most cases, initial orders will have to be made with little (if any) notice to creditors. This is because proceedings
under the CCAA are often urgent, complex and dynamic – time is of the essence and any delay could affect the
survival of the company. As a result, judges will be forced to make initial orders without the input of all the
creditors. In such situations, the initial order will often include a “comeback” clause – that is a clause that allows
any creditor (or any “interested person”) to apply to the ct to rescind or vary the order. It gives the creditor an
opportunity to apply to the ct for relief once it is given notice of the initial order.

 Sections 11(3)(a) and 4(a) permit the court to stay all proceedings taken or that might be taken against the debtor
company under the BIA. In order to protect the interests of creditors under the dating-back provisions of the BIA,
however, the ct will usually allow a creditor to file a petition for a receiving order (under the BIA), but stay any
further proceedings on the petition.

Under s.81.1 of the BIA, an unpaid supplier who has sold/delivered goods to the debtor company can (within 30
days after delivery) make a demand on the trustee for the return of the goods. In re: Woodward’s Ltd, the ct was
concerned about the rights of creditors who had supplied goods in the 30-day period prior to the filing of an
application under the CCAA – their rights to revendication would seem to have been stayed by s.11 of the CCAA.
In that case, the ct made an order that was similar to s.81.1(4) of the BIA: it provided that, if the company went into
receivership or bankruptcy (ie. if the proposal failed), the period between the beginning of the CCAA stay (ie. the
filing of a proposal under the CCAA) and the date of receivership/bankruptcy would not be counted in calculating
the 30-day period in which the supplier was required to make his demand. Thus, the period during which the unpaid
supplier was stayed from enforcing his rights would not be counted in the 30-day time limit in which he was
required to act.
As a result of the order, suppliers would have access to funds in the possession of the debtor company at the time of
bankruptcy/receivership to the extent that they could identify the funds as representing proceeds from the sale of
goods supplied by them – in the 30-day period preceding the date of the making of the application under the CCAA.


These are now frequently appointed under the terms of the initial order. They are generally “turnaround experts”
that assume control of the corporation – replacing the CEO and the directors. The appointment of a CRO can result
in higher creditor confidence.

If an initial order is made, the ct will at the same time appoint a person (known as a monitor) to monitor the business
and financial affairs of the company: s.11.7(1). Pending a re-organization, the monitor shall have access to the
company’s property, including the premises, and to the financial information (ie. books, records, etc). The monitor
is required to file a report after any “material adverse change” in the company’s projected cash flow or financial
circumstances: s.11.7. He is also required to file a report at least seven days before any meeting of creditors or at
any time required by the court: s.11.7. The remainder of his duties are set out in s.11.7(3).
The debtor’s auditor is often appointed to be the monitor (this is allowed by s.11.7(2), in contrast to the BIA,
which does not allow a company’s auditor to become its trustee). While there could be a perceived notion of
conflict, the appointment is made in order to save costs and time. The monitor, once appointed, has the same duties
as a trustee under the BIA, and becomes an officer of the court (with duties not only to the debtor company, but also
to the creditors).

In addition to the appointment of a monitor, the court may appoint an interim receiver under s.47 of the BIA.


DIP financing is when the ct gives a new lender priority over existing creditors in a re-organization. The purpose of
DIP financing is to attract new lenders in order to give an insolvent company a chance at restructuring – existing
creditors with be loath to forward any more money, and new lenders will not normally want to lend any money
when they are guaranteed last-place in the priority line. Another purpose is to ensure that the company has access to
monitors who are capable of overseeing a successful restructuring – it is argued that capable monitors will not take
such a position unless their fees are guaranteed by a super-priority. In addition, it is argued that the “fruits of the
monitors’ efforts” if for the benefit of all creditors and therefore it is only fair that monitors (and their counsels) be
paid first.
DIP financing gives new lenders (or professional fees incurred in connection with the working out of a CCAA plan;
such as monitor’s fees, lawyer’s fees, etc) a super-priority over all other creditors in regards to their loan (or
services). In re: Sulphur Corporation, an Alberta ct said that these costs (ie. financing meant to maintain the status
quo; legal fees in the CCAA process) do not necessarily have to be incurred after the initial CCAA application – the
cost can be incurred prior to the application and still receive super-priority status where “justice dictates and
practicality demands”. If, for example, legal fees were incurred in preparation of a CCAA application, the ct may
still give these legal fees super-priority status.
Although the CCAA makes no provisions for DIP financing, it seems to be well established that the ct may give a
priority for such financing – using its powers of “inherent jurisdiction”.

In re: Royal Oak Mines Inc, the ct said that the extension of DIP financing in an initial order (ie. giving a super-
priority as terms of the stay) should be minimal – it should be restricted to what is reasonably necessary to meet the
debtor’s urgent needs while a plan is being developed.
In re: United Used Auto, the ct said that in order for it to authorize DIP financing, there must be convincing
evidence that the benefit of the financing clearly outweighs the prejudice to the lenders whose security is being
subordinated (ie. prior creditors).
Some cases in which the ct has approved DIP financing include:
      The ct has approved DIP financing in cases where additional funding was necessary in order to complete
          certain specific construction projects, holding that giving the new loan super-priority was for the benefit of
          all creditors (both secured and unsecured): Canadian Asbestos Services Ltd.
      The ct has also given super-priority status to bridge loans meant to keep the debtor company afloat, citing
          the broader interest of saving 12 000 jobs as justification for doing so: re: Dylex.

Janis Sarra (in her article) cites five principles that the cts take into consideration when deciding whether to grant
DIP financing. These are:
    1. Adequate Notice: the cts are loath to make orders granting DIP financing on short notice. In such
         situations, the cts are only prepared to grant enough financing to “keep the lights on” for a brief, but urgent,
         period. The ct enunciated this requirement in re: Royal Oak Mines Inc, where the ct said that DIP
         financing in an initial order will be restricted to the amount necessary to meet a debtor company’s urgent
         needs, while it negotiates a proposal.
    2. Sufficient Disclosure: the ct will require the monitor to report on the financial and business affairs of the
         debtor-corporation in order for the ct, and all creditors, can decide whether DIP financing is feasible. In
         essence, the ct want to be able to determine whether DIP financing is actually required, and also whether
         re-organization is a viable alternative to liquidation.
    3. Timeliness of the Request: while CCAA proceedings are normally a process of last resort, there is a
         difference between debtor-corporations who invoke the CCAA after failing to succeed in good-faith
         negotiations with creditors, and debtor-corporations who invoke the CCAA in order to defer liquidation
         without any real prospect of devising an acceptable business plan. If a debtor-corporations request for DIP
         financing is only an attempt to defer the inevitable (ie. liquidation), then the ct will reject the request.
    4. Balancing the Prejudice to All Stakeholders: the ct will consider the amount of relief sought, the debtor-
         corporations overall debt, the prospect of devising a feasible proposal, the risks to employment, the impact
         on the local economy, any remaining equity interest of shareholders, and other considerations. If these
         consideration outweigh the prejudice that will felt by secured creditors, then the ct will grant the super-
         ***Sarra says that a review of the cts decisions indicates that the threshold for granting super-priority for
         monitor’s fees is lower than that for DIP financing for continued operations. This is based on the fact that
         the monitor is required under the CCAA, as well as the fact that in performing his duties, the monitor is
         acting in the interests of all the creditors.
    5. Extraordinary Remedy: the granting of DIP financing is an extraordinary remedy. In order to ensure that
         the goals of the CCAA are met, the ct will require firm judicial control over the amounts of financing, over
         the precise purpose and use of such funding, and over the accountability of the debtor to the monitor and
         the ct.

Section 13 of the CCAA gives any person “dissatisfied” with an order/decision made under the Act a right to appeal
the decision (provided they get leave of the ct). In re: Algoma, the ct made light of the fact that a Court of Appeal
should exercise its powers sparingly when asked to intervene with respect to orders/decisions made under the
CCAA. In that case, Farley J. made an order allowing for DIP financing, which was appealed – the CA refused to
overturn the decision based on the fact that orders made by a judge (who is exercising a supervisory function under
the CCAA) require a careful and delicate balancing of interests/problems. To over-rule his decision may have the
effect of upsetting the balance and frustrate the process under the CCAA. The CA made light of the fact that Farley
J, in ordering the DIP financing, included a comeback clause [see SHORT NOTICE AND THE COMEBACK
CLAUSE above], which allowed the creditors to apply for relief with him, rather than appealing the order. The CA
said that this was the preferable method of dealing with creditor disputes to judicial orders (rather than using the s.13
right to appeal).


In Sklar-Pepplar Furniture Corp, the ct made it clear that s.11 of the CCAA gives it the power to sanction a plan
which includes termination of leases as part of the debtor’s plan of re-organization. In re: T. Eaton Company Ltd,
the ct said that a tenant can terminate a lease (in the sense of repudiate the lease contract), even if the lease contains
restrictions that would normally (ie. outside a restructuring plan) restrict a tenants’ right to repudiation.
In re: Westar Mining Ltd, the ct said that its “inherent jurisdiction” gives it the power to make orders during the
interim period between the filing of a plan and its approval. This inherent jurisdiction is meant to fill in the gaps in
the legislation.
In re: Dylex, the ct said that it could use its “inherent jurisdiction” to sanction the termination of leases during the
interim period before plan approval (ie. in an initial order). The ct in re: Dylex did in fact make such an initial order
and included a comeback clause (which allowed any landlord adversely affected by the termination of the lease to
make an application to the ct for relief). In interpreting the comeback clause (ie. after the landlord decided to
exercise this right), the ct attempted to balance the rights of the parties and decided that in this case the nod should
be given to the tenants. The landlords were in sound financial shape (generally) although the two malls in question
were perhaps less than robust – the tenant was in a far more precarious position. To require the tenant to keep his
stores open (ie. not allow a termination of the lease) would create supplying difficulties, and given his precarious
position, would be greatly prejudicial.
***Note that the cts reasoning in this case was based on the wording of the comeback clause and its application to
the particular facts of the case. Although the landlord would be able to appeal any such initial order using s.13, it
would seem that re: Algoma would make it difficult for him to be able to persuade a CA to overturn the order [see

When a tenant terminates a lease, what he is actually doing is repudiating the contract. The ct allows this in a
CCAA plan, even if the terms of the lease say that repudiation is not an option. The relief available to landlords in
such case is an action for breach of contract. In such an action, any damages claim awarded to the landlord will
necessarily be an unsecured claim (ie. judgement creditors are unsecured), and therefore the chances of the
landlord getting such a judgment satisfied in full are slim (considering the judgment debtor has invoked the CCAA
and is therefore not in the best of financial health; any CCAA plan will necessarily result in creditors getting less
than full value). The cts recognize that this is not necessarily the ideal situation for landlords, but refused to allow
landlords to elevate their claims (above unsecured status) by forcing specific performance of a lease.


While a stay order under the CCAA usually prohibits creditors from terminating contracts with the debtor company,
the debtor (with ct approval) may terminate (ie. breach) contracts, even where repudiation of the contract is
restricted by the terms of the agreement: re: Blue Range. The ability of the CCAA-debtor to repudiate contracts
forces the non-defaulting party to bring an action for breach of contract -- and to claim as an unsecured creditor for it
damages in the CCAA proceedings. Similar to the breach of leases, a non-breaching judgement debtor will
necessarily get less than full value in a CCAA plan (ie. the nature of a CCAA re-structuring is that creditors get less
than full value).
In re: T. Eaton Company Ltd, the non-breaching party asked for specific performance in regards to the contract. The
ct said that specific performance is only available where the non-breaching party cannot be adequately compensated
in damages for the breach. The fact that the non-breaching party will receive less than full value under a CCAA
plan is not reason enough to force specific performance.

Jeffrey Mines case: once certification is granted, the employer loses the option of granting different terms with
individual employees. The monitor under a CCAA plan is required to comply with the terms of the CBA.


Section 6 of the CCAA requires that any re-organization plan be approved by a majority in number of each class of
creditors – and the majority must represent 2/3 in value of the creditors in that class. It should be noted that the
majority (2/3 value) is only required of those creditors who actually vote on the process (ie. creditors who do not
take part in the process are eliminated from the equation), but all creditors are bound by the plan (and get to share in
the benefits).
Once a class has approved a plan, then the ct may sanction the plan – in which case it will be binding on that class of

The responsibility of making the classification of creditors is on the debtor company (ie. the debtor makes the
classes), however if there is disagreement as to the classes (ie. between the debtor and creditors), then the parties can
apply to the ct for directions.
In deciding the proper classification of creditors, the cts starting point is Sovereign Life Assurance. In that case, the
ct held that the reason for dividing creditors into different classes is that creditors have different interests and they
should only be permitted to bind other creditors who have the same interests. The classification, however, must not
be so fine as to render it impossible to get a plan approved. The test that has been adopted by the Canadian cts, in
deciding whether a classification is too fine, is the “non-fragmentation” approach – the ct will attempt to define
classes that have a commonality of interests, while at the same time not fragmenting creditors into too many classes.
The reason for this approach is that the cts wish to promote re-organization: having many classes increases the risk
that a creditor will be able to scuttle a re-organization plan. Broader, non-fragmented classes increase the
probability that a CCAA proposal will be accepted by creditors.
Some examples of the cts approach to classification include:
      Secured creditors may argue that they have security interests against different assets and therefore should
          be divided into different classes. The cts have said no – they are all secured creditors, therefore they all
          have similar legal interests, and should therefore be in the same class.
      Employees may argue that they should be in a different class than trade creditors. The ct have said no –
          both groups have contracts terminated and are therefore unsecured judgment debtors; as a result, both have
          similar legal rights and should be in the same class.
      Equipment financiers may argue that they should be in a different class from inventory financiers because
          they provided enabling loan rather than credit. The cts said no – both have similar legal rights, therefore
          same class.
      Landlords in “anchor” chains (ie. the mall is built around the CCAA debtor company) may argue that they
          are in a different position than non-anchor landlords, and should therefore get their own class. Cts said no
          – while an anchor landlord stands to lose more money, he is in no different a legal position.
      Landlords who are having their leases repudiated may argue that they are in a different position from
          landlords who are simply having their rent reduced, and should get their own class. Cts said no, they had
          similar legal rights, thus same class.
What you will find in most cases is the ct straining to make a logical argument in order to group numerous creditors
into the same class. While at times the cts logic may seem unreasonable, the truth of the matter is that the ct is
endeavouring to create classes that are likely to accept the re-structuring plan. The best way for the ct to do this is to
create as few distinct classes as possible, thus eliminating the opportunity for a single creditor to scuttle the re-
organization plan.

After the creditors have approved a plan, s.6 says that the ct will hold a sanctioning hearing in order to decide
whether to implement a plan. Section 6 is discretionary, not mandatory – meaning that the ct does not have to
sanction the plan, even if it has been approved by the required majority of creditors. For example, the ct may refuse
to accept a proposal if it concludes that the plan is not economically feasible (re: 229531 BC Ltd). The ct may also
refuse to sanction a proposal if it feels that the creditors are not receiving any advantage over bankruptcy (ie. they
are receiving drastically less on the dollar under the plan, than they would in a liquidation): re: Mernick. That said,
the ct will not second-guess a reasonable business judgment.
The test for sanctioning of the plan is as follows:
     1. The ct must be satisfied that all statutory requirements have been complied with (ie. that the CCAA is
          available because the debt is over $5M, etc).
     2. The ct must be satisfied that the plan is “fair and reasonable”. This does not mean that the plan has to be
          perfect; it must, however, be inherently reasonable, fair and equitable. In determining whether a plan is fair
          and reasonable, the following are relevant considerations
                          i. the composition of the unsecured vote – ie. plan is approved by requisite majority of
                         ii. anticipated receipts in liquidation or bankruptcy
                        iii. alternatives to the plan – are there other options available?
                        iv. oppression of rights of certain creditors
                         v. unfairness to shareholders
                        vi. the public interest – ie. will the proposal save jobs?

Once the proposal has been accepted by the creditor and sanctioned by the cts, it is binding on all creditors affected
by the plan. After the plan has been sanctioned, no creditor whose claim is affected by the plan can bring an actin to
enforce its claim.


These funds work by buying the debt held by panicked creditors at a discount. The creditors, fearful of the results of
a restructuring (or even a bankruptcy), are quick to sell their debt at a discount (in order to guarantee some kind of
return). The vulture funds buy up huge blocs of debt, in order that they can control a significant voting class in the
restructuring process. The vulture funds are betting on the debtor-corporation emerging from the restructuring as a
viable entity, so that they can make good on the debt (which they purchased at a discount). The impact of the
vulture funds is that they often play an integral role in any restructuring process, since they control a significant


Part III Division 1 offers another means for an insolvent debtor to make a proposal to his creditors. Unlike the
CCAA, Part III Div 1 is available even when the debtor-corporations debts are less than $5M. As a result, the BIA
provisions are used for proposals from smaller companies, and from professionals (who are above the $75k limit for
consumer proposals under Part III Division 2). The benefits of Part III are that they are cheaper to use than the
CCAA – although they are more rule-oriented (as opposed to court-supervised) and therefore less flexible.
Part III Div 1 was amended in 1992 to deal with a major shortcoming of the provisions – until the amendments, the
filing of a proposal did not prevent secured creditors from realizing on their security. As a result, a debtor had to
obtain the co-operation of its secured creditors before lodging a proposal or risk the plan being scuttled by an
unsatisfied secured creditor. The 1992 amendments were meant to limit the ability of secured creditors to single-
handedly kill a proposal (and prior to 1992, this was one of the main reasons that the CCAA provisions were used
instead of Part III).

When Part III Division 1 was amended, there were concerns about possible abuses, especially those prevalent under
Section 11 in the US. In the US, companies would file a proposal, and would therefore be protected by the
automatic stay it provided them, and would never come out of bankruptcy protection. The debtor-corporation would
use the bankruptcy provisions to protect itself from creditors. This abuse led to the inclusion of “guillotines” in Part
III: if certain requirements are not met within a prescribed time limit, then the debtor is deemed to make an
assignment in bankruptcy.
***Note also that a creditor can make an application at any time to have the proceedings (ie. the proposal)
terminated, on grounds, such as, the debtor is unlikely to make a proposal that will be accepted by the creditors:
s.50.4(11). If the creditor’s application is successful, then the debtor will be deemed to make an automatic
assignment in bankruptcy.


Prior to filing a notice of intention/proposal, the trustee must make an assessment of the debtor: the trustee must
conduct a financial appraisal of the debtor and review all statutory (and non-statutory) options available to him. An
assessment certificate must be filed with the Official Receiver at the time of filing the notice of intention/proposal.


A notice of intention is prepared (s.50.4(1)). In order to file the notice, the debtor must prepare a list of creditors
with claims of $250 or more, and obtain the consent in writing of a trustee who is prepared to act as trustee for the

The notice is filed with the Official Receiver in the locality of the insolvent person: s.50.4(1).

When a notice of intention is filed, all actions against the debtor by secured and unsecured creditors are stayed until
a a proposal is filed or the debtor goes into bankruptcy: s.69(1). [see THE STAY OF PROCEEDINGS IN A
PROPOSAL above]. To protect the assets during the stay, an interim receiver can be appointed: s.47.1.

Within 10 days after filing a notice of intention, the debtor must file a cash-flow statement with the Official
Receiver: s.50.4(2). A copy of the cash flow statement must also be filed with the ct. Any creditor can obtain a copy
of the cash-flow statement from the trustee: s.50.4(3).
***FIRST GUILLOTINE: If the cash-flow statement is not filed within 10 days, the debtor is deemed to have
made an assignment in bankruptcy: s.50.4(8).

Within five days after the filing of the notice of intention, the trustee must send a copy of the notice to all known
creditors: s.50.4(6).

A proposal must be filed within 30 days after filing a notice of intention: s.50.4(8). The ct can extend this period for
45 days at a time, but the total period of the extension cannot exceed five months after the expiration of the 30 day
period (ie. 6 months): s.50.4(9). In order to be granted an extension, the ct must be satisfied that the requirements
of s.50.4(9)(a)-(c) have been met.
***SECOND GUILLOTINE: If the proposal is not filed within the 30 day period (or longer if extension
granted), then the debtor is deemed to have made an assignment in bankruptcy: s.50.4(8).


If the person making the proposal is bankrupt, the proposal will be accompanied by a “statement of affairs”:
s.50(2)(b). If the debtor is not bankrupt, the proposal will be accompanied by a statement showing the financial
position of the debtor at the date of the proposal (verified by affidavit): s.50(2)(b).

Where a proposal is filed by an insolvent person, all actions against the debtor (by secured and unsecured creditors)
are stayed until the proposal is fully performed, or the debtor goes into bankruptcy: s.69.1. To protect assets during
the stay, an interim receiver can be appointed: s.47.1.
In a proposal by an insolvent person, the trustee must (when filing the proposal) file with the Official Receiver a
projected cash-flow statement. If a notice of intention was filed, then the trustee must file a revised cash-flow
statement: s.50(6)(a). This cash-flow statement must be accompanied by a report by the trustee as to its
reasonableness: s.50(6)(b). Any creditor can obtain a copy of the cash-flow statement from the trustee: s.50(7).

The trustee is required by s.50(5) to make an appraisal and investigation of the affairs/property of the bankrupt, so
he can make a report at the meeting of creditors as to the debtor’s financial situation and causes of financial

A “meeting of creditors” to consider the proposal (ie. vote on the plan) must be called within 21 days after the filing
of the proposal: s.51(1).

Section 51 requires the trustee to mail the following material to every known creditor (and the Official Receiver) at
least 10 days before the meeting of creditors:
        a notice of date/time/place of meeting
        condensed statement of assets and liabilities
        list of creditors
        copy of proposal
        proof of claim form


A creditor does not have to attend or be represented at the meeting of creditors – he can vote on the proposal by
voting letter: s.53.

Creditors vote by classes. All unsecured creditors constitute one class unless the proposal otherwise provides:

To be accepted by creditors, a majority in number (and 2/3 in value) of each class of unsecured creditors must accept
the proposal: s.54(2)(d).
***If the required majority of unsecured creditors is not obtained, the debtor is deemed to have made an
assignment in bankruptcy: s.57(a).

To be binding on a class of secured creditors, the proposal must be accepted by a majority in number (and 2/3 in
value) of that class: s.62(2)(b). The fact that secured creditors may have accepted/rejected a proposal is irrelevant in
determining whether a proposal has been accepted – it is only the votes of unsecured creditors that decides if a
proposal has been accepted: s.54(2)(c).


If the proposal is accepted by creditors (ie. unsecureds), the trustee must (within 5 days) apply to the ct for an
appointment for the hearing of the application for approval: s.58(a).

To obtain a cts approval, the applicant must satisfy the ct that the terms of the proposal are reasonable and are
calculated to benefit the general body of creditors.
***If the ct refuses to approve a proposal by an insolvent person, the debtor is deemed to have made an
assignment in bankruptcy: s.61(2).

[see CHAPTER 5: IMPACT OF BANKRUPTCY ON CONTRACT RIGHST to see how contractual rights
are treated in a proposal].

Part III is vague as to the classification of creditors. In addition, there is no real jurisprudence on the rights of
secured creditors in Part III – probably because restructurings under Part III involve small corporations and are not
worth the cost of litigation. Ramsay says that the ct may be likely to take an approach similar to the CCAA (ie.
“anti-fragmentation”) in classifying creditors, since the objectives of both sections are the same (ie. re-organization,
instead of liquidation). On the other hand, Part III restructurings affect less people than do CCAA restructurings (in
term of employment, etc), so the cts may feel less inclined to want to force re-organization (and simply allow the
creditors to liquidate the corporation).


The trustee must call a meeting of the creditors within 21 days of filing the proposal. The voting requirements are
the same as the CCAA: a majority in each class representing 2/3 in value. If the proposal is rejected by the
unsecured creditors, then the debtor-corporation is deemed to make an assignment in bankruptcy: s.57(a).
If the unsecured creditors vote for a proposal, and the secured creditors vote against it, then the proposal can go on
without the secured creditors: s.62.2(b). A proposal can also be made that doesn’t include the secured creditors at
In practice, the secured creditors will approve (or allow) a proposal if the debtor promises to keep the security in
place and resumes payment.


The trustee must, within 5 days of creditor approval of a plan, apply to the ct for court approval: s.58(a). The trustee
also files a report with the ct saying whether he feels the proposal is advantageous (or not) towards the creditors.
Under s.59(2), the ct is not required to approve a creditor-approved plan – rather, it has a discretion to do so. Before
it will approve a creditor-approved plan, the ct must be satisfied of both of the following requirements:

         1.   that the terms are calculated to benefit the general body of creditors – the terms of the proposal must be
              drafted so as to be advantageous to the creditors
         2.   that the terms are reasonable – to be reasonable, a proposal must have a reasonable possibility of being
              successfully completed in accordance with its terms; in addition, a proposal must meet the
              requirements of commercial morality and maintain the integrity of the bankruptcy system (ie. is the
              plan fair to creditors and society?)

In deciding whether to approve a proposal, the ct considers not only the wishes and interests of creditors, but also
the conduct and interests of the debtor, the interests of the public and future creditors and the requirements of
commercial morality.

In addition to the above test, a person seeking court approval of a proposal must be acting in good faith. Good faith
requires full disclosure of the assets of the debtor and the encumbrances against them.
In re: Mayer, the creditors were required (under the terms of the proposal) to accept the debtor’s equity in his home
as a full settlement of their claims. However, the information that the debtor had provided to the creditors did not
disclose that the premises were held jointly (with his spouse), nor did it disclose the extent of the encumbrances on
the property. In addition, there was no proper appraisal of the property. As a result, the ct found that the debtor was
not acting in good faith and refused to approve the proposal.
***The ct made this decision even thought the trustees’ report said that the proposal was advantageous to the
creditors: the ct said that the report was wrong.
If any of the facts in s.173 are proved (ie. facts that prevent an automatic discharge, such as paying less than 50% of
the debt owed), then the ct shall refuse to give approval to a plan – unless the proposal provides reasonable security
for the payment of not less than 50% on all unsecured claims of creditors: s.59(3). The ct however has a discretion
under s.59(3) to fix a lesser percentage. “Reasonable security” means that there should be a reasonable probability
that the amount required to be paid under the proposal will be paid, having regard to the debtor’s state of affairs as
presented to the creditors.
of the facts under s.173].

If the debtor has committed any one of the offences in s.198-200, the ct may refuse to approve a proposal: s.59(2).
If it is proved that the debtor has committed one of the offences in s.198-200, then the ct must exercise great care
and caution before approving a proposal.

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