Bankruptcy

Between Bankruptcy and the Discharge.

duties of the bankrupt.

Mandatory Counseling.

 

The rationale for mandatory counseling is to explain debtor’s rights and obligations in bankruptcy process and to educate the bankrupt on how to manage bankrupt’s financial affairs after the discharge. The trustee in bankruptcy must arrange for counseling for the individual bankrupts. Under Directive 1R2, the first counseling session must be scheduled within 10 days after the bankruptcy, the second one must be provided no less than 20 days, but no more than 120 days after the first one. The costs of the counseling are paid out of the bankruptcy estate. The consequences of bankrupt’s refusal or neglect in receiving the counseling is that the automatic stay does not apply. (s.157 of the BIA).

Sources.
s.157 of the BIA
Directive 1R2

Duties of the Bankrupt

The duties of the bankrupt are set in s.158 of the BIA and can be summarized as follows:

The other duties of the bankrupt can be found in relevant provisions of the act, such as initiation of bankruptcy proceeding, consumer proposal and discharge.

Sources.
s.158 of the BIA.
OSB Directive 3 (duty to deliver credit cards)

DISTRIBUTION OF BANKRUPT’S Property among creditors.

Vesting of Property in a Trustee in Bankruptcy.

 

At the time of the bankruptcy, a bankrupt ceases to have control to dispose of or otherwise deal with his property and the legal title to the property immediately vests in the trustee in bankruptcy. In other words, bankrupt’s estate is created and the trustee manages the estate for its further distribution among the creditors.(s.71(2). The bankrupt is obliged to deliver all his property to the trustee in bankruptcy. The issue, thus, becomes what is considered to be “property” that is to be delivered to the creditors and what property the bankrupt is entitled to keep.

Definition of “Property”.

The property of a bankrupt divisible among his creditors comprises all “property” wherever situated or that may be acquired by or devolve on him before his discharge (s.67(1)(c) of the BIA). Section 2(1) defines property as:

Any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.

The trustee in bankruptcy has the same powers in respect of the property in the bankruptcy estate as might be exercised by the bankrupt for his own benefit.(s.67(1)(d). Practically, it means that where the bankrupt has discretion of decision making as to the management of his property, the trustee in bankruptcy has to make the decision for the creditor’s benefit.

Generally, the definition of property is very broad and includes every asset the bankrupt has unless the assets are expressly exempted by bankruptcy or provincial debt enforcement legislature.

Exempt Property.

 

The answer to the question of how much property the bankrupt is allowed to keep after declaring bankruptcy is the answer to the question of how difficult it would be for a bankrupt to go through bankruptcy process and to make a “fresh start”. Under s.67(1) of the BIA, the property of a bankrupt divisible among his creditors does not include:

(a) property held by the bankrupt in trust for any other person
(b) any property that is exempt from execution or seizure under provincial laws, or
(b.1) such goods and services tax credit payments and prescribed payments relating to the essential needs of the individual.

The property that is exempted under provincial legislation by virtue of s.67(1)(b) varies from province to province. Under s.2 of the Ontario Execution Act, the following property is exempt from the bankruptcy estate in Ontario:

1. necessary and ordinary clothes of the debtor or his family not exceeding $5,000 in value.
2. the household furniture, food and fuel not exceeding $10,000.
3. for the persons engaged solely in farming:  tools and instruments not exceeding $35,000 in value and certain amount of seed  and livestock food.
4. A motor vehicle not exceeding $5,000 in value.

Under s.196(2)of the Ontario Insurance Act, if beneficiary under insurance policy are either a child, a grandchild or a parent of the bankrupt, the interest of the insured in the contract is exempted from “property” In Re Larocque, the question before court was whether an annuity contract where bankrupt’s wife would get benefits upon bankrupt’s death is insurance policy for the purpose of s.196(2) of the Insurance Act. The court held that the contract is captured by the definition of “life insurance” and the life insurance is exempt, because the wife is beneficiary of the “insurance.

Under s.66(1) of the Pension Benefits Act, money payable under a pension is exempt from bankrupt’s “property”. In Re Laroucque, the court determined that RRSP income is not considered to be pension income and is not exempted from distribution to the creditors.

Sources.
s.67 of the BIA.
s.196(2) of the Ontario Insurance Act.
s.66 of the Pension Benefits Act.
Re Larocque, (1982), 38 O.R. (2d) 385 (S.C.)

 

Treatment of assets and income acquired after the bankruptcy.

Under s.67(1)(c) of the BIA, all the property that is transferred to the bankrupt is vested in a trustee in bankruptcy for its consequent distribution among the creditors.

The bankrupt’s post-bankruptcy income is not automatically  captured by the creditors. The trustee in bankruptcy determines what amount of wages the bankrupt pays into the estate, having regard for the Directives created by the OSB and the family circumstance of the bankrupt. Where the bankrupt does not pay the determined amount into the estate, the trustee can make an application to the court to require the bankrupt to do so.

Directive 11R provides a trustee in bankruptcy with guidance as to the amount of the surplus to be paid into bankruptcy. The surplus is determined in three steps. First, the trustee in bankruptcy must subtract from the total income the following payments:

  1. child support payments;
  2. spousal support payments;
  3. child care expenses;
  4. expenses associated with a medical condition;
  5. court-imposed fines or penalties that are in process of being paid;
  6. expenses permitted by the Income Tax Act (or similar provincial legislation) that are a condition of employment; or
  7. any other debt where a stay of proceedings has been lifted by the court, and recourse authorized.

Second, the trustee in bankruptcy will deduct the minimum necessary living expenses from total income varying on the number of bankrupt’s dependents in accordance with the minimum bankruptcy income allowance regulations.

Third, the trustee in bankruptcy will use his discretion to determine a part of the surplus is to be payable into the estate and further distribution of the surplus to bankrupt's creditors.


Sources.
s.67, 68 of the BIA.
Directives 5, 5R (estate funds and banking),  11R (surplus income).
Marzetti v. Marzetti, [1994] 2 S.C.R. 765
Re Landry, (2000), 192 DLR (4th) 728 (Ont.C.A.)
Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701
Vachon v. Canada (Employment & Immigration Commission), [1985] 2 SCR 417

bankrupt and executory contracts.

Termination of executory contracts by creditors

Effect of Proposal on the Executory Contracts

 

Termination of Executory Contracts by Creditors.

(i) Termination of contracts by creditors

The executory contracts are contracts that are not completed, i.e. at least one of the , parties has to pay for the goods or services or to deliver goods and services. The contractor cannot disclaim the contract where a debtor is bankrupt as soon as the bankrupt continues to perform his contractual and trustee in bankruptcy assumes (approves) the contract within reasonable time (usually at the first meeting of the creditors. If the trustee in bankruptcy does not approve the contract within the reasonable time the contractor may assume that the contract is terminated (see Re Thomson Knitting below). Where a bankrupt does not perform the obligations, a contractor may likely terminate the contract for bankrupt’s breach and claim the damages. In accordance with s.124 of the BIA, the damages have to be proved to the trustee in bankruptcy. Because of stay of judicial proceedings in s.69 of the BIA, the contractor is prohibited from suing the bankrupt in the court, unless he files a successful application and “lifts the stay” (“stay”, chapter I(F)). Practically for the bankrupt, the contractor is likely to become an unsecured creditor and damages are likely to be repaid from the bankruptcy estate, rather than from bankrupt’s income.

In Re Thomson Knitting, the purchaser had received shipment from a supplier and subsequently went bankrupt. The trustee in bankruptcy had not assumed the contract. The issue before the court was what damages, if any are the creditors entitled to for the breach of contract? The court ruled that upon the purchaser becoming bankrupt, the contract for the purchase of goods is not cancelled. A trustee in bankruptcy can approve the contract, but if he does not do it within reasonable time, the vendor is entitled to assume that the contract is cancelled and breached. The contractor may prove contractual damages to the trustee in bankruptcy and become an unsecured creditor and be compensated as such in accordance with priority of distribution scheme.

(ii) Termination under ipso facto provision

On the other hand, the creditor may unilaterally terminate the contract if the contract contains an ipso facto provision that allows the termination of the contract in the event of bankruptcy. Depending on the situation and the words of the contract, the creditor may claim contractual damages, in this case the creditor will have to prove the damages to the trustee in bankruptcy ( “proof of claims”, chapter II(2)(b)).

(iii) Summary

To summarize, the contractor cannot terminate a contract with bankrupt where the trustee in bankruptcy assumes the contract and the bankrupt continues to perform his obligations or where an ipso facto clause is present. If a contractor stops performing his obligations under the contract, he can be sued for contractual damages that would vest in bankrupt’s estate.

Termination of executory contracts by a bankrupt or a trustee in bankruptcy.

Bankrupt

The bankrupt who terminates the contract may be responsible for other party’s contractual damages. The contractor must prove the damages to the trustee in bankruptcy ( “proof of claims”, chapter I(E)(2)). Practically for the bankrupt, the bankrupt would not have to pay the damages, unless the damages are not discharged later, the contractor would become an unsecured creditor and be compensated out of bankruptcy estate.

Trustee in Bankruptcy

 

Trustee in bankruptcy can terminate the contracts of the bankrupt by power given to the trustee under s.30(1). The section gives the trustee a power, with the permission of the inspectors, to manage bankrupt’s affair in so far as may be necessary for the beneficial administration of estate. The bankruptcy estate may be liable for damages that would have to be paid from the bankruptcy estate. The contractor cannot sue trustee in bankruptcy for damages, because the trustee would be protected from liability by virtue of s.215 of the BIA.

Other than s.30(1) there is no legislative provision that regulates executory contracts, therefore the area is regulated by judicial precedents. The law regulating executory contracts is a bit ambiguous and unsettled. The trustee has power to assume the contracts, assign the contracts to the third party for the benefit of estate or terminate the contract if it is beneficial for the creditors. In  Re Thomson  Knitting, the Ontario Court of Appeal decided that where the trustee does not assume the contract within reasonable time, the contractors may assume that the contract is terminated. In Potato Distributors Inc. v. Eastern Trust Co., the court decided that it is a duty of trustee to distribute the property among the creditor as soon as possible by not assuming the contract and not to endeavor making profits by assuming the contract and continuing making profits out of that contract.

Sources.
s.30 of the BIA.
s.215 of the BIA.
Re Thompson Knitting Co., (1925) 5 CBR 489 (Ont. CA)
Potato Distributors Inc. v. Eastern Trust Co., (1955), 35 C.B.R.. 161 (P.E.I.C.A.)