Initiating Bankruptcy Process



Bankruptcy is a legislative procedure under Bankruptcy and Insolvency Act (“the BIA”) (1) complemented by provisions of federal and provincial legislation (2) that allows an insolvent person, who cannot pay his debts and liabilities, and who assigns himself or petitioned by the creditors into bankruptcy,  to surrender his property to a trustee in bankruptcy for the purpose of distribution among creditors in accordance with legislative priority of distribution scheme.

Upon bankrupt’s compliance with bankruptcy procedures allows a bankrupt to be discharged (excused) from paying all or , chapter of his debts and liabilities. The legislation may be complemented by regulations and Office of Superintendent in Bankruptcy directives.

(1) Bankruptcy and Insolvency Act, 1985, R.S., 1985, c. B-3
(2) to name few: Ontario Executions Act, RSO, 1990, c.E-14; Ontario Fraudulent Conveyances Act, R.S.O., 1990, c. F.29; Ontario Assignments and Preferences Act, R.S.O., 1990, c. A.33; Ontario Personal Property Security, R.S.O., 1990, c. P.10.



The bankruptcy process may be divided in three stages:

Initiation of the bankruptcy process.


At this stage:



Between Bankruptcy and Discharge.


At this stage:




Absolute or Conditional Discharge

At this stage:



Purpose and objectives of the bankruptcy process.

The purpose of the bankruptcy process is to introduce a legislative mechanism that would provide a fair and peaceful resolution of financial conflict between debtors and creditors, creditors competing among themselves for recovery of their loans and balance public interest in protecting financial security of creditors on one hand and public interest in allowing an insolvent individual to make a fresh start. Generally, the objectives of the bankruptcy process can be summarized as follows:

1. to permit an honest, but unfortunate debtor to obtain a discharge of his debts and to make “fresh start”;

2. not only to permit an honest debtor to make a fresh start, but also to rehabilitate such a debtor by counseling bankrupt on managing his  financial affairs after discharge in order to prevent subsequent insolvency of the bankrupt;

3. to promote a sense of commercial responsibility of the bankrupt and to deter bankrupt from subsequent insolvencies by introducing stricter legislative and judicial treatment of second and ensuing bankruptcies;

4. to permit an investigation of the financial affairs of the bankrupt by a mediator, a trustee in bankruptcy, who is given broad powers to facilitate settlement of the claims by way of consumer proposal, to require compliance with bankruptcy procedures, to set aside fraudulent transactions and preferences among creditors and to adjudicate various matters under the BIA;

5. to protect the creditors from competing with each other and to secure debtor from excessive pressure from the creditors attempting to collect their debts first by introducing a priority of distribution of bankrupt’s property scheme under which all creditors are treated equallyin accordance with the scheme.



Causes of Insolvency

In his bankruptcy studies,  Jacob S. Ziegel summarized the academic research on the causes of consumer bankruptcy(1) as follows:




Consumer Debt









Business related



Marital family problems




Schwartz & Anderson


No. of responses

Percent of Total

Loss of job or reduced income



Personal problems



The debt repayment process



General inability to repay loans



Credit cards



No specific event/debt or “no response”



Debts to government



Small business failure



All other events or debts



Total number of triggering events of debts named




Iain Ramsay


All debtors (%)

Pure consumer debtors (%)

Adverse employment changes



Business failure






Inadequate/insufficient income



Loss of income overextension



Marital breakdown and loss on sale of home/deficiency claim



Real estate investment failure






Adverse employment change related to health



Tax liability



Mismanagement of finances



Marital breakdown



To briefly summarize the statistics, the insolvency is caused either by inability to manage individual affairs, increasing standard of living by increasing debt load or by sudden and unexpected loss of income.

(1) J.S. Ziegel, “Book Review of the Fragile Middle Class” (2001), 79 Texas L Rev. 1241, at 1247

Bankruptcy Statistics in Canada

According to Office of Superintendent in Bankruptcy 2005 study (1), 102,660 Canadians have declared themselves to be insolvent under the BIA. Consumer bankruptcies represent 91% of all bankruptcies in Canada. 84,638 of consumer insolvents have finally become “bankrupt” either by assignment or creditor’s petition for receiving order, 18,022 have filed a consumer proposal. The statistics show that comparing to 2004, more insolvents settled their debts with creditors by filing a consumer proposal (8.2% increase), comparing to been assigned or petitioned into bankruptcy (0.3% increase).

Recently, the OSB has posted an overview of statistics as to consumer bankrupts up to 2004 with comments on the statistics figures that can be summarized as follows (2):


Average Age of Insolvents by type of insolvency (years):

Consumer Proposal

Average Canadian population:





Gender of the Insolvents by type of insolvency (percentage of males):

Consumer Proposal

Average Canadian population






Marital Status of Insolvents by type of insolvency:


Common Law/Married

Consumer proposal

Common Law/Married

Average Canadian Population

Common Law/Married










Average Income of Insolvents by type of insolvency ($/a year):

Consumer Proposal

Average Canadian Income:






Average Estimate Liabilities of Insolvents ($):

Consumer Proposal





Average Estimate Assets of Insolvents ($):

Consumer Proposal




To briefly summarize the data, a typical consumer bankrupt is a middle age individual with below average income with little assets and large liabilities. An insolvent person is more likely to be willing to settle the debts by way of consumer proposal in situations where the debt load is lower and income and amount of assets is higher.



Positive Consequences.




Negative Consequences.










For the purposes of the BIA, it is important to be able to distinguish between legal definition of “insolvent person” and one of “bankrupt”. Generally, insolvent person is a person, who cannot pay his debts that may subsequently become bankrupt, either by assigning himself into bankruptcy, been petitioned into bankruptcy by the creditors or been deemed to assign himself into bankruptcy by defaulting on consumer proposal.

Legal Definition of “Insolvent Person” in s.2 of the BIA.


The person who is unable to pay his obligation is considered to be insolvent person under the BIA. Under s.2 of the BIA “insolvent person” means a person who is not bankrupt and who resides carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,
(b)the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;

The definition of “insolvent person” is essentially important in two main areas of the BIA. First, only an insolvent person may make an assignment in bankruptcy under s.49 of the BIA and essentially been petitioned into bankruptcy by creditors under s.49 of the BIA (“assignment into bankruptcy”, chapter II(A)). Second, transfer of the property of the insolvent person to a creditor may be attacked as being a fraudulent preference under s.95 of the BIA (“fraudulent preferences”, chapter IV(C)(4)).

Legal definition of “bankrupt” in s.2 of the BIA.

Under s.2 of the BIA, an “insolvent person” can become “bankrupt” for the purposes of the BIA in three ways:


ss.157-181 of the BIA.


Priority of Claims

Section.2 of the BIA defines a “creditor” as a person having a claim, unsecured, preferred by virtue of priority under s.136 of the BIA or secured, that can be proved as a claims under s.124 of the Act. The creditors may be divided into four categories:


      Unsecured creditors are the creditors, whose claims are not guaranteed by some security in bankrupt’s property and do not have priority under s.136(1) of the BIA. If the property of the estate is insufficient to compensate all unsecured claims, the property is distributed proportionally to unsecured creditor’s claims (pari passu principle in s.141 of the BIA).


Proof of Claims

Every creditor must prove his claim and a creditor who does not prove his claim is not entitled to any distribution of the proceeds from bankrupt’s estate (s.124(1). The claim must be delivered to the trustee in bankruptcy and the trustee in bankruptcy must examine every proof of claim and can request further proof. The trustee may disallow, in whole or in part any claim , right to a priority under the BIA or security. Generally, the test of proving the claim before the trustee in bankruptcy is very low, a claim is proved unless it is too “remote and speculative”.(Re Wiebe). The rationale for such a low test is to discharge as many claims as possible to allow the bankrupt to make a fresh start after the discharge.

ss.121-157 of the BIA

Trustee in Bankruptcy.


A trustee in bankruptcy is an individual or a corporation licensed by the official superintendent to hold in trust and, subsequently, to distribute bankrupt’s property among the creditors in accordance with distribution scheme under the BIA. The bankrupt and all other persons holding bankrupt’s property must transfer the property to trustee. The trustee may also assist individual in preparing and submitting a consumer proposal to creditors. The trustee must arrange mandatory counseling of the bankrupt. The trustee must follow the procedures under the BIA, call creditors meetings and send the , parties required notices of proceedings and documents. The trustee is responsible for preparation of pre-discharge report and may oppose bankrupt’s discharge.

Bankrupts often misunderstand the role of the trustee in bankruptcy in bankruptcy process considering him to be personal representatives and counsels of the bankrupts. In reality, despite the fact that the bankrupt pays for trustee’s services, trustees in bankruptcy are required to act in the interest of the creditors. The major duty of trustee is to arrange bankrupt’s compliance with the procedures under the BIA in order to distribute the estate among creditors, which is not always in the best interest of creditor, who is more interested in excluding as much property from distribution among creditors and been excused from as many debts as possible as a result of discharge order.

ss.13-41 of the BIA.
Office of Superintendent in Bankruptcy Licensed Trustee Database:

The Office of the Superintendent of Bankruptcy.

The OSB is designed to supervise the administration of all estates and matters to which the BIA applies.  The specific duties of the OSG are to grant licenses for the trustees in bankruptcy; to inspect and to investigate bankruptcy estates; review the conduct of the trustees in bankruptcy and the receivers; to examine trustee’s accounts, receipts, disbursements and final statements. The specific powers of the OSB are to intervene in any matter or proceeding in court as if the OSB were a party thereto; and to issue directives providing official interpretation of the bankruptcy process to the trustees in bankruptcy and the receivers.

ss.5-11.1 of the BIA
Office of Superintendent in Bankruptcy website:

Bankruptcy Court.

Under s.183(1) of the GIA the provincial Superior Courts of Justice have “such jurisdiction at law and in equity” as will enable them to exercise bankruptcy process under the BIA. S.183(2) regulates appeals from bankruptcy court decisions unless otherwise provided in the BIA. Under s.188, the decisions of the provincial court are enforceable in the courts of other Canadian provinces and all courts and the officers of all courts must act and cooperate in all bankruptcy matters.

Under s.192 of the BIA, the registrars of the provincial Superior Courts have significant powers in relation to procedural matters, unopposed proceedings and in other matters under the Act.

s.183-197 of the BIA.


Inspectors are individuals who are usually appointed at the first meeting of the creditors to perform functions described below. No inspector may be appointed if he is a , party to any contested action or proceeding against the estate. No inspector is usually appointed under summary administration procedure, where the value of debtor’s property is under $10,000.

The trustee is required to obtain the permission inspectors before carrying out many of trustee’s responsibilities, such as the sale of property of the estate, the institution or defending of actions relating to the property of the bankrupt, settling any debts owing to the bankrupt and exercising trustee’s discretion in retaining and assigning bankrupt’s contracts. The inspectors must give their approval to the final statement of receipts and disbursements and trustee’s fees.

Inspectors have fiduciary duty to the creditors and should be impartial though acting in creditor’s interest. The should supervise trustee’s compliance with the procedures under the BIA and the Directives and may apply for the removal of the trustee (Re Bryant)



Re Bryant, Isard & Co. (1923) 4 CBR 41, at 48

Interim Receivers.

Where a creditor has made a petition for a receiving order , the court may appoint an interim receiver, if it is shown that it is necessary for the protection of the estate of the debtor at any time after filing of a petition.(s.46(1). The court may appoint the trustee in bankruptcy as a receiver of debtor’s property. The receiver can take conservative measures and dispose of perishable property, but the receiver cannot unduly interfere with the bankrupt in the carrying on of debtor’s business, except as is necessary for conservatory measures. The  court may appoint a receiver where secured creditor enforces his security (s.47) or in cases of consumer proposal (s.47.1).

In Re Stuart and Sutterby, the court set out the factors, which should be considered in exercising discretion of whether to appoint an interim receiver:

  1. no person in control of the property
  2. debtor is acting in bad faith and giving preferences to other creditors
  3. debtor is fraudulently disposing and concealing his assets
  4. allegation of criminal offences are made
  5. the property is in possession of third , parties


The receiver must to what “practicality demands” to preserve the assets (Minister of Indian Affairs v. Curragh) and must not go beyond what is necessary in the circumstances (Re Insolvency of Big Sky Living Inc.).

s.47-47.1 of the BIA.

Initiating Bankruptcy process.

Debtor’s Assignment into Bankruptcy.

Only an “insolvent person” or administrators of latter’s estate may make an assignment of all of his property to the trustee in bankruptcy for the general benefit of the creditors (1). The definition of the “insolvent person” can be found in s.2(1) of the BNA and generally means a person who is not a bankrupt, who resides or carries business in Canada with liabilities of at least $1000 and

a) who is, for any reason, unable to meet his obligations as they generally become due,
b)the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due(2).

An example of the assignment is attached as a Schedule A. The assignment must be later supported by a sworn statement of affairs (attached as a Schedule B) listing all of the property of the debtor and all of the debts owed by him. The assignment and the sworn statement of affairs must be offered to the official receiver in the locality of the debtor, and it is inoperative until accepted by the receiver. The official receiver must appoint a trustee in bankruptcy in accordance to the wishes of the most interested creditors. Where it is determined that the debtor has $5,000 or less in realizable assets, the summary administration proceedings under s.155 of the BIA applies (“summary administration” , chapter II (D)).

s.49 of the BIA



Application for Bankruptcy.

Under s.43 of the BIA, one or more creditors may apply to the court for a bankruptcy order against a debtor if, and if it is alleged in the application that,

(a) the debt or debts owing to the applicant creditor or creditors amount to $1000; and
(b) the debtor has committed an act of bankruptcy within six months before the filing of the application.

Act of Bankruptcy.


The “act of bankruptcy” in s.43(1)(b) of the BIA is defined in s.142(1) of the BIA as either of situations, where an insolvent debtor:

(a) files an assignment in bankruptcy has been made;
(b) makes a fraudulent gift, deliver or transfer of debtor’s property;
(c)  makes a transfer of the property that would be characterized as fraudulent preference;
(d) departs out of his dwelling- house or out of Canada with intent to defeat or delay creditors,;
(e) permits an execution process against bankrupt’s property to remain unsatisfied within five days after the time fixed for sale of the property
(f) exhibits any statement of assets and liabilities that shows inability to pay debts
(g) assigns, removes or disposes his property with intent to defraud, defeat or delay his creditors
(h) gives notice to any of his creditors that he has suspended or that he is about to suspend payment of his debts
(i) defaults in a consumer proposal
(j) ceases to meet his liabilities generally as they become due.

The creditor must prove the commission of an “act of bankruptcy” before the bankruptcy court.

Single Creditor’s Applications and “Special Circumstances”.


The court may refuse the application in situations, where a single creditor petitions a debtor into bankruptcy as a matter of debt collection. The courts usually allow the applications in the situations, where there are significant circumstances. The court may find “special circumstances”, where a debtor had attempts to avoid debts liabilities, defrauds the creditors and had tries to delay the process by initiating vexatious legal proceedings against the creditors. In Re Holmes and Sinclair, the court held that a petitioner must satisfy a strict burden of proof that a debtor has committed an act of bankruptcy. According to the court, single creditor bankruptcies are only permitted in situations, where:

1. a debtor has failed to respond to “repeated demands”.
2. applicant is a “significant creditor” and there are special circumstances.
3. a debtor admits that he is not able to pay his creditors generally.

In Re Mastronardi, the court found the evidence of special circumstances where the applicant was one of the several injured family members and the respondent was disposing his assets. The court has noted that the bankruptcy regime is not a fall-back legislation and the applicant does not have to exhaust every other possible avenue of  debt enforcement before applying for a bankruptcy order. Similarly, in Re Dixie Market, the court found that a single creditor may apply for a bankruptcy order in the absence of “special circumstances” where “a debtor ceased to meet liabilities generally as they become due”.

Debtor’s Opposition to the Application.

The application for bankruptcy order is an adversarial process in the court, where the application may be disputed by a creditor. Normally, a successful creditor’s defence is based either on the fact that the creditor has failed to prove that act of bankruptcy has occurred or on the fact that there is absence of special circumstances and the debtor is able to repay the loans.

ss.42-44 of the BIA.
Re Dixie market (Nurseries) Limited, (1971), 14 CBR (NS) 281 (Ont.S.C.)
Re Holmes and Sinclair, (1975), 20 CBR (NS) 111 (Ont.S.C.)
Re Mastronardi, (2000), 195 DLR (4th) 631; 21 CBR (4th) 107 (Ont.C.A.)
Platt v. Malmstrom, (2001), 198 DLR (4th) 285 (Ont.C.A.)

Deemed assignment as a result of default on consumer proposal.

The debtor may be deemed to be bankrupt if the debtor files a consumer proposal under s.66 of the BIA, the proposal is accepted by the creditors and later the debtor defaults on the proposal. For the further discussion of consumer proposals, please read chapter III.

Summary administration.

Under s.49(6) of the BIA, where the bankrupt is not a corporation and it appears that the realizable assets of the bankrupt will not exceed $10,000, the summary administration process in ss.155-157 of the BIA will apply. The justification for simplified procedure is where the total realizable value of the consumer bankrupt’s asset is so nominal that going through the formal bankrupt process would be a waste of both creditors and government resources some formal requirement should be waived

Section 155 of the is generally waives some formal requirements of the formal bankruptcy proceeding: some notices are not required to be given, meetings of creditors  are not to be called unless requested, inspectors are not appointed unless requested, the requirements to the estate requirements are less strict. Under s.157 of the BIA, all other provisions of formal bankruptcy procedure apply to the summary administration procedure, unless those requirements are waived by s.155 of the BIA.

ss.155-157 of the BIA.

Application for Annulment.

Under s.181(1) of the BIA, the court can allow an application to annul a receiving order where, in opinion of the court, “the receiving order ought not to be issued or an assignment ought not to have been filed”.

Under s.181(2)of the BIA, if bankruptcy is annulled, all sales, dispositions of property, payments duly made and acts done before the making of the order by the trustee or other person acting under the trustee’s authority, or by the court, are valid, but the property of the bankrupt vests in any person that the court may appoint, or, in default of any appointment, be returned to the bankrupt subject to any terms and conditions, if any, that the court may order.

In Re Wale, before filing an assignment in bankruptcy, the husband was attempting to avoid payments of spousal support by transferring the assets and not showing accurate income. On hearing of bankrupt wife’s application for annulment, the court held that the court should look at the following factors, when annulling the bankruptcy:

1. Whether the bankrupt were insolvent before filing assignment or whether the act of bankruptcy was committed, before creditors applied for receiving order?
2. Is the debtor’s financial situation genuinely overwhelming or could it have been managed?
3. Was the timing of the assignment related to other proceedings, i.e. spousal support payment proceedings in this case?
4 Was the debtor cooperating with creditors or did he conceal assets and make fraudulent preferences?
5. Did debtor converted non-exempted assets into exempted assets?
6. Would existing creditors negotiate settlement with debtor?
7. Is there any evidence that the debtor acted in bad faith?

In some cases, the courts focus their attention on finding bankrupt’s bad faith and deliberate planning. In  Re In the Matter of the Bankruptcy of Donald Allen, the Canada Revenue Agency argued that declaring bankruptcy to avoid tax payment is an abuse of bankruptcy process and “deliberate planning” of bankruptcy is improper result in successful execution of ulterior motive. The court refused to grant an annulment , because there was no evidence of “deliberate planning”.

Sometimes, the bankrupt who assigned himself in bankruptcy attempts to annul the bankruptcy himself.  The courts may grant or refuse such applications. In Re Hydra-Dyne Industrial Cleaning Services Ltd., the directors of bankrupt company argued that the assignment into bankruptcy should be annulled, because the decision to assign was made under duress and the signatory of assignment did not have authority to sign. The court was unsympathetic to the facts and concluded that the assignment into bankruptcy is valid as long as insolvency test under s.2 of the BIA is met.

In conclusion, the courts are very unsympathetic to the bankrupts who have deliberate intention to defraud creditors. Similarly, the court may be unsympathetic to the creditors who attempt to collect the debts through bankruptcy process, even though there is no evidence of insolvency or special circumstances and normal debt collection remedies are feasible. Also, the court expect the bankrupts to carefully consider their assignments before filing it and generally, may be unwilling to annul the assignments unless a sound reason to do so is shown to the court.

s.181 of the BIA.
Re Wale, (1996), 45 CBR (3d) 15 (Ont.Gen.Div.)
In the Matter of the Bankruptcy of Donald Allan, 1997 Carswell Man 272, 47 C.B.R. (3d) 100, 119 Man. R. (2d) 137, [1998] 2 W.W.R. 456, 2 W.W.R. 456
Hydra-Dyne Industrial Cleaning Services Ltd., Re, (unreported), Ontario Superior Court of Justice, Gordon J., Judgment: February 19, 2002


stay of proceedings and collection remedies.

Stay of the Proceedings.

In bankruptcy, the creditors cannot continue (“has no remedy” in the words of s.69.3(2) of the BIA) any legal action, enforcement of the debts or any other proceedings against the bankrupt (s.69.3(2). All existent proceedings are stayed and the creditors have to prove their claims to the trustee in bankruptcy rather than in the court. However, the stay does not apply to the secured creditors, who can still apply to the court for an order to take possession of their security (s.69.3(2)).

The justification for a stay is that all claims in bankruptcy must be resolved under bankruptcy legislation by proving claims to trustee in bankruptcy (s.124 of the BIA). First, it would relieve a bankrupt from creditor’s pressure and allow him to prepare for a fresh start. Second, it would prevent creditors from competing with each other in debt collection and allow a fair distribution of bankrupt’s property among creditors in accordance with legislative scheme.

The courts have decided that stay includes all actions against the bankrupt giving a broad interpretation of “remedy” in s.69.3(2) of the BIA. In Vachon v. Canada, the government overpaid the debtor his unemployment insurance benefits and after the bankruptcy, withheld further benefits to recover overpayment. The court prohibited the government from recovering overpayment saying that the claim for overpayment is stayed by s.96.3(2), which is an absolute bar to the proceeding against the bankrupt.

Lifting the Stay.

Under s.69.4 of the BIA, an individual claimant may apply to the court for a declaration that they are not affected by a stay (lifting a stay) and the court has discretion of making such a declaration, if it is satisfied that:

(a) the creditor is likely to be materially prejudiced by the continued operation of the stay; or
(b) it is equitable on other grounds to make such a declaration

In Re MA, the Ontario Court of Appeal concluded that and applicant who asks the court to lift the stay does not need to prove his claim. The applicant must only demonstrate material prejudice if the stay would not be lifted. The “material prejudice” may be found in cases, where:

(a) the damages or remedies are one that would be exempted from discharge
(b) valuation of the claim is not possible
(c) third , party may be prejudiced by the stay, i.e. where the bankrupt is necessary , party in a larger class action.

In Royal Bank v. Saulig, the Ontario Superior Court master decided that the stay of the actions against the bankrupt applies to the third  parties holding bankrupt’s property. In this case, the master refused to lift a stay where Royal Bank of Canada attempted to recover the property that the bankrupt transferred to his wife. The court emphasized that if the transfer was fraudulent, the property can be recovered by the trustee in bankruptcy.
In Re Catahan, the Ontario Superior Court ruled that where “material prejudice” to the claimant justifies the lift of the stay, financial inability of the bankrupt to defend the action is not relevant. In Re Koval, the Ontario Superior Court concluded that the stay will be lifted where the claims against the bankrupt are for debts, which would not be released by the discharge. Also, in this case, the court has determined that investigation of fraud would not be successful without examination of the bankrupt before the court.

s.69 of the BIA.
Vachon v. Canada (Employment & Immigration Commission), 1985 2 SC.R. 417
Re Ma,2001 Carswell Ont 1019, 24 C.B.R. (4th) 68, 143 O.A.C. 52, [2001] O.J. No. 1189
Royal Bank v. Saulig, unreported, Ontario Superior Court of Justice, Master Beaudoin, Judgment: May 21, 2004
Re Catahan, unreported, Ontario Superior Court of Justice, Deputy Registrar Nettie, Judgment: March 18, 2003
Re Koval, unreported, Ontario Superior Court of Judgment, Ground J., December 10, 2003