The Process of Bankruptcy
Voluntary Bankruptcy under BIA
An insolvent company can voluntarily file for bankruptcy under the BIA along with the submission of a statement of all its assets and liabilities. All of the company’s unencumbered assets are then transferred to a bankruptcy trustee who takes possession of all the assets and deals with all creditors. Secured creditors remain unaffected by the bankruptcy procedure since they have the right to take possession of the secured assets and liquitdate them to recover the amount they are owed.
An insolvent company can also apply for a voluntary reorganization under the BIA by filing a proposal of its reorganization plan. If a business is viable but financially unsound, restoring its financial condition with a reorganization proposal is a good option as it may save the business, preserve jobs and provide creditors with better returns than what they could expect to receive in a bankruptcy. The court may approve the proposal subject to the approval of the majority of the company’s unsecured creditors. Once approved, the company carries on with business as usual, but is subject to review by a trustee and the supervision of the court. Creditors receive interim dividends according to the terms of the proposal. After the reorganization process is successfully completed, the trustee gives a certificate to the debtor which discharges the insolvent company from bankruptcy.
In case this proposal of reorganization is rejected by the court or the unsecured creditors, the insolvent company is automatically placed in liquidation under the BIA. Also, a proposal usually states that claims arising after the filing of proposal will have priority over the creditors which are affected by the proposal and will be paid in the ordinary course of the business.
Involuntary Bankruptcy under BIA
An unsecured creditor (with a minimum claim of C$1,000) can also initiate the involuntary liquidation proceeding against a company. However, to obtain a bankruptcy order, the creditor must prove that the company is insolvent and has committed an ‘act of bankruptcy’ during the six months preceding the start of the case. An ‘act of bankruptcy’ refers to the inability of the company to pay for outstanding debts as they become due.
Voluntary Reorganization under CCAA
A company with liabilities of more than C$5 million can apply for a voluntary reorganization under CCAA, by persuading the court of the benefits of being granted protection from creditors to reorganize. If this protection is granted under the CCAA, the Canadian court grants a very comprehensive stay of proceedings against actions by creditors while the debtor’s reorganization plan is being developed and negotiated. The court also appoints a ‘monitor’ as an independent court officer to look after the interests of all the creditors and to provide a report on the reorganization progress to the court and creditors. Creditors can also initiate an involuntary reorganization under the CCAA, but these cases are very rare.
A secured creditor initiates receivership under the terms of its security. A receiver is a person who is appointed to take possession of all the secured assets including inventory, accounts receivable and any other property. The reviever has the authority to sell these assets and after paying any priority creditors and the costs of receivership, the balance of sales is paid to the secured creditor. A secured creditor can appoint a private receiver or apply to the court for a court-appointed receiver.
What happens when a company goes bankrupt?
The process of Bankruptcy
Different types of creditors
Priority of claims in a business liquidation
Secured and unsecured creditors
Amendments to the BIA and CCAA