Types of Creditors
Distribution of Assets
In liquidations under the BIA, the assets of an insolvent company are left in the hands of a trustee, who has the power to sell them with the permission of the board of inspectors of the estate. Similarly, during reorganization, the sale of assets in the ordinary course of business of the insolvent company is permitted but sales out of the ordinary course of business including the sale of an insolvent company's entire business requires the permission of the court. In both BIA and CCAA proceedings, the insolvent company can sell all of its assets without waiting for a formal BIA proposal or CCAA plan.
Before discussing the process of how assets of a bankrupt company are distributed, it is important to understand the classification of creditors under the BIA and CCAA for the purpose of the distribution of claims on liquidated assets. Under the BIA, creditors are divided into four categories:
Secured creditors are creditors whose claims are guaranteed by some security in the bankrupt company’s property (accounts receivable, inventory or any other property). These creditors are not affected by the insolvent company’s bankruptcy since they can take possession of assets. However, they still need to prove their claim to the trustee in bankruptcy or in the court.
Preferred creditors are creditors, whose claims come second in priority of distribution under the BIA by virtue of section 136(1) of the BIA. If property of the bankrupt company is insufficient to compensate all preferred creditors, the property is distributed proportionally to all preferred creditors. Preferred creditors become unsecured creditors for the rest of the uncompensated claims.
Unsecured creditors are the creditors whose claims are not guaranteed by any security in the bankrupt company’s property and do not have priority under section 136(1) of the BIA. If the property of the estate is insufficient to compensate all unsecured claims, the property is distributed proportionally to all unsecured creditors.
Deferred creditors are creditors whose wages are deferred for public policy reasons. Their claims can be compensated only after unsecured creditor’s claims are fully repaid. The deferred claims include back wages to bankrupt’s spouses and back wages to other relatives.
Proof of Claims
As per section 124 (1) of the BIA, every creditor of an insolvent company must prove his claim to the trustee in bankruptcy and the trustee in bankruptcy can request further proof after the examination of every claim. A creditor who does not prove his claim is not entitled to any payment of the proceeds from the sale of the bankrupt company's assets. An unsecured creditor must first prove its claim through proceedings in court. Once a judgment is obtained, assets of the debtor are seized by a court officer and sold, to pay all proven claims. The proceeds are distributed pro-rata among all creditors holding valied claims against the debtor in the area which the seizure took place.
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