Administering the Bankrupt Estate

AuthorRoderick J. Wood
Pages236-259
236
CHAPTER 8
ADMINISTERING THE
BANKRUPT ESTATE
Many decisions need to be made when administering the bankrupt
estate. A right of action that vests in the trustee may have an uncer-
tain value if the person alleged to owe the obligation contests liability.
Someone must decide whether to pursue the legal action or attempt
to settle. Someone must decide whether pre-bankruptcy transactions
should be impugned. Someone must decide whether the price offered
by buyers for bankruptcy assets is adequate. Bankruptcy legislation
identif‌ies those who are entitled to make decisions on these and other
matters, and def‌ines the avenues for recourse available to those who
may disagree with these decisions. The governance structure that is
established is particularly important because it is designed to limit po-
tential conf‌lict of interest and abuse that arises in the absence of any
checks and balances on the exercise of power.
A. THE ROLE OF THE CREDITORS
1) The Creditor Control Model
Insolvency regimes vary considerably as to the administrative model
that is used to govern this decision-making process. Three models of
administr ative decision making w ithin insolvency regimes can be iden-
tif‌ied: the judicial control model, the creditor control model, and the
off‌icial control model. Under the judicial control model, a bankruptcy
Adminis tering the Bankr upt Estate237
judge occupies a central role in making decisions. In the creditor con-
trol model, it is the creditors who make the important decisions. And,
in the off‌icial control model, a state off‌icial takes on this role.
The bankruptcy regime in Canada uses a modif‌ied creditor control
model that contains some elements of off‌icial control.1 A model that
promotes the participation of creditors seems sensible on f‌irst impres-
sion. After all, it is the creditors who have a direct f‌inancial interest in
the outcome. The administrative decisions that are made directly af-
fect the size of the bankruptcy dividend that the creditors will receive.
However, the reality is that creditors rarely have an adequate incen-
tive to carry out these responsibilities. This phenomenon is sometimes
called rational apathy. The amount that is recovered by an unsecured
creditor by way of a bankruptcy dividend is often only a small fraction
of the original claim. In many cases, it simply does not make economic
sense for a creditor to expend time and effort given the small return.
Moreover, creditors who choose not to involve themselves at all obtain
the same recovery as those who participate in the decision making.
Bankruptcy systems that are based upon a creditor control model
are susceptible to abuse if the creditors do not take an interest in the
administration of the bankrupt estate. Although a trustee’s primary
legal duty is to act for the benef‌it of the creditors, the reality is that
most bankruptcies are voluntary ones that have been initiated by the
debtor. In practice, it is debtors rather than creditors who choose the
trustee. One need only look to the Yellow Pages under the bankruptcy
trustee heading to see that the advertising is directed to debtors and
not to creditors. Even in involuntary bankruptcies, the creditor who
initiates the bankruptcy often is a secured creditor wishing to obtain a
more favourable priority for its claim.2 Having attained this objective,
the secured creditor often has no further interest in the administration
of the bankruptcy. Under these circumstances, there exists a potential
for abuse. A trustee may engage in conduct that is not in the interests
of the creditors but that benef‌its the debtor, a secured creditor, or the
trustee. Indeed, a perception of dishonest administration contributed
to the wholesale repeal of Canadian insolvency legislation in 1880.
Canadian bankruptcy law departs from a pure creditor control
model in order to curb the potential for conf‌lict of interest and abuse
that arises out of creditor indifference. It does so by regulating, licens-
ing, and supervising those who are permitted to act as trustee. This
1 This model is not adopte d in all of the Canadian i nsolvency regimes. Most nota -
bly, the reorganizat ion regime of the CCAA adopt s the judicial control model.
2 See Chapter 5, Sect ion B(6).

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