Administering the Bankrupt Estate

AuthorRoderick J. Wood
Many decisions need to be made when administering the ban krupt
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 tra nsactions
should be impugned. Someone must decide whether the price offered
by buyers for bankruptcy assets is adequate. Bankr uptcy legislation
identif‌ies those who are entitled to m ake decisions on these and other
matters, and def‌ines the avenues for recourse avail able to those who
may disagree w ith these decisions. The governance str ucture that is
established is par ticularly important bec ause it is designed to limit po-
tential conf‌lict of interest and abuse t hat arises in t he absence of any
checks and balance s on the exercise of power.
1) The Creditor Control Model
Insolvency regimes var y considerably as to the admini strative model
that is used to govern th is decision-making process. Three models of
administr ative decision making w ithin insolvency regimes can be iden-
tif‌ied: the judicial control model, the cred itor control model, and the
off‌icial control model. Under the judicial control model, a bankr uptcy
Adminis tering the Bankr upt Estate 237
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 t akes on this role.
The bankruptcy regime i n Canada uses a modi f‌ied creditor control
model that contains some elements of off‌icia l 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 di rect f‌inancial interest in
the outcome. The administrative decisions that are made directly af-
fect the size of the bankr uptcy dividend that the creditors will receive.
However, the reality is that creditors rarely have an adequate incen-
tive to carry out the se responsibilities. This phenomenon is sometimes
called rational apathy. The amount that is recovered by an unsec ured
creditor by way of a bankruptcy d ividend is often only a small fract ion
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 mak ing.
Bankruptcy systems that are based upon a cred itor control model
are susceptible to abuse if the cred itors do not take an interest in the
administr ation of the bankrupt estate. Although a trustee’s primary
legal duty is to act for the benef‌it of the creditors, the realit y 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 bankr uptcy
trustee heading to see that the advertising is directed to debtors and
not to creditors. Even in involuntary bankr uptcies, the creditor who
initiates the bankruptcy often is a secured creditor wishing to obtain a
more favourable priority for its clai m.2 Having attai ned this objective,
the secured creditor often has no f urther interest in the administration
of the bankruptcy. Under these circum stances, there exist s a potential
for abuse. A trustee may engage in conduct that is not in t he 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 Canad ian insolvency legislation in 1880.
Canadian ba nkruptcy law depart s from a pure creditor control
model in order to curb the potential for conf‌lict of interest and abuse
that arise s out of creditor indifference. It does so by regulating, licens-
ing, and supervising those who are permitted to act as t rustee. 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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