Administering the Bankrupt Estate

• Author: Roderick J. Wood
• Pages: 236-259

236

CHA PTER 8

ADMINISTER ING THE

BA NKRUPT ESTATE

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.

A. THE ROLE OF THE CREDITORS

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).