Administering the Bankrupt Estate

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

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).