Administering the Bankrupt Estate

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 219-240

219

CHA PTER 8

ADMINISTERING THE

BANKRUPT ESTATE

Many decisions need to be made when admin istering the bankrupt

estate. A r ight of action that vests in the trustee may have an uncer-

tain value if the person alleged to owe the obligation contests liabilit y.

Someone must decide whether to pursue the legal action or attempt

to s ettle. Someone must decide whether pre-bankruptcy t ransactions

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 w ith these decisions. The governance structure that is

established is part icularly important bec ause it is designed to limit po-

tential conf‌lict of interest and abuse that arises in the abs ence 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 i s used to govern this decision-mak ing process. Three models of

administrative decision making within insolvency regimes can be iden-

tif‌ied: the judici al control model, the creditor control model, and the

off‌icial control model. Under t he judicial control model, a bankruptcy

BANKR UPTCY A ND INSOLVENCY LAW220

judge occupies a central role in maki ng decisions. In the creditor con-

trol model, it is t he creditors who make the importa nt decisions. And,

in the off‌icial control model, a state off‌icial t akes on this role.

The bankruptcy regime in Canada uses a modif‌ied creditor control

model t hat contains some elements of off‌icial control.1 A model that

promotes the part icipation 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 t hat the creditors wi ll receive.

However, the reality is that creditors rarely have an adequate incen-

tive to carry out these responsibilities. This phenomenon is sometimes

called r ational apathy. The amount that is recovered by an unsecured

creditor by way of a bankruptcy d ividend is often only a small f raction

of the original claim. In many cases, it simply does not make economic

sense for a creditor to expend time and effort given the sm all 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 a re based upon a creditor control model

are suscept ible to abuse if the creditors do not take an interest in the

administration of the bankrupt estate. Although a tr ustee’s primary

legal duty i s to act for the benef‌it of the creditors, the reality is that

most bank ruptcies are voluntar y ones that have been initiated by t he

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 att ained this objective,

the secured creditor often has no further intere st in the administr ation

of the bankr uptcy. Under these circumstances, there exi sts a potentia l

for abuse. A t rustee may engage in conduct that is not in the interests

of the c reditors but t hat benef‌its the debtor, a secured creditor, or the

trustee. Indeed, a perception of dishonest admi nistration contributed

to the wholesale repeal of Canad ian insolvency legislation in 1880.

Canadian bankr uptcy 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 reg ulating, licens-

ing, and supervising those who are permitted to act as trustee. Thi s

1 This model is not adopte d in all of the Canadian i nsolvency regimes. Most

notably, the reorganiz ation regime of the Companies’ Creditors Arrangemen t Act

adopts the judici al control model.

2 See Chapter 5, Sect ion B(6).