An Introduction to Insolvency Law

• Author: Roderick J. Wood
• Pages: 1-25

1

CHA PTER 1

AN INTRODUCTION

TO INSOLVENCY LAW

A. THE NATUR E, PURPOSE, AND

BOUNDARIES OF INSOLVENCY L AW

1) The Relationship between Bankruptcy Law and

Insolvency Law

In Canada, it is common to see the ter ms bankruptcy a nd insolvency

law used in tandem. The Constitut ion Act, 1867 confers exclusive au-

thority on the Parliament of Can ada to make laws in relation to ban k-

ruptcy and insolvency,1 and the primary federa l statute in the f‌ield is

named the Bankruptcy an d Insolvency Act (BIA). The only danger with

this usage is t hat it might suggest to some that bankr uptcy law and

insolvency law are two distinct though related legal f‌ields. In fact, in-

solvency law is the wider concept, encompassing ba nkruptcy law but

also including other non-bankruptcy insolvency systems. The usage

has probably come about because bankr uptcy is the oldest and most

established of the ins olvency regimes and therefore ta kes pride of place

at the beginning of the phrase, with all of the other insolvency regimes

lumped together at the end. This terminology should not obscure the

fact that bankr uptcy is merely one of several different legal regimes

that respond to the insolvency of a debtor.

1 30 & 31 Vict, c 3 (UK), reprinted in RSC 1985, App II, No 5, s 91(21).

BANKR UPTCY AND INSOLVENC Y LAW2

2) The Single Proceeding Model of Insolvency Law

At its core, insolvency law is concerned wit h the inability of a person

to pay claims owi ng to others. A person who is in this st ate of affairs

is considered to be insolvent, and insolvency law provides a set of legal

responses to addre ss this problem. Insolvency law is premi sed upon a

debtor’s inability to pay, rather than upon a debtor’s unwillingne ss to

pay. If the debtor has the means to pay but simply refuses to do so, a

claimant can commence and prosecute a civil action against the debtor.

If the claimant is successful, the claim ant will obtain a judgment from

the court. This perm its the claimant to invoke judgment enforcement

law in order to obtain satisfaction of the claim. The judgment enforce-

ment system is established by provincial law and gives the claimant a

set of enforcement remedies against the ass ets of the debtor.

Insolvency law is not primarily concerned with coercing pay ment

from reluctant debtors. Rather, it comes into play when the debtor does

not have suff‌icient assets to sati sfy the claims of all of t he claimants.

In most cases, the debtor’s insolvency results from an inability to pay

contractual claim s voluntarily incurred by the debtor. Some of these

claims may ar ise from the extension of credit by a per son who has

provided goods or services to the debtor and who has agreed to accept

payment for them at some future date. Others may ar ise from contracts

of loan under which the debtor borrows a specif‌ic sum of money from a

lender and agrees to repay it according to a f‌ixed schedule (term loans)

or under which amounts that are advanced are repayable on demand

(demand loans). However, insolvencies may also occur because t he

debtor does not have suff‌icient assets to sati sfy claims that are not as-

sociated with an extension of credit. These may involve claims again st

the debtor for breach of contract, as in the case of a constr uction f‌irm

that is liable in contract for the shoddy constr uction of a building. They

may also involve claims aga inst the debtor in tort for injuries caused by

wrongful acts or omis sions, as in the case of a manufacturer whose use

of asbestos in a product has rendered it liable in negligence to v ictims

suffering from asbestosis and mesothelioma.

The various insolvency regimes h ave different objectives. Some are

primarily concerned with the liquidation of the debtor’s assets. Ot hers

provide a means by which a debtor can attempt to rescue a busi ness

by seeking an arrangement or compromise in which creditors agree

to accept less than they are entitled to. Some are concerned with the

economic rehabilitation of the debtor. Others are not. In spite of these

differences, there is one feature that is common to all insolvency re-

gimes. They all provide a collective proceeding t hat supersedes the