An Introduction to Insolvency Law

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

1

CHAPTER 1

AN INTRODUCTION

TO INSOLVENCY LAW

A. THE NATURE, PURPOSE, AND

BOUNDARIES OF INSOLVENCY LAW

1) The Relationship between Bankruptcy Law and

Insolvency Law

In Canada, it is common to see the terms bankruptcy and insolvency

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

thority on the Parliament of Canada to make laws in relation to bank-

ruptcy and insolvency,1 and the primary federal statute in the f‌ield is

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

this usage is that it might suggest to some that bankruptcy law and

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

solvency law is the wider concept, encompassing bankruptcy law but

also including other non-bankruptcy insolvency systems. The usage

has probably come about because bankruptcy 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 bankruptcy 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).

BANKRUPTCY AND INSOLVENC Y LAW2

2) The Single Proceeding Model of Insolvency Law

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

to pay claims owing to others. A person who is in this state of affairs

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

responses to address this problem. Insolvency law is premised upon a

debtor’s inability to pay, rather than upon a debtor’s unwillingness 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 claimant will obtain a judgment from

the court. This permits 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 assets of the debtor.

Insolvency law is not primarily concerned with coercing payment

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

not have suff‌icient assets to satisfy the claims of all of the claimants.

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

contractual claims voluntarily incurred by the debtor. Some of these

claims may arise from the extension of credit by a person 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 the

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

sociated with an extension of credit. These may involve claims against

the debtor for breach of contract, as in the case of a construction 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 omissions, as in the case of a manufacturer whose use

of asbestos in a product has rendered it liable in negligence to victims

suffering from asbestosis and mesothelioma.

The various insolvency regimes have different objectives. Some are

primarily concerned with the liquidation of the debtor’s assets. Others

provide a means by which a debtor can attempt to rescue a business

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 that supersedes the