An Introduction to Insolvency Law

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 1-24

1

CHA PTER 1

AN INTRODUCTION

TO INSOLVENCY LAW

A. THE NATUR E, PURPOSE, AND

BOUNDARIES OF INSOLVENCY LAW

1) The Relationship between Bankruptcy Law and

Insolvency Law

In Canad a, it is common to see the ter ms bankruptcy and in solvency

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

thority on the Parliament of Can ada to make laws in rel ation 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 w ith

this usage is that it might suggest to some that bank ruptcy law and

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

solvency law is the wider concept, encompas sing ba nkruptcy law but

also including other non-bankruptcy insolvency systems. The usage

has probably come about because bankruptcy is t he oldest and most

established of the insolvency regimes and therefore takes pride of place

at the beginning of the phrase, with al l of the other insolvency regimes

lumped together at the end. This terminology should not obs cure 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 (U.K.), reprinted in R. S.C. 1985, App. II, No. 5, s. 91(21).

BANKR UPTCY A ND INSOLVENCY L AW2

2) The Single Proceeding Model of Insolvency Law

At its core, insolvency l aw is concerned wit h 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. In solvency 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 refuse s to do so, a

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

If the claimant is successful, t he claimant w ill obtain a judgment from

the court. This per mits t he claim ant to invoke judgment enforcement

law in order to obtai n satisfaction of t he claim. The judgment en force-

ment system i s established by provincial law and gives the claimant a

set of enforcement remedies against the assets of the debtor.

Insolvency law is not pri marily concerned with coercing payment

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

not have suff‌icient a ssets to satisfy the claims of all of the claimants.

In most c ases, the debtor’s in solvency results from a n 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 h as

provided goods or serv ices to the debtor and who has agreed to accept

payment for them at some future date. Others may arise 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 t hat are advanced are repayable on demand

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

debtor does not have suff‌icient asset s to satisfy cla ims th at are not a s-

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

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

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

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

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

of asbestos i n a product ha s 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 l iquidation 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 wh ich creditors agree

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

economic rehabilitation of t he debtor. Others are not. In spite of these

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

gimes. They all provide a collective proceeding that supersedes the