Bankruptcy, insolvency and receivership.

• Author: Bowal, Peter

Canadian commercial insolvency law is not codified in one exhaustive statute. Instead, Parliament has enacted multiple insolvency statutes, the main one being the Bankruptcy and Insolvency Act. The BIA offers a self-contained legal regime providing for both reorganization and liquidation. It is characterized by a rules-based approach to proceedings. The BIA is available to insolvent debtors owing $1000 or more, regardless of whether they are natural or legal persons. It contains mechanisms for debtors to make proposals to their creditors for the adjustment of debts. If a proposal fails, the BIA contains a bridge to bankruptcy whereby the debtor's assets are liquidated and the proceeds paid to creditors in accordance with the statutory scheme of distribution.

-- Century Services Inc. v. Canada, 2010 SCC 60 (CanLII)

Bankruptcy, insolvency, receivership and liquidation are complicated concepts that come to bear during financial distress. They are bound to be confusing, especially since there are different processes for corporations and individuals which can both make proposals and arrangements. Some aspects are contractual, some are common law and yet others are statutory where the applicable legislation can be federal or provincial.

This article provides a short tour through these concepts.

Federal or Provincial Law?

The federal government legislates on "bankruptcy and insolvency". It has done so through two main statutes: the Bankruptcy and Insolvency Act ("Bankruptcy BIA"), under which debtors can be reorganized or liquidated and see most or all of their debts discharged, and the Companies' Creditors Arrangement Act ("CCAA") which oversees reorganization of companies with debts over $5,000,000. It is similar to Chapter 11 of the U.S. Bankruptcy Code.

Provincial governments have enacted personal property security legislation to deal with the rights of secured creditors. Provincial Rules of Court allow judges to appoint receivers and managers.

Insolvency

Insolvency is a financial state where one is unable to meet one's obligations generally as they become due. This is also called equity insolvency and may reflect an income or cash flow problem. Balance sheet insolvency is where liabilities exceed the value of its assets.

By contrast, receivership and bankruptcy are legal statuses that may flow from insolvency where a receiver or trustee in bankruptcy is appointed to take over one's property which may be sold and the proceeds distributed to...