Commencement of Bankruptcy
Author | Roderick J. Wood |
Pages | 50-82 |
50
CHAPTER 3
COMMENCEMENT
OF BANKRUPTCY
There are three different means by which bankruptcy proceedings can
be commenced. In the vast majority of cases, the debtor initiates the
bankruptcy. This is known as a voluntary bankruptcy. In a voluntary
bankruptcy, it is the debtor who takes the steps t hat are required to bring
the bankruptcy regime into play. In most cases, the debtor will contact
an insolvency professional who will then assist the debtor in complet-
ing and processing the necessary documents. The debtor is required
to disclose the assets that are owned by the debtor and the creditors
who have claims against the debtor. Voluntary bankruptcy involves
a relatively simple process that does not require a court application.
The insolvent person merely signs a document called an assignment in
bankruptcy and files it with the official receiver.1
The creditors can also init iate a bankruptcy. This is known as an in-
voluntary bankr uptcy. Here, it is the creditors who ta ke the active steps
in commencing bankruptcy proceedings. The procedure used to initi-
ate an involuntary bankruptcy is more complex and requires a court
application. One or more of the creditors must apply to a bankruptcy
court for a bankruptcy order against the debtor.2 This terminology is
relatively new. Until recently, the bankruptcy order was referred to as a
receiving order and the application was called a petition for a receiving
1 BIA, s 49(1).
2 Ibid, s 43(1).
Commencement of Bankruptcy 51
order.3 The creditors must establish through evidence that the debtor
has committed an act of bankruptcy, and a debtor may appear at the
hearing and dispute the truth of the alleged facts. If the court is satis-
fied that there has been proper service and proof of the alleged facts, it
may make a bankruptcy order.
Bankruptcy proceedings can arise automatically without the inter-
vention of either the debtor or the creditor. This will occur when an
attempt to negotiate a commercial proposal fails for one of a number of
different reasons. The BIA provides that the debtor is deemed to have
made an assignment in bankruptcy when this happens.
A.ELIGIBLE PERSONS
In many countries, including the United Kingdom and Australia, bank-
ruptcy proceedings are available only in relation to individuals. A sep-
arate insolvency regime operates in relation to corporations and other
artificial entities. Canada and the United States do not take this ap-
proach. Both natural persons and artificial entities are subject to bank-
ruptcy proceedings.
Several key definitions in the BIA are used to delineate the kinds
of persons who are subject to bankruptcy proceedings. In the case of an
involuntary bankr uptcy, the Act provides th at one or more creditors m ay
bring bankruptcy proceedings against a debtor. The definition of “debt-
or” imposes certain eligibility requirements on the types of persons
who can be forced into bankruptcy.4 In the case of voluntary bankrupt-
cy, the Act provides that an insolvent person may make an assignment
in bankruptcy. The definition of “insolvent person” is similarly used
to impose certain eligibility requirements on the types of persons who
can make an assignment.5 The Act also makes it clear that bankruptcy
proceedings are available in respect of an estate of a deceased person.6
Both the definition of “debtor” and that of “insolvent person” use the
term “person,” which is defined in the Act as including a partnership,
an unincorporated association, a corporation, a cooperative society, or
an organization.7 Banks, insurance companies, trust companies, loan
3 The terminology wa s changed in 2004 as pa rt of the federal harmoni zation proj-
ect to ensure t hat both language versions of t he statute take into account bot h
the common law and c ivil law systems.
4 BIA, s 2 “debtor.”
5 Ibid, “insolvent person.”
6 Ibid, “person,” ss 44 and 49(1).
7 Ibid, “ per son .”
BANKRUPTCY AND INSOLVENC Y LAW52
companies, and railway companie s are not subject to ban kruptcy. These
entities are excluded from the Act because other special insolvency stat-
utesgovern their liquidation or restructuring.8 Unfortunately, a clumsy
drafting approach is used to achieve this result. The term “person” in-
cludes a corporation, while the term “corporation” excludes those enti-
ties just mentioned.9 “Creditor” is also defined using the ter m “person.”10
A literal reading of the definitions would lead one to the conclusion
that banks and other excluded corporations cannot prove a claim as a
creditor in a bankr uptcy, since they are not persons w ithin the meaning
of the Act and a creditor must be a person. Courts have overcome this
problem by holding that this restricted meaning of “corporation” was
not intended to be used in all of the provisions of the Act.11
A partnership is an ag gregate of persons rather than a separate legal
entity, and therefore bankruptcy proceedings must be initiated by or
against the part ners who make up the firm. Unless authorized, a pa rtner
does not have the power to make a bankruptcy assignment on behalf of
the other partners.12 All of the members of a firm should therefore exe-
cute an assignment if the firm wishes to initiate a voluntary bankrupt-
cy.13 Creditors who initiate involuntary bank ruptcy proceedings against
a firm are not required to present a bankruptcy application against all
the part ners.14 However, a failure to do so w ill mean that the bankr uptcy
will encompass only the bankrupt partner’s separate assets as well as
his or her joint interest in the partnership assets. Because the BIA de-
fines a person as including a partnership, the creditors of a firm can
bring a bankruptcy application in the name of the partnership.15 This
does not transform the partnership into a separate legal entity. It simply
has the same effect as if the bankruptcy application named each of the
partners.16
The BIA provides that the Act applies to limited partnerships in the
same manner as if they were ordinary partnerships.17 A bankruptcy
8 See Chapter 21.
9 BIA, s 2 “corp oration.”
10Ibid, “credit or.”
11Re Selkirk Spruce Mills Ltd (1958), 37 CBR 11 (BCSC); Re Fischel (1991), 10 CBR
(3d) 282 (NBCA).
12Re Union Fish Co (1923), 3 CBR 779 (Ont SC).
13 Re Squires Brothers (1922), CBR 191 (Sask KB) [Squires Brothers]. The bankr upt-
cy estate inc ludes the separate asset s of the individual part ners as well as the
partnersh ip assets. See Taylor v Leveys (1922), 2 CBR 390 (Ont SC).
14BIA, s 43(15).
15Langille v Toronto-Dominion Bank, [1982] 1 SCR 34 [Langille].
16Re Gottingen Street Food Marke t (2002), 31 CBR (4th) 250 (NSSC).
17BIA, s 85(1).
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeUnlock full access with a free 7-day trial
Transform your legal research with vLex
-
Complete access to the largest collection of common law case law on one platform
-
Generate AI case summaries that instantly highlight key legal issues
-
Advanced search capabilities with precise filtering and sorting options
-
Comprehensive legal content with documents across 100+ jurisdictions
-
Trusted by 2 million professionals including top global firms
-
Access AI-Powered Research with Vincent AI: Natural language queries with verified citations

Unlock full access with a free 7-day trial
Transform your legal research with vLex
-
Complete access to the largest collection of common law case law on one platform
-
Generate AI case summaries that instantly highlight key legal issues
-
Advanced search capabilities with precise filtering and sorting options
-
Comprehensive legal content with documents across 100+ jurisdictions
-
Trusted by 2 million professionals including top global firms
-
Access AI-Powered Research with Vincent AI: Natural language queries with verified citations

Unlock full access with a free 7-day trial
Transform your legal research with vLex
-
Complete access to the largest collection of common law case law on one platform
-
Generate AI case summaries that instantly highlight key legal issues
-
Advanced search capabilities with precise filtering and sorting options
-
Comprehensive legal content with documents across 100+ jurisdictions
-
Trusted by 2 million professionals including top global firms
-
Access AI-Powered Research with Vincent AI: Natural language queries with verified citations

Unlock full access with a free 7-day trial
Transform your legal research with vLex
-
Complete access to the largest collection of common law case law on one platform
-
Generate AI case summaries that instantly highlight key legal issues
-
Advanced search capabilities with precise filtering and sorting options
-
Comprehensive legal content with documents across 100+ jurisdictions
-
Trusted by 2 million professionals including top global firms
-
Access AI-Powered Research with Vincent AI: Natural language queries with verified citations

Unlock full access with a free 7-day trial
Transform your legal research with vLex
-
Complete access to the largest collection of common law case law on one platform
-
Generate AI case summaries that instantly highlight key legal issues
-
Advanced search capabilities with precise filtering and sorting options
-
Comprehensive legal content with documents across 100+ jurisdictions
-
Trusted by 2 million professionals including top global firms
-
Access AI-Powered Research with Vincent AI: Natural language queries with verified citations
