Commencement of Bankruptcy

• Author: Roderick J. Wood
• Pages: 50-82

50

CHA PTER 3

COMMENCEMENT

OF BANKRUPTCY

There are three different mean s by which bankruptcy proceedi ngs can

be commenced. In the vast majorit y of cases, the debtor initiates t he

bankruptcy. This is known as a voluntary bankr uptcy. In a voluntar y

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 nece ssary documents. The debtor is required

to disclose the asset s that are owned by the debtor and the creditors

who have claims again st the debtor. Voluntary ba nkruptcy 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 f‌i les 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 bankr uptcy 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

ord er.3 The creditors must establi sh through evidence that the debtor

has committed an act of bank ruptcy, and a debtor may appear at the

hearing and di spute the truth of the alleged facts. If t he court is satis-

f‌ied that there has been proper service and proof of the alleged facts, it

may make a bankruptcy order.

Bankruptcy proceed ings 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. ELIGIBL E PER SONS

In many countries, including t he United Kingdom and Australia, bank-

ruptcy proceedings are avai lable only in relation to individuals. A sep-

arate insolvency regime operates i n relation to corporations and other

artif‌icial ent ities. Canada and the United St ates do not take this ap-

proach. Both natural pers ons and artif‌icial ent ities are subject to bank-

ruptcy proceedings.

Several key def‌initions in t he BIA are used to deline ate the kinds

of persons who are subject to bankr uptcy proceedings. In the case of an

involuntary bankr uptcy, the Act provides th at one or more creditors m ay

bring bankr uptcy proceedings against a debtor. The def‌inition of “debt-

or” imposes certai n eligibility requirements on t he 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 t ypes of persons who

can make an assignment.5 The Act also makes it clear th at bankruptcy

proceedings are available in re spect 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, in surance 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 .”

BANKR UPTCY 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-

utes govern their l iquidation or restructuring.8 Un fortunately, a clumsy

drafting approach is used to achieve this result. The term “per son” 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 def‌in itions 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 h ave 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 f‌ir m should therefore exe-

cute an assignment if t he f‌irm wishes to init iate a voluntary bankrupt-

cy.13 Creditors who initiate involuntary bank ruptcy proceedings against

a f‌irm are not required to present a ba nkruptcy 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. Becaus e the BIA de-

f‌ines a person as including a partnership, the creditors of a f‌irm ca n

bring a bankr uptcy 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

partner s.16

The BIA provides that the Act applies to limited partnerships in the

same manner as if t hey were ordinary partnerships.17 A bankruptcy

8 See Chapter 21.

9 BIA, s 2 “corp oration.”

10 Ibid, “credit or.”

11 Re Selkirk Spruce Mills Ltd (1958), 37 CBR 11 (BCSC); Re Fischel (1991), 10 CBR

(3d) 282 (NBCA).

12 Re 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).

14 BIA, s 43(15).

15 Langille v Toronto-Dominion Bank, [1982] 1 SCR 34 [Langille].

16 Re Gottingen Street Food Marke t (2002), 31 CBR (4th) 250 (NSSC).

17 BIA, s 85(1).