Commencement of Bankruptcy

AuthorRoderick J. Wood
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.
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 .”
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).

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