Commencement of Bankruptcy
| Author | Roderick J. Wood |
| Profession | Faculty of Law University of Alberta |
| Pages | 47-78 |
47
CHA PTER 3
COMMENCEMENT OF
BANKRUPTCY
There are three different mea ns by which bank ruptcy proceedings c an
be commenced. In the vast majority of cases, the debtor init iates the
bankruptcy. This is known as a voluntary bank ruptcy. In a voluntary
bankruptcy, it i s the debtor who takes t he steps that are required to
bring t he bank ruptcy regime into play. In most cases, the debtor will
contact an insolvency professional who will then assist the debtor in
completing and processing the necessary documents. The debtor is
required to disclose the assets that are owned by the debtor and t he
creditors who have claims against the debtor. Voluntary bankruptcy
involves a relatively simple process that does not require a court appli-
cation. The insolvent person merely signs a document called an assign-
ment in bankruptcy and files it with the official receiver.1
The creditors can also initiate a bankruptcy. This is known as an in-
voluntary bankruptcy. Here, it is the creditors who take 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 Thi s ter minology 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 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 49(1) [BIA].
2 Ibid., s. 43(1).
BANKR UPTCY A ND INSOLVENCY L AW48
ord er.3 The creditors must establish through evidence th at the debtor
has committed an act of bankruptcy, and a debtor may appear at the
hearing a nd dispute the truth of the alleged facts. If the court is satis-
fied that there has been proper service and proof of the al leged 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 rea sons. The BI A prov ides th at the debtor is deemed to have
made an assignment in bankruptcy when this happens. Automatic
bankruptcy al so ensues when a court annul s a consumer proposal.
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 t ake 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 bank ruptcy proceedings. In the case of
an involuntar y bankruptcy, the Act provides that one or more credit-
ors may bring bank ruptcy proceedings against a debtor. The definition
of “debtor” imposes certain eligibility requirements on the t ypes of
persons who can be forced into bankruptcy.4 In the case of voluntary
bankruptcy, the Act provides that an insolvent person may make an
assignment in bankr uptcy. The definition of “insolvent person” is simi-
larly used to impose cert ain eligibility requirements on the types of
persons who can make an assig nment.5 The Act also makes it clear
that b ankruptcy proceedings are available i n 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 t he Act as i ncluding a partnership,
an unincorporated a ssociation, a corporation, a cooperative society, or
3 The terminolog y was changed in 2004 as p art of the federal harmon ization pro-
ject to ensure t hat both language version s of the statute take into account bot h
the common law and c ivil law systems.
4 BIA, above note 1, s. 2 “debtor.”
5 Ibid., “insolvent pe rson.”
6 Ibid., “person”, ss. 44 and 49(1).
Commencement of Ban kruptcy 49
an organizat ion.7 Banks, insurance companies, trust companies, loan
companies, and railway companies are not subject to bankruptcy. These
entit ies are exc luded from the Act b ecause oth er specia l insolvenc y stat-
utes govern their liquidation or restr ucturing.8 Unfortunately, a clumsy
drafting approach is used to achieve this result. The term “person” in-
cludes a corporation, while t he term “corporation” excludes those ent i-
ties just mentioned.9 “Creditor” is also defined using the term “person.”10
A literal reading of the definitions would lead one to the conclusion
that ba nks and other excluded corporations cannot prove a claim as a
creditor in a bankruptcy, since they are not persons within the meaning
of the Act and a creditor must be a per son. 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 aggregate of persons rather than a separate
legal entity, and therefore bankruptcy proceedings must be initiated
by or against the pa rtners who make up the firm. Unless authorized, a
partner 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 there-
fore execute an assignment if the firm wishes to initiate a voluntary
ba n kr u pt c y.13 Cred itors who initiate involuntary bankruptcy proceed-
ings against a firm are not required to present a bankruptcy application
against all the partners.14 However, a failure to do so will mean that the
bankruptcy will encompass only the bankrupt partner’s separate assets
as well as his or her joint interest in the partnership asset s. Because the
BIA defines a person as including a partnership, the creditors of a firm
can bring a bankruptcy application in t he n ame of the partnership.15
This does not transform the part nership into a separate legal entity. It
simply has the same effect as if the bankruptcy application named each
of the partners.16
7 Ibid., “person.”
8 See Chapter 21.
9 BIA, above note 1, s. 2 “corporat ion.”
10 Ibid., “creditor.”
11 Re Selkirk Spruce Mills Ltd. (1958), 37 C.B.R. 11 (B.C.S.C.); Re Fischel (1991), 10
C.B.R. (3d) 282 (N.B.C.A.).
12 Re Union Fish Co. (1923), 3 C.B.R. 779 (Ont. S.C.).
13 Re Squires Brothers (1922), C.B.R. 191 (Sask. K.B.) [Squires Brothers]. The bank-
ruptcy est ate includes the separate as sets of the individual p artners as well as
the partne rship assets. See Taylor v. Leveys (1922), 2 C.B.R. 390 (Ont. S.C.).
14 BIA, ab ove note 1, s. 43(15).
15 Langille v. Toronto-Dominion Bank, [1982] 1 S.C.R. 34 [Langille].
16 Re Gottingen Street Food Marke t (2002), 31 C.B.R. (4th) 250 (N.S.S.C.).
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