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 that 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 completing 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.1The creditors can also initiate a bankruptcy. This is known as an involuntary bankruptcy. Here, it is the creditors who take the active steps in commencing bankruptcy proceedings. The procedure used to initiate 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.2This 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
order.3The 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 satisfied 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 intervention 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. Automatic bankruptcy also ensues when a court annuls a consumer proposal.
In many countries, including the United Kingdom and Australia, bankruptcy proceedings are available only in relation to individuals. A separate insolvency regime operates in relation to corporations and other artificial entities. Canada and the United States do not take this approach. Both natural persons and artificial entities are subject to bankruptcy 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 bankruptcy, the Act provides that one or more creditors may bring bankruptcy proceedings against a debtor. The definition of "debtor" imposes certain eligibility requirements on the types of persons who can be forced into bankruptcy.4In the case of voluntary bankruptcy, 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.5The Act also makes it clear that bankruptcy proceedings are available in respect of an estate of a deceased person.6Both 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.7Banks, insurance companies, trust companies, loan companies, and railway companies are not subject to bankruptcy. These entities are excluded from the Act because other special insolvency statutes govern their liquidation or restructuring.8Unfortunately, a clumsy drafting approach is used to achieve this result. The term "person" includes a corporation, while the term "corporation" excludes those entities just mentioned.9"Creditor" is also defined using the term "person."10A 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 bankruptcy, since they are not persons within 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 aggregate of persons rather than a separate legal entity, and therefore bankruptcy proceedings must be initiated by or against the partners 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.12All of the members of a firm should therefore...