Introduction, Historical Perspectives, and Bankruptcy Theory
| Author | Stephanie Ben-Ishai; Thomas G. W. Telfer |
| Pages | 3-46 |
CHAPTER 1
Introduction, Historical Perspectives,
and Bankruptcy Theory
I. INTRODUC TION
Sears, Payless, Target, Toys “R” Us, and Nortel are just a few of the recent corporate bankrupt-
cies that have drawn national and international attention. The loss of more than CAD
million of investor funds and the bankruptcy proceedings in the cryptocurrency exchange
Quadriga CX raise a new challenge for the bankruptcy system. Large-scale disasters like the
Lac-Mégantic train disaster in Canada with its mass tort claims, and the constant media
attention paid to the debt problems felt by millennial students and the elderly also keep
bankruptcy in the media on a near daily basis. Globally, we see what happens when there
is no way to oer a country bankruptcy relief as we watch in horror as Venezuelan citizens
struggle to stay alive in the face of draconian austerity measures.
The way that a country chooses to deal with the debts of its citizens (corporate and indi-
vidual) tells a deep and complex story about the underlying values in that society. We learn
about what constitutes a “fresh start,” who we give second chances to, which voices and
interests are valued and which institutions are entrusted to make these decisions.
In order to understand and unpack the interests that frame a particular system we rst
need to understand this system and how it operates on the ground. This is the task we set
out to help you accomplish in this casebook.
A. Scope of Casebook
This casebook sets out to provide clear, accessible, and elucidating textual commentary on
the law, modern and illustrative cases, and plenty of realistic problems to challenge students
to do what lawyers actually do — address and solve clients’ problems.
A particularly helpful aspect of this book generally will be that it describes the law both on
the books and in action. The empirical, historical, and practical work that the authors have
done on both the consumer and the business side is usefully reected in this book.
Each chapter includes problems to be taken up in class and an illustrated guide is avail-
able in conjunction for students. Our goal is for this book to serve as a “course in a box” for
both professors and students.
Chapter sets out the key constitutional aspects and structures that are unique in Can-
ada’s bifurcated bankruptcy system. Next, Chapter explains the process for initiating a
bankruptcy and the consequences. In Chapter , we dene the contours of what counts as
“property” for the purpose of the bankruptcy estate. This leads into our discussion in Chap-
ter of the types of pre-bankruptcy transactions that can be challenged in order to bring
more property back into the estate. Chapter considers the treatment of executory contracts
or contracts where both parties still have actions to perform in a bankruptcy proceeding.
BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS
Chapter explains how creditors can make claims in a bankruptcy and Chapter deals with
the claims of secured creditors, who are often referred to as “strangers to the bankruptcy.”
Chapter sets out the ranking of creditors and the manner for distribution of proceeds in a
bankruptcy. Chapter deals with one particular issue that often arises in a corporate bank-
ruptcy — liability of corporate directors.
Chapter could in itself be the basis of a complete course and it provides a detailed
examination of consumer bankruptcy issues.
Chapters through to take us through commercial reorganizations under the Com-
panies’ Creditors Arrangement Act, RSC , c C- (CCAA). Chapters deals with the Bank-
ruptcy and Insolvency Act, RSC , c B- (BIA) corporate and consumer proposals. Chapter
examines the law of receiverships. Chapter , the concluding chapter, addresses inter-
national insolvency issues.
B. Bankruptcy Terminology
Under the BIA, the terms “bankruptcy” and “bankrupt“ are conned to straight liquidation
proceedings under Part III of the Act and a “bankrupt” is the subject of a “bankruptcy order.“
All other proceedings under the BIA are known as insolvency proceedings (hence the title
of the Act, the Bankruptcy and Insolvency Act) or are identied by the part and division of the
BIA under which the proceedings are brought. The subject of these proceedings is referred
to as a “debtor.” Importantly, however, unlike the British Insolvency Act , c , the BIA
draws no distinction between corporate and personal or individual bankruptcies. All liquid-
ation bankruptcies are basically governed by the same rules. The term “reorganization” is
not actually used in the BIA or the CCAA to describe non-liquidation proceedings designed
to enable an insolvent business to stay alive or to enable an insolvent individual to avoid
the stigma of bankruptcy by reaching an agreement with the debtor’s creditors to pay o all
or part of the indebtedness over a period of years. Instead, BIA, Part III, Division and BIA,
Part III, Division , speak of commercial and consumer proposals, respectively; the object of
proceedings under the CCAA is referred to as an “arrangement.” However, “reorganization”
(or, increasingly commonly, “restructuring”) are the non-technical terms frequently used to
describe proceedings under BIA, Part III, Division , and the CCAA, and they are used in the
same sense in this casebook.
The US Bankruptcy Code draws no terminological distinction between straight bank-
ruptcy and reorganizational proceedings. All are referred to as “bankruptcy” or “case” pro-
ceedings, and particular bankruptcy proceedings are usually identied by the Code chapter
under which they are brought — for example, Chapter for straight liquidations, Chapter
“Bankrupt” is dened in BIA, s. The expression is of Italian origin, banke rota or bancarupta, and was
used in the Italian city states in the Middle Ages to describe the breaking of the bench of a merchant
who had defaulted on his debts: see the Tassé Report, extracted below in this chapter.
To avoid needless repetition and unless otherwise indicated, references in notes in the casebook to
bankruptcy proceedings cover all types of bankruptcy and insolvency proceedings under the BIA and
the CCAA.
USC §.
American terminology has also been picked up by Canadian media and it is common for news reports
to refer to a Canadian company seeking “bankruptcy protection” under the CCAA even though
the CCAA is quite independent of the BIA. What is meant is that a stay of proceedings is in eect
precluding creditors from suing or invoking remedies against the debtor company while the company
is preparing a plan of reorganization to put before its creditors or is preparing to sell its assets.
Cha pter : In troduction, Histori cal Perspectives, an d Bankruptcy Theor y
for commercial reorganizations, and Chapter for wage-earner debt adjustments. More-
over, chapters , , and apply to all case proceedings under the Code unless otherwise
provided. The Code also eschews use of the word “bankrupt”; instead, persons who are the
subject of case proceedings under any chapter of the Code are referred to as “debtors.”
In England and Wales (Scotland has its own insolvency legislation) the term “bankruptcy”
is restricted to liquidation proceedings involving the assets of individual debtors; “winding
up” or “winding-up order” is the expression used to describe the liquidation of insolvent
companies, although under the Insolvency Act , many of the substantive rules are the
same for both individual and company insolvencies.
Unhappily, common law jurisdictions also dier in their terminology in reporting sta-
tistical results. The Canadian statistics published by Industry Canada distinguish between
personal insolvencies and business insolvencies. “Insolvencies” cover bankruptcy and
reorganizational proceedings under the BIA (but not proceedings under the CCAA). Busi-
ness insolvencies cover the insolvencies of corporations, partnerships, and individuals
where, in the case of individuals, percent or more of the indebtedness is of business ori-
gin. Personal insolvencies cover business and consumer insolvencies, whereas consumer
insolvencies are restricted to personal, non-business insolvencies. Consumer insolvencies
are subdivided into consumer bankruptcy proceedings and consumer proposals under BIA
III.. The other common law jurisdictions — for example, England and Australia — use dif-
ferent terminology in reporting personal insolvencies; hence considerable care must be
used in comparing their statistics with Canada’s.
Query: Should Canada follow suit and avoid the use of the pejorative term “bankrupt”? See Industry
Canada, Corporate, Insolvency and Competition Policy: Statutory Review of the Bankruptcy and Insolvency
Act and the Companies’ Creditors Arrangement Act (Ottawa: Industry Canada, ) [Corporate, Insol-
vency and Competition Policy]: “Some stakeholders have expressed concern that the term ‘bankruptcy’ in
the title of the legislation and for ‘trustee in bankruptcy’ may create an unintended social stigma that
may prevent some Canadians from seeking much needed professional assistance to obtain debt relief.
As a result, these debtors may suer greater economic and social consequences than would otherwise
be the case. It has been suggested that the term ‘bankruptcy’ be removed from use.”
The reason for the distinction is historical, but the distinction continues to enjoy popular support in
England. The Canadian Winding-Up and Restructuring Act, RSC , c W-(WURA), rst adopted in ,
was copied from British legislation after the federal Parliament repealed the Insolvent Act of in .
See Section III of this chapter. The WURA is now little used except in cases where its use is mandatory
for designated incorporated entities such as banks and insurance companies. See Bruce Welling &
Thomas Telfer, “The Winding-Up and Restructuring Act: Realigning Insolvency Law’s Orphan to the
Modern Law Reform Process” () Banking & Finance Law Review .
This is the denition of business used by the Oce of the Superintendent of Bankruptcy. See Oce of
the Superintendent of Bankruptcy Canada, Insolvency Statistics in Canada — (Glossary) (Ottawa:
OSB, ), online: www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br.html.
There is also a small number of orderly payment of debts (OPD) proceedings under Part X of the BIA,
but these are statistically insignicant and are often overlooked. In , there were only OPD
orders for all of Canada compared to , consumer insolvencies.
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