H. Post-Approval Default

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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A plan that has been approved by the creditors and by the court may nevertheless fail to rescue the debtor from insolvency. The treatment of post-approval default under the CCAA is relatively straightforward. Upon approval of the plan, the previous obligations are replaced by new obligations. A default under these new obligations will give the creditors the normal enforcement remedies associated with those rights. If the financial crisis is not alleviated, the debtor may attempt to initiate a second round of restructuring proceedings.

The position under the BIA is more complicated. Proposals that are made in respect of smaller firms or individuals are more likely to involve terms that require future performance. The performance terms may involve putting a lease into good standing or making future payments in accordance with a schedule of payments set out in the proposal. The BIA provides a system for the judicial annulment of a proposal. The annulment of a proposal is significant since it results in the automatic bankruptcy of the debtor.122A court may annul a proposal if there has been a default under the provisions of a proposal, if it appears to the court that the proposal cannot continue without injustice123or undue delay, if the approval of the court was obtained by fraud, or if the debtor has been convicted

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of a bankruptcy offence.124The trustee must inform the creditors and the official receiver of a default in the performance of any provision in a proposal unless the default is waived or it is remedied within thirty days.125The power to annul a proposal is discretionary and a court is not required to order an annulment on a default in performance. It is not necessary for creditors to demonstrate that they would receive any benefit on a bankruptcy of the debtor.126

An annulment of a proposal does not affect the validity of any sale, disposition of property, or payment duly made or anything duly done under or in pursuance of the proposal.127Creditors affected by the proposal as well as post-filing creditors rank equally in the subsequent bankruptcy, and the affected creditors may prove for the original value of their claims less any amounts received under the proposal.128If the proposal provides that post-filing creditors will be given priority in respect of their claims, this provision is effective even if the proposal is annulled.129If the proposal provides for the granting of a security interest in favour of...

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