Preserving the Bankrupt Estate
Author | Roderick J. Wood |
Pages | 165-187 |
165
CHAPTER 6
PRESERVING THE
BANKRUPT ESTATE
The property of the debtor vests in the trustee on bankruptcy, and the
trustee will gather in and assemble these assets. To facilitate this pro-
cess, bankruptcy law provides a set of rules and principles that are
designed to preserve the bankrupt estate so that its full value can be
realized. Bankruptcy is a collective proceeding through which claim-
ants with personal rights against a debtor can enforce their claims
against the debtor’s assets. For this to work properly, it is absolutely es-
sential to stop attempts by these creditors to enforce their claims or to
recover their debts. To permit them to remove assets from the ba nkrupt
estate would seriously destabili ze the bankruptcy system. Ordin ary liti-
gation must also come to a stop on the occurrence of a bankruptcy. In
its place, bankruptcy law provides a summary method for determining
the validity and the value of claims against the bankrupt. Bankruptcy
law prevents creditors from interfering with the trustee’s administra-
tion of the bankrupt estate through an automatic stay of proceedings.
In order to maximize the value of the bankrupt estate, the trustee
must also make a number of important decisions. The trustee must de-
cide whether or not to perform contracts that were concluded between
the debtor and a third party prior to the bankruptcy. If the debtor’s
property has been polluted or contaminated and is subject to an en-
vironmental remediation order, the trustee must make a choice be-
tween retaining and cleaning up the property or abandoning it. Fin ally,
bankruptcy law contains rules and mechanisms that protect against
post-bankruptcy conduct or actions of the debtor that would otherwise
diminish the value of the bankrupt estate.
BANKRUPTCY AND INSOLVENC Y LAW166
A. THE STAY OF PROCEEDINGS
1) Objectives of the Stay
The bankruptcy stay of proceedings serves two fundamental purposes.
First, by preventing creditors from commencing or continuing their
legal actions, it replaces the normal civil process with a summary
method by which the trustee reviews, accepts, or rejects and values
claims against the bankrupt estate. This prevents a multiplicity of ac-
tions and significantly reduces the costs of adjudication of the various
claims.1 Second, by preventing creditors from enforcing their claims
against the bankrupt’s property, it replaces a free-for-all — in which
creditors attempt to seize assets before other creditors are able to do
so — with a more orderly liquidation and pro rata sharing that, to the
collective benefit of all the creditors, is more likely to enh ance the value
that will be received for the assets.2
Bankruptcy law draws a sharp division between proprietary rights
and personal rights held by claimants. Claimants who can establish a
proprietary right to an asset are able to take the asset out of the bank-
rupt estate, since it is only the property of the debtor that is divis-
ible among the creditors. The mechanism by which they assert such
claims ha s been previously examined.3 Those who have personal right s
against the bankrupt must prove their claims within the bankruptcy
regime. The bankruptcy claims procedure as well as the trustee’s re-
sponsibility to liquidate assets and distribute the proceeds by way of
a bankruptcy dividend are exclusive processes that replace the nor-
mal methods by which creditors establish and enforce their personal
rights. The automatic bankruptcy stay of proceedings is the mechan-
ism that ensure s the exclusivity of these two processes. For thi s reason,
the automatic bankruptcy stay of proceedings applies only to creditors
who have provable claims in bankruptcy. Claimants who have propri-
etary claims or personal claims that arise after the bankruptcy do not
have provable claims, and therefore they must enforce their claims out-
side the bankruptcy system.
1 382231 Ontario Ltd v Wilano ur Resources Ltd (1982), 43 CBR (NS) 153 (Ont HCJ)
[Wilanour].
Fashions Ltd (1972), 17 CBR (NS) 16 (Ont CA) [Amanda Designs].
3 See Chapter 5, Section A .
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