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].

2 R v Fitzgibbon, [1990] 1 SCR 1005; Amanda Design s Boutique Ltd v Charism a

Fashions Ltd (1972), 17 CBR (NS) 16 (Ont CA) [Amanda Designs].

3 See Chapter 5, Section A .