Preserving the Bankrupt Estate

• Author: Roderick J. Wood
• Pages: 165-187

165

CHA PTER 6

PRESERVING THE

BA NKRUPT ESTATE

The property of the debtor vests in the tr ustee on bankruptcy, and the

trustee wi ll gather in and assemble these a ssets. To facilitate this pro-

cess, bankr uptcy law provides a set of rules and pri nciples that are

designed to preserve t he bankrupt estate so t hat its full value can be

realized. Bankruptcy is a collective proceeding t hrough 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 bankr uptcy. In

its place, bankruptcy law provides a summar y method for determining

the validity and the va lue of claims against the ban krupt. Bankr uptcy

law prevents creditors from interfering with the trustee’s admi nistra-

tion of the bankrupt est ate through an automatic stay of proceedings.

In order to maximi ze the value of the bankrupt est ate, the trustee

must also make a number of import ant decisions. The trustee must de-

cide whether or not to perform contracts that were concluded between

the debtor and a third part y prior to the bankruptcy. If the debtor’s

property has been polluted or contaminated and is subject to an en-

vironmental remedi ation 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.

BANKR UPTCY AND INSOLVENC Y LAW166

A. THE STAY OF PROCEEDINGS

1) Objectives of the Stay

The bankruptcy stay of proceedi ngs serves two funda mental purposes.

First, by preventing creditors from commencing or continuing t heir

legal actions, it replaces the normal civ il process with a summary

method by which the trustee reviews, accepts, or rejects and values

claims again st the bankrupt estate. This prevents a multiplicity of ac-

tions and signif‌ica ntly reduces the costs of adjudication of the various

claims.1 Second, by preventing creditors from enforcing their claims

against the bank rupt’s property, it replaces a free-for-all — in which

creditors attempt to seize asset s 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 right s

and personal right s held by claimants. Claimants who can establi sh a

proprietary right to an a sset are able to take the asset out of the bank-

rupt estate, since it is only the propert y of the debtor that is divis-

ible among the creditors. The mechanism by which they a ssert such

claims ha s been previously examined.3 Those who have personal right s

against the bank rupt must prove their claims within the bankruptcy

regime. The bankruptcy cl aims procedure as well as the t rustee’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 st ay of proceedings is the mechan-

ism that ensure s the exclusivity of these two processes. For thi s reason,

the automatic bankruptcy st ay of proceedings applies only to creditors

who have provable claims in bankruptcy. Claimants who have propri-

etary clai ms or personal claim s that arise after the bankruptcy do not

have provable claims, and therefore they must enforce their claims out-

side the bankruptcy s ystem.

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 .