Preserving the Bankrupt Estate

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 151-172

151

CHA PTER 6

PRESERVING THE

BANKRUPT ESTATE

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

trustee w ill gather in and assemble these asset s. To facilitate this pro-

cess, bankruptcy law provides a set of rules and principles th at are

designed to preserve t he ban krupt estate so t hat its ful l value can be

realized. Bankruptcy is a collective proceeding through which claimants

with personal r ights against a debtor can enforce their claim s again st

the debtor’s assets. For this to work properly, it is abs olutely essential

to stop attempts by these creditors to enforce their claims or to recover

their debts. To permit them to remove assets from t he bankrupt estate

would seriously destabilize the bankr uptcy system. Ordinar y litigation

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 cl aims against the ba nkrupt. Ba nkruptcy l aw

prevents creditors from interfering w ith the trustee’s administration of

the bankrupt estate through an automatic stay of proceedings.

In order to maximize the value of the bankr upt estate, t he trustee

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

cide whether or not to perform contracts th at 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. Finally,

bankruptcy law contains rules and mechanisms that protect against

BANKR UPTCY A ND INSOLVENCY LAW152

post-bankruptcy conduct or actions of the debtor that would otherwise

diminish the value of the bankrupt est ate.

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 meth-

od by wh ich the trustee reviews, accepts, or rejects and values claims

against the bank rupt estate. This prevents a multiplicity of actions a nd

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 replace s a free-for-all — in wh ich creditors at-

tempt to seize assets before other creditors are able to do so — with

a more orderly liquidation and pro rata sharing that, to t he collective

benef‌it of all the creditors, is more likely to enhance the value that will

be received for the assets.2

Bankruptcy l aw draws a shar p division bet ween proprietary r ights

and personal rights held by claimants. Claimants who can establish a

proprietary r ight to an a sset are able to take the asset out of t he 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 has been previously examined.3 Those who have personal rights

against the bankrupt must prove thei r cl aims within the bankruptcy

regime. The bankruptcy claims procedure as well as the trustee’s re-

sponsibility to l iquidate assets and distr ibute the proceeds by way of a

bankruptcy dividend are exclusive processes that replace the normal

methods by which creditors establish and enforce their personal rights.

The automatic ban kruptcy stay of proceedings is the mechani sm th at

ensures the exclusivity of these two processes. For this reason, the

automatic bankruptcy stay of proceedings applies only to creditors who

have provable cl aims in bankruptcy. Claimants who have proprietary

claims or personal claim s that arise after t he bankruptcy do not have

1 382231 Ontario Ltd. v. Wilanour Re sources Ltd. (1982), 43 C.B.R. (N.S.) 153 (Ont.

H.C.J.) [Wilanour].

2 R. v. Fitzgibbon, [1990] 1 S.C.R. 1005; Amanda Designs Bou tique Ltd. v. Charisma

Fashions Ltd. (1972), 17 C.B.R. (N.S.) 16 (Ont. C.A.) [Amanda Designs].

3 See Chapter 5, Sect ion A.