D. Preventing the Bankrupt from Dealing with the Estate

• Author: Roderick J. Wood
• Profession: Faculty of Law. University of Alberta
• Pages: 170-172

Page 170

In order to preserve the bankrupt estate for the benefit of the creditors, it is necessary to prevent the bankrupt from engaging in activities that may result in the loss of property that would otherwise be available to the creditors. Two things need to be done. First, it is necessary to acquire control over the assets. Although the bankrupt’s assets will have vested in the trustee, this will be of little benefit to the creditors unless the trustee is also able to obtain control over the assets so as to be in a position to dispose of them. Second, it is necessary to take certain legal steps to prevent the bankrupt from selling or otherwise disposing of any of the assets to a third party. Here, the controversy is whether the loss caused by the actions of the bankrupt will be borne by the innocent third party who acquired an asset from the bankrupt or whether it will be borne by the trustee and, ultimately, by the creditors who prove their claims in the bankruptcy.

The BIA imposes an obligation on a bankrupt to cooperate with the trustee in identifying assets, disclosing records, and aiding in the realization of assets.⁹⁷The BIA also provides that no property of a bankrupt shall be removed from the province in respect of which bankruptcy proceedings were commenced without the permission of the court or the inspectors.⁹⁸These provisions assist the trustee in assembling and preserving the bankrupt estate.

The bankrupt estate is also protected from actions by the debtor that attempt to dispose of or otherwise deal with the assets. Upon the occurrence of a bankruptcy, the bankrupt ceases to have any capacity to dispose of or otherwise deal with the property.⁹⁹Acting mistakenly or fraudulently, a bankrupt may purport to transfer an interest in property to another despite this lack of capacity. The transaction will generally not be effective to transfer any interest to the transferee, since the bankrupt no longer has any interest in the property, and it makes

Page 171

no difference that the transferee took in good faith and for value. The third-party purchaser will usually have a personal action against the bankrupt. As this is a post-bankruptcy claim, it will not be subject to the automatic bankruptcy stay and will not be extinguished upon a discharge of the bankrupt. However, in seeking to recover this claim, the third-party purchaser will be unable to resort to any of the assets that have vested in the trustee. A third-party...