Property of the Bankrupt

• Author: Roderick J. Wood
• Pages: 83-128

83

CHA PTER 4

PROPERTY OF THE

BANKRUPT

A. THE CONCEPT OF PROPERTY IN

BANKRUPTCY LAW

The concept of property is central to bankr uptcy law. In order to under-

stand its use, one must know something about the mea ning of this con-

cept in the wider context of the general law. Most often, the concept is

employed to distinguish between two fundamentally different kinds of

rights — personal rights and proprietary tights. A personal right (also

referred to a right in person am) is one that is enforceable against an

identif‌iable person or a def‌inite clas s of persons. When a creditor lends

money to a debtor, the creditor obtains a personal right again st the

debtor to recover the debt. The right is enforceable only against the

person who incurred the obligation. A proprietar y right (also referred

to as a right in re m) is a right in respect of a thing. The right is available

against an indef‌inite class of persons.1 However, the concept of prop-

erty is also sometimes used in a wider, less technic al sense to denote

all valuable rights without regard to whether they are personal rights

or proprietar y rights.

1 It is sometimes s aid that it is a right enforceable ag ainst the entire world, but

this is not a nece ssary condition for a propert y right. For example, a f‌inder ha s

a property ri ght in the goods that is good aga inst the world except for the true

owner, and a subordin ate secured creditor has a prop erty interest in the coll at-

eral that i s trumped by that of a senior s ecured creditor.

BANKR UPTCY AND INSOLVENC Y LAW84

Bankruptcy law uses the wider meani ng of property in one con-

text and the narrower meaning in another. One must be careful when

using the term in order to underst and which sense is intended. The

wider meaning is used i n identifying which of the debtor’s assets will be

available to satisfy t he claims of the creditors. The Act def‌ines property in

a very broad manner th at sweeps both personal rights and property

rights into the bankrupt estate. For example, a personal r ight held by

the bankrupt to recover a debt from another vests in the trustee, who

thereby obtains the r ight to commence an action to recover the debt.

In this respect, the def‌inition of property is not drawi ng a distinction

between personal rights and property rights but rather is using the

term in the broad sense a s including all the assets of the ban krupt. This

does not pick up absolutely every right held by the bankr upt. A right of

action to recover damages in tort for pain and suf fering does not vest in

the trustee. Nevertheless, most economically signif‌icant r ights will be

caught by the def‌inition.

The narrower concept of property is used to differentiate between

claims again st the bankrupt that are administered with in the bank-

ruptcy regime and cla ims against the bankrupt th at remain enforceable

outside it. It is here that the distinct ion between a personal right and

a property right is of fundamental importance. A person who ha s a

personal right again st the bankrupt loses the right to enforce the clai m

upon the occurrence of the bank ruptcy.2 In its place, the claimant ob-

tains the r ight to prove the claim in bankr uptcy and obtain a dividend

from the liquidation of the bankrupt’s assets. The matter is entirely

different if the claimant has a property right in the asset. Only those

assets th at belong to the bankr upt vest in the trustee.3 If t he asset is not

owned by the bankr upt but is the property of the claimant, the claim-

ant will have the r ight to recover the asset from the trustee.

In many instance s, both the bankrupt and t he claimant will h ave

property rights in t he same thing. Consider the case of a bankr upt who

operated a jewelry store and repaired a watch ow ned by a customer.

The bankrupt has a propert y right in the watch in the form of a pos-

sessory lien, whi le the customer remains the owner of the watch. The

right to the lien is a property r ight that vests in the tr ustee, and it can

be asserted by t he trustee against the customer. However, the lien se-

cures only the cost of the repair s and does not give the trustee the right

2 The right is not lost but is mer ely suspended in respect of ce rtain kinds of

claims t hat survive the dis charge of an individual ba nkrupt. See Chapter 10,

Section G.

3 BIA, s 71.

Property of t he Bankrupt 85

to the full value of the watch unless it happens to be less than t he cost

of the repairs.

The bankrupt and the cla imant may have conf‌licting cl aims to a

right. For example, a person to whom a debt is owed may have assig ned

the right to both the ban krupt and to another claima nt. Property law

provides priority rule s for the resolution of conf‌licting claims to the

thing.4 In the ex ample above, priority between the trustee in bankrupt-

cy and the claim ant is resolved according to the order of registration in

the personal propert y registry if the assign ments were within the scope

of personal property security legislation.5 If not, priority is g iven to the

f‌irst person to notify t he debtor of the assignment.6

B. THE BANKRUPT’S ESTATE

1) Property Vesting in the Trustee

Upon the occurrence of a bankr uptcy, the debtor’s property vests in

the trustee in bankruptcy.7 The def‌inition of property is very wide and

encompasses any ty pe of property “whether real or personal, legal or

equitable, as well as obligations, easements and every description of

estate, interest and prof‌it, present or future, vested or contingent, in,

arising out of or incident to property.”8 The def‌inition covers both per-

sonal rights and propert y rights that are held by the ba nkrupt at the

time of the bankr uptcy. The vesting of property in t he trustee occurs

through operation of law without the need for any document or act of

conveyance to give effect to the transfer.

The assets that vest in t he trustee are subject to all the li mitations

or defences that could be asserted against the bankrupt.9 This is what

4 The subject matter of the prope rty right can be a pers onal right, such as a debt.

Property l aw def‌ines who has the better cl aim to the debt. However, the subject

matter again st which the competing clai mants assert thei r proprietary claim s —

the debt — remain s a personal right. It is en forceable by legal action against t he

person who owes the obl igation (the account debtor). If the account debtor al so

goes bankr upt, the party who has t he better claim to the debt wi ll nevertheless

lose the right to s ue on it and will instead obta in only the right to prove for a

dividend in t he bankruptcy of the account debtor.

5 See R Cuming, C Walsh, & R Wood, Personal Prop erty Security Law, 2d ed (To -

ronto: Irwin L aw, 2012) at 157 and 402–4.

6 Dearle v Hall (1828), 3 Russ 1.

7 BIA, s 71.

8 Ibid, s 2 “property.”

9 Yale v MacMaster (1974), 18 CBR (NS) 225 (Ont HCJ).