C. The Fundamental Principles of Bankruptcy Law

• Author: Roderick J. Wood
• Profession: Faculty of Law. University of Alberta
• Pages: 39-43

Contenidos

• 1) Bankruptcy Proceedings Are Collective.
• 2) The Debtor’s Assets Vest in the Trustee.
• 3) Proprietary Rights of Third Parties Are Unaffected.
• 4) Personal Rights of Creditors Are Converted into Rights of Proof.
• 5) A Statutory Scheme of Distribution Governs Payments to Creditors.
• 6) Discharge Releases the Debtor from Pre-Bankruptcy Claims.

Page 39

One might embark upon the study of bankruptcy law by reading the Bankruptcy and Insolvency Act from beginning to end. Although this is a sensible strategy for reading most things, it is not recommended as a path to enlightenment when learning about bankruptcy law. The unfortunate reader would quickly become discouraged by a disorderly mass of rules, and would discern little of the overarching structure of the law. In order to comprehend bankruptcy law, it is necessary to understand the fundamental principles that form its backbone. Only then will the detailed rules begin to make sense.

Page 40

1) Bankruptcy Proceedings Are Collective

Bankruptcy is a collective proceeding that can be initiated by the creditors or by the debtor. Creditors who initiate bankruptcy proceedings against the debtor do so on behalf of all the creditors who are entitled to participate in the distribution of the debtor’s assets. This has several different implications. First, non-initiating creditors can replace initiating creditors who do not diligently prosecute the action.⁵³As well, courts will closely examine bilateral agreements between a debtor and an initiating creditor for the discontinuance of bankruptcy proceedings to ensure that the interests of other creditors are not prejudiced.⁵⁴The collective nature of the proceedings is also seen in the rule that the legal costs of the initiating creditor and the administration costs of the bankruptcy are paid out of the bankrupt estate,⁵⁵a provision that ensures that all participating creditors share in the costs of the bankruptcy. It is manifested, too, in the stay of proceedings that prevents creditors from opting out of the bankruptcy proceedings by exercising their ordinary civil remedies for the recovery of their claims.

2) The Debtor’s Assets Vest in the Trustee

Upon the occurrence of bankruptcy, all of the debtor’s assets vest in the trustee in bankruptcy. The vesting of assets is automatic through operation of law and does not require a transfer or conveyance by the debtor. The assets that vest in the trustee form the bankrupt estate and include contractual rights and other rights of action that the debtor has against third parties. The trustee takes the assets subject to the same rights, equities, and defences as...