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.
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.
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 the bankrupt. This is what is...