A. The Nature, Purpose, and Boundaries of Insolvency Law

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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1) The Relationship between Bankruptcy Law and Insolvency Law

In Canada, it is common to see the terms bankruptcy and insolvency law used in tandem. The Constitution Act, 1867 confers exclusive authority on the Parliament of Canada to make laws in relation to bankruptcy and insolvency,1 and the primary federal statute in the field is named the Bankruptcy and Insolvency Act (BIA). The only danger with this usage is that it might suggest to some that bankruptcy law and insolvency law are two distinct though related legal fields. In fact, insolvency law is the wider concept, encompassing bankruptcy law but also including other non-bankruptcy insolvency systems. The usage has probably come about because bankruptcy is the oldest and most established of the insolvency regimes and therefore takes pride of place at the beginning of the phrase, with all of the other insolvency regimes lumped together at the end. This terminology should not obscure the fact that bankruptcy is merely one of several different legal regimes that respond to the insolvency of a debtor.

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2) The Single Proceeding Model of Insolvency Law

At its core, insolvency law is concerned with the inability of a person to pay claims owing to others. A person who is in this state of affairs is considered to be insolvent, and insolvency law provides a set of legal responses to address this problem. Insolvency law is premised upon a debtor’s inability to pay, rather than upon a debtor’s unwillingness to pay. If the debtor has the means to pay but simply refuses to do so, a claimant can commence and prosecute a civil action against the debtor. If the claimant is successful, the claimant will obtain a judgment from the court. This permits the claimant to invoke judgment enforcement law in order to obtain satisfaction of the claim. The judgment enforcement system is established by provincial law and gives the claimant a set of enforcement remedies against the assets of the debtor.

Insolvency law is not primarily concerned with coercing payment from reluctant debtors. Rather, it comes into play when the debtor does not have sufficient assets to satisfy the claims of all of the claimants. In most cases, the debtor’s insolvency results from an inability to pay contractual claims voluntarily incurred by the debtor. Some of these claims may arise from the extension of credit by a person who has provided goods or services to the debtor and who has agreed to accept payment for them at some future date. Others may arise from contracts of loan under which the debtor borrows a specific sum of money from a lender and agrees to repay it according to a fixed schedule (term loans) or under which amounts that are advanced are repayable on demand (demand loans). However, insolvencies may also occur because the debtor does not have sufficient assets to satisfy claims that are not associated with an extension of credit. These may involve claims against the debtor for breach of contract, as in the case of a construction firm that is liable in contract for the shoddy construction of a building. They may also involve claims against the debtor in tort for injuries caused by wrongful acts or omissions, as in the case of a manufacturer whose use of asbestos in a product has rendered it liable in negligence to victims suffering from asbestosis and mesothelioma.

The various insolvency regimes have different objectives. Some are primarily concerned with the liquidation of the debtor’s assets. Others provide a means by which a debtor can attempt to rescue a business by seeking an arrangement or compromise in which creditors agree to accept less than they are entitled to. Some are concerned with the economic rehabilitation of the debtor. Others are not. In spite of these differences, there is one feature that is common to all insolvency regimes. They all provide a collective proceeding that supersedes the

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usual civil process available to creditors to enforce their claims. The creditors’ remedies are collectivized in order to prevent the free-for-all that would otherwise prevail if creditors were permitted to exercise their remedies. In the absence of a collective process, each creditor is armed with the knowledge that if they do not strike hard and swift to seize the debtor’s assets, they will be beaten out by other creditors. The fundamental importance of "single control" in a collective insolvency proceeding has long been recognized in Canadian law.2The single control policy furthers the "public interest in the expeditious, efficient and economical clean-up of the aftermath of a financial collapse."3The race to grab assets in the absence of a...

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