B. The Objectives of Bankruptcy Law

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

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The Supreme Court of Canada has stated that the purpose and object of bankruptcy law is to (1) distribute equitably the assets of the debtor and (2) permit the rehabilitation of the debtor as a citizen.46This provides a very useful starting point for examining the objectives of bankruptcy law. The first objective is to create a collective process through which the assets of the debtor are liquidated, the claims of the creditors are assessed, and the proceeds of the liquidated assets are distributed to the creditors. The second objective is to afford the debtor a fresh start when it is appropriate to do so. The entire history of bankruptcy law reform reveals a third objective: the prevention of fraud and abuse of the bankruptcy system, the promotion of commercial morality, and the protection of the credit system.47

1) Liquidation and Distribution of the Debtor’s Assets

The insolvency of a debtor typically means that there will not be sufficient assets to satisfy the claims of all the creditors. Bankruptcy is a legal process that seeks to maximize the recovery of the creditors as a group. In a world of no bankruptcy, some of the creditors - those who are able to grab assets before the other creditors are able to do so - are better off. But the creditors as a whole are worse off. There are two reasons why this is the case. First, in the absence of bankruptcy, each creditor must incur the cost of obtaining judgment and of enforcing it. This produces duplication in adjudication and enforcement costs that might be reduced if there was a collective liquidation proceeding carried out on behalf of all the creditors. Second, under a regime where the ranking among creditors is determined by a principle of first come,

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first served, each creditor will have a strong incentive to rush in and grab the assets even though a more orderly liquidation of assets would produce a higher return for all the creditors as a group. Bankruptcy law protects the integrity of a collective liquidation proceeding by imposing an automatic stay of proceedings that pre-empts the enforcement remedies of the creditors. In doing so, it provides "a way to override the creditors’ pursuit of their own remedies and to make them work together."48A collective liquidation proceeding requires a process for the assessment of creditors’ claims and the distribution of assets to creditors. Creditors do not invoke the usual civil process for...

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