B. The Role of the Trustee

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

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1) Appointment of the Trustee

A trustee is not bound to act in any particular bankruptcy, but, having accepted an appointment, a trustee must perform the duties required of the office until discharged or another is appointed.78The creditors by a special resolution at a meeting may replace the trustee.79The court on application of any interested person may for cause replace the trustee.80

The existence of a conflict of interest often forms the grounds for removal and replacement of a trustee by a court.81The BIA specifically enumerates the following situations in which a trustee is not qualified to act as such in relation to the estate of a debtor unless the trustee obtains the permission of the court:82· the trustee was a director or officer of the debtor, or was related to or in an employment relationship with the debtor or a director or officer of the debtor during the past two years;

· the trustee was the auditor, accountant, or solicitor or a partner or employee of the auditor, accountant, or solicitor during the past two years; and

· the trustee is a trustee under a trust indenture issued by the debtor or a person related to the debtor or is related to the trustee under a trust indenture.

The trustee is not permitted to act as a trustee in relation to an estate of a debtor in the following situations unless the trustee provides full disclosure at the time of appointment as well as at the first meeting of creditors:83· the trustee is acting as trustee in a bankruptcy or proposal of a person related to the debtor; and

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· the trustee is acting as receiver or liquidator of the property of any person related to the debtor.

A trustee who acts for an estate is not permitted to act for or assist a secured creditor to realize or otherwise deal with the security unless the trustee has obtained a written opinion from independent legal counsel that the security is valid and enforceable against the estate.84

This requirement is often invoked when a secured creditor appoints a receiver in respect of the assets of a debtor and then forces or persuades a debtor to go into bankruptcy in order to obtain a more favourable priority status.85The trustee has a limited role since the realization is conducted primarily through the receivership. The trustee who acts in this dual capacity must notify the superintendent and the creditors or inspectors that the trustee is acting for the secured creditor and inform them of the basis of any remuneration from the secured creditor and of the legal opinion.86

2) Taking Possession or Control of the Bankrupt Estate

One of the primary duties of the trustee is to take possession or control of the property of the bankrupt. Although the property of the bankrupt vests in the trustee upon the occurrence of the bankruptcy, the taking of possession or control over the asset is a practical necessity. A trustee will find it difficult to sell or otherwise dispose of the asset if the trustee is unable to deliver possession or control of it to the purchaser. The powers conferred on the trustee to obtain and realize property can be exercised anywhere,87but it may be necessary to seek the assistance of a foreign court if the property is located in another country. The trustee is required to open a separate trust account for the bankrupt estate and deposit all funds received from the estate into it.88As soon as possible, the trustee must take possession of the books and records of the bankrupt as well as all property of the bankrupt and make an inventory.89The trustee is empowered to enter premises in order to make an inventory but must first obtain a warrant if a person other than the bankrupt occupies the premises, unless that person con-

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sents to the entry.90No person is permitted to assert a lien or right of retention of the records against the trustee.91A solicitor’s lien is therefore ineffective against a trustee in respect of documents in the possession of the solicitor.92

Persons who are in possession of property of the bankrupt are required to deliver the property to the trustee unless they have a right to retain it as against the bankrupt.93Secured creditors are therefore not required to surrender possession so long as they have priority against the trustee. A lessee who has a right to retain the goods as against the owner is also not required to surrender possession of the property to the trustee. The trustee can bring an action for conversion against a person who wrongfully fails to surrender property of the bankrupt to the trustee.94

The trustee can also obtain a search warrant authorizing the trustee to enter and search premises and to seize the property of the bankrupt.95The trustee, if authorized by the creditors or inspectors, may conduct an examination of the bankrupt or of any other person who is reasonably believed to have knowledge of the affairs of the bankrupt.96The person to be examined is required to attend and answer questions.97

The trustee is not required to obtain a court order before conducting the examination.

The trustee can also obtain legal advice and take legal proceedings necessary for the recovery or protection of property of the bankrupt prior to the first meeting of creditors and thereafter on an emergency basis when the necessary authority cannot be obtained from the inspectors in time.98The trustee has the power to insure the assets temporarily until the appointment of the inspectors, at which time they are to authorize the insurance coverage.99The trustee also has the power to request the redirection of the bankrupt’s mail, but must obtain a court order in the case of mail addressed to the residence of an individual bankrupt.100

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3) Carrying on the Business of the Bankrupt

A trustee may carry on the business formerly conducted by the bankrupt if the trustee thinks that this may be advantageous for the administration of the bankrupt estate.101A wider set of powers is given to a trustee in respect of a bankruptcy of a securities firm to permit the effective operation of the business.102A decision to carry on the business carries certain risks. Prior to 1949, the courts recognized that post-bankruptcy transactions entered into by the trustee were personal obligations owed by the trustee to the other contracting party, unless the contract expressly excluded this liability.103Although the trustee, if authorized to carry on the business by the inspectors, had a right to claim these expenses as a cost of administration of the estate, this did not protect the trustee if the assets were insufficient to cover these obligations. Because of this potential for personal liability, a trustee is not required to carry on the business of the bankrupt if the trustee is of the opinion that the realizable value of the assets of the estate...

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