A. The Stay of Proceedings

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

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The property of the debtor vests in the trustee on bankruptcy, and the trustee will gather in and assemble these assets. To facilitate this process, bankruptcy law provides a set of rules and principles that are designed to preserve the bankrupt estate so that its full value can be realized. Bankruptcy is a collective proceeding through which claimants with personal rights against a debtor can enforce their claims against the debtor’s assets. For this to work properly, it is absolutely essential to stop attempts by these creditors to enforce their claims or to recover their debts. To permit them to remove assets from the bankrupt estate would seriously destabilize the bankruptcy system. Ordinary litigation must also come to a stop on the occurrence of a bankruptcy. In its place, bankruptcy law provides a summary method for determining the validity and the value of claims against the bankrupt. Bankruptcy law prevents creditors from interfering with the trustee’s administration of the bankrupt estate through an automatic stay of proceedings.

In order to maximize the value of the bankrupt estate, the trustee must also make a number of important decisions. The trustee must decide whether or not to perform contracts that were concluded between the debtor and a third party prior to the bankruptcy. If the debtor’s property has been polluted or contaminated and is subject to an environmental remediation order, the trustee must make a choice between retaining and cleaning up the property or abandoning it. Finally, bankruptcy law contains rules and mechanisms that protect against

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post-bankruptcy conduct or actions of the debtor that would otherwise diminish the value of the bankrupt estate.

1) Objectives of the Stay

The bankruptcy stay of proceedings serves two fundamental purposes. First, by preventing creditors from commencing or continuing their legal actions, it replaces the normal civil process with a summary method by which the trustee reviews, accepts, or rejects and values claims against the bankrupt estate. This prevents a multiplicity of actions and significantly reduces the costs of adjudication of the various claims.1

Second, by preventing creditors from enforcing their claims against the bankrupt’s property, it replaces a free-for-all - in which creditors attempt to seize assets before other creditors are able to do so - with a more orderly liquidation and pro rata sharing that, to the collective benefit of all the creditors, is more likely to enhance the value that will be received for the assets.2Bankruptcy law draws a sharp division between proprietary rights and personal rights held by claimants. Claimants who can establish a proprietary right to an asset are able to take the asset out of the bankrupt estate, since it is only the property of the debtor that is divisible among the creditors. The mechanism by which they assert such claims has been previously examined.3Those who have personal rights against the bankrupt must prove their claims within the bankruptcy regime. The bankruptcy claims procedure as well as the trustee’s responsibility to liquidate assets and distribute the proceeds by way of a bankruptcy dividend are exclusive processes that replace the normal methods by which creditors establish and enforce their personal rights. The automatic bankruptcy stay of proceedings is the mechanism that ensures the exclusivity of these two processes. For this reason, the automatic bankruptcy stay of proceedings applies only to creditors who have provable claims in bankruptcy. Claimants who have proprietary claims or personal claims that arise after the bankruptcy do not have

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provable claims, and therefore they must enforce their claims outside the bankruptcy system.

2) Scope of the Stay

The stay of proceedings prevents claimants from invoking any remedy against the debtor or the debtor’s property. The Supreme Court of Canada has held that this includes both judicial and extra-judicial proceedings, such as a right to recover an overpayment by retention from subsequent benefit.4The stay also operates on other remedies, such as a statutory right of distress.5The stay of proceedings operates only in respect of proceedings by creditors against the bankrupt. It does not apply in respect of proceedings against third parties.6Although the stay of proceedings that is typically granted by courts in CCAA proceedings prevents a contracting party from terminating an agreement between it and the debtor, the automatic stay of proceedings in bankruptcy has never been interpreted as preventing the exercise of this right. The restructuring provisions of the BIA contain a separate provision that prevents the termination of executory contracts.7This supports the view that the automatic stay of proceedings was not intended to extend to the termination of executory contracts, since the provision would not be needed otherwise.

The stay of proceedings operates only in respect of claims that are provable in bankruptcy. In order to be provable, the claim must be one that was in existence at the date of bankruptcy. Although post-bankruptcy claimants are able to commence action and obtain judgment against the bankrupt,8they will encounter difficulties when they attempt to enforce their judgments.9Most of the bankrupt’s assets will have vested in the trustee on bankruptcy. Post-bankruptcy claimants will not be able to take judgment enforcement proceedings against these assets because the bankrupt no longer owns them. Upon obtaining a bankruptcy discharge, an individual bankrupt thereafter obtains ownership of any newly acquired assets. These new assets will be available to satisfy the claims of post-bankruptcy claimants.

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Although family-support obligations are provable in bankruptcy, they are partially excluded from the operation of the stay of proceedings.10The family-support claimant is permitted to commence or continue an action against the bankrupt, but not to take any action or proceeding against the property of the bankrupt that has vested in the trustee or in respect of surplus income payments that are made to the trustee.11

3) Duration of the Stay

The automatic stay of proceedings commences on the date of bankruptcy12and ends when the trustee is discharged.13On its face, this might seem to suggest that creditors have a window of opportunity after the discharge of the trustee and before the bankrupt obtains a discharge during which they can sue the bankrupt and enforce their claims against any assets that have not vested in the trustee. Courts initially held that the bankruptcy law could not have been intended to declare an "open season" on undischarged bankrupts.14Claimants who have provable claims are therefore unable to take any action against an undischarged bankrupt even after the stay comes to an end.15More recently, some courts have departed from this view and have held that claimants with provable claims can bring action and enforce their claims against the bankrupt’s property after discharge of the trustee.16Other courts have refused to follow this new line of decisions and have defended the view that claimants with provable claims are subject to the stay after the discharge of the trustee unless a court lifts the stay.17The issue has often arisen in cases where there has been misconduct or lack of cooperation on the part of the bankrupt.

There is a further difficulty associated with the view that a discharge of the trustee terminates the stay of proceedings. It undermines a fundamental principle of bankruptcy law that prevents a race of the

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swift and...

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