D. Voluntary Bankruptcy

• Author: Roderick J. Wood
• Profession: Faculty of Law. University of Alberta
• Pages: 72-73

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Bankruptcy law confers a benefit on debtors as well as on creditors. Indeed, the vast majority of bankruptcies are ones where the debtor has voluntarily entered into the proceedings. In the case of individual bankrupts, it provides relief from legal action of the creditors and the prospect of obtaining a fresh start upon obtaining a bankruptcy discharge. Even in the case of artificial entities that do not typically survive the bankruptcy, voluntary bankruptcy provides an efficient mechanism for liquidating the entity and distributing the proceeds to the creditors.

Bankruptcy law provides the exclusive avenue through which insolvent debtors can make voluntary assignments of all of their property for the general benefit of their creditors.¹⁵⁹In order to make an assignment in bankruptcy, the debtor must fall within the definition of an "insolvent person."¹⁶⁰This definition specifies four elements that

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must exist in order for a debtor to make an assignment in bankruptcy. First, the claims of the creditors must amount to $1,000.¹⁶¹Second, the person must not be an undischarged bankrupt. Third, the person must reside, carry on business, or have property in Canada. Fourth, the debtor must be insolvent as measured by the cash flow tests or balance sheet test for insolvency as set out in the definition.¹⁶²

The process is simple and does not involve a court application. A sworn statement that discloses the debtor’s property, the names and addresses of the creditors, and the amounts of their claims must accompany the assignment.¹⁶³The assignment and sworn statement are filed with the official receiver in the locality of the debtor.¹⁶⁴The official receiver will appoint a licensed trustee and will complete the assignment by filling in the name of the trustee. The debtor becomes a bankrupt on the date and time of the filing.¹⁶⁵The debtor usually selects the trustee in the first instance, and that trustee will typically assist the debtor in the preparation of the documents. However, if the creditors want some other person to act as trustee, their wishes are to govern.¹⁶⁶

An individual partner may make a bankruptcy assignment, but the bankruptcy affects only the partner’s individual assets along with that partner’s interest in the assets of the firm. In order to create a bankruptcy of the entire interest in the firm’s assets, all partners must be parties to the assignment.¹⁶⁷In the case of an artificial entity, the assignment must be...