Chapter 12 - Bankruptcies and Financial Reorganizations Flashcards
Bankruptcy and insolvency come under which jurisdiction?
federal
Proceedings must be officially initiated for the ___ Act to apply.
Bankruptcy and Insolvency
The Bankruptcy and Insolvency Act essentially provides three types of procedures:
- Forced bankruptcy (receiving order)
- Voluntary bankruptcy (assignment)
- Making a proposal
___ is the usual remedy under civil law to force a debtor to settle their debts.
Seizure
stay of proceedings applies only to the rights of ___ creditors
ordinary (unsecured and non-preferred)
___ creditors are unaffected by the bankruptcy
Secured
Any payment by an insolvent debtor to one of their creditors in the three months preceding the bankruptcy with a view to giving that creditor a preference over the other creditors, may be ___
voided
maximum of ___ inspectors (not connected to the bankruptcy) may be appointed, to act as representatives of all the creditors
five
May be worth instituting bankruptcy proceedings even if there is no amount available for ordinary creditors and no dubious acts have been committed in the months preceding the bankruptcy. There are a number of advantages, including: (5)
CONTROL BY THE TRUSTEE
SUPERVISION BY THE SUPERINTENDENT OF BANKRUPTCY
INVERSION OF PRIORITIES
RAPIDITY
LIMITED ENVIRONMENTAL LIABILITY
In the event of a bankruptcy, all the property of the insolvent person is vested in ___
a trustee
duties of SUPERVISION BY THE SUPERINTENDENT OF BANKRUPTCY (3)
Keep a record of the proceedings
Receive and record complaints by
Creditors, debtors,and the public.
Conduct investigations.
Bankruptcy and Insolvency Act, subject to certain strictly defined exceptions,
relegates the federal or provincial government to the status of ___
ordinary creditors
why is rapidity a benefit of declaring bankruptcy^
trustee can sell the property quicker
a secured creditor who becomes the owner of the property or a subsequent purchaser
could have to assume clean-up costs far exceeding the value of the property itself. However, a ___ is not liable for any environmental condition that arose or environmental damage that occurred before or after their appointment
trustee
two reasons why financial planners must know the rules relating to the allocation of property
among creditors
To be able to evaluate the respective situation of each class of creditors if the business should declare bankruptcy.
Must be able to estimate how much the
creditors are likely to recover.
three major classes of creditors:
Secured creditors
Preferred Creditors
Unsecured creditors
Secured creditors have a lien on the company’s assets. what does this mean?
They are unaffected by the bankruptcy in that they can claim their property or exercise their rights regardless of whether proceedings have been initiated
Unsecured creditors have right to the assets of the company only after ___
secured and preferred creditors are paid.
___ of a company are typically unsecured
creditors
Common shareholders
Some creditors have special rights to ensure that ___
they can recover the amounts owed to them.
___ is the most frequent example of a
personal security
surety
surety’s assets guarantee the payment of the debt between the main debtor and the creditor. If the corporation cannot respect its commitments, the creditor will seek payment from ____
the shareholders.
Owner credit - Creditors who own an asset are not, strictly speaking, secured creditors. why?
because the trustee repossesses it. The property is not part of the bankrupt’s estate to be shared among creditors.
Quebec Consumer Protection Act contains provisions intended to protect consumers under certain circumstances. For example, before taking possession of the property sold, the creditor must ___ . The consumer has a ___ period to pay the amounts owing. If the consumer has already paid for more than __ of the property, the creditor must ask the court’s permission to repossess the property
send written notice
30-day
half
If the goods are left on consignment with a retailer, the trustee cannot ___
refuse to return them to the seller upon request
GOODS HELD IN TRUST
Bankruptcy and Insolvency Act provides that property held by the bankrupt in trust for any other person is not part of the estate. Three conditions must be met, however, for a true trust to exist:
- The property in trust is held separately from the bankrupt’s other property to be identifiable.
- The authors of the trust actually intended to create a trust.
- The beneficiaries of the trust can be identified with certainty.
Under the Bankruptcy and Insolvency Act, the federal and provincial governments have no priority or preference with
respect to the amounts owing to them; they are ___ creditors
ordinary
Legally, for a trust to exist, the property it concerns must be identifiable. To circumvent this difficulty, some legislation has created a sort of legal fiction called a ___ . In this case there is a presumption that the property has not been mixed with the bankrupt’s other property and should be considered as having been held
separately.
deemed trust
the amounts due to governments with respect to ___ are deemed trusts. The other amounts due to governments are ___
source deductions
ordinary debts
Section 427 of the Bank Act allows a company that wishes to obtain financing from a bank to offer its ___ (2) as security.
inventory and account receivables
Most common form of payment security
hypothec
___ are to be paid ahead of any other preferred claim, from the amounts realized by liquidating the bankrupt’s property, but subject to the rights of secured creditors. This means that the trustee must first consider
the situation in this respect before agreeing to administer the estate of a bankrupt
The trustee’s fees
Wages for services rendered in the six months preceding the bankruptcy, to a maximum of $2,000 per employee, including vacation pay for this same period, are ___
a preferred claim
In the event of a bankruptcy, some creditors’ claims are postponed, meaning that all other ordinary creditors must be paid before them. In other words, they are not likely to receive anything. They are: (4)
- A spouse’s claim based on a marriage contract
- A spouse’s claim for wages
- A lender’s claim if the lender receives interest at a rate varying according to the company’s profits or receives a
share of the profits - A claim resulting from a reviewable transaction
A company wishing to undertake a financial reorganization may proceed in any of three ways:
- Negotiate out-of-court arrangements with creditors.
- Undertake official proceedings under the (federal) Companies’ Creditors Arrangement Act (C-36).
- Submit a notice of intent to make a proposal under bankruptcy and insolvency act
Creditors accept this type of arrangement only because the company is insolvent and they would lose more if it were to declare bankruptcy
OUT-OF-COURT ARRANGEMENTS
This act allows companies with over $5 million in debt the opportunity to restructure their affairs in order to avoid bankruptcy.
The Companies’ Creditors Arrangement Act
A court that orders a stay of proceedings appoints ___ , who may be the company’s auditor, to oversee the affairs of the insolvent person. Responsibilities are similar to those of the bankruptcy trustee or receiver.
A monitor
plan must be approved by a majority representing ___ in value of the creditors
two-thirds
To initiate proceedings under the Bankruptcy and Insolvency Act, a company must first file a notice of intent to make a proposal with the official receiver. This notice must contain the following information: (2)
- The name and address of the trustee
- The names of creditors with claims of $250 or more and the amounts of their claims
A creditor who has given notice of intention to enforce their security more than __ days before a notice of intention
or a proposal is filed may execute their security
ten
Refusal by the court to approve the proposal, like the refusal of creditors to accept it, automatically brings about ___
the bankruptcy of the insolvent person
Within ten days following the filing of a notice of intention, the insolvent person must file the following documents: (3)
- A cash flow statement supported by forecasts
- A report by the trustee on the reasonableness of the cash flow statement
- A report containing prescribed representations by the person making the proposal regarding the preparation of the cash flow statement
Provided that the debtor has filed the documents required by law, they have up to 30 days to submit a proposal to the creditors. Otherwise ___
the debtor will automatically be deemed bankrupt.
first step in preparing the proposal
draw up a statement of affairs to determine the consequences for the different classes of creditors in the event of bankruptcy
From a financial point of view, the creditors’ contribution may take one or more of the following forms: (4)
- Postpone the due date of amounts payable.
- Reduce the amount of the debt or the interest rate.
- Refinance the debt.
- Accept shares of the company or other securities as payment of the claim.
Once the original or amended proposal has been accepted, the trustee must obtain ___
court approval
Role of cout approval
To make sure that the proposal complies with the requirements of the Bankruptcy and Insolvency Act.
The obligations imposed on secured creditors and receivers may be broken down into three categories:
- Give insolvent advance notice of intention to enforce security.
- Notify superintendent, insolvent person, and creditors / Trustee of the receiver’s appointment
- Report on the receiver’s activities to these same individuals
A creditor who intends to enforce a security on all of the property of an insolvent person must give that person notice in the prescribed form and manner. The person then has at least __ days to either remedy the state of insolvency or reach an
arrangement with creditors
ten
The obligation to give advance notice of the intention to enforce security does not apply in certain situations specifically provided in the Act:
(4)
- A secured creditor is excluded from a proposal or is part of a class of creditors who have refused the proposal.
- A secured creditor obtains from the court that the automatic stay of proceedings resulting from the filing of a notice of intention or a proposal no longer applies.
- A receiver has already taken possession of part or all of the property of the insolvent person or the person is already bankrupt.
- A secured creditor proceeds with a receivership for reasons other than insolvency
To protect the property during this ten-day period, the secured creditor may apply to the court to appoint
an interim receiver
The receiver must provide two documents in order to meet the disclosure requirements provided in the Act:
notice of appointment
a statement after taking possession or control of property.
As soon as possible and no later than ten days after becoming a receiver, the receiver must notify ___ (3) of that fact.
the insolvent person
all creditors
the Superintendent of Bankruptcy
The receiver must prepare a statement containing the following information relating to the receivership, with regard to the secured property: (3)
- The names of all creditors, the amount owing to each of them, and the total amount owing to all the creditors
- A list of assets of which the receiver took possession or control and the book value of each one
- The receiver’s proposed action plan
As soon as the duties are complete, the receiver
must prepare a final report and statement of accounts with the following information: (4)
- final statement of receipts and disbursements
- details on the distribution of proceeds from the assets possessed.
- details on disposition of assets posessed and not considered in the final statement of receipts and disbursements.
- other important information concerning the performance of their duties.
The receiver must produce interim reports at least once every ___ months, including a statement of receipts and disbursements, and a statement of the assets of which he has taken possession and has not yet realized
six
common for a shareholder to pledge collateral, from ___ or even personally guarantee a debt of
the company. The creditors of this debt now might have a claim against the shareholder in certain circumstances.
their personal assets
most ___are protected in bankruptcy.
registered retirement savings plans (RRSPs)
Under bankruptcy law, the assets available in the cash value portion of the insurance policy are exempt only if the designated beneficiary is either ___ (5) If the beneficiaries are not from this group, the trustee can cash it out to recover the money for the creditors or pay an amount equal to the cash out amount to keep the policy intact.
the spouse, children, parent, grandparents, or grandchildren.
Investments in ___ are subject to seizure if an owner has personally pledged a guarantee to the creditors of their company.
A TFSA
when an owner of the corporation pledges a personal asset for the business, the creditor of that pledged collateral is treated as ___ and can claim that asset from the individual in the event the company files for bankruptcy or insolvency.
a secured creditor
___ is a way for secured creditors to exercise their rights.
Receivership
The Bankruptcy and Insolvency Act contains provisions similar to those formerly in effect in Quebec under the Civil
Code of Lower Canada, allowing suppliers to repossess their goods within thirty days following delivery. To exercise this right, the following conditions must apply: (4)
- purchaser must be bankrupt or there must be a receiver in relation to the purchaser.
- The supplier must present a written demand for repossession to the trustee or receiver or purchaser, within 30 days of delivery
- goods must be in possession of purchaser, trustee, or receiver and must be in the same state as they were on delivery.
- must not have been resold at arm’s length or be subject to any agreement for sale.
The purpose of the___ is to defray the expenses of the superintendent relating to bankruptcy proceedings.
Only creditors who ___ must pay the levy;
levy
have benefited from bankruptcy proceedings
The insolvent person may apply to the court to have the initial stay of 30 days extended by __ days, several times, not to exceed __ months in all from the expiry of the initial period
45
five
