Understanding Bankruptcy - The Road to Maximizing Recovery

Article
by Angelo D'Ascanio

Disclaimer: This article was written in order to provide information only and should not be relied upon as legal advice. Detailed legal advice should be obtained which will be appropriate for the specific circumstances of your matter. (Copyright and Disclosure).

Should you have any questions relating to a bankruptcy and/or insolvency matter matters, please contact Angelo D'Ascanio by e-mail or by phone at (519) 672-9330. If corresponding by email, be sure to include your name, your telephone number, and a brief message.

Understanding Bankruptcy - Maximizing Recovery

I read once that "bankruptcy is to capitalism what hell is to heaven". This is true with respect to the original purpose of the Bankruptcy and Insolvency Act which was intended to be a commercial statute.

Private business is central to our economy. There exists an inherent risk of failure for any private business. To provide an incentive to business persons to take a financial risk, they need to know that there is a way out if that risk materializes.

Two fundamental principles of the Act are often stated to be as follows:

1.	To permit an honest debtor, who has been unfortunate in business, to secure a discharge from bankruptcy so that he or she can make a fresh start and resume his or her place in the business community; and

2.	To provide a regime whereby the creditors of a bankrupt will pursue their claims by collective action through the Trustee so that the assets of the bankrupt can be realized and distributed on an equitable basis subject to the rights of secured creditors and the priorities of preferred creditors.

The following is a general overview of the bankruptcy process:

1.	All claims against the bankrupt as at the date of bankruptcy are stayed;

2.	All of the bankrupt's property in existence as at the date of bankruptcy, or acquired thereafter up to the date of the bankrupt's discharge, vests in his or her Trustee for distribution among the bankrupt's unsecured creditors, except for property subject to security, certain statutory deemed trusts, property held in trust by the bankrupt for third parties, and property exempt by statute from seizure;

3.	Inspectors are appointed to provide the Trustee with guidance and direction and generally to speak on behalf of the unsecured creditors;

4.	The Trustee has the power to review the affairs and conduct of the Bankrupt with a view to setting aside any payments made or assets transferred by the bankrupt to third parties prior to bankruptcy if these payments or transfers constitute a preference, settlement, or reviewable transactions;

5.	Individual bankrupts are required to make monthly "surplus income" payments to their Trustee in accordance with published guidelines;

6.	First time individual bankrupts are entitled to an absolute discharge from bankruptcy after nine months unless an objection is filed by a creditor, the Trustee, or the Official Receiver;

7.	If a bankrupt is required to proceed to a discharge hearing, the Registrar will consider the circumstances and either grant an absolute discharge, or refuse or suspend the discharge, or order that the bankrupt has to pay a sum of money to his or her Trustee as a condition of being discharged; and

8.	Upon being discharged from bankruptcy, all claims against the bankrupt in existence as at the date of bankruptcy are released, with some exceptions referred to below.

After a Trustee's costs, and the Superintendent's levy charged before any distribution, the practical reality is that most bankrupts don't have any meaningful assets or income which can be realized by a Trustee to provide a significant return to creditors. Another practical reality is that often times the Trustee does not realize enough money to cover the cost of investigation or action necessary to attack transactions to recover money or assets for the benefit of the creditors.

When faced with a situation where a Trustee refuses to act and conduct investigation or take steps to attack pre-bankruptcy transactions, a creditor is more than welcome to take the appropriate steps under the Act to be placed in the Trustee's shoes and to take over the Trustee's position.

It is important for all creditors to appreciate that not all debts are released by "a bankruptcy". The most notable exceptions in a commercial context are:

1.	Any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; and

2.	Any debt or liability for obtaining property by false pretences or fraudulent misrepresentation.

Often times a bankrupt's debt arises as a result of a trust breached by the bankrupt, or a bankrupt has failed to disclose the full extent of his or her liabilities on a credit application. In these situations, a creditor should give some serious thought as to whether the bankrupt should be pursued for a non-dischargeable debt. Any money recovered by a creditor for a non-dischargeable debt does not need to be shared with the other creditors.

Hopefully, with the foregoing explanation of the bankruptcy process in mind you should be equipped to ask the right questions of the Trustee and the bankrupt, and to take the appropriate steps to make sure your recovery is maximized in a bankruptcy.

Maximizing your recovery in a bankruptcy, however, really starts with protecting yourself in the event of a bankruptcy of one of your customers by conducting a proper credit risk analysis, getting security or personal guarantees, and staying on top of and monitoring the account for collection closely.