Need Help Rebuilding Your Credit

PETITIONING A DEBTOR INTO BANKRUPTCY

Introduction

One purpose of the Bankruptcy and Insolvency Act ("the Act") is to provide for the orderly and fair distribution of the property of a bankrupt amongst his or her creditors. The Act provides a mechanism under which all non-exempt property vests in a bankrupt's Trustee. It also provides a summary method of inquiry into a bankrupt's property and affairs to recover assets for the creditors' benefit.
Generally speaking, the Act is intended to operate for the benefit of both bankrupts and their creditors. While the Act is not intended for use as a tool for collection of individual debts, in certain circumstances that use is permitted.

When may a Creditor file a Petition to place a Debtor into Bankruptcy?

A creditor may bring a Petition for a Receiving Order (i.e. an Order to adjudge someone bankrupt) where:

It is owed over $1,000 on an unsecured basis - to achieve such status, security may be waived to the extent necessary; and
There has been an act of bankruptcy by the debtor within the six months that precede filing of the Petition.

Acts of bankruptcy include the following:

Fraudulent conveyances, gifts, deliveries or transfers of property or the creation of charges thereon in circumstances which would constitute any such charge as a fraudulent preference;
The absenting of oneself from one's dwelling house if done with intent to defeat or delay creditors;
The failure to satisfy a Writ of Seizure and Sale with the result that it is returned to the Court Registry marked "nulla bona" or "unable to locate assets";
The exhibiting to a meeting of creditors of any statement of assets and liabilities that shows the debtor to be insolvent or admits of an inability to pay debts generally;
The secreting or removal of assets (or attempts thereat) with intent to defraud, defeat or delay creditors of any of them;
The giving of notice to any creditor that the debtor has suspended or is about to suspend payment of debts generally; and
The failure to pay liabilities generally as they become due.

An individual creditor can utilize the Act to Petition someone into bankruptcy - without proof of failure to pay other creditors - using grounds (1), (2), (3) and (5) above. Ground (7) above usually requires proof of at least two other creditors who are not being paid as agreed unless "special circumstances" apply. "Special circumstances" have been held to apply where there has been a breach of trust, fraud or near-fraud or (in some instances) repeated demands for payment and repeated default. It should, however, be kept in mind that strict proof of both your unsecured claim and an act of bankruptcy are necessary to have someone adjudged bankrupt.

When should a Creditor Petition a Debtor into Bankruptcy?

In Petitioning a debtor one has to retain a lawyer to prepare the necessary documents, attend to service and seek the Receiving Order before the Registrar in Bankruptcy or a Judge in Chambers. The Petitioning creditor must also make arrangements for a Trustee to act and may be liable for payment of the costs incurred by the Trustee where realizations are insufficient for that purpose. To avert such a prospect, arrangements are usually made to limit the Petitioning creditor's obligation to the Trustee to the amount of an agreed "retainer".

Before deciding to launch a Petition the following should be considered:

The existence and amounts of preferred claims that may rank in priority; (NOTE: the Bankruptcy and Insolvency Act, effective November 30, 1992, did away with the preferred status for statutory creditors such as Revenue Canada Taxation, and provincial and federal government claims.)
The quantum of unsecured claims which may rank pari passu (Latin - equally and without preference);
The occurrence of preferences, reviewable transactions and/or settlements within the three month to five year review periods prior to the filing of your Petition;
Your receipt of payments beyond the "usual" amounts within the three months prior to filing of your Petition; and
The validity of any security you may hold.

There are certain instances where Petitions for Receiving Orders are particularly potent tools. Some of them are the following:

Where the debtor has transferred property to another individual without fair consideration, (such as transfer of house to related party for $1.00), or shows preference to one creditor over another.
Where your debtor does not wish to lose a particular element of his property (a yacht, exotic car, shares in a Company, etc.) or does not wish his affairs and dealings to be scrutinized by a Trustee and/or his creditors;
Where your debtor anticipates receipt of an inheritance;
Where you are dealing with a debtor who needs to be a Director or Officer of one or more Companies. The interaction of the Bankruptcy and Insolvency Act and the Company Act results in such a person ceasing to be a Director and ceasing to be eligible to be an Officer upon being adjudged bankrupt;
Where you are dealing with a debtor who may lose or have modified his professional accreditation as a result of being adjudged bankrupt; or
Where your debtor is a person who is always "dealing" and doesn't wish to disclose his status as an undischarged bankrupt when entering upon negotiations or where he might lose the benefit of a particular contract, lease or business prospect by being adjudged bankrupt.

Procedure for Petitioning of a Creditor

A letter of demand, stating that a bankruptcy Petition will be lodged, is sent to the creditor
A letter from a lawyer stating that endorsed draft bankruptcy Petition will be lodged on a specific date if settlement of matter is not performed before;
An agreement is made with a Trustee that he will act as the Trustee in the Petition; and
When the Petition is granted, a third party retainer is forwarded to the Trustee.

Top