The Bankruptcy and Insolvency Act (BIA) is the federal legislation that outlines the bankruptcy and insolvency proceedings in Canada. The BIA defines the different roles and responsibilities of each stakeholder or party involved in a bankruptcy proposal or proceeding. They include the bankrupt or insolvent company or business, its creditors, the courts, and the government (through the Superintendent of Bankruptcy).
Purpose of the Bankruptcy and Insolvency Act
The BIA’s main purpose is to help the bankrupt or insolvent company (debtor-company) and its creditors by ensuring that the debtor-company’s rights are protected over the bankruptcy or insolvency proceedings. At the same time, the BIA aims to secure the rights of creditors in relation to the financial obligations that the debtor-company owes them.
Each party in a bankruptcy or insolvency process must deal with each other in good faith. The court may sanction any party who does otherwise (Section 4.2, BIA).
The Office of the Superintendent of Bankruptcy (OSB)
The OSB, commonly called the Superintendent, is the federal agency responsible for implementing the Bankruptcy and Insolvency Act. Among its functions are:
- the licensing of Licensed Insolvency Trustees (LITs), Trustees, and Receivers;
- the maintenance of public records and statistics on bankruptcies; and
- other responsibilities granted by the Companies' Creditors Arrangement Act (CCAA).
What happens when you claim insolvency?
A Canadian company or business is considered insolvent (Section 2, BIA) under any of these circumstances:
- when it is unable to pay off its debts or other financial obligations that are pending to become due and demandable, because of some financial distress
- when it has stopped paying its debts or other financial obligations after they become due and demandable because of some financial distress
- when its aggregate assets and properties are not enough to cover all its debts or other financial obligations when sold at a fair valuation or when disposed of at a sale under any legal process
When any of these situations happens to a business or company, it may file a Bankruptcy Order and Assignment. This is the legal process for recovering assets and paying off debts of the Canadian debtor-company as sanctioned by the court or by the government.
Bankruptcy happens when a bankruptcy assignment or bankruptcy order has been made in the name of that business or company. A debtor-company may also file a Division I Proposal or a Division II Proposal.
Insolvency or Bankruptcy Proceedings
The Bankruptcy and Insolvency Act has at least three proceedings that an insolvent person, business, company, or even its creditors may use:
- Bankruptcy Orders and Assignments (Part II, BIA): for individuals and businesses or companies that have committed any of the acts of bankruptcy (Section 42, BIA), where the LIT will administer the selling of the debtor’s assets to satisfy its obligations to its creditors.
- Commercial or Corporate Proposal or Division I Proposal (Division I, Part III, BIA): for individuals, businesses, or companies whose unsecured debts amount to more than C$250,000, where a proposal will be sent to its creditors, subject to their approval, voted during a meeting called for that purpose (creditors’ meeting).
- Consumer Proposal or Division II Proposal (Division II, Part III, BIA): for individuals whose unsecured debts amount to more than C$1,000 but less than C$250,000, where a proposal will be sent to its creditors, subject to their approval, voted during a meeting called for that purpose (creditors’ meeting).
Division I (Commercial or Corporate) proposals and Division II (Consumer) proposals are both alternatives to bankruptcy filings. These proposals are legally binding agreements between the insolvent debtor (either private persons or juridical entities) and its creditors, usually enacted through a LIT.
After the filing of bankruptcy, surplus income payments may also have to be paid by the bankrupt entity. Here is a quick video regarding surplus income payments:
If you need help with bankruptcy matters, speak with a lawyer in your province or territory. If you live in Hamilton, for example, you can contact any of the Lexpert-ranked lawyers on insolvency and financial restructuring in Ontario.
Bankruptcy Offences
In a bankruptcy proceeding, a debtor-company is expected to be transparent with its financial situation as evidenced by its financial records and other company-related documents.
The BIA has outlined bankruptcy offences (Part VIII, BIA) that a debtor-company may commit during a bankruptcy proceeding:
- fraudulent dispositions
- false entry or material omissions in financial statements
- concealment, destruction, mutilation, or falsification of financial statements or other documents or properties
- false representations to acquire credits or properties
- failure to comply with a court order
- failure to disclose facts of being an undischarged bankrupt to business transactions
Convictions under these offences may include fines or imprisonment, or both.
How are bankruptcies discharged in Canada?
A bankruptcy discharge means that the debtor-company or the insolvent entity has been released from all its debts and other financial obligations or liabilities. Under the Bankruptcy and Insolvency Act, a bankrupt corporation may apply for bankruptcy discharge after paying all its creditors’ claims in full (Section 169 (4), BIA).
Some debts may not be released or paid off even after a bankruptcy discharge (Section 178, BIA):
- fine, penalty, restitution order, or award of damages in respect of an offence or crime, including debt due to a recognizance or bail
- debt or liability arising out of an alimony or alimentary pension
- debt or liability out of spousal or child support
- dividend due a creditor
- loans under the Canada Student Loans Act or the Canada Student Financial Assistance Act
- loans under the Apprentice Loans Act
Are bankruptcies public record in Canada?
The Bankruptcy and Insolvency Act says that proposals and bankruptcies are indeed public records which shall be kept by the Superintendent of Bankruptcy (Section 11.1, BIA). These public records also include licenses of LITs and trustees, and appointments or designations of administrators that are made or issued by the Superintendent of Bankruptcy.
A bankrupt corporation or business need not worry about the public disclosure of these records. These are only provided on request and upon payment of a fee by any requesting party.
In general, only a business’s creditors, its trustees, and the Superintendent will know of the bankruptcy proceedings.
Have some questions about the Bankruptcy and Insolvency Act and other related matters? Drop your questions in the comment section below or check out our list of the best insolvency and financial restructuring lawyers in Canada.