Bankruptcy and Insolvency Act (BIA)

The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA) provides structured processes for an insolvent debtor to make a proposal to creditors or become bankrupt. The BIA applies to both individuals and corporations.

The practical objective depends on the path chosen: a proposal is intended to compromise debts and permit the debtor to continue or wind down in an orderly way, while bankruptcy generally results in liquidation of the debtor’s assets and distribution of proceeds according to the status and priority of the creditors. If the affected creditors reject a proposal, or the court does not approve it, the debtor will be deemed to be bankrupt.

Impact on Payment Obligations and Commercial Relationships:

A few key aspects of BIA proceedings are:

1. Stay of Proceedings: A notice of bankruptcy or intention to make a proposal generally triggers a stay of proceedings that prevents creditors from starting or continuing most collection steps, including lawsuits. The stay gives the debtor and the licensed insolvency trustee time to administer the estate or develop a proposal. Creditors may seek court permission to continue litigation or enforcement where the stay causes unfair prejudice or where another legal basis exists to lift or vary it.

2. Repossession of Supplied Goods: if an unpaid supplier deliveredgoods within 30 days before a bankruptcy or notice of intent to make a proposal, the supplier may have the right to repossess those goods if it makes a demand to do so within 14 days after the bankruptcy or notice to make a proposal.

3. Impact on Contracts: the debtor or trustee may seek to continue, assign, disclaim, or otherwise deal with contractual obligations. A creditor cannot usually terminate a contract with a business that had filed a notice of intent to make a proposal because of the insolvency, but the creditor can require immediate payment for goods or serves rendered after the filing.

4. Proposal to Creditors: A proposal is an offer to compromise debts owing to creditors. It may provide for partial payment, extended payment terms, a sale process, new financing, or other arrangements. Creditors affected by the proposal are entitled to vote on it. If the required creditor majorities approve the proposal and the court approves it, affected creditors are bound by its terms.

5. Priority of Claims in Bankruptcy: in case of a bankruptcy, the BIA establishes rules for proving claims and distributing estate funds. Secured creditors generally benefit from the collateral over which they have security. Certain claims may receive preferred or statutory priority. If higher ranking claims and administration costs are paid, the remaining estate funds may be distributed to ordinary unsecured creditors.

When a counterparty files a notice of intent to make a proposal or an assignment into bankruptcy, creditors should act promptly to preserve their rights. Creditors who wish to vote on a proposal or receive a distribution in a bankruptcy or proposal process must file a proof of claim with supporting documents. Missing claims deadlines, failing to provide sufficient backup, or mischaracterizing secured and unsecured portions of a claim can affect recovery.