Inspectors' Handbook — Parts I to IV
Part I —
Trustees in bankruptcy are licensed by the Superintendent of Bankruptcy.
When appointed to an estate, the trustee assumes certain statutory responsibilities. Some responsibilities, such as calling meetings of creditors when required by the Act and submitting various reports to the court and the Superintendent of Bankruptcy, are mandatory and fall outside the scope of discretion accorded to creditors, inspectors and trustees. However, the Act provides for many other administrative functions that are subject to the approval and control of the inspectors and creditors. Those functions will be discussed in this handbook.The trustee is an officer of the court who acts in a fiduciary capacity for the creditors under the guidance and direction of the inspectors. If there is a disagreement between the trustee and the inspectors, they may seek guidance from either the creditors or the court to resolve the matter.
The Act places administrative control of an estate in the hands of the creditors. This control is exercised particularly at the first meeting of creditors, when the creditors:
- confirm the trustee's appointment (or substitute another trustee);
- provide the trustee with directions; and
- appoint a board of inspectors.
The inspectors are appointed as representatives of all creditors and occupy positions of trust. They are expected to assist the trustee by virtue of their experience and are required to supervise certain aspects of the trustee's administration.
Part II —
Board of Inspectors
When and how are inspectors appointed? (sections 115 and 116)
At the first meeting of creditors, the chairperson, who may be the Official Receiver or his or her nominee, asks creditors for suggested nominations to the board of inspectors. The appointment of inspectors is decided by ordinary resolution, carried by the majority of votes, and for that purpose the votes of a creditor are calculated by counting one vote for each dollar of every claim of the creditor. The creditors may also agree to not appoint inspectors.
Who can be appointed an inspector? (section 116)
The Act does not specify criteria for the appointment of inspectors. It does, however, stipulate that no person who is party to any contested action or proceedings by or against the estate of the bankrupt may be appointed an inspector. This excludes, for example, an officer, a director, a shareholder or a representative of a corporation that is party to any contested action or proceeding against the estate of the bankrupt.
Once appointed, inspectors cannot appoint some other person to represent them at a meeting of inspectors that they are unable to attend.
Although persons appointed as inspectors generally are creditors, a person who is not a creditor or a representative of a creditor can be appointed as an inspector. For example, a lawyer representing a client may be appointed an inspector.
If there is a dispute about who should be appointed as inspectors, the nominees who receive a majority of the votes cast at the meeting of creditors, either in person or by proxy, will be appointed.
It should be noted that inspectors do not represent their employers and must perform their duties in the best interests of all creditors. Inspectors must not act for their personal advantage and must make full and complete disclosure to the trustee and co-inspectors of their personal position any time there is a possible conflict of interest.
How many inspectors can be appointed?
In a bankruptcy of an individual under Summary Administration, there are generally no inspectors appointed unless the creditors decide otherwise [paragraph 155(e)].
In consumer proposals, creditors may appoint a maximum of three inspectors (section 66.21).
For all other proposals and bankrupt estates, a maximum of five inspectors can be appointed [section 56 and subsection 116(1)].top of page
No defect or irregularity in the appointment of an inspector invalidates an act done by the inspector in good faith. Accordingly, if the court finds that the appointment of an inspector is improper, any act done by the inspector honestly and lawfully will not be affected.
A vacancy may occur by incapacity, resignation or death. If a vacancy arises on the board of inspectors, the creditors or inspectors may fill it at any meeting. The appointment of an inspector may also be revoked at any creditors' meeting or by the court. If no inspectors are appointed to fill the vacancy, the trustee is required to call a meeting of creditors for the purpose of appointing inspectors.
- Resignation of inspectors
The Act contains no provision for the resignation of inspectors. In practice, an inspector resigns by delivering a written notice of resignation, and the remaining inspectors fill the vacancy.
- Revoking appointment of inspectors
The trustee or any creditor may apply to the court to have an inspector's appointment revoked. As well, creditors may revoke the appointment of any inspector and appoint another at any of their meetings.
Inspectors give direction and advice to the trustee regarding specific actions to be taken in the administration of the estate. They also supervise the trustee's administration and ensure the trustee acts in accordance with their directions.
The Act sets out, in various sections, the responsibilities of inspectors appointed to bankruptcy estates. Generally, these responsibilities can be grouped into three categories: Action, Authorization and Supervision.
Action: The Taking of Some Specific Action by Inspectors
Who calls them and when are they held? (section 117)
The first inspectors' meeting is usually held immediately after the first meeting of creditors. After this initial inspectors' meeting, the trustee calls other meetings when deemed advisable or when a meeting is requested in writing by a majority of the inspectors.
When inspectors attend a meeting, they are expected to play an active role by expressing their opinions and voting on motions, when necessary.
If all of the inspectors consent, any inspector may participate in a meeting of inspectors by telephone or other communication device provided all can communicate with each other during the meeting. Inspectors who participate in a meeting in this fashion are deemed to be present at the meeting.
Individual inspectors have no power to call meetings on their own. The powers of the inspectors are exercised by the majority. Moreover, all decisions must be specific and recorded in a resolution. All discussions and resolutions must also be recorded in the minutes of the meetings. After they are signed by the chairperson (usually the trustee), these minutes form part of the proposal or bankruptcy estate file.
If there is an equal division of opinion at an inspectors' meeting, the inspectors will seek the opinion of any absent inspector to resolve the difference. If a difference cannot be resolved in this manner, the trustee has a casting vote unless the matter involves the personal conduct or interest of the trustee, in which case it must be resolved by the creditors or the court.
Conflict between creditors and inspectors (section 119)
If there is a conflict between the directions given to the trustee by a general meeting of creditors and those given by a meeting of inspectors concerning the administration of the estate, the directions given by the creditors prevail.
If a trustee or any interested person is in doubt about a decision made by the inspectors, the trustee or the interested person may apply to the court to have the decision reviewed and to ask for direction. The court may review the inspectors' decision or action and may revoke or vary any such action or decision. It may then give such directions, permission or authority as it deems proper, including referring the matter back to the inspectors for reconsideration.
Requirement to call a meeting of creditors (section 103)
Although the trustee may call a meeting of creditors at any time, the trustee must call a meeting when:
- directed by the court;
- requested to do so in writing by a majority of the inspectors; or
- requested to do so in writing by 25 percent of the creditors holding at least 25 percent in value of the proven claims.
A majority of the inspectors may convene a creditors' meeting at any time when the trustee is not available to call a meeting or has failed to do so when directed by the inspectors.top of page
Examination of bankrupt and others by the trustee [subsection 163(1) and section 167]
Who may be examined?
The trustee may examine the following people, under oath, before the registrar of the court:
- the bankrupt;
- any person reasonably thought to have knowledge of the affairs of the bankrupt; and
- any person who is or has been an agent, clerk, servant, officer, director or employee of the bankrupt.
Scope of the examination
The trustee may examine a person with respect to the bankrupt, the bankrupt's dealings or the bankrupt's property. Any person being examined is required to answer all questions about the business or property of the bankrupt, the causes of the bankruptcy and the disposition of the bankrupt's property.
What is required to conduct such an examination?
The trustee must obtain an ordinary resolution passed by the creditors, or the written request or resolution of a majority of the inspectors.
Examination of the bankrupt, trustee or other interested person by creditors [subsection 163(2)]
Who may apply to conduct an examination?
On the application to the court by the Superintendent, any creditor, or "other interested person," an order may be made to conduct an examination before the registrar. "Other interested person" means a person who, like a creditor, has an interest in the administration of the bankrupt estate. An undischarged bankrupt falls within the meaning of "other interested person."
Who may be examined?
The persons who may be examined for the purpose of investigating the administration of the bankrupt estate are:
- the trustee;
- the bankrupt;
- an inspector;
- a creditor; or
- any other person named in the court order.
Scope of the examination
The objective of such an examination is to investigate aspects of the administration with a view toward benefiting the creditors generally. The examiner cannot use the examination to pursue a private remedy. For example, a secured creditor cannot attempt to locate a missing piece of property covered by its security.
Insurance coverage [subsection 24(1)]
It is the trustee's duty to insure all of the bankrupt's property for such amount and against such hazards as the trustee deems advisable, until inspectors are appointed. The insurance should cover all of the debtor's property, not just unencumbered property (i.e., unsecured property).
After they are appointed, the inspectors determine the amount of the coverage and the risks against which the bankrupt's property shall continue to be insured by the trustee.
Limitations on carrying on the bankrupt's business
[paragraph 30(1)(c) and subsection 31(3)]
The trustee, with the permission of the inspectors, may carry on the business of the bankrupt as necessary for the beneficial administration of the bankrupt estate.
Authorization: Giving Permission to the Trustee to Perform Certain Acts
Powers exercisable by trustee with permission of inspectors (section 30)
The principal powers of an inspector are conferred by section 30, which gives the trustee the power to take certain actions, with the permission of the inspectors. The purpose of this section is to protect the estate and to allow the trustee to benefit from the inspectors' business experience. Inspectors must give permission to take a specific action, not blanket authorization to the trustee to take all or any of the actions listed in the Act. Permission to take all or any of these actions is not to be granted by a general resolution of inspectors. These powers are the following:
- dispose of assets by tender, public auction or private contract;
- lease real property;
- carry on the business of the bankrupt;
- start or defend legal proceedings relating to the property of the bankrupt;
- hire a solicitor to deal with matters sanctioned by the inspectors;
- accept future payment and security in the sale of property;
- incur obligations, borrow money and give security;
- settle debts owing to the bankrupt;
- settle claims made by or against the estate;
- divide property among the creditors that cannot be readily or advantageously sold;
- deal with leases or other temporary interests in any property of the bankrupt; and
- appoint the bankrupt to help in the administration of the estate in such manner and upon such terms as the inspectors direct.
However, if no inspectors are appointed, the trustee may decide on his or her own initiative to take one or more of the above-mentioned actions.
Securities firm bankruptcies (section 259)
In a securities firm bankruptcy, the trustee may undertake any of the following actions even before inspectors are appointed. However, after inspectors have been appointed, the trustee must obtain their permission before doing the following:
- exercising a power of attorney and transferring any security passed on to the trustee;
- selling securities, other than customer name securities;
- purchasing securities;
- discharging any security interests on securities vested in the trustee;
- completing open contractual commitments;
- maintaining customers' securities accounts and meeting margin calls;
- distributing cash and securities to customers;
- transferring securities accounts to another securities firm;
- liquidating any securities account without notice; and
- selling, without tender, assets of the securities firm essential to carrying on its business.
Trust account [subsection 25(1.3)]
The trustee must obtain the inspectors' permission in writing or obtain a court order before any monies can be withdrawn from the trust account of an estate, except for the payment of dividends and charges incidental to the administration of the estate.
Supervision: Approving Various Reports, Documents and Accounts, and, Generally, Supervising the Trustee's Administration of the Estate
The inspectors are expected to oversee the adequacy of the trustee's administration by examining certain documents and accounts. The Act enables the inspectors to carry out this function by giving them access to the estate's books and records as described below.
Access to information (sections 26 and 27)
The books, records and documents relating to the administration of an estate are the property of that estate. The trustee must allow the estate's books and records to be inspected and copied by certain persons, including any creditor or creditor's agent, at any reasonable time. In addition, the trustee shall, from time to time, report:
- to every creditor, when required by the inspectors;
- to any specific creditor at that creditor's request; and
- to the Superintendent or to the creditors in general when required by the Superintendent of Bankruptcy.
The purpose of these reports is to show "the condition of the bankrupt's estate, the monies on hand, if any, and particulars of any property remaining unsold." The trustee is entitled to charge against the bankrupt's estate only the actual disbursements for the preparation and delivery of the reports.
Specific duties of inspectors [subsection 120(3)]
In addition to performing the functions conferred on them by the Act, the inspectors must:
- verify the bank balance of the estate;
- examine the trustee's accounts; and
- inquire into the adequacy of the estate bond filed by the trustee with the Official Receiver.
The estate bond is issued in favour of the creditors by a bonding company, which is responsible for ensuring that the trustee accounts for, pays and transfers to the parties entitled all monies and property received by the trustee, and faithfully performs the trustee's duties. The amount of the bond should normally be based on the estimated receipts in the estate, less the trustee's fees and disbursements.top of page
Bankrupt's discharge [subsection 170(1) and rule 121.1]
The trustee must prepare a report on the debtor's bankruptcy in the following situations:
- the bankrupt has surplus income;
- there is opposition to the bankrupt's discharge;
- the bankrupt has been bankrupt before; or
- the court must hold a hearing on the bankrupt's discharge.
This report is prepared prior to the bankrupt's application for discharge or, where applicable, prior to automatic discharge. The report is accompanied by a resolution of the inspectors indicating whether they approve or disapprove of this report. If they disapprove, the inspectors must provide reasons.
This trustee's report provides information concerning the affairs of the bankrupt, the causes of bankruptcy, the manner in which the bankrupt has performed the duties under the Act, the conduct of the bankrupt both before and after the initial bankruptcy event, whether the bankrupt has been convicted of any offence, and any other facts that would justify a court in refusing an unconditional order of discharge.
Discharge of trustee [subsections 120(4) and 152(3)]
Inspectors are required to approve, at a properly called meeting, the trustee's final statement of receipts and disbursements, the dividend sheet and the disposition of unrealized property. The meeting may be convened by telephone if physical attendance is not possible.
The inspectors must meet certain conditions before they can approve the trustee's final statement of receipts and disbursements. The inspectors must satisfy themselves that:
- all the property has been properly accounted for;
- the administration of the estate has been completed as far as is reasonable;
- the disbursements and expenses incurred are proper and have been duly authorized; and
- the fees and remuneration are fair and reasonable.
If an inspector is dissatisfied with any of the above aspects of the statement, the inspector should notify the trustee in writing explaining the reasons for concern.
The trustee must then forward the final statement of receipts and disbursements to the Superintendent of Bankruptcy for comment before the trustee presents the accounts to the court for taxation.
The statement of receipts and disbursements is a complete accounting of all monies received and disbursed by the trustee concerning the administration and the realization of the estate assets. The remuneration claimed by the trustee is disclosed.top of page
How may assets be sold? [paragraph 30(1)(a)]
The trustee, with the inspectors' permission, can sell estate assets by:
- public auction; or
- private contract.
To whom can the trustee sell?
[paragraph 30(1)(a), subsections 120(1) and 30(4), (5) and (6), and rules 42 and 43]
As a general rule, trustees can sell the estate's assets to "any person or company." "Any person" includes the bankrupt person.
However, trustees cannot sell the property:
- to their employees or agents;
- to other trustees or to employees of other trustees; or
- to related persons of the trustee or to related persons of the above-mentioned individuals.
Trustees cannot purchase the property of any debtor for whom they are acting with respect to a professional engagement. Also, they cannot obtain the property of any estates for which they are not acting unless the property is purchased at the same time and for the same price as it is offered to the public, and during the normal course of business of the bankrupt or debtor.
Furthermore, inspectors may not acquire estate assets, either directly or indirectly, except with the prior approval of the court.
The trustee must obtain court approval in order to dispose of, notably through sale, property of the bankrupt to a person related to the bankrupt. In determining whether to grant such approval, the court considers several factors, including whether the consideration to be received for the property is reasonable and fair, whether the creditors were consulted, and whether the process was reasonable in the circumstances.
Sale for consideration other than cash [paragraph 30(1)(a)]
The trustee can sell all or any property of the bankrupt for consideration other than cash. All the realized property is then divided among the creditors.
Sale for a sum of money payable in the future [paragraph 30(1)(f)]
The trustee can accept as the consideration for the sale of any property of the bankrupt a sum of money payable at a future time, subject to such stipulations as security and otherwise as the inspectors think fit.
- Disclaimer on secured assets (section 20)
Sections 127 to 134 deal with the rights of secured creditors. The trustee may, with the approval of the inspectors, issue a disclaimer relinquishing all or any part of the trustee's right, title or interest in any real or immovable property of the bankrupt. This section is usually applied where there is no equity in an estate asset because of the claim of a secured creditor.
- Return of property to debtor (section 40)
With the inspectors' permission (if inspectors were appointed), the trustee is required to return any property incapable of realization to the bankrupt. The purpose of this provision is to permit a trustee to complete his or her administration of the estate.
Generally, estate funds are distributed in the following order:
- the costs of estate administration (for example, trustee's fees and disbursements, filing fees, counselling fees, legal fees and court fees);
- certain claims such as employees' salaries, municipal taxes and landlords' rental arrears; and
- all other unsecured creditors.
When a trustee has sufficient estate funds, the trustee should pay an interim dividend to creditors who have proven their claim. Under subsection 148(3), inspectors are to direct when an interim dividend should be paid. If they direct the trustee to pay a dividend and the trustee refuses or fails to do so, then the court may order the trustee to pay it with interest.
If the inspectors refuse to authorize the payment of an interim dividend when the funds are available to pay it, the trustee can apply to the court in accordance with subsection 119(2) to overrule the decision of the inspectors.
A proposal is an agreement between an insolvent person and his or her creditors that alters the debtor's financial obligations toward the creditors. The Act provides for two types of proposals.
- Division I is primarily for corporations and for individuals who have not made a consumer proposal under Division II. Where a debtor has made a proposal under Division II, he or she cannot make a proposal under Division I until the administrator under the consumer proposal has been discharged.
- Division II provides a streamlined procedure for individuals who have debts under a prescribed dollar amount.
Inspectors may be appointed in a proposal. When inspectors are appointed in a proposal, they assume the same roles and responsibilities as in a bankruptcy, subject to any provision in the proposal expanding or restricting their functions.
Proposal by a bankrupt [subsection 50(3) and paragraph 66.4(2)(a)]
When a bankrupt intends to make a proposal, the inspectors appointed in the bankruptcy must approve the proposal before any further action is taken.
Waiving a default [subparagraph 62.1(b)(i)]
If the debtor defaults in the performance of a Division I Proposal, the inspectors have the authority to waive the default and to wait and see if the debtor is capable of rectifying the problem at the root of the default.top of page
Part III —
Dealing with Bankruptcy Abuses
Section 10 of the Act empowers the Superintendent of Bankruptcy to investigate an offence that may have been committed in connection with a bankruptcy. These investigations relate to the conduct, dealings and transactions of the bankrupt, the causes of the bankruptcy and the disposition of the bankrupt's property. The main objective of this section of the Act is to detect evidence of statutory offences, although any information uncovered during the investigation that leads to the recovery of assets is to be provided to the trustee.
Section 161 of the Act permits the Official Receiver to examine the bankrupt under oath and to ask questions about the bankrupt's conduct, the causes of bankruptcy and the disposition of property.
The Superintendent of Bankruptcy is assisted by staff in major centres across Canada in detecting and reporting possible offences (see Appendix C). Investigations are normally carried out by the Royal Canadian Mounted Police.
Trustees who do not perform their duties professionally and in compliance with the Act, Rules and Directives may be subject to professional conduct measures in the event of wrongdoing (for example, a trustee's licence may be subject to certain conditions or limitations, suspended or cancelled). Where warranted, criminal charges may also be laid.
In addition, trustees are required to comply with the Code of Ethics for trustees (Rules 34–53). The code establishes standards for activities such as providing creditors with information, handling trust funds, dealing with conflicts of interest, and overseeing the sale of the property of a bankrupted business or individual. The code also sets standards for advertising and for maintaining the good reputation of the trustee community.
Complaints about trustees should be addressed to the nearest divisional office of the Superintendent of Bankruptcy (see Appendix C).
When creditors have information regarding assets, fraudulent preferences (for example, a payment by the debtor to a creditor that gives the creditor preference over other creditors), improper dealings between the bankrupt and relatives or a related company, or other possible irregularities, these matters should be brought to the attention of the trustee or the inspectors.
The inspectors and the trustee should choose the best course of action to benefit the creditors in these situations.
If the inspectors suspect an offence has been committed, they should discuss the matter with the trustee, who should then report it to the Office of the Superintendent of Bankruptcy. When they consider it appropriate (for example, for matters related to the trustee's conduct), inspectors may also report concerns directly to the Superintendent of Bankruptcy.
The Act describes various bankruptcy offences under sections 198 to 208.
Offences by bankrupts (sections 198, 199 and 200)
A bankrupt is guilty of an offence if he or she:
- makes any fraudulent disposition of his or her property before or after the date of the initial bankruptcy event;
- refuses or neglects to answer fully and truthfully all proper questions posed at any examination held pursuant to the Act;
- makes a false entry or knowingly omits information in a statement or accounting;
- after or within the year before the initial bankruptcy event, conceals, destroys, mutilates, falsifies, makes an omission in or disposes of, or knows about the concealment, destruction, mutilation, falsification, omission from or disposal of, a book or document affecting or relating to his or her property or affairs, unless the bankrupt had no intent to conceal the state of his or her affairs;
- after or within the year before the initial bankruptcy event, obtains any credit or any property by false representations or by someone else giving false representations with the bankrupt's knowledge;
- after or within the year before the initial bankruptcy event, fraudulently conceals or removes any property valued at $50 or more or any debt owed to or by the bankrupt; or
- after or within the year before the initial bankruptcy event, mortgages, pawns, pledges or disposes of any property he or she has obtained on credit and has not paid for, unless the bankrupt is a trader and the mortgage, pawning, pledging or disposing is part of normal trading activities, and unless the bankrupt had no intent to defraud.
The bankrupt is also guilty of an offence if he or she fails to comply with an order of the court requiring a monthly payment to the bankrupt's estate, based on his or her income and family situation. Moreover, the bankrupt is guilty of an offence if he or she fails to comply with the required duties throughout the bankruptcy. For example, the duties include delivering, for cancellation, all credit cards to the trustee, as well as informing the trustee of any changes pertaining to his or her financial situation.
It is an offence for an undischarged bankrupt to engage in a trade or business or to obtain credit exceeding $1000 without disclosing that he or she is an undischarged bankrupt. It is also an offence for a person who is currently bankrupt and who has previously been bankrupt or made a proposal not to have kept proper books of account (detailing the person's day-to-day transactions and financial position) of any trade or business done within the two-year period before the initial bankruptcy event. Also, an offence is committed if, within that period of time, the bankrupt conceals, destroys, mutilates, falsifies or disposes of any book or document affecting his or her property or affairs, unless there was no intent to conceal the state of the affairs.
Offences by creditors [subsection 201(1)]
It is an offence for a creditor to willfully and with intent to defraud make any false claim or any proof, declaration or statement of account that is untrue.
Offences by trustees (sections 202, 203.1 and 203.2)
Section 202 deals mainly with the failure of a trustee to perform duties imposed by the Act. However, some paragraphs, such as 202(1)(a) and (f), and subsection 202(2), are wider in scope and apply to persons who are not trustees.
It is an offence for a trustee to act as a trustee under the following conditions:
- while the trustee's licence has ceased to be valid for failure to pay licence fees;
- after the trustee's licence has been suspended or cancelled by the Superintendent; or
- after the trustee has been informed of the intention to cancel the licence.
If a trustee's licence has been restricted, it is an offence for the trustee to exercise powers beyond those authorized by the restricted licence.
Offences by inspectors [subsection 201(2)]
It is an offence for an inspector to accept a fee, commission or other benefit of any kind from the bankrupt, the trustee or any person or company acting on behalf of the bankrupt, other than the regular fees allowed by the Act.top of page
Inspectors' fees range from $10 to $40 per meeting. The fee is based on the net receipts of the estate, which are calculated by subtracting the payments to secured creditors from the total receipts received by the trustee:
|Net receipts||Fee per meeting|
|less than $10,000||$10|
|$10,000 to $50,000||$20|
|$50,000 to $100,000||$30|
|more than $100,000||$40|
Inspectors may also be reimbursed for out-of-pocket travel expenses for the performance of their duties.
Finally, an inspector duly authorized by the creditors or by the inspectors to perform special services for the estate may be paid a special fee for his or her services, subject to the approval of the court. The approval of the court must be given before the rendering of the special services. To be allowed an extra fee, the services rendered by the inspector must require the special attention and skills of the inspector. For example, an inspector who is a chartered accountant may be paid a special fee to conduct an accounting investigation for the bankrupt estate.
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