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BIA: Supervisory role of OSB and role of trustees

Clause by Clause Briefing Book

An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Acts


Bill Clause No. 16
Section No. 14.03(1), (2)(b) and (2)(f)
Topic: Disciplinary hearings

Proposed Wording

14.03(1) Subject to subsection (2), the Superintendent may, for the protection of an estate, the rights of the creditors or the debtor,

(2)(b) the Superintendent makes or causes to be made any inquiry or investigation under paragraph 5(3)(e);

(2)(f) a trustee has been found guilty of an indictable offence that, in the Superintendent's opinion, is of a character that would impair the trustee's capacity to perform the trustee's fiduciary duties, or has failed to comply with any of the conditions or limitations to which the trustee's licence is subject; or

Rationale

The amendment to subsection (1) is intended to ensure that the protection of an estate extends to protection of the rights of creditors and debtors.

The reform to paragraph (2)(b) to add "inquiry" is a technical amendment intended to make the English version correspond with the French version.

The amendment to paragraph (2)(f) is intended to clarify the circumstances in which the Superintendent will exercise the discretion to refuse to grant a licence to a person found guilty of an indictable offence. The intention is that the discretion should be exercised where the indictable offence is related to fiduciary relationships, fraud, theft or similar actions that would lead to questions as to the fitness of the person to act as a trustee.

The term "convicted" has been replaced with the term "found guilty" due to concerns that the French term for "convicted" is more restrictive than what is intended. The reform should create better parallelism between the French and English versions of the Act.

Present Law

14.03(1) The Superintendent may, for the protection of an estate in the circumstances referred to in subsection (2),

(2)(b) the Superintendent makes or causes to be made any investigation pursuant to paragraph 5(3)(e);

(2)(f) a trustee is convicted of an indictable offence or has failed to comply with any of the conditions or limitations to which the trustee's licence is subject; or

Senate Recommendation

None.

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Bill Clause No. 17
Section No. 14.06(1.1) and (1.2)
Topic: Trustee Liability

Proposed Wording

14.06(1.1) In subsections (1.2) to (6), a reference to a trustee means a trustee in a bankruptcy or proposal and includes

  • (a) an interim receiver;
  • (b) a receiver within the meaning of subsection 243(2); and
  • (c) any other person who has been lawfully appointed to take, or has lawfully taken, possession or control of any property of an insolvent person or a bankrupt that was acquired for, or is used in relation to, a business carried on by the insolvent person or bankrupt.

(1.2) Despite anything in any federal or provincial law, if a trustee carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount if the claim is in relation to a debt or liability, present or future, to which the debtor is subject on the day on which the trustee is appointed.

Rationale

Subsection (1.1) is an explanatory provision. For the purposes of this section, references to a trustee are deemed to include interim receivers, receivers and persons acting like receivers without that designation. The reform is intended to ensure that a person who, under a security agreement, acts as a receiver but who does not fall within the four corners of section 243 still obtains the protection that receivers are granted.

Subsection (1.2) is intended to clarify that trustees (as defined to include interim receivers, receivers and those acting like receivers) are not personally liable for obligations or liabilities to which the debtor company was subject on the day on which the trustee was appointed.

Present Law

(1.1) In subsections (1.2) to (6), a reference to a trustee means a trustee in a bankruptcy or proposal and includes an interim receiver or a receiver within the meaning of subsection 243(2).

(1.2) Notwithstanding anything in any federal or provincial law, where a trustee carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount where the claim arose before or upon the trustee's appointment.

Senate Recommendation

The Bankruptcy and Insolvency Act be amended to separate clearly the personal liability of an insolvency practitioner from the liability of the debtor's estate.

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Bill Clause No. 18
Section No. 19(3)
Topic: Trustees' Duties

Proposed Wording

18. Subsection 19(3) of the Act is repealed.

Rationale

Subsection 19(3) was moved to section 21, clause 19.

Present Law

19(3) The trustee shall verify the bankrupt's statement of affairs.

Senate Recommendation

None.

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Bill Clause No. 19
Section No. 21
Topic: Verifying the Statement of Affairs

Proposed Wording

21. The trustee shall verify the bankrupt's statement of affairs referred to in paragraph 158(d).

Rationale

The reform to section 21 is a technical amendment to renumber existing subsection 19(3) to provide a more logical sequence. The existing section 21 is repealed to reflect current practice - trustees do not initiate criminal proceedings under the Act.

Present Law

21. The trustee may initiate such criminal proceedings as may be authorized by the creditors, the inspectors or the court against any person believed to have committed an offence under this Act.

Senate Recommendation

None.

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Bill Clause No. 20
Section No. 25 (1), (1.1), (1.2), (1.3), (1.4) and (3)
Topic: Trust Funds

Proposed Wording

25(1) When acting under the authority of this Act, a trustee shall, without delay, deposit in a bank all funds received for an estate in a separate trust account for each estate.

(1.1) The trustee may deposit the funds in a deposit-taking institution, other than a bank as defined in section 2, only if deposits held by that institution are insured or guaranteed under a provincial or federal enactment that provides depositors with protection against the loss of funds on deposit with that institution.

(1.2) If the funds are situated in a country other than Canada, the trustee may, if authorized by he Superintendent, deposit them in a financial institution in that country that is similar to a bank.

(1.3) The trustee shall not withdraw any funds from the trust account of an estate without the permission in writing of the inspectors or, on application, the court, except for the payment of dividends and charges incidental to the administration of the estate.

(1.4) A trustee may, with the permission of the court, invest the funds in short-term securities of the Government of Canada or the government of a province held in trust for the estate.

(3) The trustee shall not deposit any funds received by the trustee when acting under the authority of this Act in any banking account kept by the trustee for the trustee's personal use.

Rationale

The amendment to subsection (1) is intended to ensure that the rules regarding handling of estate funds apply regardless the capacity in which the trustee is acting. As well, technical amendments were made to update language usage.

Reforms to subsections (1.1), (1.2) and (1.3) are technical amendments to the English version of the Act only, to update language usage.

Subsection (1.4) was included to provide trustees with greater flexibility to invest estate funds, which are expected to be held for an extended period. Government backed short term securities are generally regarded as safe investments and may provide a better return for the estate than a bank account.

Reforms to subsections (3) are technical amendments to update language usage.

Present Law

25(1) Subject to subsections (1.1) and (1.2), a trustee shall forthwith deposit in a bank all moneys received for an estate in a separate trust account for each estate.

(1.1) The trustee may deposit moneys pursuant to subsection (1) in a deposit-taking institution, other than a bank as defined in section 2, only if deposits held by that institution are insured or guaranteed under a provincial or federal enactment that provides depositors with protection against the loss of money on deposit with that institution.

(1.2) Where moneys referred to in subsection (1) are situated in a country other than Canada, the trustee may, where authorized by the Superintendent, deposit the moneys in a financial institution in that country that is similar to a bank.

(1.3) The trustee shall not withdraw any money from the trust account of an estate without the permission in writing of the inspectors or, on application, the court, except for the payment of dividends and charges incidental to the administration of the estate.

(3) The trustee shall not deposit any sums received by the trustee in the trustee's official capacity as a trustee in any banking account kept by the trustee for the trustee's personal use.

Senate Recommendation

None.

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Bill Clause No. 21
Section No. 28 (1)
Topic: Documents to be sent to the Superintendent

Proposed Wording

28(1) The trustee shall, without delay after their receipt or preparation, send to the Superintendent, in the prescribed manner, true copies of the documents referred to in section 155 and a true copy of

  • (a) the notice referred to in section 102,
  • (b) the statement referred to in paragraph 158(d),
  • (c) the trustee's final statement of receipts and disbursements and the dividend sheet, and
  • (d) every order made by the court on the application for discharge of a bankrupt or annulling any bankruptcy, and file a copy of the documents referred to in paragraphs (b) and (c) in the court.

Rationale

The reform is a technical amendment to increase efficiency by allow in for the transfer of documents in a manner other than by mail.

Present Law

28(1) The trustee shall, forthwith after their receipt or preparation, mail to the Superintendent true copies of the documents referred to in section 155 and a true copy of

  • (a) the notice referred to in section 102,
  • (b) the statement referred to in paragraph 158(d),
  • (c) the trustee's final statement of receipts and disbursements and the dividend sheet, and
  • (d) every order made by the court on the application for discharge of a bankrupt or annulling any bankruptcy, and file a copy of the documents referred to in paragraphs (b) and (c) in the court.

Senate Recommendation

None.

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Bill Clause No. 22
Section No. 29(2)
Topic: Trustees' Duties

Proposed Wording

22. Subsection 29(2) of the Act is repealed.

Rationale

The requirement for the trustee to file the reports are dealt with in concurrent amendments at clause 102, in section 170(1).

Present Law

29 (2) Every trustee before proceeding to his discharge shall, unless he has already done so, prepare and file the reports referred to in sections 170 and 171 and forward a copy of each to the Superintendent.

Senate Recommendation

None.

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Bill Clause No. 23
Section No. 30(3), (4), (5) and (6)
Topic: Trustee's Powers

Proposed Wording

30 (3) If no inspectors are appointed, the trustee may do all or any of the things referred to in subsection (1).

(4) The trustee may sell or otherwise dispose of any of the bankrupt's property to a person who is related to the bankrupt only with the court's authorization.

(5) For the purpose of subsection (4), in the case of a bankrupt other than an individual, a person who is related to the bankrupt includes a person who controls the bankrupt, a director or an officer of the bankrupt and a person who is related to a director or an officer of the bankrupt.

(6) In deciding whether to grant the authorization, the court must consider, among other things,

  • (a) whether the process leading to the proposed sale or disposal of the property was reasonable in the circumstances;
  • (b) the extent to which the creditors were consulted in respect of the proposed sale or disposal;
  • (c) the effects of the proposed sale or disposal on creditors and other interested parties;
  • (d) whether the consideration to be received for the property is reasonable and fair, taking into account the market value of the property;
  • (e) whether good faith efforts were made to sell or dispose of the property to persons who are not related to the bankrupt; and
  • (f) whether the consideration to be received is superior to the consideration that would be received under all other offers actually received in respect of the property.

Rationale

Subsections 30(1) and (2) set out the powers that may be exercised by the trustee with the permission of the inspectors, however, it is not in every bankruptcy that inspectors are appointed. Especially when the estate is small and creditors do not believe that recovery is likely, the creditors will not expend the time or expense to have inspectors appointed. The addition of subsection (3) provides that in the absence of inspectors the trustee can act unilaterally so that an estate is not left in limbo when inspectors are not appointed.

Subsection (4) will require that the trustee obtain court approval before selling or disposing of the bankrupt's property to a person who is related to the bankrupt. Subsection (4) is intended to prevent possible abuse by "phoenix corporations". Prevalent in small business, particularly in the restaurant industry, phoenix corporations are the result of owners who engage in serial bankruptcies. A person incorporates a business and proceeds to cause it to become bankrupt. The person then purchases the assets of the business at a discount out of the estate and incorporates a "new" business using the assets of the previous business. The owner continues their original business basically unaffected while creditors are left unpaid.

Subsection (5) expands the definition of "related person" for the purposes of the section to address corporations.

Subsection (6) sets out the factors the court must consider before granting an order to sell the property. It provides legislative guidance for the court and provides direction for the debtor. The provision should improve consistency of judicial decisions.

Present Law

None.

Senate Recommendation

None.

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Bill Clause No. 24
Section No. 31 (1) and (2)
Topic: Borrowing Powers

Proposed Wording

31 (1) With the permission of the court, an interim receiver, a receiver within the meaning of subsection 243(2) or a trustee may make necessary or advisable advances, incur obligations, borrow money and give security on the debtor's property in any amount, on any terms and on any property that may be authorized by the court and those advances, obligations and money borrowed must be repaid out of the debtor's property in priority to the creditors' claims.

(2) For the purpose of giving security under section 427 of the Bank Act, the interim receiver, receiver or trustee, when carrying on the business of the bankrupt, is deemed to be a person engaged in the class of business previously carried on by the bankrupt.

Rationale

The reforms are technical amendments to reflect concurrent amendments to the interim receiver provisions and the receiver provisions. The role of interim receivers is to be reduced and, as such, they will not be granted powers under this section. At the same time, the role of receivers is expected to expand. By adding receivers to the parties that may use this provision will give receivers more flexibility in carrying on their duties.

Present Law

31(1) With the permission of the court, an interim receiver or a trustee, prior to the appointment of inspectors, may make necessary or advisable advances, incur obligations, borrow money and give security on the property of the debtor in such amounts, on such terms and on such property as may be authorized by the court and those advances, obligations and money borrowed shall be repaid out of the property of the debtor in priority to the claims of the creditors.

(2) For the purpose of giving security under section 427 of the Bank Act, the trustee or interim receiver if authorized to carry on the business of the bankrupt is deemed to be a person engaged in the class of business previously carried on by the bankrupt.

Senate Recommendation

None.

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Bill Clause No. 25
Section No. 33
Topic: Expenses and Disbursements

Proposed Wording

33. The court may make an order providing for the sale of any or all of the assets of the estate of the bankrupt, either by tender, private sale or public auction, setting out the terms and conditions of the sale and directing that the proceeds from the sale are to be used for the purpose of reimbursing the trustee in respect of any costs that may be owing to the trustee or of any moneys the trustee may have advanced as disbursements for the benefit of the estate.

Rationale

The reform to subsection 33(1) is technical, to clarify that the proceeds from a sale of assets ordered by the court are to be used to pay the expenses of the trustee, including disbursements.

Subsection 33(2) is repealed due to the fiduciary relationship between the trustee and the estate. A potential conflict of interest may arise in the situation where a trustee is declared to own property the trustee is administering in trust.

The BIA already provides for third party deposits and fee guarantees.

Present Law

33(1) The court may make an order providing for the sale of any or all of the assets of the estate of the bankrupt, either by tender, private sale or public auction, setting out the terms and conditions of the sale and directing that the proceeds therefrom shall be used for the purpose of reimbursing the trustee in respect of any costs that may be owing to him or of any moneys he may have advanced for the benefit of the estate.

(2) If no bid is received for the assets of the estate of the bankrupt sufficient to reimburse the trustee, the court may make an order vesting in the trustee personally all assets of the estate and on the making of the order the rights and interests of the creditors and of the bankrupt to the assets shall be determined and ended.

Senate Recommendation

None.

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Bill Clause No. 26
Section No. 34 (3)
Topic: Notice

Proposed Wording

34 (3) The trustee must send notice to the Superintendent's division office of the day and time when any application for directions made under subsection (1) is to be heard and of the day and time when the trustee intends to report to the court as required by the Superintendent under subsection (2).

Rationale

The reform is intended to ensure that the Superintendent has notice of any court proceedings related to a trustee seeking directions from the court. The purpose is to provide the Superintendent with an opportunity to intervene in such circumstances so that the Superintendent may bring to the court's attention relevant information prior to directions being given.

Present Law

None.

Senate Recommendation

None.

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Bill Clause No. 27
Section No. 35 (3)
Topic: Time limitation

Proposed Wording

35 (3) If a bankrupt is an individual, a notice referred to in subsection (1) is operative only during the three-month period immediately after the date of the bankruptcy unless the court, on application, extends that period on any terms that it considers fit.

Rationale

The reform is a technical amendment to modernize language.

Present Law

35 (3) Where a bankrupt is an individual, a notice referred to in subsection (1) is operative only during the three month period immediately following the date of bankruptcy unless the court, on application, extends that period on such terms as the court considers fit.

Senate Recommendation

None.

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Bill Clause No. 28
Section No. 36(1)
Topic: Duty of former trustee

Proposed Wording

36 (1) On the appointment of a substituted trustee, the former trustee shall without delay pass his or her accounts before the court and deliver to the substituted trustee all the property of the estate, together with all books, records and documents of the bankrupt and of the administration of the estate, as well as a statement of receipts and disbursements that contains a complete account of all moneys received by the trustee out of the property of the bankrupt or otherwise, the amount of interest received by the trustee, all moneys disbursed and expenses incurred and the remuneration claimed by the trustee, together with full particulars, description and value of all the bankrupt's property that has not been sold or realized, setting out the reason why the property has not been sold or realized and the disposition made of the property.

Rationale

The reform is intended to clarify that where there has been the appointment of a substituted trustee, the former trustee must account for his or her own administration of the file. This amendment also adapts the section to the new procedures provided for in section 152 of the Bill that addresses the final administration of the trustees' accounts. It will provide a better understanding of the work accomplished by the trustee to relate it to the final account submitted by the Trustee.

Present Law

36 (1) On the appointment of a substituted trustee, the former trustee shall forthwith pass his accounts before the court and deliver to the substituted trustee all the property of the estate, together with all books, records and documents of the bankrupt and of the administration.

Senate Recommendation

None.

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Bill Clause No. 29
Section No. 40 (1)
Topic: Disposal of unrealizable assets

Proposed Wording

40 (1) Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(d) or otherwise disclosed to the trustee before the bankrupt's discharge and that is found incapable of realization must be returned to the bankrupt before the trustee's application for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.

Rationale

The amendment of subsection (1) will provide a fair mechanism for the treatment of the bankrupt's unrealizable assets and will enhance the transparency of the administration of those assets.

Present Law

40 (1) With the permission of the inspectors, any property of a bankrupt found incapable of realization shall be returned to the bankrupt prior to the trustee's application for discharge.

Senate Recommendation

None.

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