Application for a Bankruptcy Order by a Creditor – Another Tool in the Litigators Toolbox

Your client calls you and indicates that they have tirelessly attempted to collect a substantial debt owing to them.  Emails, phone calls and letters demanding payment have not resulted in any collection. In these situations where the debt is owing, but payment hasn’t been made, a litigation lawyer may recommend that its client commence an application for a bankruptcy order against the debtor that owes them the money.  If the Order is granted the Court will adjudge an individual or corporation bankrupt. At that time, a Licensed Insolvency Trustee will be appointed as the trustee of the bankruptcy estate and its role will be to realize on assets for the benefit of creditors

The bankruptcy of a debtor will provide a creditor with additional means to collect on an outstanding debt, including, among other things: (a) expedited process to seize and sell assets; (b) further investigative powers to uncover the existence of unknown and/or hidden assets; and (c) the ability to attack fraudulent payments or transfers of assets at undervalue to related parties.

Seizure and Sale of Assets

The bankrupt individual or the designated representative of the bankrupt corporation must swear, under oath, a statement of affairs which identifies all of its owned assets.  These identified assets vest in the trustee with very limited exceptions. It is the Trustee’s mandate to seize and sell these assets for the benefit of all the creditors of the bankruptcy estate.  Assets can include, real property, securities, machinery and equipment, accounts receivable, intangible assets including intellectual property, interests in legal proceedings in which the bankrupt is the named plaintiff.  The bankruptcy of a debtor will result in an expedited process to liquidate assets and repay debts.

Investigative Powers

The Bankruptcy and Insolvency Act provides the Trustee with significant powers to investigate the business and financial affairs of the bankrupt induvial or corporation. This includes, but is not limited, to the following:

(a)   the ability to conduct under oath examinations, of the bankrupt and any “person reasonably thought to have knowledge of the affairs of the bankrupt”. This would include the officers, directors and employees of a company. A Court order is not required to conduct such examinations; and,

(b)   the ability to demand that any person who is in possession of any of the books and records of the bankrupt provide same to the Trustee.

If more traditional methods for collecting on a debt are not possible, creditors may be able to derive significant benefits by successfully petitioning an insolvent debtor into a bankruptcy proceeding.