THE BANKRUPTCY AND INSOLVENCY ACT A WORD OF CAUTION FOR THE UNINFORMED PRACTITIONER Randall Rooke McDougal/Ready 300.. 110-21stSt. E. Saskatoon, Sask.S7KoS6 Ph: 6534641 Fax: 665--8511 BIOGRAPHICAL..INFORMATION RandallRook~... Randy received a B.Comm.and an LL.B. fromthe UniverSitYofSaskl:l~chewanin 1976. He was.calledto.theml:l.nitoba barin 1977 and the;saskatchewan par in 1979. Randy practices in the area~ofgorporate Law, Insolvency,,and Bankruptcy,,For the lastseveral years, he. has been a presenter atthe bankruptcy portion of.~hebar Admis 13 ion.course.. andin1~95,a'so presented the receivership portion of thebar Admission. Course. He has. beeninvolvedwith the,. Canadian Bar A~sociation~s.ChairmanoJ the Legisi<:itive and Law Reform Review Committee.andasVlce-(jhairof the f\eatproperty Committee. Randy is currently a member of the Saskatoon lnsolvency Association and has served as a guest presenter for the Canadian Insolvency Practitioners Association in both Winnipeg and Edmonton. '. He recently served as a Committee Member of the' TaskForce making recommendations for changes to the Bankruptcy and InsolvencyAct. Randy is a partnerwith McDougall,Ready in its SaskCltoon office.,
) THE BANKRUPTCY AND INSOLVENCY ACT A WORD OF CAUTION TO THE UNINFORMED PRACTITIONER TABLE OF CONTENTS I. IN'TRODUCTION....................................... 3 II. NOTICE BY SECURED CREDITOR OF ITS IN'TENTION TO ACT ON ITS SECURITY 3 III. NOTICE BY A RECEIVER........................... 4 IV. ADDITIONAL NOTICES BY A RECEIVER................ 5 v. UNPAID SUPPLIERS RIGHTS........... 6 Unpaid Suppliers Unpaid Farmers, Fishermen and Aquaculturalists VI. SUMMARy... 7
3 I. INTRODUCTION The Bankruptcy and Insolvency Act (the "Act") has had a significant impact on the procedure to be followed by a secured creditor before the secured creditor enforces its security. Concerns about reasonable notice and disclosure have led to the enactment of several new regulatory provisions. Concerns about the lack of remedies for unpaid suppliers have led to certain rights being given to suppliers, farmers, fishermen and aquaculturists. Practitioners will be required to know the basic fundamentals of the Notices required under the Act and the rights given to suppliers, farmers, fishermen and aquaculturists in order to properly advice clients. II. NOTICE BY SECURED CREDITOR OF ITS INTENTION TO ACT ON SECURITY Section 244(1) and 244(2) of the Act provides that a secured creditor who intends to enforce security on all or substantially all of the inventory, the accounts receivable or the other property of an insolvent person that was acquired for or used in relation to a business carried on by the insolvent person must send notice of that intention to the insolvent person prior to enforcing the security and will be precluded from enforcing its security until the expiry of ten (10) days after the sending of the Notice.. Rule 113.1 of the Bankruptcy Rules provides the manner in which such, notice must be given and references the proper form (Form 115) to be served on the insolvent person priorto enforcementtaking place. It should be noted, howeverthat an insolvent person may consent to an early enforcement ofthe security (Section244(2)) butthat such consent may only be given after the sending of the notice in question (Section 244(2.1)). Furthermore, no notice is necessary where a receiver has already been appointed (Section 244(4)) or the debtor is already a bankrupt, as the definition ofan insolvent person excludes a person who is bankrupt. In addition, no notice need to be given where the secured creditors right to realize on its security is protected as a result of the debtor having filed a proposal which did not include the secured creditor (Section 244(3) and Section 69.1(5)); where the secured creditor is in a class of secured creditors who voted the refuse the proposal made by the insolvent person (Section 244(3) and Sectioll 69.1(b)); or where a Court Order has been obtained lifting the stay of proceedings (Section 244(3)(b)) pursuant to Section 69.4. In certain circumstances, a demand for payment by a creditor can be served at the same time as the Notice of Intention under Section 244 of the Act. (See Delron Computers Inc. vs. Peat Marwick Thome Inc. et ai. (1995) 31 C.B.R. (3d) 75 Sask. Q.B.). A postponement of enforcement, in the absence of a new agreement which either restricts or impedes the rights created by the original security agreements, will not result in the secured creditor being required to serve a new Notice of Intention. (See Delron Computers Inc. vs. Peat Marwick Thome Inc. et ai, Sllpra).
4 The most difficult problem for secured creditors is the factual determination of whether or not a secured creditor will be enforcing security on "all or substantially all of' the inventory, the accounts receivable or the "other" property ofthe insolvent person. No guideline has been given as to the definition of "substantially all". There has been some suggestion that ifthe Income Tax guidelines are followed, then "substantially all" will mean in excess of 90%. However, we do not have any specific guidelines as of yet and accordingly, the definition will have to be determined by case law. Presumably, mostpractitioners will send the notice ifthere is any doubt. The second very significant determination that has to be made is whether or not the borrower is an "insolvent person" with in the meaning ofthe Act. Although the obvious test of insolvency is where your debts exceed your liabilities, the definition of an "insolvent person" also includes a person who for any reason is unable to meet his obligations as they generally become due or who has ceased payinghis current obligations inthe ordinary course ofbusiness as they generally become due. These determinations are all factual determinations which will have to be reviewed with your client prior to making a determination as to whether or not the client will be required to comply with the notice provision. Practitioners should not assume that a ten (10) day notice period will be "reasonable notice" of a demand for payment. The common law will still be applicable to any determination as to what is a reasonable period between the date of demand on a Borrower and the date that the secured creditor enforces its security. In addition, although a demand for payment and Notice under Section 244(1) of the Act are generally given concurrently, there are still some authors that suggest that on demand loans, the secured creditor should make a demand for payment before giving notice under Section 244(1) ofthe Act, arguing that until the demand period has expired, the creditor cannot have "an intention to enforce its security". Although such comments have received some criticism (see Delron Computers Inc. v. Peat Marwick Thome Inc. etat supra. at page 84), practitioners should be aware that no appellate court has commented on the matter as of yet. III. NOTICE BY A RECEIVER Section 245(1) of the Act requires a receiver to send notice of his appointment within 10 days of his appointment to the Superintendent in Bankruptcy; the insolvent person; and all creditors of the insolvent person. In the case of a Bankruptcy, notice need only be sent to the Superintendent in Bankruptcy and to the Trustee. Rule 113.2 ofthe Bankruptcy Rules references the prescribed form of notice that must be sent and Rule 119 sets a fee of $70.00 payable to the Superintendent in Bankruptcy. These particular provisions have generated a significant amount of controversy as to what constitutes a "Receiver" within themeaning ofthe Bankruptcy andinsolvency Act. The definition of Receiver is found in Section 243(2) of the Act. The section was considered in Farm Credit Com. v. Corriveau (1993) 6 W.W.R. 360 (Sask. Q.B.). Justice Baynton held that the new
) 5 section was not intended to completely redefine the concept of a receiver, nor to legislate into existence a whole new concept ofreceivership. Foreclosure proceedings were not intended to be caught by the definition of a receiver. A Secured Creditor who acquires possession of secured property is not a receiver under s. 243(2) unless: 1. he is appointed or authorized by the terms of the security agreement, or a court order, to take possession of and dispose of the secured property; and 2. he takes possession of the secured property under the authority of and by means of the security agreement, or the receivership order, and not by some other extraneous means, such as by a foreclosure or a voluntary transfer. Practitioners should also be aware of the case Re: Color Box Ltd. (1995) 29 C.B.R. (3d) 262 which considered Farm Credit v. Corriveau. supra. and held that a person who voluntarily obtains possession of all of the inventory of a bankrupt from the bankrupt's trustee will be held to be a receiver for the purposes of Section 243 of the Act. The court held that the trustee was not acting in a voluntary manner when it handed over the inventory to the secured creditor because it had no option but to do so after it obtained a legal opinion that the security was valid. Practitioners should be careful as to what may be considered a "voluntary" transfer ofthe security in light of these decisions. IV. ADDITIONAL NOTICES BY A RECEIVER If you become a Receiver within the meaning of the Act, Section 246(1) and Rule 113.3 requires the Receiver, upon taking possession or control, to prepare a statement containing the names of all creditors and the amounts owing to them; a list of the assets in the possession or control of the Receiver and their book value; and information as to the Receiver's intended plan of action "as far as it may be known at that time". This statement must be sent to the Superintendent in Bankruptcy, the insolvent person or the Trustee (in the case of a Bankruptcy) and to any creditor who requests a copy of same up to six months after the end of the Receivership. In addition, Section 246(2) of the Act and Rule 113.5 require that a Receiver prepare interim reports at least once every six months. These reports must set out an interim statement of receipts and disbursements and disclose the property remaining inthe control ofthe Receiver and not yet disposed of and any other significant information regarding the Receivership. Reports must be provided to the Superintendent in Bankruptcy, the insolvent person or the Trustee (in the case of Bankruptcy) and to any creditor who requests a copy of the reports. Section 246(3) also provides that upon the completion of the Receivership, the Receiver must prepare a final report as prescribed by Rule 113.6 ofthe Rules which report must contain a final statementof the receipts and disbursements; an explanation of the disposition of the proceeds of the Reeffiership; details of the disposition of any property disposed of but not accounted for in the statement of receipts and disbursements and any other significant information regarding the
6 Receivership. V. UNPAID SUPPLIERS RIGHTS UNPAID SUPPLIERS Section 81.1 ofthe Act gives certain rights to unpaid suppliers which mirror the rights presently enjoyed by such persons in the Province of Quebec. An unpaid supplier has the right to repossess, at his own expense, unpaid goods which were sold and delivered to a purchaser ifthe purchaser is bankrupt or in receivership and provided that the following conditions are met: (a) (b) the supplier must demand possession of the goods within 30 days after delivery; the purchaser must be either bankrupt or in receivership; (c) the goods must be in the possession of the purchaser, Trustee or Receiver;. (d) (e) (f). the goods must be identifiable and not fully paid for; the goods must be in the same state as when delivered; and the goods must not have been sold at arms length or subject to any agreement for sale at arm's length; The purchaser, Trustee or Receiver has the right to pay the balance outstanding once the demand has been made. Where goods have beenpartiallypaid for, repossession ofa portionofthe goods will be permitted. If the partial payment made for the goods is reimbursed to the purchaser, trustee or receiver, the supplier may repossess all ofthe goods. Goods subject to an Agreement for Sale on the date on which the demands for repossession were given were held not to fall within the section. Re Commercial Body Builders Ltd. (1993) 21 C.B.R. (3d) 218. Once the supplier has established his rightto repossess, he will have 10 days to retake possession ofthe goods unless such time frame is extended by mutual agreement. The suppliers right to repossess will rank. ahead ofany other claim against the goods other than the right of a bona fide subsequent purchaser who did not have notice that the supplier had demanded repossession ofthe goods. Because of the limitations imposed on the identifiability and condition of the goods as well as the time constraints of this legislation, it remains to be seen whether or not the rights of the supplier will have any practical significance to secured creditors. I i
UNPAID FARMERS. FISHERMEN AND AQUACULTURALISTS 7 Section 81.2 of the Act purports to give some protection to farmers, fishermen and aquaculturalists. These rights are above and beyond the unpaid suppliers rights as usually the goods of farmers, fishermen and aquaculturalists are immediately processed or resold upon receipt. Such claims will be secured by a charge on all of the purchaser's inventory and has priority to every other claim except a suppliers right under the Act. In order to qualify, the goods must have been delivered to the purchaser within a 15 day period proceeding the day on which the purchaser became bankrupt or the day on which the purchaser was placed into receivership. If delivery occurred within that time frame, the goods will be secured by a charge on all ofthe inventory ofthe purchaser as ofthe day on which the purchaser became bankrupt or the day on which the purchaser was placed into receivership. Ifthe Trustee or Receiver takes possession of the inventory covered by the charge, the Trustee or Receiver is liable for the claim ofthe farmer, fisherman or aquaculturalists to the extent ofthe net amount realized on the sale of the inventory. The right ofthe farmer, fisherman or aquaculturalists is exercised by filing a Proof of Claim with the Trustee or Receiver within 30 days after the Bankruptcy or Receivership begins. The farmer, fisherman or aquaculturalists has the right to repossess the inventory covered by the charge granted by this section. VI. SUMMARY The Bankruptcy andinsolvency Act has added a new source ofconcern to practitioners in the area of security enforcement and to practitioners advising clients who supplied goods on the eve of a bankruptcy or insolvency. Although most practitioners do not concern themselves with the Bankruptcy provisions ofthe Act, it is essential that all practitioners have a working knowledge of the notice requirements of the Act and the rights of suppliers in order to be in a position to properly advise clients.
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