A corporate entity owes you $1,000 or more. Are payments no longer received as they are due? Has property been transferred, or intention to commit fraud demonstrated? To recover a sum of money, you have recourse to the Bankruptcy and Insolvency Act (BIA) by submitting an application for a bankruptcy order.
According to the BIA, it is possible to file an application against any corporate entity incorporated in Canada or that has facilities, activities, or goods in Canada.
To file this application, unsecured creditors must allege that the debtor
- Owes more than $1,000; and
- Has committed an act of bankruptcy within the six (6) months preceding the filing of the application.
The court may then issue a bankruptcy order at its own discretion to declare the corporate entity bankrupt. The court will then appoint a Licensed Insolvency Trustee (LIT) to administer the assets of the company.
Issuing a bankruptcy order on a debtor is an exceptional procedure with severe consequences. It should be used only in cases as provided by law. It exists for the benefit of all creditors of a debtor, not for a single creditor who could normally use ordinary recourse under the civil code (Quebec) or Common law (Ontario).
The bankruptcy order amounts to a seizure by garnishment before judgment. The debtor loses its assets, which will be administered by a judicial officer (LIT) from that point.
There may be cases where a single creditor can obtain a bankruptcy order if the evidence indicates special circumstances, for example, fraud committed by the debtor1.
Who can file an application?
Under section 43 of the BIA, an application for a bankruptcy order may be filed by one or more unsecured creditors.
A secured creditor may also file an application under one condition: they must be willing to give up their security for the benefit of all creditors if a bankruptcy order is issued. It is also possible to file an application for a bankruptcy order if the secured creditor provides an estimate of the value of their security, although they are unable to precisely evaluate it due to actions by the debtor and its entourage2. They may then be admitted as an unsecured creditor up to the extent of the balance of the debt due to them after deducting the value so estimated.
Confirming the existence of a $1,000 dollar debt
As noted above, the person or persons filing the application to the court must be owed a debt of at least $1,000. The court must confirm the existence of this debt. If in doubt, the application must be refused3.
Any claim, even if it has not yet come due, may be taken into consideration when determining whether the debt is at least $1,0004. As long as the court is satisfied that the debtor owes at least this amount to the claimant, the exact amount does not need to be determined.
There is no reason to suspend the application when there is disagreement on the amount owed to the petitioning creditor, except if it is possible that the debt is below the minimum amount5.
What is an act of bankruptcy?
By filing the application, it is also necessary to allege that the company committed an act of bankruptcy within the six months preceding filing the application.
Applications most frequently cite the debtor’s failure to pay its debts as they come due as an act of bankruptcy. For this allegation, the applicant must be able to demonstrate the existence of debt obligations besides their own as proof of the act of bankruptcy.
In rare cases, the courts have chosen some special circumstances6 where it is possible to file an application for a bankruptcy order without having to demonstrate the existence of other debt obligations. For example, if the applicant is the sole creditor or if they are owed a large debt for which they have failed to receive reimbursement despite repeated requests, or if the corporate entity committed fraud or admits that it is unable to pay its creditors.
Determining whether there is a failure to discharge obligations is, broadly speaking, a question of fact7.
A company also commits an act of bankruptcy in other cases, for example, if it fraudulently transfers, delivers, provides, or transports its property or if it surrenders, removes, hides, or disposes of part of its property with the intention to defraud, frustrate, or delay one or more of its creditors. These cases are less common as evidence of acts of bankruptcy in applications.
Verification of an application by affidavit: why is this important?
Under section 43 of the BIA, the application must be verified by affidavit of the applicant or of a person who is authorized to do so in their name and who has personal knowledge of the facts alleged to in the application.
The courts will reject any application not verified by affidavit.
Who is responsible for the burden of proof?
During the hearing, the court requires proof of the facts alleged to in the application, as well as the significance of those facts. If the evidence is satisfactory, the court will issue a bankruptcy order8.
The burden of proof falls on the applicant creditor, who must prove the facts alleged to in the application.
Bankruptcy proceedings being of a quasi-criminal nature, courts have repeatedly stressed that creditors who want to benefit from these proceedings must adhere rigorously to the law9. They require irrefutable evidence of the act of bankruptcy and of each allegation in the application10.
Which court should the application be filed with?
The application must be filed before the court in the debtor’s locality. This is an essential condition11.
Section 2 of the BIA defines the “locality of a debtor” as being the principal place where the debtor has carried on business during the year immediately preceding the initial bankruptcy event or where the debtor has resided during the year immediately preceding the initial bankruptcy event.
If the company has not carried on business in Canada during the year immediately preceding the bankruptcy event, the locality of the debtor is defined as the location where the largest part of the company’s property is located.
The applicant creditor must prove, if requested, that the application was filed in the locality of the debtor12.
Rejection of an application
Pursuant to rule 69 of the BIA, the original application for a bankruptcy order must be filed with and signed by the registrar. Additionally, the seal of the court must be affixed before a certified copy may be served.
Failure to comply with this rule is a substantive defect, which the court cannot resolve. Therefore, the application for a bankruptcy order served here is null and must be rejected13.
Under section 43 and rules 70–73 of the BIA, the court has sole discretion to issue a bankruptcy order. It can issue the order if the provisions in the BIA are respected. However, the application will be rejected if:
- The proof of facts alleged is not satisfactory;
- If the service of the application is not satisfactory;
- The debtor company has convinced the court that it is able to pay its debts; or
- The court deems it inappropriate to issue an order for another reason.
No order will be issued if:
- The debtor has a reasonable chance of escaping its financial difficulties and continuing its business;
- The application for a bankruptcy order is filed under false pretenses in a dispute between the parties and as a result of enmity; or
- The creditor refused to accept payment for the debt14.
Determining whether the debtor has failed to meet their obligations is in general an issue to be settled based on the evidence. Financial difficulties do not necessarily indicate an act of bankruptcy. The facts alleged to in an application for a bankruptcy order must be strictly proven. Therefore, if the court is not satisfied with the submitted evidence and disagrees with the approach of the applicant creditor, the application will be rejected15.
Contesting an application
If a debtor intends to contest an application, they must file a notice to the court. This notice must indicate which allegations the debtor intends to contest, the grounds for contesting, and its address for service.
The debtor must also serve a copy to the applicant or their lawyer at least two days before the date of the hearing scheduled in the application.
Contested applications cannot be heard by a registrar. Only a judge is competent according to the BIA. An application may only be made to the registrar if it is not contested.
In the case of a dispute, the debtor must challenge the claim or demonstrate that it has not committed an act of bankruptcy.
If the debtor presents financial statements or proves by other means that they are able to pay their debts, they are likely to succeed in having the application dismissed.
If the debtor disputes the application but does not appear at the hearing, the court may issue the bankruptcy order based on allegations contained in the application.
Note that a debtor can be justified in not having contested an application within the time prescribed by the Act. This may be the case if the debtor was in negotiations with its creditor and its waiver to contest the application for a bankruptcy order was not shown16.
Appointing a Licensed Insolvency Trustee
By issuing an order, the court or registrar must appoint a Licensed Insolvency Trustee as trustee of the debtor’s property. It must consider the wishes of the creditors insofar as the court deems equitable17.
This appointment is provisional or interim, as the creditors will not have confirmed the appointment at the first creditor meeting18.
Applications and bankruptcy orders being a complex subject, we cannot claim to have covered all possible related topics. That is why we invite you to consult a LIT at Ginsberg Gingras if you would like to or need to learn more about the subject.
1Affaire : Kaneb c. Canadian International Paper Co., (1968) B.R. 410
2Affaire : Marché central métropolitain Inc. et Sœurs du Bon-Pasteur de Québec, (1999), R.J.Q. 18 (C.A.), conf. (1998) R.J.Q. 177 (C.S.); REJB 1997-03052 (C.S.)
3Affaire : Masson V. Paul Georges Godin Ltée, (1978), 27 C.B.R. (N.S.) 303 (C.S. Qué.)
4Affaire : It’s Hear Co (1991), 8 C.B.R. (3e) 78, (Div. gén. Ont)
5Affaire : Black & White Sales Consultants Ltd, (1979), 33 C.B.R. (N.S.) 87 (C.S. Ont.)
6Affaire : Holmes and Sinclair, (1975), 20 C.B.R. (N.S.) 111, 9 R.J.O. (2e) 240, 60 D.L.R. (3e) 82 (H.C.)
7Affaire : Doerbecker, (1941), 22 C.B.R. 349 (C.S. Ont.), Affaire : O’Donnell, (1950), 31 C.B.R. 1 (C.S. Ont.), Affaire : Norseman, (1949), 30 C.B.R. 253 (Qué.)
8Affaire : Brown c. Gentleman, (1971) R.C.S. 501; (1971) 18 D.L.R. (3d) 161 (S.C.C.)
9Affaire : Little, 5 C.B.R. 244, 56 R.J.O. 196, [1925] 1 D.L.R. 395 (C.S.)
10Affaire : Holmes and Sinclair, (1975), 20 C.B.R. (N.S.) 111, 9 R.J.O. (2e) 240, 60 D.L.R. (3e) 82 (H.C.)
11Affaire : Allied Weaving (Canada) Ltd c. Affiliated Factors Corp., (1966) C.S. 348
12Affaire : Solloway, (1939), 20 C.B.R. 309 (C.A. Ont.)
13Affaire : Delaney Technologies Inc., 2017 QCCS 529
14Affaire : Jardin Prestige Ltée c. Genest, (1974) C.S. 199
15Affaire : MTM Electric Co. Ltd., (1982) 42 C.B.R. (N.S.) 29 (Ont. S.C.)
16Affaire : Soca Ltée : Soca Ltée c. Banque Nationale de Paris, J.E. 97-2041 (C.A.)
17Affaire : Matthews : Freed c. Kenilworth Corp., (1969) C.S. 252; Affaire : Brown c. Gentleman, (1971) R.C.S. 501; (1971) 18 D.L.R. (3d) 161 (S.C.C.)
18Affaire : Matthews : Freed c. Kenilworth Corp., (1969) C.S. 252