Disposition of assets in a bankruptcy, a proposal (Division I), or a notice of intent

The Act goes into some detail about how various interested people may dispose of property, depending on the context. These people are the Licensed Insolvency Trustee (LIT) in cases of bankruptcy and the debtor in cases of proposals (including the intent). Issues differ from one situation to another.

Disposition of assets in a bankruptcy

Bankruptcy results in liquidation. The LIT must therefore realize the assets of the bankrupt person, meaning they must “transform” these assets into money for the benefit of the creditors. Section 30 of the Act is one of the provisions that define how to proceed.¹

30 (1) The trustee may, with the permission of the inspectors, do all or any of the following things:

• (a) sell or otherwise dispose of for such price or other consideration as the inspectors may approve all or any part of the property of the bankrupt, including the goodwill of the business, if any, and the book debts due or growing due to the bankrupt, by tender, public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;
• (…)
• (c) carry on the business of the bankrupt, in so far as may be necessary for the beneficial administration of the estate of the bankrupt;
• (…)
• (f) 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 to security and otherwise as the inspectors think fit;
• (g) incur obligations, borrow money and give security on any property of the bankrupt by mortgage, hypothec, charge, lien, assignment, pledge or otherwise, such obligations and money borrowed to be discharged or repaid with interest out of the property of the bankrupt in priority to the claims of the creditors;
• (…)
• (j) divide in its existing form among the creditors, according to its estimated value, any property that from its peculiar nature or other special circumstances cannot be readily or advantageously sold;
• (…)

If no inspectors

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

Sale or disposal to related persons

(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.

Related persons

(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) a director or officer of the bankrupt;
• (b) a person who has or has had, directly or indirectly, control in fact of the bankrupt; and
• (c) a person who is related to a person described in paragraph (a) or (b).

Factors to be considered

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

• (a) whether the process leading to the proposed sale or disposition of the property was reasonable in the circumstances;
• (b) the extent to which the creditors were consulted;
• (c) the effects of the proposed sale or disposition 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 otherwise 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 any other offer made in accordance with the process leading to the proposed sale or disposition of the property.

The text from the Act, cited above, means the LIT can proceed to dispose property according to the following:

1. With the permission of the inspectors, if there are any
2. On their own initiative if no inspector has been appointed by the creditors during an assembly for that purpose.

However, there are exceptions in cases of disposition or sale to related persons.

The definition of a person related to the debtor that is a legal entity is given in subsection (5), listed above. In such cases, whether or not there are inspectors, the LIT must ask the court to rule on this disposition. The court will consider the factors listed in subsection (6) when deciding whether to grant authorization to proceed with disposal.

Disposition of assets in a proposal (Division I) and notice of intent

Debtors submit a proposal to settle their debts or a notice of intent to their creditors for approval, as needed. Generally, a proposal is used by debtors who intend to continue operations to meet the obligations of their proposal.

The creditors receive various details about the debtor’s business to support the merits of the proposal. They know the assets and liabilities, have projections of income and expenses, and can develop an idea of how reasonable the debtor’s proposal is. They can estimate the likelihood of success based on this information.

Consequently, the debtor should not be able to dispose of assets (outside the normal course of business) to change the structure of the company or endanger its ability to implement and realize the proposal.

Section 65.13 of the Act, included here, governs this situation:²

Restriction on the disposition of assets

65.13 (1) An insolvent person in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(1) may not sell or otherwise dispose of assets outside the ordinary course of business unless authorized to do so by a court. Despite any requirement for shareholder approval, including one under federal or provincial law, the court may authorize the sale or disposition even if shareholder approval was not obtained.

(…)

Notice to secured creditors

(3) An insolvent person who applies to the court for an authorization shall give notice of the application to the secured creditors who are likely to be affected by the proposed sale or disposition.

Factors to be considered

(4) In deciding whether to grant the authorization, the court is to consider, among other things,

• (a) whether the process leading to the proposed sale or disposition of the property was reasonable in the circumstances;
• (b) whether the trustee approved the process leading to the proposed sale or disposition;
• (c) whether the trustee filed with the court a report stating that in their opinion the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
• (d) the extent to which the creditors were consulted;
• (e) the effects of the proposed sale or disposition on the creditors and other interested parties; and
• (f) whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.

Additional factors — related persons

(5) If the proposed sale or disposition is to a person who is related to the insolvent person, the court may, after considering the factors referred to in subsection (4), grant the authorization only if it is satisfied that

• (a) good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the insolvent person; and
• (b) the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition.

Related persons

(6) For the purpose of subsection (5), a person who is related to the insolvent person includes

• (a) a director or officer of the insolvent person;
• (b) a person who has or has had, directly or indirectly, control in fact of the bankrupt; and
• (c) a person who is related to a person described in paragraph (a) or (b).

This section makes it clear that the disposition of assets in the context of a proposal is much more strictly regulated; in particular it must always be submitted to a court for approval.

The debtor and the Licensed Insolvency Trustee must clearly demonstrate to a court

• that the creditors have been notified of the intended disposition, especially those that have a lien on the debtor’s property;
• that it will benefit the realization of the proposal, and in what way;
• the reasons leading to the decision to proceed with the sale;
• that this disposition will be made at its fair value.

If the disposition is made in favour of a related person (as defined in subsection 6 of the above section), it must also be demonstrated that the property to be disposed has been offered to unrelated persons and that the consideration to be received from the related person would be superior to any other offer otherwise received.

In summary

The main takeaway is that disposition of property by the debtor is subject to a much more restrictive mechanism for a proposal than for a bankruptcy. This is because, in a proposal, the debtor is making a commitment to creditors to continue operations for the purpose of reducing the losses they would have incurred if the debtor had declared bankruptcy. Therefore, the LIT, the court, and, especially, the creditors must be allowed to examine any proposed disposition to ensure it does not endanger a filed or future proposal.

If you have more question about disposition of assets or other insolvency related topic, please do not hesitate to contact us.

¹Irrelevant subsections were removed from the quoted section for this article.

²Again, irrelevant subsections were removed from the quoted section for this article.