Bankruptcy Creditors’ Rights in Canada

Each bankruptcy case is distinctive, and while there are fundamental principles, there is no universal approach for every situation. However, there are essential steps creditors can take in responding to a customer’s bankruptcy.

Recognizing the Unique Nature of Each Bankruptcy:

• Acknowledging Uniqueness: Recognize that each bankruptcy case is unique, demanding a tailored approach based on specific circumstances.

Responding to a Customer’s Bankruptcy Filing:

• Filing a Proof of Claim: To receive further notices, promptly file a proof of claim, registering you as a creditor eligible for a share in potential dividend payments.
• Attendance at Creditors’ Meeting: Attend the creditors’ meeting for insights into the administrator’s and Trustee’s actions, posing questions and addressing concerns.

In-Depth Involvement:

• Considering Inspector Role: Contemplate becoming an inspector for a more active role in crucial decisions during the bankruptcy proceedings.
• Inspector’s Role: Assist the Trustee in decisions like approving asset sales, initiating legal procedures, and reviewing financial statements.

Seeking Further Investigation:

• Right to Examine Under BIA: Utilize your right to examine the bankrupt under oath as per the Bankruptcy and Insolvency Act (BIA).
• Section 38 Motion: If further investigation is necessary, and the Trustee disagrees, any creditor can invoke Section 38 by filing a Motion to Court.  Creditors have the right under the BIA to take over the rights of the trustee against the bankrupt or any other party if the trustee is unwilling or unable to proceed.

Creditor Rights Under Section 38 of the BIA in Canada:

Authorization to Investigate:

A creditor, with court approval, can initiate an investigation into specific matters related to the bankruptcy estate.

Equivalent Powers to the Trustee:

The creditor, once granted Section 38 authority, possesses the same powers as the Trustee for the designated investigation.

Access to Information:

The authorized creditor can access relevant information, documents, and records to conduct a thorough investigation.

Legal Standing:

The creditor gains legal standing to take actions, make decisions, and represent the interests of the estate in the context of the approved investigation.

Valid Grounds for Investigation:

A creditor must have valid reasons for seeking an investigation under Section 38, such as suspected misconduct, mismanagement, assets that have not yet been realized upon by the trustee, or other actions impacting the bankruptcy estate.

• Court Approval: Initiating a Section 38 motion requires court approval. Creditors should prepare a compelling case, presenting evidence supporting the need for the investigation or the need to the creditor to take over the asset realization process.
• Notice to Creditors: Creditors should be aware that, upon filing a Section 38 motion, notice is typically provided to all known and proven creditors. Others may choose to join in the investigation and share associated costs and benefits from any asset recovery.
• Financial Viability: Creditors should assess the financial viability of the cost of any investigation or court action vs potential recovery. If there are limited assets, the costs of the investigation may impact potential recoveries.
• Collaboration with Other Creditors: Collaboration with other creditors can strengthen the case and distribute the financial burden. Creditors may consider inviting others to join the investigation or legal claims.  If a creditor is seeking to seize assets or actions belonging to the bankruptcy, only those participating in the S.38 action will benefit..
• Legal Counsel: Seeking legal counsel is crucial to navigate the legal complexities of Section 38 proceedings. Legal professionals can assist in preparing a compelling case and navigating the court process.  In some cases, legal counsel are willing to fund estate realization costs on a continent basis which can help to reduce the financial risk to the bankruptcy creditors. 
• Potential Litigation: Creditors should be prepared for potential litigation if their Section 38 motion is contested. A strong legal strategy is essential to address any challenges which starts generally with the agreement or blessing of the trustee of record.
• Communication with Trustee: Before resorting to Section 38, creditors must attempt to communicate with the Trustee and seek cooperation. Only if the Trustee is unwilling or unable to proceed, does Section 38 becomes a viable option.

Objecting to Bankrupt’s Automatic or Impending Discharge:

• Creditors also have the right to object to the debtor’s discharge.
• This involves asserting that the debtor should not be relieved of their debts due to misconduct, fraud, or other grounds.
• To do this, the creditor must take steps prior to the debtor’s automatic discharge date. 

Steps in Objecting to Discharge:

• Objecting creditors must file a formal objection with the court, the trustee and debtor, outlining specific reasons for contesting the discharge.  The reasons why a debtor can object to debtors discharge are outlined under S.173 (1) of the BIA  (https://laws-lois.justice.gc.ca/eng/acts/b-3/page-27.html)
• The trustee will then assist the creditor and debtor by finding a court scheduled date where a hearing is held to consider the objection.

• The objecting creditor must present evidence supporting their claim, demonstrating why the discharge should be denied.

Why to Object to a Bankrupt’s Discharge?

Protecting Creditor’s Interests:

• Objecting to discharge is a protective measure to safeguard the creditor’s interests.
• It prevents debtors from being released from their obligations if there are valid reasons for objection, such as fraudulent behavior or a failure to cooperate with the trustee’s investigation.
• Objecting to a bankrupt’s discharge means that a creditor wishes to extend the time the person remains a bankrupt, or to ask the court to compel the bankrupt to pay more into the bankruptcy estate, or a combination of both of these requests. 
• Sometimes, creditors who have a S.178 claim against a debtor do not bother with objecting to the bankrupt’s discharge as they would rather the bankruptcy be concluded so they can being collection action against the bankrupt. (See, s. 178 claims below)

Special Rights S.178 Debts – Fraud, Alimony, Child Support, Student Loans etc.

More information

• Subsection 178(1) of the BIA lists eight classes of debts that are not released by an order of discharge. These exceptions are based on an overriding social policy.
• During the bankruptcy process itself, creditors who feel that their claim against the bankrupts fall under S.178 of the BIA are subject to the Stay of Proceedings and cannot continue legal proceedings against the bankrupt without prior approval of the court
• Creditors cannot simply assert that their claim falls under S. 178, rather this is done by bringing an action in the ordinary civil courts, subject to the stay restrictions under the BIA to prove this fact.
• Creditors can bring this action while the bankruptcy process is ongoing, if the Stay is lifted by the courts.  Trustees often consent to a limited lifting of the Stay, only to allow the creditor to prove that claim falls under S.178 but not to continue collection action against the bankrupt until they are discharged.
• Alternatively, creditors with claims that fall under S.178 simply opt to wait for the bankrupt to be discharged from the bankruptcy process, and then bring a claim under S.178 to continue collection against the bankrupt post-discharge. 

Conclusion:

As a creditor in a bankruptcy, navigating the insolvency system in Canada requires adaptability and the knowledge to understand creditor rights. Assess the case’s particulars, utilize creditor rights, consider an active role, and, if necessary, explore options like objecting to the bankrupt’s discharge to protect your interests.

The appointed Licensed Insolvency Trustee is a wealth of knowledge and is there to assist creditor as well as debtors.  LIT do not work solely for the bankruptcy or the creditor.  Rather, the LIT who is an officer of the court, has an obligation to both debtors and to creditors to ensure that both are treated fairly as outlined under the Bankruptcy and Insolvency Act.