1E9Ct5D

Once a person or corporation is declaredbankrupt, a licensed trustee in bankruptcy isappointed and a stay of proceedings isimposed.The bankrupt’s property is vested in thetrustee and the trustee is then responsiblefor the administration of the bankrupt’sestate.The bankrupt’s unsecured creditors fileclaims for their debts with the trustee. As asecured creditor, it is important to ensurethat your security is properly registeredbecause the trustee is responsible to reviewthe validity of the security over thebankrupt’s assets and apply to the court toset aside security that is not valid. If thesecured creditor has valid security, subjectto a limited stay provision, the securedcreditor is entitled to take possession anddispose of the secured propertynotwithstanding the bankruptcy. To theextent that the amount of a securedcreditor’s debt exceeds the value of theproperty subject to its security, a securedcreditor may participate in the bankruptcyprocess and file a proof of claim for theunsecured portion of its claim.Generally, creditors will elect one or moreinspectors to guide the conduct of thebankruptcy proceedings. Where inspectorshave been appointed the trustee must workwith the inspectors and must obtain theconsent of the majority of the inspectors tosell assets, carry on the business of thebankrupt, commence or continue legalproceedings, or settle any claims made byor against the bankrupt estate unless thedecisions of the inspectors are overriddenby the creditors or the court.PrioritiesThe bankrupt’s creditors may includesecured creditors, preferred creditors and/orunsecured creditors.Secured creditors rank in priority tounsecured creditors in a liquidation;however, there are certain statutorilyprescribed super-priority claims (e.g.,government claims for source deductions)that will rank ahead of secured creditors.Unsecured creditors are entitled to sharepro rata in the realization of the bankrupt’sassets after payment of preferred creditorsand are subject to the claims of securedcreditors.Amendments made to the BIA and CCAA in2009 allow for debtor in possession (“DIP”)financing and recognize a “super-prioritycharge” for lenders who provide interimfinancing to debtor companies. Previously,courts invoked their inherent jurisdictionwhen authorizing DIP financing.DIP financing is only allowed if it has beenapproved by court order. In order for DIPfinancing to be approved, the existingsecured creditors must be provided notice.The DIP lender’s super-priority will survivein a bankruptcy even if the DIP restructuringfails.There are new super-priority claims createdin the CCAA and BIA for wages andpension arrears, and the WEPPA providesfor the payment of wage arrears in aninsolvency.Additionally, there are a number of otherfederal and provincial statutory liens anddeemed trusts that have priority overCommercial Reorganization and Insolvency Law 128