doing business in canada - Davies Ward Phillips & Vineberg LLP

BANKRUPTCYBankruptcy results in the liquidation of an insolvent entity either voluntarily or involuntarily. It can be initiatedeither by the debtor itself or by its creditors. Upon an assignment into bankruptcy or the issuance of abankruptcy order, all of the property, assets and undertaking of the bankrupt (subject to the interests of securedcreditors) vest in a bankruptcy trustee for the general benefit of creditors.Thereafter, the bankruptcy trustee will realize against any unsecured assets. The proceeds will be distributed, inaccordance with the detailed rules set out in the BIA, to the unsecured creditors that have proven claims on apro rata basis, subject to the payment of certain Crown claims, statutorily mandated preferred claims andsecured claims. Other than statutory rights of redemption by the bankruptcy trustee, bankruptcy does notaffect the rights of secured creditors or involve secured assets. Bankruptcy proceedings are not available tobanks, insurance companies, loan companies, trust companies and authorized foreign banks.BANKRUPTCY PROPOSALAn insolvent debtor may also restructure its affairs to avoid liquidation or seizure through the consensualcompromise of creditors' claims. This is referred to in the BIA as a proposal. However, because of the strictstatutory code and time frame governing proposals in the BIA, the most significant and complex Canadianinsolvency restructurings are not carried out as proposals to creditors under the BIA. If the restructuringrequires a sophisticated remedy that is not available under the BIA, for instance, if the debtor needs to maintainuninterrupted supply from critical suppliers who have no contract with the debtor, or if the restructuring processwill take longer than six months, the CCAA is typically the legislative framework used.A restructuring by way of proposal to creditors under the BIA is generally commenced by the filing of a notice ofintention to make a proposal that triggers a stay of proceedings. From the initial filing until the end of theprocess, a licensed trustee must have agreed to act in connection with the proposal. The BIA specifies that aproposal must be filed within six months of the beginning of the process. A proposal under the BIA may bemade to creditors generally, or the creditors may be separated into classes, based on commonality of interest. ABIA proposal may also be made to secured creditors. A BIA proposal is only deemed accepted if all classes ofcreditors vote in favour of the proposal by a majority in number and two-thirds in value of the creditors voting ineach class. In addition, the proposal is subject to the court's approval.Failure of a debtor to obtain the requisite approval of creditors, or the court's refusal to approve the proposal,will result in automatic bankruptcy. Banks, insurance companies, loan companies, trust companies andauthorized foreign banks cannot make bankruptcy proposals.RECEIVERSHIPReceivers may be appointed privately or by a court. Receivers will realize against the property, assets andundertaking of the debtor and will distribute the proceeds in accordance with the relative priorities of thedebtor's creditors. In addition, receivers may be appointed as receiver and manager with the authority tooperate the debtor's business as a going concern, or simply as a supervisor. The remedies available will vary inaccordance with provincial laws.In the context of a private receivership, secured creditors may exercise certain contractual or statutoryremedies to appoint a receiver over the property, assets and undertaking of a defaulting debtor. In that case,the receiver is appointed pursuant to a contractual power granted by the debtor to the creditor in the securitydocument. Ten days prior to the receiver's appointment, the secured creditor must give a statutory notice ofintention to enforce its security to the debtor.A court-appointed receiver is an agent neither of the debtor nor of any creditors. As an officer of the court, ithas some duties and obligations in addition to those specified in the appointment order. Its powers arespecifically defined in the appointing order. In certain circumstances, the BIA also gives the court the power toBankruptcy and Insolvency Proceedings 75