Bankruptcy and Insolvency: BIA, Proposals, Priorities, and Discharge
What the Exam Tests in Bankruptcy and Insolvency
The Bankruptcy and Insolvency domain tests the Bankruptcy and Insolvency Act (BIA), the Companies' Creditors Arrangement Act (CCAA), priorities among creditors, and the discharge process. Questions often turn on the timing of bankruptcy, the treatment of secured and preferred creditors, and the effect of a proposal.
Core Rules and Concepts
- Assignment and receiving order. A debtor may make an assignment in bankruptcy; a creditor may petition for a receiving order. Bankruptcy occurs on the date of the assignment or the receiving order.
- Stay of proceedings. Bankruptcy imposes a stay on unsecured creditors; secured creditors may realize on their security subject to the BIA.
- Priorities. Secured creditors rank first to the extent of their security. Preferred creditors under s. 136 include costs of administration, wages (to a statutory maximum), and municipal taxes. Unsecured creditors share the residue.
- Proposals. A consumer proposal under Division II requires payments within statutory limits and majority creditor approval. A commercial proposal under Division I requires court approval.
- Discharge. A first-time bankrupt may be discharged automatically after nine months unless opposed. Opposed discharges require a court hearing, and the court may grant an absolute, conditional, or suspended discharge.
- CCAA. Large insolvencies may use the CCAA, which requires a court-supervised plan of arrangement.
Worked Example
A debtor with $80,000 in unsecured debt and no assets assigns into bankruptcy. The trustee's fees and disbursements are paid first as costs of administration. Wages owing to employees are preferred up to the statutory maximum. The remaining unsecured creditors receive a dividend from the residue. If the debtor had instead filed a consumer proposal, the stay would prevent collection while the proposal was performed.
Traps That Cost Marks
- Treating secured creditors as part of the unsecured pool.
- Forgetting that preferred creditors rank ahead of ordinary unsecured creditors.
- Assuming automatic discharge applies to a second-time bankrupt.
- Confusing a consumer proposal with a Division I commercial proposal.
- Missing that the CCAA is court-supervised and available only to larger debtors.