BANKRUPTCY Margot Hurlbert Legal Department, Saskatchewan Power 2025 Victoria Avenue Regina, Saskatchewan S4P 0S1

BANKRUPTCY Margot Hurlbert Legal Department, Saskatchewan Power 2025 Victoria Avenue Regina, Saskatchewan S4P 0S1 Revised 2002

Saskatchewan: Bar Admission Program ACKNOWLEDGMENT The original version of this paper was prepared for the Bar Admission Course by Margot Hurlbert. In 2002 the paper was updated by Conrad Hadubiak of MacPherson Leslie & Tyerman LLP (Regina). May 2002

Saskatchewan: Bar Admission Program i TABLE OF CONTENTS I. PURPOSES OF BANKRUPTCY...1 II. HOW IS BANKRUPTCY INITIATED?...2 A. VOLUNTARY ASSIGNMENT BY DEBTOR...3 1. Considerations...3 2. Procedure For Voluntary Assignment By Debtor...9 B. PETITION FOR RECEIVING ORDERS...11 1. Considerations...11 2. Grounds For Petition For Receiving Order...11 3. Procedure...12 4. Defences of Petition for a Receiving Order...13 5. Possible Court Dispositions (s. 43)...15 III. PROPERTY OF THE BANKRUPT (s. 67)...16 A. SCHEME OF DISTRIBUTION (s. 136)...18 B. AFTER-ACQUIRED PROPERTY...19 C. FRAUDULENT PREFERENCES AND SETTLEMENTS...20 IV. BANKRUPTCY PROCEDURE - AFTER THE ASSIGNMENT OR PETITION...24 A. MEETING OF FIRST CREDITORS (s. 102)...24 B. FIRST COUNSELING SESSION...25 C. SECOND COUNSELING SESSION...25 D. THIRD COUNSELING SESSION...25 E. DISCHARGE OF BANKRUPT...26 V. SECURED CREDITORS...28 A. PROOF AND VALUATION OF SECURED CLAIMS (s. 128(1))...28 B. INSPECTION (s. 79)...29 C. REDEMPTION (s. 128(3))...29 D. FORCED SALE (s. 129(1))...29 E. DISALLOWANCE OF CLAIM (s. 135)...29

ii Saskatchewan: Bar Admission Program VI. OFFENCES...29 VII. REMEDIES...30 A. FILE PROOF UNDER S. 81...30 B. APPEAL TO THE COURT UNDER S. 37...31 C. APPLY FOR LEAVE TO THE COURT UNDER S. 215...31 VIII. AN ASPECT WHICH AFFECTS EVERY DAY LIFE - NOTICE OF INTENTION...31 SCHEDULES: Schedule A - Consent to Appointment... A - 1 Schedule B: Application to Set Aside a Fraudulent Preference Notice of Motion...B - 1 Sample Affidavit...B - 3 Schedule C: Application Appealing Decision of Trustee Notice of Motion...C - 1 Sample Affidavit...C - 3

Saskatchewan: Bar Admission Program 1 I. PURPOSES OF BANKRUPTCY The purposes of bankruptcy are: i) to enable a debtor to divest himself of his assets for the purpose of obtaining an eventual discharge of his obligations in order that he may have the opportunity to re-establish himself, freeing him from the burden of debt; ii) to provide an expeditious and inexpensive method of compelling an insolvent debtor to relinquish his property to a Trustee for distribution amongst his creditors; and iii) to provide an independent investigation into the affairs and conduct of the debtor. The Supreme Court of Canada in Husky Oil Operations Ltd. v. Minister of National Revenue et al 137 Sask. R. 81 stated there are two purposes to the bankruptcy system. These are to ensure the equitable distributions of a bankrupt debtor s assets among the estate s creditors and the financial rehabilitation of insolvent individuals. In addition, the Bankruptcy and Insolvency Act, R.S.C. 1985, c.b-3 (the Act ) may have the following other purposes: i) allow an investigation to be made of the affairs of the bankrupt; ii) to permit the setting aside of preferences, settlements, and other fraudulent transactions such that all ordinary creditors may share equally in the bankrupt s assets; iii) a regime whereby creditors of a bankrupt may pursue their claims by collective action through the Trustee so the assets of the bankrupt can be realized and distributed on an equitable basis subject to the priorities of preferred creditors and the rights of secured creditors. Revised 1999

2 Saskatchewan: Bar Admission Program Generally, the courts will not interpret the Act overly narrowly and legalistically. The Act is a commercial statute to be administered by businessmen and technical objections are not given effect beyond what is necessary for the proper interpretation of the Act. The Act is an attempt to avoid litigation and court proceedings and maximize the return to creditors. However, there is still much room in the area for the involvement of knowledgeable legal counsel. II. HOW IS BANKRUPTCY INITIATED? Bankruptcy is the status of a person against whom a receiving order has been made or who has made an assignment into bankruptcy with a Trustee. Any person can have the status of bankruptcy, which is defined to include partnerships, unincorporated associations, corporations and cooperatives, societies or organizations. Many times the bankruptcy process is initiated by the debtor for the purpose of freeing the debtor from the burden of debts to allow a fresh start. This is called a Voluntary Assignment (s. 49(1)). The debtor will usually review their situation with a lawyer in order to get advice regarding bankruptcy and its effects in order to ascertain that it is the most appropriate option for the debtor. Often the bankruptcy process is initiated by a creditor who is concerned about its ability to collect from a debtor and judges that in the plethora of collection measures available that the bankruptcy route is the most beneficial. This is referred to as a Petition by a Creditor for a Receiving Order Against a Bankrupt (s. 43(1)). Revised 1999

Saskatchewan: Bar Admission Program 3 As well, proposals can be made pursuant to the Act and specifically the Division I proposals that, if not accepted by creditors or upon certain defaults of the debtor, will render the debtor bankrupt. This is the third method by which the bankruptcy process is initiated. A summary administration results if the realizable assets of the debtor after deducting claims of secured creditors will not exceed $10,000 and the debtor is not a corporation (s. 43(6), Rule 130). An ordinary administration will result if the realizable assets are greater. In a summary administration the fees of the Trustee are on a different scale than that of ordinary administration. The notice of bankruptcy and automatic discharge notices can be combined and moneys received by a Trustee in a summary administration can be deposited in a consolidated bank account. Generally this procedure expedites the bankruptcy and renders the administration of the smaller estates less expensive. A summary administration will only require a meeting of first creditors if requested by the creditors reflecting 25% in value of proven claims or the Official Receiver. A. VOLUNTARY ASSIGNMENT BY DEBTOR Before making an assignment into bankruptcy, a debtor should take into account the following: 1. Considerations (a) Is that person insolvent? In order to make an assignment a person must be insolvent. This is defined in s. 2 of the Act to be a person who is not bankrupt and whose liabilities to creditors provable are in excess of $1,000 and: i) who is unable to meet financial obligations as they generally become due; ii) who has ceased paying his current obligations in the ordinary course of business as they generally become due; or Revised 2002

4 Saskatchewan: Bar Admission Program iii) the aggregate of whose property would not, at a fair valuation or under a fairly conducted sale under legal process, be sufficient to enable payment of all his obligations due and accruing due. A person is defined as a partnership, an unincorporated association, a corporation, a cooperative society or an organization, the successors of a partnership, association, corporation, society or organization, and heirs, executors, liquidators of the succession, administrators or other legal representative of a person according to the law of that part of Canada to which the context extends. (b) What property will be retained by the bankrupt after discharge from the bankruptcy? During bankruptcy all property of the debtor (with the exception of that property described in s. 67(1)(a)(b) and (b.1) devolves unto the Trustee. It is important to be familiar with the provisions of the Exemptions Act and the Saskatchewan Farm Security Act and the Bank Act. It is also important to have a valuation of the amount of property of the debtor which is exempt, and the type. Although assets are exempt, they may still be a consideration in a debtor s discharge. In the case of Registered Retirement Savings Plans which were exempt and not part of the bankrupt s estate but amounted to $209,000 in Nelson (Bankrupt), Re; Pinder (Jeffrey) & Associates Ltd. v. Nelson (1995), 133 Sask. R. 178 (Q.B.) together with non-exempt equity in a home of $33,000 the bankrupt was ordered to pay $75,000 to the Trustee within three years in order to obtain a discharge from bankruptcy. Revised 2002

Saskatchewan: Bar Admission Program 5 Most secured creditors who prove their claims are given their security to realize upon. The Trustee may elect to redeem the security. If the bankrupt is current in payments to the secured creditor usually the secured creditor allows the bankrupt to retain the property and continue to make payments. Many security agreements do provide that it is an act of default under the security agreement to be bankrupt which would seem to allow the secured creditor the remedies available on default. A secured creditor when filing its claim will value its security and if there is a shortfall it will claim as an unsecured creditor for the balance remaining. The Trustee may elect to redeem a security on payment to the secured creditor either the debt owing or the value of the security as assessed in the proof of the security of the secured creditor. Then the Trustee could realize any surplus in value. (c) What creditors will the person have to pay regardless of bankruptcy? There will be certain debts, which the bankrupt will have to pay over and above those released in bankruptcy. These include things such as a mortgage on a residence which is exempt and which the bankrupt requires for living. Also, car loans and farm equipment loans which are purchase-money secured loans on those specific cars and pieces of equipment that the debtor requires for its farm or business will have to be paid unless the debtor is willing to lose that security to the secured creditor. Loans secured by Bank Act security as well need special attention. It is also important to keep in mind that although the bankruptcy will discharge all debt obligations it will not prevent a secured creditor from pursuing its security. If the security is a general security agreement the debt will be discharged in the Revised 1999

6 Saskatchewan: Bar Admission Program bankruptcy but the security will not be discharged within the bankruptcy. The registration will still remain at the Personal Property Security Registry as against the debtor and the property at the time. See Chetty v. Burlingham Associates Inc. (1992), 125 Sask. R. 249 (C.A.). (d) What debts will not be released in the bankruptcy process? (s. 178) The bankruptcy process does not release the bankrupt from: i) a fine, penalty, restitution order or debt imposed by a court or arising out of a recognizance or bail; ii) any debt or liability for alimony; iii) child or spousal maintenance; iv) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; v) any debt or liability for obtaining property by false pretenses or fraudulent misrepresentation; vi) any dividend a creditor would have been entitled to receive on any provable claim not disclosed to the Trustee unless the creditor had notice and failed to take any action to prove its claim; vii) a provincial or federal student loan if the date of bankruptcy occurs before the date the bankrupt ceased to be a student or within ten years the bankrupt ceased to be a full time or part time student; viii) any award of damages by a court in civil proceedings in respect of bodily harm intentionally inflicted, sexual assault or wrongful death resulting therefrom. Revised 2002

Saskatchewan: Bar Admission Program 7 At any time after ten years after a bankrupt who has a debt under (vii) ceased to be a student, the court may, on application, order that the debt is discharged if the court is satisfied: a. the bankrupt acted in good faith in connection with the bankrupt s liabilities under the loan; b. the bankrupt has and will continue to experience financial difficulty to such an extent the bankrupt will be unable to pay the liabilities under the loan. These rules as to student loans apply regardless of when the loan was incurred in relation to the April 30, 1998 passing of the enactment. However, the rules only apply to bankruptcies or proposals commenced after April 30, 1998. (e) Are there any advantages to be obtained for the bankrupt through the bankruptcy process? Upon review of a debtor s affairs you may come across improper perfection and registration by a secured creditor of their security interest at the personal property security registry. For the debtor who is not bankrupt this will most likely have no advantage as upon the creditor realizing the insufficiency it is most likely registration will occur and the creditor will salvage some rights vis à vis other creditors. Even without registration there will still be rights and obligations as between a debtor and secured creditor. However, if the debtor declares bankruptcy it is possible that the secured creditor will lose its rights as a secured creditor and be declared unsecured. This will only have immediate benefits to the debtor if the security of the creditor is exempt Revised 1999

8 Saskatchewan: Bar Admission Program property such that the bankrupt will be able to retain it in the bankruptcy process. If it is not exempt the property will be realized upon by the Trustee and instead of the secured creditor receiving it, it will be divided amongst unsecured creditors. This advantage occurred with respect to a farmer s grain in Rainbow Soil Services Ltd. v. Kada (1994), 130 Sask. R. 154 (Q.B.). (f) Are the debts of the bankrupt such that they might warrant a conditional discharge? In certain circumstances a bankrupt may be penalized depending on the type of debt which the bankrupt is seeking to avoid. An example is income tax of a professional or businessperson that is responsible for remitting their tax directly. In this situation there is a good chance that the bankrupt will not receive an absolute discharge but will receive a conditional discharge with the requirement that payments be made over the next several years. If this is the case it is sometimes easier to make a proposal to such a creditor prior to making an assignment in order to attempt to prevent the necessity and uncertainty of the bankruptcy process. (g) Will the debtor have to pay any surplus income to the Trustee? Section 68(3) of the Act directs that a Trustee shall fix the amount of a bankrupt s surplus income per month and take reasonable measures to ensure the bankrupt pays this amount to the estate. The Superintendent establishes in respect of the provinces or bankruptcy districts the standards for determining that portion of total income of an individual bankrupt that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living. Total income for this purpose is all revenues of a bankrupt of whatever nature or source. Revised 1999

Saskatchewan: Bar Admission Program 9 Once the Trustee has set the amount, the bankrupt may request mediation if the bankrupt disagrees with the amount set. As well, if the Official Receiver determines that the amount required to be paid is substantially not in accordance with the applicable standards it may recommend to the Trustee an amount be paid. If the Trustee does not agree with the Official Receiver s recommendation then the Official Receiver can request the Trustee refer the matter to court. In addition the Trustee may refer the matter to court on the request of the inspectors, any of the creditors. 2. Procedure For Voluntary Assignment By Debtor (a) Appointment with Trustee in bankruptcy and disclosure of all Assets and Liabilities A debtor will, after meeting with a lawyer and reviewing the ramifications of bankruptcy, then meet with a Trustee to ascertain the actual mechanics of how and when the process will occur. (b) Assignment into bankruptcy by debtor The chosen Trustee will prepare the necessary forms and required statements and upon filing them with the Official Receiver the assignment into bankruptcy is operative. The Official Receiver appoints a Trustee upon the filing of the documents but this appointment must be ratified at the first meeting of creditors. The creditors may substitute another Trustee. Revised 1999

10 Saskatchewan: Bar Admission Program (c) Stay of Proceedings (s. 69(1)) Upon the assignment into bankruptcy, a stay is imposed as against all creditors of the bankrupt. No further actions such as garnishment or seizure or commencement/continuation of legal actions can occur without leave of the bankruptcy court. (d) Notification to Creditors to File Proofs of Claim A bankrupt will have given a Trustee a listing of all the creditors of the estate. The Trustee then notifies, within five days of the Trustee s appointment, the creditors of the assignment and at the same time provides notice of the first meeting of creditors (or in summary administrations, the ability to request a first meeting). (e) First Meeting of Creditors Section 102 of the Act provides that this first meeting must be within twenty-one days of the Trustee s appointment. This may be extended in special circumstances. The purpose of the meeting is to consider the affairs of the bankrupt, appoint inspectors, confirm the appointment of the Trustee and give such direction to the Trustee as the creditors may see fit. One creditor entitled to vote or the representative of such creditor constitutes a quorum. Creditors must have proofs of claim filed with the Trustee in order to have standing at this meeting. All questions at meetings of creditors other than otherwise provided by the Act are decided by resolution carried by the majority of votes calculated on the basis of one vote for each dollar of every claim of a creditor that is proven. Fully secured creditors do not have the right to vote at meetings of creditors. Revised 1999

Saskatchewan: Bar Admission Program 11 B. PETITION FOR RECEIVING ORDERS 1. Considerations (a) Are there advantages over other methods of debt enforcement? (b) Have there been any fraudulent preferences? (c) Will it prevent dissipation of assets? (d) Would priority over a landlord or statutory claim be gained? (e) Is the person engaged principally in farming or fishing? (f) Can the cost of the Petition and uncertainty of the outcome of the Petition be justified in light of realizable property of the bankrupt? 2. Grounds for Petition for Receiving Order In order for a creditor to petition for a receiving order against a bankrupt, the creditor must show that: i) the debts of the debtor exceed $1,000; and ii) the debtor has committed an act of bankruptcy within six months preceding the filing of the Petition. The following are considered acts of bankruptcy under s. 42(1)(n) of the Act: i) a debtor making an assignment of his property to a Trustee for the benefit of his creditors generally; ii) the making of a fraudulent preference or conveyance, gift, delivery or transfer of his property, or with intent to defeat creditors, departs out of Canada or his dwelling-house while remaining in Canada; Revised 1999

12 Saskatchewan: Bar Admission Program iii) iv) allowing a sheriff to seize property under execution till within five days of the date fixed for its sale. Also, if the debtor s property is sold by the sheriff for execution or other process and monies have been held by the sheriff for a period of fifteen days after written demand for payment without seizure or the return of a writ with the statement the sheriff can find no property to take; the presentation to any meeting of creditors of a statement of assets and liabilities that shows the debtor is insolvent or of a written admission by the debtor of inability to pay debts; v) the actual or attempted removal or disposal of assets with intent to defraud, defeat or delay creditors; vi) vii) viii) the giving of notice to any creditors that one is or is about to suspend payment of debts; the default in any proposal made under the Act; and ceasing to meet liabilities generally as they become due. 3. Procedure To obtain a receiving order against a bankrupt, you must prepare an application, including: i) Petition for a Receiving Order; ii) iii) iv) Affidavit of Petitioner or duly authorized designate having personal knowledge of the facts alleged in the Petition; Affidavit of Truth of Statements in Petition; Consent to Appointment, to be executed by the Trustee; v) Notice of Hearing; and vi) Draft Receiving Order. Revised 1999

Saskatchewan: Bar Admission Program 13 Precedents of these materials can be found by going to the website of the Superintendent of Bankruptcy Canada at http://strategis.ic.gc.ca/epic/internet/inbsf-osb.nsf/en/home and following the links to the forms and in Schedule A. You must serve the debtor (personally), the Trustee named in the Petition and Division Office (registered mail) not less than ten (10) days before the date set for a hearing unless the court abridges same under Rule 71(1). The debtor must file a notice contesting the allegations contained in the Petition in order to contest the application and serve it two clear days before the hearing. Failure to do so may be excused by the court or may result in the Petition proceeding unopposed before the Registrar in Bankruptcy. 4. Defences of Petition for a Receiving Order (a) (b) Deny allegation of the act of bankruptcy. Counterclaim against the creditor. The counter claim could have the effect that monies owing to creditor will be less than $1,000. (c) Debtor s principal occupation is as a fisherman or farmer. This protection is not extended to farming partnerships, corporations, associations or cooperatives. The onus of proving that the debtor is not so protected is on the creditor. In ACS v. Nagy (1993), 110 Sask. R. 200 (Q.B.) the creditor attempted to allege a farmer farmed in partnership with his wife and thus was not protected by the Act. The onus of proving the debtor was not a farmer as defined under the Act was found to be on the creditor. Prior to 1998, the Act had used the words solely engaged in farming. The Saskatchewan Court of Appeal had taken a rather strict view of the requirement that the farmer be engaged solely in the occupation of farming. In Newell v. McIvor (1996), 141 Sask. R. 114 (C.A.) a farmer who received $560 per month to

14 Saskatchewan: Bar Admission Program act as a building manger for two apartments was found not to qualify for the protection afforded by this section. It is now open to the courts to determine the meaning of principally ; (d) Creditor has undervalued its security A secured creditor s valuation will not be subjected to rigorous scrutiny unless it can be shown to be a sham or absurdly low. (Re Fengar Investments Corp. (1993), 17 C.B.R. (3d) 167.) Also see Royal Bank v. Anaheim Management Ltd. wherein it was found to be insufficient to state the petitioning creditor had overstated its debts and undervalued the security. The debtor had to establish in addition that it was able to pay its debts as they became due. In Moody v. Ashton, 158 Sask. R. 286 (C.A.) the Chambers Judge receiving order was set aside as the Judge had erred in that the issues if Ashton had met his financial obligations to Moody s under partnership agreements was in dispute. The alleged bankrupt proved to the Court he was able to pay his debts and had the means of paying his debts. Section 43(7) of the Act states that the Petition may be dismissed if the court is not satisfied with the proof of the facts alleged in the Petition, the service of the Petition or is satisfied by the debtor that the debtor is able to pay its debts or for other sufficient cause no order ought to be made. The onus to show sufficient cause is on the debtor. In addition to the aforementioned arguments, a debtor may argue that if given a fair chance the debtor will be able to meet obligations to creditors, there is nothing to be gained from a bankruptcy but additional costs, there are no assets which to pass through a bankrupt estate, there may be the loss of a potential asset if put through bankruptcy (i.e., a cause of action ). Revised 1999

Saskatchewan: Bar Admission Program 15 In Vawn Cattle Co-operative Ltd. v. Beausoleil, 147 Sask. R. 313 the Saskatchewan Court of Queen s Bench held that although a petition erroneously stated the amount of the debt, there was no doubt it exceeded $1,000 and several facts proved it existed. Also, where several acts of bankruptcy were alleged in the petition, only one act of bankruptcy within the statutory period needed to be proven for a receiving order to be made. 5. Possible Court Dispositions (s. 43) (a) Trial of an issue The court can order the trial of an issue (with or without the appointment of an interim Receiver) making an Order staying the proceedings under a Petition altogether or for a limited time on such terms and subject to such conditions as the court may think just. (b) Order Further Particulars (c) Dismiss the Petition The court can dismiss the application and make an Order staying the proceedings under a Petition altogether or for a limited time on such terms and subject to such conditions as the court may think just. (d) Allow a Petition and make a Receiving Order The Court, once it makes a Receiving Order, will appoint a Trustee. Once appointed, the Trustee sends Notices to all creditors. Within 21 days, a Notice of Meeting of First Creditors must be held. Revised 1999

16 Saskatchewan: Bar Admission Program III. PROPERTY OF THE BANKRUPT (s. 67) The property of a bankrupt which is divisible among his or her creditors is all of his or her property, wherever situated at the date of bankruptcy or that may be acquired by or devolved unto the bankrupt before discharge, but shall not include : i) property held in trust for any other person; ii) iii) iv) specific withholdings under the Income Tax Act (Canada), Canada Pension Plan, Employment Insurance Act and similar provincial legislation; any property exempt from execution under the laws of the Province where the property is situated and within which the bankrupt resides. There have been a few decisions which have held that exemption by provincial law applies to law applicable in the province whether enacted by the provincial legislature or by Parliament. (See C.I.B.C. v. Meltzer, 6 C.B.R. (3d) 1 (Man. Q.B.) and Jean-Germain Huot & Associes Inc. (1996), 42 C.B.R. (3d) 181 (C.S.Que.); and Goods and Services Tax Credit payments and prescribed payments relating to the essential needs of an individual as are made in prescribed circumstances. Much legal debate has centered around whether all property devolves to a Trustee upon an assignment or petition into bankruptcy and then the Trustee returns to the bankrupt that which is exempt or if the exempt property does not pass into the hands of the Trustee initially at all. In Rainbow Soil Services v. Kada, supra it was found that exempt assets are declared exempt and returned to the bankrupt upon such determination. As well in Toronto Dominion Bank v. Mulatz (1995), 5 W.W.R. (Sask. C.A.) it was held that lease-back right under the Saskatchewan Farm Security Act did pass unto the Trustee as property and because the Trustee did not return this property to the bankrupt as it was not exempt, it remained with the Trustee even after the discharge.

Saskatchewan: Bar Admission Program 17 This reasoning is confirmed by the Supreme Court of Canada in Ramgotra (Bankrupt) 141 Sask.R. 81 which held that s. 91 and s. 67 of the Act relate to two different stages of bankruptcy. Section 91 dictates that settled property will fall back to the estate of the bankrupt in the possession of the Trustee. Section 67 allows administrative powers over the estate. An exempt asset passes to the possession of the Trustee at the time of the bankruptcy, the exemption bars the Trustee from dividing the asset among creditors because of s. 67. As such, property that had been fraudulently settled by changing a designation of a beneficiary under a life insurance policy fell back to the Trustee pursuant to s. 91. However, as the life insurance policy was exempt, the Trustee could not divide it to creditors because of s. 67(1)(b). (See also Goertz discussed earlier in this paper.) Because the property devolves unto the Trustee from the bankrupt, the Trustee takes the property subject to the same rights and obligations the bankrupt had in the property. See Re J.W.O. Enterprises Ltd. (1981), 4 W.W.R. 540 (Q.B.). However, if a secured creditor is claiming security against a bankrupt and at the date of assignment the secured creditor did not have a perfected security interest pursuant to the Personal Property Security Act, 1993 the secured creditor will lose its secured status in the bankruptcy even though the secured creditor may have been able to pursue the debtor prior to bankruptcy as a secured creditor even without having made the necessary registration at the Personal Property Registry. Historically there has been many debates as to the deemed trust claims of provincial crown claims legislated by provincial statute. These have been clarified by specific legislative amendment to the Act dealt with under the scheme of distribution in s. 136 of the Act (see the heading A. Scheme of Distribution (s. 136) ). Now, the only such provincial crown claims which will qualify to priority not in these provisions are those which can establish a trust claim pursuant to the common law. Any trust claim qualifying under s. 67(1)(a) must arise under general principles of the law and not trusts deemed by provincial legislation. As such all

18 Saskatchewan: Bar Admission Program elements of creating and retaining a trust must be present. In Factory Window and Door Ltd. 135 Sask. R. 235 (Q.B.) it was held that a contractor who deposited payments it received for installed windows into its bank account and later went bankrupt did not hold funds in trust for a manufacturer. As a result, the manufacturer did not qualify for an elevated claim to the bankrupt estate by way of deemed trust for the statutory trust provisions under the Builders Lien Act. The possibility was left that had all requisites been met according to trust law (i.e., certainty of intent, object, and subject matter, holding the monies separate and apart etc., the detail of which are beyond the scope of this paper), some claim could have been made. A. SCHEME OF DISTRIBUTION (s. 136) Subject to the rights of the secured creditors, trust claims and specific statutory trust claims, proceeds realized from the bankrupt s property are applied as follows: i) if a bankrupt is deceased, against reasonable funeral and testamentary expenses of the bankrupt; ii) iii) iv) the costs of administration in the following order: (1) expenses and fees of a person acting under a superintendent s direction under paragraph 14.03(1)(a), expenses and fees of the Trustee; (2) expenses and fees of the Trustee; and (3) legal costs; Superintendent s Levy on payments made to by the Trustee to creditors; wages, salary or commission for services rendered during the six months preceding the bankruptcy to the extent of $2,000 and in the case of a traveling salesman, disbursements properly incurred by him to the extent of $1,000 and certain commissions on goods shipped in the previous six month period; v) any debt or liability for alimony, support, or maintenance for a spouse or child living apart from the bankrupt which have accrued in the year before the date of bankruptcy plus any lump sum amount that is payable;

Saskatchewan: Bar Admission Program 19 vi) vii) viii) ix) municipal taxes assessed within two years preceding bankruptcy that do not constitute a secured claim against the real property and limited to the value of the interest of the bankrupt in the property in respect of which the taxes were imposed; arrears of rent for a period of three months next preceding the bankruptcy and accelerated rent of up to three months following the bankruptcy if provided for in the lease to a maximum of the value of the realization from the property on the premises under lease, provided payment on account of accelerated rent shall be credited against the amount payable by the Trustee for occupation rent; the solicitor s Bill of Costs, including Sheriff s fees and land registration fees, incurred by the creditor first attached by way of Garnishment or lodged with the Sheriff and attachment, execution or other process against the bankrupt s property, to the extent of the realization from the property exigible thereunder; all indebtedness for withholding under the Workers Compensation Act, Employment Insurance Act, or Income Tax Act (Canada) if bankrupt before November 30, 1992 (see s. 86); x) claims resulting from injuries to employees of the bankrupt which the provisions of the Workers' Compensation Act do not apply, but only to the extent of monies received from persons or companies guaranteeing the bankrupt against damages resulting in such injuries; xi) claims of the Crown not previously mentioned in Right of Canada or in the Province, notwithstanding any statutory preference to the contrary if bankrupt before November 30, 1992; Any creditors whose rights are restricted by this scheme are entitled to rank as an unsecured creditor for any balance of claim due to that creditor. B. AFTER-ACQUIRED PROPERTY Section 67(1)(c) of the Act provides that all property of a bankrupt that is divisible among creditors is all property that may be acquired by or devolve on the bankrupt before their discharge. However, after-acquired property is different from other property of the bankrupt

20 Saskatchewan: Bar Admission Program inasmuch as until the Trustee intervenes, all transactions by an undischarged bankrupt with a person dealing with the bankrupt in good faith for value in respect of such property are valid and the person acquiring the property from the bankrupt receives good title. An exception to this rule is after-acquired property, which is exempt from execution and was purchased with the use of exempt property. It is not clear, however in the event exempt property is used to purchase non-exempt property. It has been held that the increase in value of the nonexempt property accrues to the benefit of the bankrupt estate. (See Re Chisick (1967), 62 W.W.R. 586 (Man. C.A.) in which the use of exempt wages to increase the value of non-exempt property was found to be for the benefit of the bankrupt estate.) However, in Re Torrie (Bankrupt) 112 Sask. R. 215 (Q.B.), exempt funds from a motor vehicle accident settlement which were used to purchase a Registered Retirement Savings Plan ( R.R.S.P ) prior to the bankruptcy and could be traced directly to the R.R.S.P. were found to continue to be exempt. The sale of exempt property for cash proceeds may also result in the loss of the exempt status of the cash proceeds. This is particularly true in light of the sale of a residence, which is otherwise exempt. Generally, if the sale is voluntary by the bankrupt the exempt status will be lost. This line of decisions is most recently affirmed by the Alberta Court of Appeal in Alberta Treasury Branches v. Wilson, [1996] 5 W.W.R. 130. There have been cases were if a sale were a forced sale the exempt status would not be lost. (See Re Neuls; Touche Ross Ltd. v. First City Trust Co. (1985), 56 C.B.R. (N.S.) 132 (Sask. C.A.).) C. FRAUDULENT PREFERENCES AND SETTLEMENTS A settlement is a contract, covenant, transfer, gift and designation of a beneficiary in an insurance contract to the extent the contract, covenant, transfer, gift or designation is gratuitous or made for merely nominal consideration. It is not necessary to prove a fraudulent intention on the part of the settlor in order to obtain an order setting aside a settlement. See Re Bozanich (1942), 23 C.B.R. 234 (S.C.C.). This has been reaffirmed in Ramgotra, infra where the Supreme

Saskatchewan: Bar Admission Program 21 Court of Canada stated that the intention of the settlor and her or her good faith is not relevant to the question of whether a settlement has been made within s. 91 of the Act. In contrast, however, intention is highly relevant where a settlement is challenged under provincial fraud legislation. If a settlement is made within one year prior to the date of the initial bankruptcy event, the settlement is void against the Trustee in bankruptcy. If the settlement is made in the previous five years of the initial bankruptcy event it will be void as against the Trustee if it can be shown that at the time of the settlement the bankrupt was unable to pay all debts without the aid of the property comprised in the settlement or the interest of the settlor in the property did not pass on the execution thereof. The date of the initial bankruptcy event in respect of a person is the earliest of the making of an assignment, the filing of a proposal, the filing of a notice of intention, the filing of a first petition for a receiving order which is deemed or the filing of a petition in respect of which a receiving order is made. A transaction will be found not to be a settlement if: i) it is protected as a settlement before or in consideration of marriage; or ii) iii) in favour of a purchaser or incumbrancer in good faith and for valuable consideration; or on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the settlor s spouse or children. Section 92 of the Act provides certain marriage contracts providing for future payment of money or settlements of property for which the settlor at the date of marriage had no interest are void as against the Trustee.

22 Saskatchewan: Bar Admission Program Any payment of money or transfer of property in respect of a settlor s marriage is void against the Trustee unless the person to whom the payment or transfer was made proves: i) the payment or transfer was made more than six months before the date of the initial bankruptcy event; ii) iii) at the time the settlor was able to pay all debts without the aid of the money or property allegedly paid; or the payment or transfer was made in pursuance of a covenant or contract to pay or transfer money or property expected to come to the settlor on the death of a person named in the covenant or contract and made within three months the money or property came into the settlor s possession or control. If such a payment or transfer is set aside, the recipient is able to claim for a dividend in the bankrupt s estate. Schedule B to this paper has a draft application setting aside a conveyance of land as a settlement. It is possible on the application for the court to proceed in a summary manner to try the question or issue, direct or settle any issue to be tried, give directions for the preparation and filing of pleadings and for the trial of the question or issue, or to make any further order as the court considers necessary or desirable. The onus of proof is the ordinary civil burden of proof being proof on a balance of probabilities. The effect is to find a settlement deemed to be the property of the bankrupt or to declare a conveyance void as against the Trustee and find the Trustee the owner of the bankrupt s interest in the property. A bankrupt will not enjoy the exemption exclusion from property, if property became exempt because of a fraudulent transfer or conveyance. In Ramgotra the Supreme Court of Canada held that if property became exempt by reason of a fraudulent conveyance declared void pursuant to

Saskatchewan: Bar Admission Program 23 provincial law, then the conveyance rendering property exempt is void against creditors by operation of provincial law and the property is not exempt from execution or seizure by creditors under provincial law. The reverse situation is not necessarily true. If property is exempt and a fraudulent conveyance or transfer is made, the conveyance will not be set aside and the exempt status retained. In Goertz v. Goertz, 137 Sask. R. 267, thirteen months prior to bankruptcy, a bankrupt transferred farm lands and the matrimonial home to his wife to repay alleged loans. These conveyances were declared void as against the Trustee. Because the transaction became void at the moment of bankruptcy and from the time of the impeached conveyance to the assignment in bankruptcy the husband had no interest in land he lost, his claim to the homestead exemption and the property was divisible amongst his creditors. A Trustee or creditor can rely on the provincial act, the Fraudulent Preferences Act, in order to set aside a transaction. Under this legislation those transactions in which proceedings are taken within 60 days of the transaction to set it aside are deemed void if the debtor is in insolvent circumstances and the transaction has the effect of giving the creditor a preference over other creditors. Outside this time limit the applicant must prove that the debtor is unable to pay their debts in full or that they know they are on the eve of insolvency and their is an intent to give a creditor a preference by both the debtor and the creditor. The onus is on the applicant or plaintiff to establish insolvency or the inability to pay debts in full pursuant to s. 5 of that Act. If for some reason at the time of the transaction alleged the debtor is not insolvent or it is not within the ability of the creditor or Trustee to prove insolvency, it is open to the Trustee or creditor to rely on the Statute of Elizabeth I, 1571, Ch.5, which is still in force in Saskatchewan. This statute allows an action to set aside fraudulent conveyances and assignments made with the

24 Saskatchewan: Bar Admission Program intent to hinder, delay or defraud creditors. However it must be proven that both the creditor and debtor participated in the fraudulent intent unless the conveyance is voluntary and then only the debtor s intent is relevant. See Bank of Montreal v. Vandine ( 1953), 1 D.L.R. 456 and Oliver v. McLaughlin (1893), 24 O.R. 41 (C.A.). IV. BANKRUPTCY PROCEDURE - AFTER THE ASSIGNMENT OR PETITION A. MEETING OF FIRST CREDITORS (s. 102) A first meeting of creditors must be held within 21 days following the day of the Trustee s appointment. With special circumstances this may be extended up to 30 days by the Official Receiver. This meeting can be held at the offices of the Official Receiver or such other place as the Official Receiver may fix. Most Trustees now utilize their own offices. The purposes of the First Meeting of Creditors are i) to confirm the appointment of the Trustee; ii) iii) to appoint inspectors; and to give such directions to the Trustee as the creditors may see fit with reference to the administration of the estate (s. 102 (5)). At the Meeting, creditors vote on the basis of one vote for each dollar value of every claim with creditors being grouped by category (i.e., preferred, secured, and unsecured).

Saskatchewan: Bar Admission Program 25 B. FIRST COUNSELING SESSION Prior to bankruptcy a First Counseling Session may be held to allow identification of available options. The purposes of this counseling session are: i) to provide the debtor with the opportunity to communicate their concerns, fears and distress; ii) iii) iv) to provide the counselor with the opportunity to immediately evaluate the situation to determine the extent of the problem; to allow the counselor to assess the debtor s financial situation and ability to pay; to allow the counselor to identify the options available to the debtor (e.g., orderly payment of debts, proposals, bankruptcy, etc.); and v) to have the counselor review the debtor s and creditors rights and responsibilities. C. SECOND COUNSELING SESSION This Second Counseling Session is compulsory and must be held between the 28th and 90th day after making an assignment or consumer proposal. The purpose of this session is: i) to understand or discover the root causes of financial difficulty; ii) iii) to assist the bankrupt or consumer debtor to seek remedies to deal with the root causes to avoid repeating the same pattern leading to financial difficulties; and to assist the bankrupt or consumer debtor to acquire money-management skills. D. THIRD COUNSELING SESSION This session is not mandatory. The purpose of this session is to provide additional information on budgeting, consumerism and, if bankruptcy is because of behavioral problems, on rehabilitation. The cost of the sessions is $85 per individual session or $25 per group session, which can be to a maximum of 20 bankrupts.

26 Saskatchewan: Bar Admission Program E. DISCHARGE OF BANKRUPT A bankrupt corporation may not apply for discharge unless it has satisfied the claims of its creditors in full (see s. 169(4) of the Act). For others, there are three methods of discharge: i) application prior to nine month period made by bankrupt pursuant to s. 168.1(2); ii) iii) automatic discharge pursuant to s. 168.1(1)(f) for first time bankrupt if no oppositions are filed; and opposed discharge by application of Trustee to court pursuant to s. 168.1(1)(e). If a Trustee makes recommendations for discharge, which a first time bankrupt disagrees with, the bankrupt may request mediation of the terms of their discharge. As well, the creditors and/or the Trustee may request mediation in the event the bankrupt did not pay the agreed amount of surplus income into the estate, or filed for bankruptcy instead of proposing a viable repayment plan or proposal. Where the issues are not resolved or the bankrupt fails to comply with the conditions as a result of the mediation, the Trustee applies to the court for an appointment for the hearing of the matter and the provisions relating to discharge hearing apply. Pursuant to s. 192 of the Act, the Registrar has the power to deal with all Orders of Discharge and not simply those which are not opposed. The Registrar can deal with these by telephone conference call, submission in writing and by personal attendance. If the objection is based on a point of law the Registrar will refer the case on to a judge of the Court of Queen s Bench. It is hoped that this power of the Registrar will allow for consistency of decisions from both a debtor s and a creditor s stand point and also that the matters will be dealt with expeditiously. All decisions of the Registrar can be appealed to the Court of Queen s Bench. A bankruptcy judge can only overturn a decision of the Registrar if the decision omitted the consideration of or misconstrued some fact, violated some principle of law or imposed conditions that are too onerous or severe. See Re Chaban,143 Sask. R. 136 (Q.B.).

Saskatchewan: Bar Admission Program 27 On the hearing of application by a bankruptcy for a discharge the court may: i) refuse a discharge of bankrupt; ii) iii) suspend the discharge for such period as the court thinks proper; or require the bankrupt as a condition to perform such acts, pay such monies, consent to such judgments or comply with other terms as the court may direct. Facts which influence the discharge order of the bankrupt (s. 173 of the Act), are: i) the assets of the bankrupt are not of a value equal to 50 cents on the dollar of the bankrupt s unsecured liabilities unless the bankrupt can satisfy the court this has arisen from circumstances for which the bankrupt cannot justly be held responsible; ii) iii) iv) the bankrupt has not kept such books of accounts that are usual and proper of the bankrupt s business within the three years immediately proceeding the bankruptcy; the bankrupt has continued to trade after becoming aware of being insolvent; the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt s liability; v) the bankrupt has brought on or contributed to the bankruptcy by rash and hazardous speculations or unjustifiable extravagance in living, gambling or culpable neglect of the bank s business affairs; vi) vii) viii) the bankrupt has put its creditors to unnecessary expense by frivolous or vexatious defence to any action properly brought against the bankrupt; in the three months immediately preceding the date of the initial bankruptcy, the bankrupt has brought a frivolous or unjustifiable action; the bankrupt has given an undue preference to any of its creditors within the three months immediately prior to the bankruptcy;

28 Saskatchewan: Bar Admission Program ix) the bankrupt failed to perform any duties imposed on the bankrupt under the Bankruptcy and Insolvency Act or to in the three months immediately prior to the bankruptcy, the bankrupt has incurred liabilities which make the bankrupt s assets equal to or less than 50 cents on the dollar on the amount of the bankrupt's unsecured liability; x) a previous bankruptcy; xi) xii) xiii) xiv) xv) fraud or fraudulent breach of trust; any Bankruptcy and Insolvency Act offence or breach of other statute in connection with the bankrupt s property, the bankruptcy or the proceedings thereunder; in respect of bankruptcies commenced after April 30, 1998, failure to comply with requirement to pay surplus income to the Trustee; in respect of bankruptcies commenced after April 30, 1998, the fact the bankrupt chose bankruptcy rather than a proposal to creditors as a means to resolve the indebtedness; or comply with any order of the court. V. SECURED CREDITORS Secured creditors may file a proof of claim claiming their security and claiming an amount as unsecured based on the valuation of their security or surrender their security to the Trustee for the general benefit of creditors and prove the entire claim as an unsecured creditor (s. 127). A. PROOF AND VALUATION OF SECURED CLAIMS (s. 128(1)) If the Trustee has knowledge of property that may be subject to a security the Trustee may serve notice and require the person to file a proof of the security and give particulars thereof.