Bankruptcy and Insolvency Law in Canada: An Overview

The Bankruptcy and Insolvency Act (BIA) is Canadian federal legislation governing bankruptcy, insolvency, and financial restructuring processes. It is designed to help Canadians who find themselves unable to repay their debts.

July 1, 2020 marked the centenary of Canada’s foundational bankruptcy statute. Parliament passed the Bankruptcy Act in 1919 and it came into force the following year. The 100th anniversary of this statute gives reason to pause to consider its origins and importance. As Jacob Ziegel writes, the Bankruptcy Act “still provides the conceptual framework for the current Bankruptcy and Insolvency Act.”[1] What makes this statute even more remarkable is that it was Canada’s first bankruptcy statute after a near forty-year hiatus. Between 1880 and 1920, there was no federal bankruptcy legislation in Canada.

Historical Context of Bankruptcy Law in Canada

Bankruptcy law has long been accepted as a necessary feature of modern commercial law. However, in nineteenth and early twentieth century Canada, the dominant question was whether there should be a bankruptcy law at all. The two central goals of bankruptcy law -- providing individuals with a discharge from their debts, and the equitable distribution of a bankrupt’s assets among its creditors -- proved to be controversial.

Bankruptcy law-making in the nineteenth century was tentative at best. Parliament first exercised its constitutional jurisdiction over “bankruptcy and insolvency” by enacting the Insolvent Act of 1869 and then the more pro-creditor Insolvent Act of 1875. The 1875 Act abolished voluntary bankruptcy proceedings. Both statutes enabled debtors to obtain a discharge, but the discharge was available only upon required levels of creditor consent. The scope of nineteenth century bankruptcy law was very narrow, as its application was limited to traders.

The controversial nature of nineteenth century bankruptcy legislation was evident in that between 1869 and 1880, Parliament debated 10 repeal bills. To many, the discharge was an evil as it interfered with a debtor’s higher obligation to repay debts. Parliament considered reinstating a bankruptcy regime twenty times between 1880 and 1903, but all reform bills failed. Parliament did not discuss bankruptcy reform again until 1918.

Although Prime Minister Wilfrid Laurier was content to allow the provinces to regulate debtor-creditor matters, the growth of interprovincial trade and the move away from a local economy generated renewed interest in a uniform federal bankruptcy regime. During the War, the Canadian Bar Association and the Canadian Credit Men’s Trust Association (CCMTA) began to press for a national bankruptcy statute. The CCMTA represented authorized assignees who administered estates under provincial assignments legislation.

Parliament first debated the Bankruptcy Bill in 1918 and passed the legislation the following year. But the Bill did not come from the pen of a civil servant or from the halls of the Department of Justice. The CCMTA retained Winnipeg lawyer H.P. Grundy to draft a bankruptcy bill that would protect their interests. Using the UK Bankruptcy Act of 1914 as a model, Grundy sought to safeguard Canadian commercial interests by drafting a bill providing for uniformity, an involuntary bankruptcy procedure (based upon proof of acts of bankruptcy), a composition scheme, and a discharge. Grundy submitted his Bill to the Minister of Justice on June 21, 1917.

Under the new legislation, courts supervised the administration of the new bankruptcy discharge. The idea of giving judges the power to refuse, suspend or impose conditions on a discharge dates back to the original Bankruptcy Act. The inclusion of the discharge in the Bankruptcy Act did not entirely represent the triumph of forgiveness or concerns for the rehabilitation of the debtor. Although the idea of relieving debtors from the burden of debt was present in the public discourse during and after the War, Grundy included the discharge because it satisfied the interests of creditors. After 1880, the absence of a discharge proved to be problematic for creditors as many debtors fled to the United States or engaged in deceptive conduct. Without a discharge, some debtors sequestered assets and arranged their affairs to make themselves judgment proof. Certain debtors cheated creditors who could endlessly pursue judgments without end.

While the acceptability of the discharge in 1920 stood in stark contrast to the nineteenth century, it is important to understand that the discharge came to be seen as a new regulatory feature that would benefit creditors. Creditors found the court-supervised discharge regime more acceptable than trying to collect debts from misbehaving debtors. There were no debtor interest groups that lobbied for a discharge.

When Parliament passed the Bankruptcy Act in 1919, there was a great deal of optimism in the business community. Canada was at last joining the United States and the United Kingdom as a jurisdiction with a permanent bankruptcy statute. But the ideal of a problem free bankruptcy regime was not entirely realized in the 1920s. By 1923, Quebec MPs called for the repeal of the Bankruptcy Act on the basis that it interfered with provincial jurisdiction over property and civil rights. The introduction of a federal bankruptcy law was a radical idea in 1920 as it came on the heels of nearly forty years of provincial regulation of debtor-creditor matters, and many in Quebec did not accept the federal intrusion into provincial affairs.

The 1920s was also an era of trustee misconduct. The Bankruptcy Act created the new office of a trustee in bankruptcy. In contrast to today, the Bankruptcy Act did not regulate private sector trustees. Authorized trustees were appointed by the Governor in Council after the applicant submitted an application to the Secretary of State. The lack of regulation would see trustees operate in an unfettered manner in the 1920s, leading to many complaints about trustee incompetency and corrupt trustee practices, including trustee collusion with debtors and creditors.

H.P. Grundy could not have anticipated all of the changes to business and the economy that followed in the next 100 years. For example, the reorganization of insolvent companies was well beyond the vision of the drafter. The Bankruptcy Act is a landmark piece of legislation that still influences the Bankruptcy and Insolvency Act today.

The Bankruptcy and Insolvency Act (BIA) governs all bankruptcies and proposals that take place in Canada. The Companies Creditors Arrangement Act (CCAA) is another piece of federal legislation that enables financially troubled businesses to restructure themselves. The CCAA brings the company and its creditors together under the supervision of the court. On May 14-15, 2021 Western University Faculty of Law will host a virtual conference to mark the centenary of the Bankruptcy Act.

Key Aspects of Bankruptcy and Insolvency

Personal Bankruptcy

Personal bankruptcy is a legal process that eliminates eligible debts that were in place when the bankruptcy was filed.

Consumer Proposal

A Consumer Proposal, also known as a Division 1 Proposal, allows you to repay some or all of your debt. It consolidates your payments into one monthly payment. Here are the key features of a Consumer Proposal:

• It can reduce your debt by up to 80%, while allowing you to repay some of what you owe.
• You have five years (60 months) to repay it.
• You must make all your monthly payments on time.
• You keep all your assets.
• It’s available for both individuals and businesses.
• It will hurt your credit score.

If there’s no way you can repay any of your debt, filing for Bankruptcy may be the right solution for you.

When you file for Bankruptcy:

• You will be discharged from your debts.
• For first-time bankruptcies, the process generally takes nine months.
• You keep some assets, but not all.
• You maintain the right to earn a living.
• It will affect your credit score more than a Consumer Proposal.

Key Definitions

• The Debtor: Someone who owes money to a creditor. In a bankruptcy, the debtor is known as insolvent since their liabilities exceed their assets and they don’t have the ability to pay their debts.
• The Bankrupt: When an insolvent individual files for bankruptcy, they are known as a bankrupt.
• The Creditors: People that the debtor owes money, goods, or services to. There are 3 types of creditors - secured creditors, preferred, and unsecured.

Treatment of Assets

A bankrupt must surrender assets owned at the time of bankruptcy for the benefit of creditors.

Surplus Income Rules

If your monthly income exceeds a government set surplus income limit determined by your household size, you may need to make additional payments to your creditors.

Stay of Proceedings

When bankruptcy or a consumer proposal is filed, creditors must immediately stop collection activities, lawsuits, and wage garnishments.

Meetings and Examination

Meetings of creditors may be held and inspectors appointed. If a meeting is called, the bankrupt is required to attend. In certain situations, a bankrupt may be required to undergo an examination.

Discharge

Once the bankruptcy procedure is completed (usually after nine months) the bankrupt will, in most cases, receive a Certificate of Discharge, which means all of the bankrupt’s debts, with certain exceptions, are wiped out. If a bankrupt is not eligible for automatic discharge, the bankrupt can receive an Absolute Order of Discharge issued by the court once all duties are completed.

Proof of Claim and Voting

Each creditor must file a proof of claim with the trustee confirming how much debt is owing. When you file a consumer proposal or a Division I proposal, your creditors have the right to vote on whether to accept or reject your offer. Each creditor votes based on the dollar value of the debt you owe them.

Provincial Laws

Bankruptcies in Canada are not only governed at the federal level. Each province and territory have specific laws surrounding property exemptions and enforcement of court orders and debt collection.

• Alberta: Alberta’s Civil Enforcement Act dictates Alberta insolvency law, including details about how different types of assets are affected by bankruptcy.
• Nova Scotia: The Judicature Act is Nova Scotia’s authority on bankruptcy and insolvency in the province.
• Prince Edward Island: The Judgement and Execution Act is Prince Edward Island’s authority on bankruptcy and insolvency procedures.
• Saskatchewan: The Enforcement of Money Judgement Act and the Farm Security Act both contain information on the impact of going bankrupt in Saskatchewan.

How Borrowers Go Bankrupt

The BIA federally governs bankruptcy. Each province also has specific rules that must be followed, including asset exemptions. Only a Licensed Insolvency Trustee (LIT) can file for Bankruptcy on your behalf. LITs are debt professionals who have the necessary training and licensing. Their work is overseen by the Office of the Superintendent of Bankruptcy (OSB). The OSB ensures that the process is handled with expertise and integrity.

There are three ways to go Bankrupt:

• Voluntary Assignment: A voluntary assignment is when you approach a LIT to deal with your debts.
• Involuntary Assignment: Your creditors can petition the court to force you into Bankruptcy. They may do this when you violate the borrowing contract, such as by missing payments.
• Deemed Bankruptcy: A deemed bankruptcy occurs when you file a Consumer Proposal but do not fulfill its requirements. You are legally considered bankrupt without having filed. One reason for deemed bankruptcies is borrowers who are unable to make monthly payments on their Consumer Proposals.

Canadian Insolvency Laws

Bankruptcy is a government-approved debt relief solution. It legally binds the borrower and the creditors. The legislation can be complex, and working with a trustee in Bankruptcy is essential. Both debtors and creditors have rights and responsibilities.

Borrower’s Rights and Responsibilities

Debtors have the right to earn a living, even after filing for Bankruptcy. Provincial laws allow you to keep some necessary tools and equipment for your job. You can keep a vehicle and home if your equity is below the provincial maximum. Additionally, you have the right to be free from any collection calls, legal action or wage garnishment from your creditors.

Bankruptcy is a legally binding debt solution. Filing immediately stops contact by your creditors. So, what do you need to do to comply with Bankruptcy laws? Your responsibilities include:

• Disclosing all of your income, assets and debts to your LIT.
• Surrendering any non-exempt assets to your LIT so they can be sold.
• Completing two financial counselling sessions.
• Reporting your income to your LIT every month.
• Paying extra towards your debt if your income exceeds a certain threshold.

You must follow the law to ensure a successful bankruptcy process. By doing so, you’ll experience relief from creditors’ demands. Your debts will be written off, and you can move forward with a clean slate.

The BIA ensures that honest but unfortunate debtors can legally eliminate their debts if they are insolvent. However, some individuals may attempt to act fraudulently for personal gain. Bankruptcy fraud is taken very seriously by the courts. For instance - one common fraud that some borrowers commit is fraudulent conveyance (or fraudulent transfer). This occurs when a debtor transfers an asset to another person. They do this to avoid losing it during Bankruptcy. ie:, selling a vehicle to a relative for a low price and then buying it back later is considered fraudulent when in bankruptcy.

Creditors’ Rights and Responsibilities

Creditors have a right to know if you are filing for Bankruptcy. Your LIT will notify them of your intention. Once they know of your intention to file, they have the right to ask about your financial affairs. They can also call a meeting of creditors and have the right to file a claim for the money you owe. If a creditor’s debt is not included in the Bankruptcy, they have the right to continue collecting payment.

Creditors can object to your discharge from Bankruptcy if they have reasons to do so. Their main actions are:

• Stop all collection activity once you file for bankruptcy.
• File a claim for the money you owe.
• Write off your debt once the Bankruptcy is complete.

Navigating Debt and Seeking Help

Facing unmanageable debt is hugely stressful and the idea of filing for bankruptcy can be intimidating. You might feel like you’re at your creditors’ mercy and fear they’ll take everything you own. However, it’s important to remember that when it comes to Bankruptcy laws, Canada has a firm system to protect you and your creditors. The Bankruptcy and Insolvency Act of Canada (BIA) outlines the rights and responsibilities of insolvent borrowers and the creditors they owe. The laws provide a safety net in challenging times.

In order to better understand your rights and responsibilities during bankruptcy, it's important to seek advice from a Licensed Insolvency Trustee.

Don’t be afraid to find help when dealing with unmanageable debt. It’s normal to fear losing your assets or privacy when it comes to bankruptcy, but bankruptcy laws in Canada try to protect the borrower’s dignity and ability to earn a living. With professional guidance and support, you can confidently navigate this challenging time.

Joshua Lowney, a Licensed Insolvency Trustee in New Brunswick, combines his legal and financial expertise to help individuals navigate debt challenges with clarity and confidence. A former lawyer, he simplifies complex financial matters, assisting clients to regain control. Josh provides tailored solutions to guide clients toward a fresh start. Outside of work, he enjoys family time and helping on his wife’s family farm.

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