A company can become bankrupt either voluntarily or involuntarily. In order to become bankrupt voluntarily, the board of directors passes a resolution authorizing the company to file for bankruptcy and, as long as the company owes at least $1,000 and is unable to pay its debts as they become due or, its assets, at fair value, are insufficient to discharge all of its liabilities, then it can file for bankruptcy. A company can also become bankrupt involuntarily. This happens when a proposal put forth by the company is rejected by its creditors or, if one or more creditors petition the Court for an order to put the company into bankruptcy. Regardless of how a company becomes bankrupt, it is necessary to have a licensed trustee in bankruptcy (the “Trustee”) directly involved in the process.
At the time of a voluntary filing for bankruptcy, or within 5 days after an involuntary filing, a designated officer or director of the company, is required to prepare (the Trustee will assist) a sworn statement of the assets and liabilities of the company. The Trustee will call a meeting of creditors which is generally held within 3 weeks after the bankruptcy filing. The purposes of that meeting are to: (1) affirm the appointment of the Trustee or replace the existing trustee with another, (2) appoint up to 5 inspectors (representatives of the creditor group generally), (3) provide a forum for the creditors to ask questions of a designated officer of the company, and (4) provide directions to the Trustee regarding the administration of the bankruptcy estate.
Generally, upon the company becoming bankrupt, the Trustee will take possession or control of the company’s assets. When a company becomes bankrupt, all of its assets vest in the Trustee. Vesting means that the Trustee automatically becomes the owner of the company’s assets subject only to the rights of secured creditors. Secured creditors, providing that they have properly registered their security in the personal property security registry and/or the land titles/registry system, are generally entitled to obtain possession of their collateral from the Trustee and then proceed to realize (sell or liquidate) that collateral to recover their loans.
The Trustee, will proceed to realize upon the company’s other assets (those not held as security for a loan) in consultation with the inspectors of the bankruptcy estate. The Trustee will also review all claims filed against the bankruptcy estate and admit them or disallow them, in whole or in part. Once all of the assets have been liquidated and claims determined, the Trustee will make its final distribution to creditors and proceed to close the administration of the bankruptcy estate.
Bankruptcy will be the end of the company’s existence. However, in exceptional circumstances, a bankrupt company could make a proposal in order to exit bankruptcy. Creditor approval is required for this to occur.
The role of the Trustee is to realize upon the assets of the company and distribute the net proceeds of liquidation to the company’s creditors in accordance with the provisions of the Bankruptcy and Insolvency Act (“BIA”).