When filing for bankruptcy in

This received a 27/28 in my OAC law class so, have a blast…..


WHEN FILING FOR BANKRUPTCY IN CANADA
The law sometimes seems to pervade all aspects of our
lives and an involvement with bankruptcy and insolvency
law has proved to be almost unavoidable for business
people in Canada during the 1990’s. In simplest term, corporate and individual bankruptcy law provides a set of rules to prevent chaos among the creditors of an insolvent corporation or individual.
The legislation is a complex in part because those creditors fall into so many categories-secured creditors, unsecured creditors, government creditors, and so on-each with its own special rights and interests in the bankruptcy process.

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Canada’s federal bankruptcy statute, the Bankruptcy and Insolvency Act, also deals with corporate receivership. A receivership is not the same as a bankruptcy. By the same token, a receiver is not the same as a trustee in a bankruptcy. However, the two systems have a lot in common and a receivership of an individual or a corporation usually occurs at the same time as a bankruptcy.

Corporations that have become insolvent can try to avoid bankruptcy and receivership by reorganizing their finances. The Bankruptcy and Insolvency Act deals with reorganizations and another federal statute, the Companies’ Creditors Arrangement Act, may offer relief to some corporations. Some of Canada’s biggest news stories of the past few years have concerned the attempts of major Canadian
companies such as Olympia & York, Algoma Steel, Grafton Fraser, Woodwards, Westar Mining, and Birks, to complete reorganizations. But the most well known companies were both Air Canada and Canadian Airlines.


Air Canada, Canadian Airlines, and United Airlines
are all commercial passenger air carriers. Beyond that,
they have only a few similarities. All are old commercial
carriers that were facing bankruptcy together until the
Canadian Postal Service approved air travel for Canadian
Mail in 1925. There, they reached a point of divergence
that continues today.


AIR CANADA
Time Magazine’s November 17, 1958 cover sported a
diagonal banner across one corner reading “Jets Across
Canada.” (Goutierez, 1997). At the time of the
article’s publication, “Air Canada had earned a
reputation as an industry leader, and this, coupled with
the high-profile leadership of ‘Mr. C.R.,’ made Air
Canada’s imminent transcontinental jet service the
catalyst for an exciting new era. Time wrote that
although Pan Am had already flown jets across the
Atlantic, C.R. Smith and Air Canada would usher in the
‘Jet Age’ for most Canadians with the introduction of
Boeing 707’s on Transcon routes” (Goutierez, 1997). CEO
Smith often said that his own typewriter was “the most
important piece of equipment Air Canada owns”
(Goutierez, 1997). Likely, he would barely recognize
the company today. The Time article reported that with
Air Canada’s new fast plane would come sweeping changes
in the transport of both people and things, and that Air
Canada was working with IBM “on an electronic system
that can transmit information on every Air Canada flight
across the U.S. and Canada, enabling clerks to tell
instantly which seats are free.’ Air Canada called its
new system the ‘Semi-Automated Business Research
Environment’—SABRE” (Goutierez, 1997). When A.C sought
to develop further firsts for the airline industry,
baggage handling came under scrutiny. There were plans
for automated handling of luggage destined for a common
city, but the system proved to be too cumbersome for use
on narrow-bodied jets. A Canadian executive had
complained “‘Right now, we’re still loading baggage on
planes the same way they loaded Cleopatra’s barge.’ But
containers proved impractical for narrowbodied jets, so
thirty-seven years later, we’re still loading
narrowbodies like Cleopatra’s barge” (Goutierez, 1997),
and so are all the other airlines. If United’s pilots
are exhibiting greed in attempting to reject their
current contract as owners, then it was the Air Canada
pilots they used as their role models. The highest paid
pilots in the industry, they took 4 percent pay raises
during the entire time in the 1991-93 period when the
entire industry was suffering, but “Air Canada was
hemorrhaging money…having refused to ‘share the pain’
on the downside, they now expect to ‘share the gain’ on the
upside” (Flint, 1997; p. 5). As at other airlines,
the pilot union is separate from the other employees of
the company, and those others consistently disparage the
actions of the pilots. All the other employees not only
did not receive increases during the tough times, they
also accepted pay cuts. Still, during 1997, Air Canada
was able to generate nearly $18.5 billion, an increase
of 4.6 percent over 1996 (www.nbrc.gov/).


Canadian Airlines
Currently the country’s third-largest airline in terms
of total revenue, Canadian Airlines is headquartered in
Vancouver and has more than 63,000 employees worldwide.
All of the major airlines suffered nearly crippling
losses in the early 1990s, and Canadian was no
exception. The company has only recently returned to
profitability, but reported a nearly flat annual growth
rate for the fiscal year ended June, 1997, for total
revenues of $13,590,000. Until the fall of 1996,
Canadian Airlines stock value growth had been flat as
the company searched for reasons and resolutions concerning
this major issue which faces this corporation. One
resolution could be the reorganization of finances.


Canada went more than 40 years with essentially the
same federal Bankruptcy Act. The statute became badly
outdated, and successive governments attempted bankruptcy
reform to some degree or other. However, the subject was
never a burning political issue, and each time a process
died. Finally, in November 1992, the Bankruptcy and
Insolvency Act became the law. It brought a host of changes
to the following areas of the BIA Act.
Changes to corporate reorganizations. Under the old
Bankruptcy Act, it was almost impossible for companies to
reorganize. The new legislation has tried to add new life
to reconstructing efforts under this statute.


Changes to secures creditors and receivers. Before the
BIA, when a bank wanted to enforce security against a
corporate borrower it would usually call the loan in its own
way and appoint a receiver.To the extent that
the process was regulated, it was essentially a matter of
provincial law, and many people felt it was not regulated
very thoroughly. Now the federal Bankruptcy and Insolvency
Act regulates both the manner in which the loan is called
and the receivership process.


Changes in government claims. Many government
liabilities can arise out of the day to day operation of a
business. Prior to the 1992 bankruptcy reform, these
government claims enjoyed a sweeping preferred status, which
tended to mean that the other creditors recovered little or
none of the debt owed to them, on a corporate bankruptcy.
There was a general feeling that this situation was unfair,
and the Bankruptcy and Insolvency Act has largely redressed
the imbalance by downgrading government claims ( other than
a few claims, including relating to income tax, Canada
Pension Plan and Unemployment Insurance withholdings ) to
ordinary status.
Changes were also brought about in the Environmental
legislation. In the decade before bankruptcy reform, the
federal and provincial governments expanded the scope of
their environmental protection legislation. One of the
results was that anyone who had control over a property
with an environmental problem could be held liable for the
cost of fixing the problem, even if they are not the ones
who had caused it. Such persons could include receivers and
the banks and other lenders who appoint them, as well as
trustees in bankruptcy. The situation reached the stage
where no trustee in bankruptcy would assume responsibility
for two large insolvent companies in British Columbia and
Quebec because the companies’ assets included
environmentally hazardous property.
The Bankruptcy and Insolvency Act introduced a
modest degree of protection for trustees in bankruptcy but
not for receivers. The Act protects trustees from liability
for any environmental condition or damage occurring before
or after their appointment “except where the condition arose
or the damage occurred as a result of the trustee’s failure
to exercise due diligence by investigating whether an
environmental problem has occurred or occurring (e.g.
determining if a pollutant is being discharged into a river)
at the time of accepting the appointment. The trustee must
also continue to show due diligence during the term of the
appointment in order to continue to enjoy protection under
the Act.


The last change was brought about in the Unpaid
suppliers area. Under the old Bankruptcy Act, many trade
suppliers received little or no recovery on a corporate
bankruptcy or receivership due to the abundance of claims
that used to be accorded a status superior to that of trade
suppliers. Legislators become particularly concerned about
suppliers who were unpaid even though the product was
supplied days before the bankruptcy or receivership
occurred. The Bankruptcy and Insolvency Act introduced a
right for suppliers who ship product to a company that
becomes bankrupt or subject to a receivership within 30
days. Essentially, the remedy is a right to reclaim the
product. Unfortunately, the conditions that have to be
satisfied in order for suppliers to exercise this right are
so complicated that in practice the right is often
available.


There are many legalities involved when filing for bankruptcy. These are the legal steps to follow when doing so:
More than 90 percent of bankruptcy proceedings are
reportedly voluntary. They are initiated by the debtor, who
files a petition with the appropriate federal court. A
bankruptcy trustee then collects and liquidates the debtor’s
nonexempt property for the benefit of the unsecured
creditors. Secured creditors are not affected by bankruptcy
liquidation’s because they have taken collateral (such as a
home mortgage) to ensure repayment of debts. Once
distribution to unsecured creditors occurs, the court
discharges the debtor unless that person’s prior behavior
justifies denying the discharge or granting it with certain
specific statutory exceptions. In order to limit or deny the
discharge, the creditor must prove that the debtor has
obtained credit by fraudulent practices or has engaged in
other prohibited behavior. Creditors can file an involuntary
bankruptcy petition against a debtor, alleging that the
debtor is “generally not paying” debts, but this type of
proceeding rarely occurs.


The Bankruptcy and Insolvency Act allows both consumer
and business debtors to attempt financial reorganization
instead of liquidation of nonexempt assets. A debtor who
selects this alternative proposes a reorganization plan for
consideration by the affected creditors and the court. For
individuals who use Chapter 13 reorganization proceedings, a
typical plan requires payment from the debtor’s future
income. Businesses that wish to continue their operations,
sometimes in a modified form, usually opt for Chapter 11
reorganization proceedings. Their proposals may combine
payments from sales of some business assets with income from
future business operations. Stockholder interests may be
restructured in addition to modifying payment requirements
for their secured and unsecured debts which are still
withstanding.


The rules which the legislature have set are
only there for the benefit of others, not for the bankrupt
or insolvent individual or corporation. Although, they do
outline the proper procedure that one should take in order
to and when filing for bankruptcy. Those laws can be found
in the Bankruptcy and Insolvency Act ( BIA ). This just
goes to show you that the law does indeed pervade all
aspects of our lives and an involvement with bankruptcy and
insolvency law has proved to be almost unavoidable for
business people in Canada in this day and age.