Creditors’ rights in a bankruptcy proceeding – do you have any?

This is a question that gets asked quite frequently in insolvency files. Do we have any rights? If so, what are they??

Every case of bankruptcy is different. For this reason, there are no set answers that are relevant for every situation but there are some basic principles.

So what should you do if one of your customers files a bankruptcy?

To start, if you would like to receive further notices, file a proof of claim. It is usually quite simple and you will now be “registered” as a creditor. It is this step that allows you to receive your share if a dividend payment is made.

Second, go to the meeting of creditors so you will have the opportunity to ask questions to the administrator of the bankrupt company and the Trustee as to what they have done to date. In most cases they will be able to respond to your questions or concerns.

Third, if you want to be more involved, consider becoming an inspector on the file. There can be a maximum of five creditors acting as inspectors. Inspectors are voted onto the board by a simple resolution during the creditors’ meeting.

As an inspector, your role is to help the Trustee in situations such as: approving the sale of assets, instituting any legal procedures, approving fees, approving the final statement of receipts and disbursements, etc.

Many business owners and / or operators simply don’t have the time or interest to be an inspector. Are you still able to ask questions? The basic answer is yes. However, if you want to dig deeper, the Trustee has no legal obligation to assist unless they are authorized to do so by the appointed inspectors and that there is money in the estate to fund the investigation.

However, as a creditor you can examine the bankrupt under the Bankruptcy and Insolvency Act (BIA). This means that the bankrupt (or officer of the company) will be examined under oath.

At this point, or even before the examination, if you want the Trustee to further investigate and the Trustee decides not to do so, you can once again avail yourself to the BIA and seek a “Section 38”. This is a Motion to Court requesting permission to step into the Trustee’s shoes for that particular investigation. You will need to advise all the known / proven creditors. If interested, other creditors can choose to join you and share the costs. Once the motion is approved, you will have the same power as the Trustee. Also, if you are successful in your litigation, you and anyone who joined you in the investigation would get all of the proceeds up to 100% of your claim plus costs. Any excess would be returned to the Trustee.

The Office of the Superintendent of Bankruptcy is an excellent and comprehensive resource for further details and information. At the end of the day, if you’re looking for answers or clarity, it’s important to be pro-active and get involved.