OAIRP Continuing Education Seminar May 10, 2018 Philip J. Gertler Gertler & Koven
The use and misuse of the in-bankruptcy proposal
• A bankrupt gets into “trouble” during the bankruptcy. • For example, house equity now represents 100% value of the estate (not uncommon in today’s housing market) • Or, questionable conduct—forgetting to disclose assets, payments or missing funds • Leads to investigations by the Trustee or the OSB • The Bankrupt may be required to take steps or produce documents they do not wish to comply with. • The Bankrupt may realize that they may be required to pay large amounts to their estate
The “solution” frequently tried: file an in-bankruptcy proposal and make all of the problems “disappear” Or do they…
• A number of files over the last six months where bankrupts have filed or tried to file in-bankruptcy proposals • Several possible reasons why: • Hope that creditors may not necessarily “pick up” on connection between existing bankruptcy estate and “new” proposal • Creditors may not be aware of issues developing in bankruptcy estate that may result in greater recovery – may believe the proposal is a good offer . • May regret choice of trustee and seek to find a more debtor-friendly office • Deemed acceptance a Deemed approval process (for consumer proposals) might lead to proposal flying “under the radar” and passing • Deemed or Court acceptance means bankruptcy annulled and assets revert to the debtor
• Places “obligation” on Administrator to ensure full disclosure to the creditors • But what if the bankrupt does not make full disclosure to the Administrator? • BIA does not require Administrator of in-bankruptcy consumer proposal to be the bankruptcy trustee • 66.4(2)(b) the consumer debtor must have obtained the assistance of a trustee who shall act as administrator of the proposal in the preparation and execution thereof; • Creates a presumably-unforeseen problem (discussed later)
CONSUMER PROPOSAL • 66.4(2) Where a consumer proposal is made by a consumer debtor who is a bankrupt, the consumer proposal must be approved by the inspectors, if any , before any further action is taken thereon . • Vague wording in respect of timing. • “ Where a consumer proposal is made ,” inspector approval require “before any further action is taken ” might suggest the approval of inspectors (if any) is needed before in-bankruptcy consumer proposal can be filed. • Wording is slightly ambiguous.
DIVISION I • 50(3) A proposal made in respect of a bankrupt shall be approved by the inspectors before any further action is taken thereon. • Same concept for a Division I proposal; same potential timing question • But what if there is no inspector? • Consumer proposal wording contemplates in inspector approval if any. • Division one proposal does not include the reference to “ if any ”
• What happens if there is no inspector in a bankruptcy where the bankrupt must file a Division I proposal? • Would not appear to be any case law on point • One argument: given explicit difference in wording between Consumer Proposal and Division I sections, (“if any”), no inspector means no in-bankruptcy Division I proposal. • s.50(3) might suggest that (practically speaking) in-bankruptcy Division I proposal will usually be filed with bankruptcy trustee; but not clearly stated either way. • No equivalent section to Consumer Proposal section 66.(2)(b)
• If the Division I requirement does prohibit Division I proposal where there is no inspector: Likely less mischief • Not likely that the estate inspector is going to approve an in- bankruptcy proposal with another trustee
• The difference in the inspector-approval sections also leads to potential mischief for in-bankruptcy consumer proposals. • Summary administration typically means no inspectors • Bankrupt doesn’t like what the trustee is doing • Files a consumer proposal with another trustee (Administrator). • No requirement for any pre-filing approvals where there are no inspectors.
• How can trustee protect an estate from an unexpected in-bankruptcy proposal? • Call a meeting of creditors so that the creditors may APPOINT AN INSPECTOR • As soon as it becomes evident there may be issues in the estate • Whether consumer proposal or Division I: • Once inspector appointed, inspector approval is required.
• “103(1) Meetings during administration • The trustee may at any time call a meeting of creditors[…]” • No apparent limitation on when a trustee may call a meeting • In ordinary administration, first meeting is mandatory within 21 days of bankruptcy (s. 102(1)) • In summary administration, first meeting is not mandatory unless requested by official receiver or certain amount of creditors (s.155(d.1))
In a current file • Summary administration estate • First meeting was not requested by official recover or creditors pursuant to s.155(d.1) • Conduct issues and potential undisclosed assets discovered • Trustee called a meeting of creditors to appoint an inspector • Lawyer for bankrupt is challenging the appointment of an inspector at meeting • Lawyer’s position: First meeting of creditors may only be held if requested by official receiver or creditors pursuant to s.155(d.1)
In a current file • Issues: • Does the mandatory language of s.155(d.1) (when must meeting be called) preclude discretion to call meeting in any other case in summary administration estates? • As a matter of statutory interpretation, does the specific (s.155(d.1)) override the general (S.103(1))? • Is a meeting called to merely appoint an inspector a first meeting of creditors for the purposes of the Act? • The matter will likely be argued in the next few months.
In a current file • In this instance, inspector was appointed and has refused to approve consumer proposal the bankrupt wants to offer to creditors. • If the appointment of the inspector is overturned, the bankrupt would be able to file the in-bankruptcy consumer proposal with another trustee/administrator. • The information available to the bankruptcy trustee (the therefore the estate creditors) might be “lost” in the transition to the consumer proposal with a second trustee. • Information relating to the misconduct of the bankrupt to the extent that the matter has been referred to special investigations.
• Consumer Proposal will be deemed accepted by creditors if no requirement to call a meeting of creditors, or no quorum attends meeting (66.18) • Meeting will only be called at request of official receiver or certain amount of creditors (66.15) • However, Court approval of consumer proposal required if official receiver or “ any other interested party ” requests approval hearing within 15 days of creditor acceptance of deemed acceptance (66.22(1)) • Would argue that bankruptcy trustee qualifies as an interested party • In in-bankruptcy proposals in estates with conduct issues, we have seen official receiver request (and chair) meetings of creditors as well as court approval hearings.
Criteria for Court approval • 66.22(1) Application to court - Where a consumer proposal is accepted or deemed accepted by the creditors, the administrator shall, if requested…by an interested party.... forthwith apply to the court to have the consumer proposal reviewed. • 66.24(2) Refusal to approve the consumer proposal - Where the court is of the opinion that the terms of the consumer proposal are not reasonable or are not fair to the …creditors the court shall refuse to approve the consumer proposal and the court may refuse to approve the consumer proposal whenever it is established that the consumer debtor (a) has committed any one of the offences mentioned in sections 198 to 200.
• Before we turn to specific examples—one other point: • There is nothing in the Act that protects the fees and disbursements of the bankruptcy trustee in the event that the bankrupt files an in- bankruptcy consumer proposal • Date for establishing claims provable is still date of original assignment. • Bankruptcy trustee’s WIP (or tariff entitlement) would not be considered a claim provable. • Bankruptcy trustee could find itself out of pocket for all fees and disbursements. • It has been suggested that the bankruptcy trustee’s fees would be a preferred claim in the proposal. • There would not appear to be any statutory authority for this proposition. • Court has suggested in obiter that bankruptcy trustee might have a post- proposal claim against the bankrupt
Example #1 • Bankruptcy: January 2018 • $250,000 mortgage registered on title in December 2017 • Net advance to bankrupt of $180,000 • $180,000 withdrawn from bankrupt’s bank account nine days prior to assignment • Timing was not disclosed to trustee • Still substantial equity in the property • Bankrupt provides 4 different explanations of disposition of the funds • Also fails to disclose substantial RRSPs cashed-in in year before bankruptcy • Also fails to disclose RESP that was cashed in • Trustee gathers information and notifies OSB • OSB schedules section 161 examination
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