Bankruptcy and Insolvency Act: What happens when you claim insolvency?

When that wallet seems so light or when your business’ cash registers go empty, you may wonder if you’re already insolvent. But if you already are, then what would be the next legal steps you have to take? 

Here, we’ll discuss the basics of the Bankruptcy and Insolvency Act—an important law you may want to know if you want to claim insolvency, or worse, declare bankruptcy. For more info, it’s not a bad idea to consult a professional, such as an insolvency lawyer. 

What is insolvency? 

Insolvency happens when a person cannot meet their debts and other liabilities as they become due or as their deadlines come. To add, even if they sold all their assets, it’s still not enough to pay all their debts.  

Insolvency can happen not just to a person as to their personal debts, but also to corporations in relation to their corporate liabilities. 

Rules on insolvency will depend on each country. In most cases, it’s always tied with bankruptcy, since it can be one of the ways to solve a person’s or a corporation’s insolvency. 

What is the Bankruptcy and Insolvency Act? 

In Canada, federal laws will apply when a person becomes insolvent. These laws also provide the insolvent person’s legal remedies to eventually overcome this financial difficulty. 

The most important federal law on insolvency is the Bankruptcy and Insolvency Act (BIA), which outlines the different insolvency and bankruptcy proceedings. The BIA defines the different roles and responsibilities of each stakeholder or party involved in a bankruptcy proposal or proceeding.  

Parties in an insolvency process include:  

• the insolvent person or business 
• its creditors 
• the courts  
• the government, through the Office of the Superintendent of Bankruptcy (OSB) 

However, the Companies’ Creditors Arrangement Act (CCAA) is also another federal law that governs insolvency in Canada. The insolvency procedures under the CCAA give corporations more options if they become insolvent. 

Here’s an overview of the BIA and what happens to an insolvent person in Canada: 

If you want to know more about the BIA, reach out to the best insolvency lawyers for litigation in Canada as ranked by Lexpert. 

Purposes of the Bankruptcy and Insolvency Act 

The BIA’s main purposes are to: 

• help the debtor person or corporation, including their creditors, by ensuring that the debtor’s rights are protected over the whole proceedings 

• secure the rights of creditors in relation to the financial obligations that the debtor owes them 

A general policy under the BIA is that each party in an insolvency or bankruptcy process must deal with each other in good faith. Otherwise, the court may sanction any party who violates such duty. 

What happens when you become insolvent in Canada? 

Here’s an overview of the steps you need to take when you claim insolvency in Canada: 

1. Check whether you’re already insolvent based on the definition of being insolvent under the BIA 

2. Talk to an insolvency lawyer and a Licensed Insolvency Trustee (LIT) to know your options under the BIA, the CCAA, or other laws 

3. Depending on what you've chosen, you will have to submit a proposal to your creditors for the payment of your debts 

4. As an alternative, or after exhausting all other options, you can file for bankruptcy under the BIA 

5. You will have to comply with your proposal or to discharge your bankruptcy to remove yourself from being insolvent or bankrupt 

We’ll discuss these steps below. 

1. How a person or corporation becomes insolvent 

The Bankruptcy and Insolvency Act defines being “insolvent” when any of these circumstances happen: 

• when they cannot pay their debts or obligations that are pending to become due and demandable, because of some financial distress 

• when they stopped paying their debts or obligations, after these become due and demandable, because of some financial distress 

• when their total assets are not enough to cover all their debts or obligations, even if these are sold at a fair valuation or under any legal process 

2. Consulting with an LIT and insolvency lawyer 

If you qualify under the legal definition of an insolvent under the Bankruptcy and Insolvency Act, it’s then important to consult with an LIT and insolvency lawyer. They’ll be able to guide you on what options are available for your situation.  

While both are important to turn to, they do have distinct purposes. For instance, LITs can process your filing of a proposal or bankruptcy under the BIA. Insolvency lawyers, meanwhile, are necessary when you must defend yourself in court (e.g. when a creditor sued you). 

In any case, they’ll be able to guide you on the specific course of action that you can take, considering your resources and financial position. 

3. Legal remedies against insolvency 

The Bankruptcy and Insolvency Act provides three proceedings that an insolvent, or even their creditors, may use to resolve this situation: 

• Commercial or Corporate Proposal (Division I Proposal): for individuals or corporations who have unsecured debts of more than $250,000 

• Consumer Proposal (Division II Proposal): for individuals whose unsecured debts are more than $1,000, but less than $250,000 

• Bankruptcy Orders and Assignments: for individuals and corporations who committed any of the acts of bankruptcy, which are listed in Section 42 of the BIA 

Specific to corporations, the CCAA provides additional legal remedies for insolvent or bankrupt corporations: 

• liquidation: where the proceeds of the liquidation are used to pay the corporation’s creditors, following the order of distribution of debts 

• restructuring: a court process, which allows a corporation to restructure its business and financial affairs to avoid a bankruptcy 

Proposals to creditors 

The BIA provides two kinds of proposals that you can make, subject to the approval of your creditors: Commercial or Corporate (Division I) proposals and Consumer (Division II) proposals.  

Both are alternatives to bankruptcy filings and are legally binding agreements between you and your creditors. It’s drafted and filed with the help of your LIT. 

Below are the common steps involved in a Division I and a Consumer proposal: 

• you and your LIT will discuss which among these two is proper for your case 
• your LIT will file your proposal to the OSB; the proposal will also be sent to your creditors 
• the proposal must be approved by your creditors during the creditors’ meeting 

Summary: remedies to insolvency in Canada 

4. Last option: filing for bankruptcy 

Bankruptcy happens when a bankruptcy assignment or bankruptcy order has been made against the person or corporation. When you’re declared bankrupt, your LIT will administer your assets and sell them to pay your obligations to your creditors. 

Here’s where the distinction between insolvency and bankruptcy applies: if being insolvent is just too much, then you can then file for bankruptcy. You will be automatically declared bankrupt when your Division I Proposal has been declined by your creditors. This is as opposed to the Consumer Proposal, where you’re not automatically declared bankrupt after the proposal’s denial. 

You may also file for bankruptcy without going through the process of submitting either a Division I or Consumer Proposal to your creditors. Conversely, when you commit any act of bankruptcy under the BIA, your creditors may also file a bankruptcy order against you. 

Surplus payments in a bankruptcy 

Part of being declared bankrupt is that you may also have to make some surplus income payments. Here is a quick video regarding these payments: 

If you need help with bankruptcy, speak with a law firm in your province or territory. Check out our directory of the Lexpert-ranked best insolvency law firms for litigation in Canada. 

Offences of those declared bankrupt 

In a bankruptcy proceeding, you're expected to be transparent with your financial situation, as shown by your financial records and other related documents. For this, the BIA has outlined the bankruptcy offences that a debtor may commit during a bankruptcy proceeding: 

• fraudulent sale or transfer of properties 
• false entry or material omissions in financial statements 
• concealment or destruction of other documents and properties 
• false representations to acquire credits or properties 
• failure to comply with a court order 
• non-disclosure of being an undischarged bankrupt in business transactions 

Convictions under these offences may include fines or imprisonment, or both. 

5. Becoming solvent and discharging a bankruptcy in Canada 

A bankruptcy discharge means that the debtor or the insolvent has been released from all their debts and liabilities. Under the Bankruptcy and Insolvency Act, a bankrupt individual or entity may apply for a discharge after paying all their creditors’ claims in full. 

However, the BIA says that a debtor will not be released for the following debts, even after a bankruptcy discharge: 

• fine, penalty, restitution order, or award of damages related to an offence or crime 
• those arising out of an alimony or alimentary pension 
• debt or liability from a spousal or child support 
• dividend due a creditor 
• loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or the Apprentice Loans Act 

Are bankruptcies public record in Canada? 

The BIA says that proposals and bankruptcies are indeed public records, which must be kept by the OSB. These public records also include licenses of LITs and appointments of administrators. 

A bankrupt corporation need not worry about the public disclosure of these records. These are only provided on request and upon payment of a fee by any requesting party. As such, only a business’ creditors, its LITs, and the OSB will know about these records. 

The Bankruptcy and Insolvency Act: the law for financial recovery 

If you’re insolvent, you would have several legal options under the Bankruptcy and Insolvency Act. This includes filing a proposal for your creditors, with declaring bankruptcy as your last resort. But whatever your options are, these are just some steps to becoming financially stable once again—whether it be for your personal pocket or your business’ bankroll. 

Want to read more about the Bankruptcy and Insolvency Act and other related matters? Check out Lexpert’s Special Edition on Insolvency and Restructuring.

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