To Your Credit

Bankruptcy & Insolvency

How to protect your interests when a client goes bankrupt

When one of your clients goes bankrupt, there is a way you can participate actively and directly in the supervision of certain aspects of the trustee’s administration to ensure that your interests as a creditor are protected.

How? By becoming an inspector, a trusted representative of the creditors.

Let’s take a closer look at the role of inspectors and what benefits they bring to the process.

For the benefit of all

The inspector is appointed by creditors to provide guidance and lend specific business expertise to the administration of the estate. The inspector’s most basic role is to oversee the trustee’s administration of the file.

It must be understood, however, that inspectors are obligated to work for the good of all creditors, not just the creditor they represent. As well, inspectors cannot act for personal gain and must fully disclose their personal position any time there is a possible conflict of interest.

An inspector not only gives direction and supervises the trustee, but also provides authorization on a number of fronts. As a few examples, the inspector can authorize (or withhold authorization from) the trustee to

• dispose of assets;
• hire a solicitor to deal with matters sanctioned by the inspectors;
• settle debts owing to the bankrupt; and
• appoint the bankrupt to help in the administration of the estate.

Without a doubt, inspectors carry important responsibilities. But this doesn’t necessarily translate into a heavy demand on their time. While a trustee is bound to call a meeting of all inspectors when requested to do so by a majority of the inspectors, they need not all attend the meeting in person; they may attend by telephone if all the other inspectors approve.

Inspectors offer professional expertise

Inspectors have the opportunity to use their professional expertise to benefit the estate. Because of the industry-specific knowledge that they bring to the proceedings, the trustee may be able to sell assets at a higher price or reduce the costs to market or sell them.

In addition, trustees must, in most cases, have written permission from someone in authority to withdraw funds from the trust account of an ordinary estate. That permission can come from only two sources: an inspector or the courts. Without inspectors, most withdrawals would require a trip to court, which would lead to increased costs—and less money for creditors when the estate is settled.

Inspectors also apply their expertise when they review documents. One of the duties of the inspectors is to approve—or not—the Statement of Receipts and Disbursements (SRD). This document lists all the money that has come into and been paid out.

If there is any question about the information offered by a trustee, an inspector can ask for additional supporting documents. For example, to assist in reviewing the SRD, inspectors can request the Detail Trial Balance. This lists each receipt or disbursement. Inspectors can also request a Work in Progress report from the trustee. This report documents professional fees and contains a description of work performed.

In the end, and before approving the SRD, the inspector must be satisfied that all property has been accounted for, the administration of the estate is complete, disbursements and expenses are authorized and that all fees are reasonable.

Becoming an inspector

Typically, an inspector is a creditor or an employee of a creditor. That’s not always the case, however, as third-party representatives such as lawyers, can also be appointed. While there are few limits on who may become an inspector, no person who is a party to a contested action by or against the estate of the bankrupt may do so.

Inspectors are usually appointed by majority vote—measured in terms of dollar amount of the claims voting—at the first meeting of creditors. At most five inspectors can be appointed to any bankruptcy estate.

If you cannot attend the meeting of creditors, remember that you can provide a specific written proxy to someone. This will allow them to vote on your behalf provided your proof of claim has been accepted by the trustee. As well, if you want to be an inspector but cannot attend the meeting, you can also provide a written expression of your interest with instructions to nominate you, and use your proxy to vote for you.

Resources

If you are interested in learning more about becoming an inspector, you may want to review the Inspectors Handbook. It was reproduced in two parts in earlier editions of this newsletter. You can also get a copy online at www.ic.gc.ca/epic/site/bsf-osb.nsf/en/br01479e.html

At the Office of the Superintended of Bankruptcy, we welcome your feedback on estate- and bankruptcy-related matters. For the contact numbers of division offices, visit our website at www.osb-bsf.ic.gc.ca and click on “Contact Us” at the top of our home page. To provide specific feedback on this article, please contact the Credit Institute of Canada directly at generalinformation@creditedu.org.

Extracts from the Inspectors' Handbook (Part III)

Inspectors' Handbook - continued

Part III

Dealing with Bankruptcy Abuses

Powers of the Superintendent of Bankruptcy
Section 10 of the Act empowers the Superintendent of Bankruptcy to investigate an offence that may have been committed in connection with a bankruptcy. These investigations relate to the conduct, dealings and transactions of the bankrupt, the causes of the bankruptcy and the disposition of the bankrupt's property. The main objective of this section of the Act is to detect evidence of statutory offences, although any information uncovered during the investigation that leads to the recovery of assets is to be provided to the trustee.

Section 161 of the Act permits the Official Receiver to examine the bankrupt under oath and to ask questions about the bankrupt's conduct, the causes of bankruptcy and the disposition of property.

The Superintendent of Bankruptcy is assisted by staff in major centres across Canada in detecting and reporting possible offences (see page 16). Investigations are normally carried out by the Royal Canadian Mounted Police.

Trustee Compliance
Trustees who do not perform their duties professionally and in compliance with the Act, Rules and Directives, may be subject to professional conduct measures in the event of wrongdoing (for example, a trustee's licence may be subject to certain conditions or limitations, suspended or cancelled). Where warranted, criminal charges may also be laid.

In addition, trustees are required to comply with the Code of Ethics for trustees (Rules 34-53). The code establishes standards for activities such as providing creditors with information, handling trust funds, dealing with conflicts of interest, and overseeing the sale of the property of a bankrupted business or individual. The code also sets standards for advertising and for maintaining the good reputation of the trustee community.

Complaints about trustees should be addressed to the nearest divisional office of the Superintendent of Bankruptcy (see page 16).

Inspectors' role in handling abuses
When creditors have information regarding assets, fraudulent preferences (for example, a payment by the debtor to a creditor that gives the creditor preference over other creditors), improper dealings between the bankrupt and relatives or a related company, or other possible irregularities, these matters should be brought to the attention of the trustee or the inspectors.
The inspectors and the trustee should choose the best course of action to benefit the creditors in these situations.

If the inspectors suspect an offence has been committed, they should discuss the matter with the trustee, who should then report it to the Office of the Superintendent of Bankruptcy. When they consider it appropriate (for example, for matters related to the trustee's conduct), inspectors may also report concerns directly to the Superintendent of Bankruptcy.

Statutory offences
The Act describes various bankruptcy offences under sections 198 to 208.

Offences by bankrupts (sections 198, 199 and 200)

A bankrupt is guilty of an offence if he/she:

makes any fraudulent disposition of his or her property before or after the date of the initial bankruptcy event;
refuses or neglects to answer fully and truthfully all proper questions posed at any examination held pursuant to the Act;
makes a false entry or knowingly omits information in a statement or accounting;
after or within the year before the initial bankruptcy event, conceals, destroys, mutilates, falsifies, makes an omission in or disposes of, or knows about the concealment, destruction, mutilation, falsification, omission from or disposal of, a book or document affecting or relating to his or her property or affairs, unless the bankrupt had no intent to conceal the state of his or her affairs;
after or within the year before the initial bankruptcy event, obtains any credit or any property by false representations or by someone else giving false representations with the bankrupt's knowledge;
after or within the year before the initial bankruptcy event, fraudulently conceals or removes any property valued at fifty dollars or more or any debt owed to or by the bankrupt; or
after or within the year before the initial bankruptcy event, mortgages, pawns, pledges or disposes of any property he or she has obtained on credit and has not paid for, unless the bankrupt is a trader and the mortgage, pawning, pledging or disposing is part of normal trading activities, and unless the bankrupt had no intent to defraud.

The bankrupt is also guilty of an offence if he or she fails to comply with an order of the court requiring a monthly payment to the bankrupt's estate, based on his or her income and family situation. Moreover, the bankrupt is guilty of an offence if he or she fails to comply with the required duties throughout the bankruptcy. For example, the duties include delivering, for cancellation, all credit cards to the trustee as well as informing the trustee of any changes pertaining to his or her financial situation.

It is an offence for an undischarged bankrupt to engage in a trade or business or to obtain credit exceeding $500.00 without disclosing that he or she is an undischarged bankrupt.

It is also an offence for a person who is currently bankrupt and who has previously been bankrupt or made a proposal not to have kept proper books of account (detailing the person's day-to-day transactions and financial position) of any trade or business done within the two-year period before the initial bankruptcy event. Also, an offence is committed if, within that period of time, the bankrupt conceals, destroys, mutilates, falsifies or disposes of any book or document affecting his/her property or affairs, unless there was no intent to conceal the state of the affaires.

Offences by creditors (subsection 201(1))
It is an offence for a creditor to willfully and with intent to defraud make any false claim or any proof, declaration or statement of account that is untrue.

Offences by trustees (sections 202, 203.1 and 203.2)
Section 202 deals mainly with the failure of a trustee to perform duties imposed by the Act. However, some paragraphs, such as 202(1)(a) and (f), and subsection 202(2), are wider in scope and apply to persons who are not trustees.

It is an offence for a trustee to act as a trustee under the following conditions:

while the trustee's licence has ceased to be valid for failure to pay licence fees;
after the trustee's licence has been suspended or cancelled by the Superintendent; or
after the trustee has been informed of the intention to cancel the licence.

If a trustee's licence has been restricted, it is an offence for a trustee to exercise powers beyond those authorized by the restricted licence.

Offences by inspectors (subsection 201(2))
It is an offence for an inspector to accept a fee, commission or other benefit of any kind from the bankrupt, the trustee or any person or company acting on behalf of the bankrupt, other than the regular fees allowed by the Act.

Part IV

Inspectors' Fees

Range of Payments (subsections 120(5) and (6) and Rule 135)
Inspectors' fees range from $10 to $40 per meeting. The fee is based on the net receipts of the estate, which are calculated by subtracting the payments to secured creditors from the total receipts received by the trustee:

Net receipts	Fee per meeting
less than $10,000	$10
$10,000 to $50,000	$20
$50,000 to $100,000	$30
more than $100,000	$40

Inspectors may also be reimbursed for out-of-pocket travel expenses for the performance of their duties.

Finally, an inspector duly authorized by the creditors or by the inspectors to perform special services for the estate may be paid a special fee for his or her services, subject to the approval of the court. The approval of the court must be given before the rendering of the special services. To be allowed an extra fee, the services rendered by the inspector must require the special attention and skills of the inspector. For example, an inspector who is a chartered accountant may be paid a special fee to conduct an accounting investigation for the bankrupt estate.

Bankruptcy & Insolvency

Archives