Archives: 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.
