The bankruptcy and / or insolvency of a business is a situation that can cause many headaches for their creditors. The rules of insolvency and bankruptcy are many and complex. They are a headache for SME managers who find themselves without tools allowing them to understand their rights and obligations in such a situation.

The purpose of this article is to explain to creditors generally their options, rights and remedies in the context of a business bankruptcy.

First, if one of your creditors assigns his property, the trustee in bankruptcy of your debtor will contact you. At the same time, they will send you a notice of bankruptcy, to which will be attached the list of all of the bankrupt’s creditors as well as a proof of claim form. The creditor must complete this form in which they indicate the nature, value and justifications in support of their claim (statement of account, contracts, unpaid invoices, etc.). This document must then be returned to the trustee within the time prescribed in the form. This step is fundamental for the debtor in order to be entitled in particular to vote at the meeting of creditors and to receive dividends.

Later, when the trustee authorized in bankruptcy has received the proof of claim from the creditors, a meeting of creditors will then be called by the trustee. At this first meeting, the creditors will obtain additional information on the bankruptcy, will take note of the inspector’s report, will have the opportunity to ask questions of the trustee, will vote on certain resolutions and elect inspectors.

The trustee is responsible for the administration of the bankrupt party’s property. Their role is to take possession of and realize the assets of the bankrupt party, that is to say, to collect a monetary value for the benefit of all the creditors of the bankrupt party. When the administrative aspects are completed, the trustee will see to it that the dividends are transferred to the various creditors by virtue of the state of collocation provided for by law. For example, certain receivables such as amounts due to the tax authorities or those subject to a guarantee take precedence over so-called “ordinary” receivables. This is also the case for wages owed to employees of the bankrupt company, which are secured claims.

It is important to mention that when a business transfers its assets, legal remedies are suspended under the Bankruptcy and Insolvency Act. There are, however, exceptions to this principle which authorize the creditor in very specific circumstances to apply to the court in order to be authorized to continue legal proceedings against the bankrupt party that were brought before the transfer of their property. The situations giving rise to such a request to the court will be the subject of a detailed analysis in an upcoming article.

In conclusion, in the event that one of your debtors goes bankrupt, it would be wise for you to obtain advice from a lawyer in order to know the extent of your rights in the particular situation you find yourself in.

An article written by Lawyer Patrick Pouliot-Bélair.

Photo Credit: Photo by William Iven on Unsplash