BANKRUPTCY AND INSOLVENCY

Bankruptcy and insolvency law became uniform throughout Canada on the enactment of the Dominion Bankruptcy Act of 1919, which became effective on July 1, 1920. The act 32 applies to all persons, firms, and corporations doing business in Canada, regardless of origin, except building societies having a capital stock, incorporated banks, savings banks, insurance, trust, loan, and railway companies. Insolvency proceedings against corporations are taken under the Bankruptcy Act unless leave of court is obtained to proceed under the Winding-up Act. Wage earners whose wages do not exceed $1,500 per annum, and tillers of the soil, cannot be forced into bankruptcy, but tillers of the soil may voluntarily assign.

ACTS OF BANKRUPTCY

Creditors may demand bankruptcy proceedings when the debtor has committed one or more of the following 10 acts of bankruptcy: (1) Made an assignment of property to a trustee for the benefit of creditors generally; (2) made a fraudulent conveyance, gift, delivery, or transfer of all or any part of his property; (3) made any conveyance or transfer of property or any part thereof or created any charge thereon, which would under the act be void as a fraudulent preference if he were adjudged bankrupt; (4) absconds from Canada, or being out of the country remains or is absent from his dwelling house or premises, for the purpose of defeating or delaying creditors; (5) permitted any execution or other process issued against him, under which any of the goods are seized, to remain unsatisfied until 4 days from the time fixed by the sheriff for the sale, or for 14 days after such seizure, or if the goods have been sold under such process, or if the writ is returned by the sheriff indorsed to the effect that no goods can be found on which to levy; (6) exhibited at a meeting of his creditors any statement of his assets and liabilities which shows insolvency, or presented at such meeting a written admission of his inability to pay his debts; (7) assigned or attempted to assign, remove or secrete or dispose of any goods, with intent to defraud the creditors; (8) make any bulk sale of his goods without complying with the provisions of any bulk-sales act in operation in the Province in which the business is being carried on or in which the goods are situated; (9) served notice on any creditors of suspended or proposed suspended payment of debts; and (10) ceased to meet liabilities generally as they fell due. (Sec. 3.)

If a debtor has committed any one of these acts, a creditor may, at any time within 6 months thereafter, present a petition in bankruptcy to the court having jurisdiction in the locality of the debtor

Revised Statutes of Canada, 1927, ch. 11, amended by chs. 17 and 18 of 1931 and ch. 39 of 1932.

(Provincial Supreme or Superior Court), provided the debtor owes to the petitioner or petitioners a debt totaling $500. The petition must be verified by affidavit and served on the debtor. If the petitioner is a secured creditor, he must either state that he is willing to give up his security in the event the debtor is adjudged bankrupt, or give an estimate of the value of the security, in which case he may be admitted as a petitioner to the extent of the balance of the debt due to him as if he were an unsecured creditor. The court may make a receiving order or dismiss the petition, depending upon satisfactory proof of the debt, service of the petition, and the act or acts of bankruptcy. The bankruptcy of the debtor is deemed to have related back to and to have commenced at the time of the service of the petition on the basis of which a receiving order is made against him. (Sec. 4.)

An insolvent debtor whose provable debts exceed $500 may, at any time prior to the issuance of the receiving order, make an assignment of all his property to an authorized trustee for the general benefit of his creditors. Every assignment of property other than an authorized assignment made by an insolvent debtor for the general benefit of his creditors is null and void. (Sec. 9.)

CLAIMING OWNERSHIP OF GOODS IN CHARGE OF DEBTOR

Section 54 reads as follows:

Where any goods in the charge or possession of a debtor at the time when a receiving order or an authorized assignment is made are alleged to be in his charge or possession subject to the ownership or a special or general property right, or right of possession in another person, and whether or not such goods are held by the debtor under or subject to the terms of any lien, consignment, agreement, hire receipt, or order, or any agreement providing or implying that the ownership of, property in, or right to possession of such goods, or other like goods in exchange or substitution, shall vest in or pass to the debtor only upon payment of defined or undefined moneys, or upon performance or abstention from performance of any acts or conditions, the person alleged or claiming to own such goods or such special or general property or right of possession therein or thereof shall not, by himself or his agents or servants, nor shall his agents or servants, remove or attempt to remove such goods or any thereof out of the charge or possession of the debtor, or of the trustee or any actual custodian thereof, until the elapse of 15 days after delivering notice in writing to the trustee of intention to remove.

(2) It shall not be implied from these provisions that the rights of others than the trustee have been thereby in any manner extended.

CONSIGNMENT STOCKS

As indicated by section 54, the title to consignment goods, where the owner retains ownership of goods in possession or in charge of a consignee, is recognized by the Bankruptcy Law.

In general, goods on consignment are to be regarded as being held in trust or under a bailment, and the trustee acquires no higher rights in them than the debtor had. The "reputed ownership" clause of the English Act (1914, C. 59, S. 38 (2) (c)) has been omitted from the Canadian act, so that the general body of creditors cannot take the advantage of claiming all merchandise found in the debtor's possession. The onus will be on the consignor to establish his claim, and where the agreement is relied upon to substantiate the claim, the court may examine subsequent transactions to ascertain whether the terms of the agreement have been carried out or whether the goods were delivered under conditions which indicated a sale. But "reputed ownership"

does little more than shift the onus, as it may be rebutted only by trade

custom.

Thus, title to goods remains in the consignor if delivered on "sale or return" unless a contrary intention appears. Similarly the title remains in the consignor as to the unsold balance where power is given to take therefrom so much as is paid for from time to time, or if consigned for storage to be paid for when used, or if consignee was authorized to retain as profit or commission the excess over a stated sum. Title will not pass where there is an agreement in writing to hold goods to the order of the creditor's agent, and not to use them until paid for and released, or if bought and paid for and delivery not taken. Title does not pass where goods are delivered to hold and if sold to hold the proceeds in trust, or in case of goods shipped on approbation, or where there was no intention that the property in the goods should pass until paid for in cash, or where the debtor was acting as agent to buy goods with funds of the principal. In Quebec possession is necessary to a consignment contract.

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MEETINGS OF CREDITORS

The custodian, within 5 days after his appointment, must send by registered letter to every creditor a notice of the first meeting of creditors to be held not later than 15 days after the mailing of such notice. The trustee may at any time call a meeting, and he is required to do so whenever requested in writing by 25 percent of the creditors holding 25 percent of the value of known claims. At least three creditors must be present to constitute a quorum, or all of them if their number does not exceed three. The chairman (official receiver or his nominee) of the meeting may accept telegraphic or cable communications as proof of the debt of a creditor who carries on business out of Canada, and likewise as to the authority of anyone claiming to represent and vote on behalf of a creditor. If the chairman is in doubt as to the admission of proof he may mark the proof as objected to and allow the creditor to vote subject to subsequent determination as to its validity. All questions, except where the act provides otherwise, are decided by the majority of votes, calculated as follows: One vote for every claim of or over $25 and not exceeding $200; two votes for claim between $200 and $500; three votes for claim between $500 and $1,000; and one additional vote for each additional $1,000 or fraction thereof. (Secs. 88-102.)

COMPOSITIONS

An insolvent debtor who wishes to settle his debts may require the authorized trustee to hold a meeting of the creditors to consider his proposal. In doing so he must submit a statement of his affairs, including a list of the creditors with addresses and amounts due each one and his proposal of composition or scheme of extension setting out the particulars, of any sureties or securities proposed. The trustee must notify the creditors at least 10 days before the meeting and send an account of the debtor's affairs and proposal. If the plan is approved by a majority of the creditors who hold threefourths of the amount of all proved debts, it is deemed to be accepted by all the creditors. The proposal must then be referred to the court, where it may be accepted or refused. If approved by the court, it becomes binding on all the creditors. (Secs. 11-13.)

32 Bankruptcy in Canada, Duncan and Reilley, pp. 205-6.

PRIORITY OF CLAIMS

Taxes due to the Dominion and Provincial Governments or municipalities, mortgages, and charges and liens against the property are not affected by the bankruptcy. After these claims and the landlord's priority for rent, as provided by Provincial laws, have been settled, the assets are distributed as follows:

1. Fees and expenses of the custodian and trustee.

2. Costs of the execution creditor including the sheriff's fees and disbursements, if it is an authorized assignment.

3. Wages, salaries, commission, or compensation of any employee for services rendered to the bankrupt or assignor during 3 months prior to the date of a receiving order or assignment and all indebtedness under any workmen's compensation act.

4. Claims resulting from injuries to employees not under a workmen's compensation act, but only on funds paid or payable by parties guaranteeing the insolvent debtor against damages resulting from such injuries.

5. General creditors who have proved their claims are paid pari

passu.

If a surplus exists after the foregoing claims have been settled, interest is paid on all debts from the date of the receiving order or assignment at the rate of 6 percent. Proper funeral and testamentary expenses of a deceased insolvent debtor claimed by the legal representatives are payable in priority to all other debts. (Secs. 121 to 125B.)

PREFERENCE

Every transfer of property, payment made, or obligation incurred by an insolvent person in favor of any creditor or to any person in trust for any creditor with a view to giving such creditor a preference over other creditors or which has that effect is deemed fraudulent and void as against the trustee, if the person so making or paying the same is adjudged bankrupt within 3 months after the date of making the transfer or payment, etc. (Sec. 64.)

DISCHARGE

Any debtor may, at any time after being adjudged bankrupt or making an authorized assignment, apply to the court for an order of discharge, to become effective not sooner than 3 months after the date of his being adjudged bankrupt, and the court will appoint a day for hearing of the application. Both trustee and creditors are given notice of this application, and the trustee must file his report with the registrar. On hearing the application the court may either grant or refuse an absolute order of discharge or suspend the operation of the order for a specified time or may grant an order of discharge subject to conditions. The court will suspend the discharge where the assets are not equal to 50 cents in the dollar on the amount of unsecured liabilities if the debtor cannot show that this fact arose from circumstances for which he cannot justly be held responsible. Where in the opinion of the court a debtor ought not to have been adjudged a bankrupt, or where it is proved to the

satisfaction of the court that the debts of the bankrupt are paid in full, the court may, on the application of any person interested, by order annul the adjudication. (Secs. 141 to 151.)

NOTE.-The Bankruptcy Act is complicated and more than a brief survey of its salient features has not been possible here. It is advisable for an American firm interested in a bankrupt debtor to consult counsel.

FARMERS' CREDITORS' ARRANGEMENTS

The Farmers' Creditors' Arrangement Act 34 provides that a farmer who is unable to meet his liabilities as they become due may make a proposal for a composition, an extension of time, or scheme of arrangement. The proposal is filed with the official receiver, who immediately calls a meeting of the creditors. If the proposal is accepted by the ordinary creditors and the secured creditors whose rights are affected agree to it, it is submitted to the court for approval. Where such creditors do not agree, there is reference to a board of review to formulate a proposal which, if approved by the creditor and the debtor, or if not approved but subsequently confirmed by the board, is binding on all parties.

A proposal in relation to a debt owing to a secured creditor or to a person who has acquired property subject to a right of redemption, except when confirmed by the board, requires the concurrence of such creditor. The act provides that whenever the rate of interest on a farm mortgage exceeds 7 percent, the mortgagor may tender the principal and interest, together with 3 months further interest in lieu of notice and thereafter no interest shall be payable at a rate in excess of 5 percent per annum.

The act does not apply to any debt incurred after May 1, 1935, without the concurrence of the creditor. The judicial committee of the Privy Council on January 28, 1937, affirmed the opinion of the Supreme Court of Canada in re Farmers' Creditors' Arrangement Act decided on June 17, 1936, holding that this legislation was intra vires by virtue of the exclusive authority of the Parliament. of Canada over bankruptcy and insolvency under the provisions of the North America Act,

PROVINCIAL DEBT ADJUSTMENTS

Debt adjustment acts in almost uniform terms were originally enacted in 1932 and 1933 by the legislature of the three Prairie Provinces with a view to aiding distressed farmers. In subsequent years these acts have been amended or issued as new consolidations. It is reported that debt adjustments under the Dominion Farmers' Creditors' Arrangement Act are now more active in Manitoba and Saskatchewan than under the provincial laws.

The Alberta Debt Adjustment Act of 1937 provides that a permit. must be obtained from the debt adjustment board before certain proceedings may be taken against a resident debtor where the original consideration arose before July 1, 1936. Among such proceedings which require the consent of the board are an action or suit for the recovery of any money which is recoverable as a liquidated demand

34 Ch. 53 of 1934 and ch. 20 of 1935.