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Canadian bankruptcy: the first meeting of creditors. (International Affairs Section).

Editor's note: A previous article "Insolvency: The Canadian Landscape" appeared in the May 2002 issue of Business Credit providing an overview of the Canadian insolvency regime. This article explores in more detail creditors' rights in Canadian bankruptcy proceedings.

The mail arrives, and you open up an envelope only to learn that one of your Canadian customers has gone bankrupt! As the expression goes, "another one bites the dust!" The notice also extends to you an invitation to attend the first meeting of creditors.

How Do You RSVP?

The decision to become involved or not is a personal decision based upon the amount of your claim, your past dealings with this customer, recent correspondence and dialogue and many other factors. You may consider retaining a Canadian agent (usually a Canadian lawyer, trustee in bankruptcy or other Canadian business associate) to attend the first meeting of creditors. Assuming you have decided to actively participate in the bankruptcy process, you or your Canadian agent should be generally aware of the following:

Timing

The first meeting of creditors is scheduled within three weeks of the date of bankruptcy. This allows sufficient time for the trustee to investigate the bankrupt's affairs and to report the results of its review at the meeting.

Proof of Claim

As a creditor, you are afforded the opportunity to file your proof of claim with the trustee prior to the meeting. You must file a proof of claim to be eligible to vote at the meeting.

You should complete the proof of claim and proxy section which will be included along with the notice that you received of the bankruptcy. In addition, you should review the list of creditors to determine the magnitude of the indebtedness to each creditor. If you are one of the larger creditors (or for that matter, just interested), you may want to contact these companies to discuss the events leading to this customer's bankruptcy. Certain specific industries have credit associations (e.g., Sports Industry Credit Association, National Apparel Bureau, Food Industry Credit Association, etc.) which may be a source of information to assist you in obtaining answers to your questions regarding the customer's bankruptcy.

Information on the Bankrupt

You should also review the bankrupt's Statement of Affairs. If it is not enclosed with the notice, you may want to obtain a copy from the Trustee in Bankruptcy. The Statement of Affairs discloses the net realizable value of the assets, if any, and provides further derails regarding secured, preferred, contingent and unsecured creditors.

You may discover some discrepancies between the bankrupt's statement and the information that you have in your records. These discrepancies should be brought to the trustee's attention either prior to or at the first meeting of creditors.

You should also be aware that it is usual practice for an officer of the bankrupt corporation to be examined under oath by the Official Receiver (a government official and the Superintendent of Bankruptcy's representative) either prior to or after the first meeting of creditors. Although there are preset questions, the questionnaire provides for additional questions to be put to the officer of the bankrupt corporation. Creditors may want to prepare a number of questions which should be submitted to the trustee's office who will in turn forward them to the Official Receiver to be put to the officer of the bankrupt corporation. While this is permissible, you should bear in mind that it is nor an exhaustive process and the number of questions should be reasonable in the circumstances. By having these questions answered prior to the meeting, this should provide for a more meaningful discussion at the meeting.

You may be aware of certain transactions which are suspect. This should also be brought to die attention of the trustee as soon as possible so that it can be investigated and reported on at the first meeting of creditors.

If you would like to vote at the meeting but cannot attend, you may appoint someone who will be there is your proxy, such as your agent as noted above or even the trustee.

If you are a creditor through your corporation, the corporation must appoint you as its proxy, in order to vote.

Purpose

The purpose of the first meeting of creditors is to:

* consider the affairs of the bankrupt;

* affirm the appointment of the trustee or substitute that trustee with another;

* appoint inspectors; and

* give directions to the trustee on the administration of the bankrupt estate.

The bankruptcy process is very much the creditors' "bat and ball." Creditors are an integral part of the process and provide directions to the trustee in bankruptcy. The purpose(s) of the first meeting is fulfilled at the behest of the creditors.

The Bankrupt's Affairs

At the meeting, the trustee usually provides a written preliminary report of the administration. It is the trustee's duty to verify the accuracy of the bankrupt's Statement of Affairs and follow up on any discrepancies.

From this report, you assess if any transactions by the bankrupt prior to the bankruptcy should be investigated, such as payments made in preference to other creditors or the conveying or settling of property at the creditors' expense, etc.

The Official Receiver who acts as the chairperson of the meeting will usually review the highlights of the examination of the officer of the bankrupt corporation (if time permitted the examination prior to the meeting). If questions were provided by creditors beforehand, the Official Receiver will then provide the answers given by the officer of the bankrupt corporation either at the meeting, or arrangement should be made with the trustee upon receipt of the written examination to deliver a copy to creditors requesting to review the examination. The officer of the bankrupt corporation is required to be present at the meeting and may be called upon to answer questions. If the questions are reasonable and pertain to the bankrupt's conduct and property, the Official Receiver will ask the officer present to respond to the questions.

Trustee Appointment

Keep in mind that it is usually the bankrupt who selected the trustee in the case of a voluntary assignment in bankruptcy. As a creditor, you have the right to vote for or vote to replace that trustee with another of your own choosing. The vote is by special resolution which means that a majority in number of persons present, representing 75 percent of the dollar value of claims filed, must vote for the substitution.

Trustees are substituted when creditors feel that there is a conflict of interest. In the writers experience, substitution is a rare occurrence. Creditors should remember that a trustee in bankruptcy acts as a court officer and owes a duty of care to both the creditors and the debtor. The trustee's role is to ensure that the bankruptcy process is respected and served in accordance with the provisions of the Bankruptcy and Insolvency Act (Canada).

Inspectors

As noted above, the Bankruptcy and Insolvency Act places administrative control in the hands of the creditors. One such control, exercised particularly at the first meeting of creditors, is the appointment of Inspectors. At the first meeting of creditors, the chairperson asks for nominations of Inspectors. A maximum of five inspectors may be appointed. The creditors may appoint any individual to be an inspector, except a person who is party to any contested action or proceedings by or against the estate of the bankrupt. The inspector must avoid any conflict of interest.

The inspectors are appointed as representatives of all creditors and occupy positions of trust. They are expected to assist the trustee by virtue of their experience and are required to supervise certain aspects of the trustee's administration.

It is usual for the first meeting of inspectors to follow the first meeting of creditors. Depending upon the complexity of the administration, further meetings of inspectors may be required. These subsequent meetings of inspectors are usually held either in person or by telephone conference call.

Giving Directions

After considering the affairs of the bankrupt, creditors may provide direction to the trustee. These directions can be for the method of disposing of certain assets or for the raking of proceedings to attack fraudulent preferences, reviewable transactions and settlements. This is, of course, subject to the availability of funds to the estate, or otherwise creditors may be required to fund such endeavors where the estate is without funds.

What Happens if You Miss the Meeting?

This should not be a problem. As previously noted, if you have certain questions that you want to be asked of the bankrupt, you can set them out in a letter and forward them to the trustee prior to the examination of the officer of the bankrupt corporation. You should request from the trustee the responses given at the examination. You should also ask the Trustee for a copy of the Trustee's preliminary report presented at the meeting.

Should You Attend?

As noted above, that will depend on the amount of your claim and whatever input you would like to have in the bankruptcy.

Even if you don't attend the meeting, as long as you have filed a proof of claim with the trustee's office, you are entitled to receive updates on specific requests, relevant notices in the bankruptcy and a dividend, if funds are available for distribution.

As a creditor, you have the right to attend and give it your best to influence the outcome of the bankruptcy process to your benefit. The writer would encourage all creditors to take an active role in the bankruptcy administration to ensure that the process is properly served.

Bryan A. Tannenbaum, FCA, CIRP is a Trustee in Bankruptcy and President of Mintz & Partners Limited in Toronto, Ontario, Canada. For more information, please e-mail Bryan at bryan_tannenbaum@mintzca.com or call him at 416/644-4302.
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Author:Tannenbaum, Bryan A.
Publication:Business Credit
Geographic Code:1CANA
Date:Oct 1, 2002
Words:1634
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