A recent article in The Lawyers’ Weekly addressed the stigma of bankruptcy, which may prevent some estate trustees of insolvent estates from pursuing a formal declaration of bankruptcy. Many associate bankruptcy with mismanagement and failure. The author suggests that the perceived dishonour of bankruptcy may even prevent lawyers from presenting bankruptcy as an option to clients. Even the most responsible among us, however, might die at an unexpected time, owing debts we had planned to discharge. Lawyers can help dispel the stigma by canvassing the benefits of bankruptcy with their clients.
It is important to keep in mind that insolvency and bankruptcy are related but discrete concepts. An “insolvent” estate is one in which the estate assets are insufficient to satisfy its debts. The administration of an insolvent estate is governed by the Trustee Act and the Estates Act. A “bankrupt” estate is one that has been formally declared bankrupt. The administration of a bankrupt estate is primarily governed by the Bankruptcy and Insolvency Act.
An estate trustee is responsible for settling an insolvent estate’s debts. In contrast, a licensed trustee in bankruptcy takes control of a bankrupt estate, pursuant to the Bankruptcy and Insolvency Act. This might be a major benefit to an estate trustee with little or no experience in administering an estate or settling debts.
A second benefit is that declaring bankruptcy removes the potential for the estate trustee to be held personally liable to a creditor. If the estate is bankrupt, the estate trustee is no longer responsible for discharging the estate’s debts and cannot be held liable.
We have written about insolvent and bankrupt estates many times on this blog, covering topics such as: the matrimonial home and bankruptcy; personal liability of the estate trustee; considerations in declaring an insolvent estate bankrupt; family law equalization claims and bankruptcy; children’s money and parents’ creditors; and RRSPs and bankruptcy.
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Administration of an insolvent estate raises a number of unique challenges that the estate trustee must maneuver. One particularly unique challenge is the determination of whether or not it would be beneficial to petition the estate into formal bankruptcy or to administer the estate as an insolvent testamentary estate.
Commonly, an estate that does not have sufficient assets to pay its liabilities is referred to as “insolvent” or “bankrupt” interchangeably. However, these two concepts are distinctly different. An estate that is bankrupt is one that has been assigned and declared formally bankrupt. An insolvent estate, on the other hand, is one that simply does not have enough funds, liquid or otherwise, to pay all of its debts.
When an estate trustee is confronted with the task of administering an insolvent estate, there are a number of matters that ought to be considered and explored, including exposure to personal liability, the priority of payment of creditors and level of desired control over the estate in question.
First and foremost, an estate trustee must consider the level of exposure to personal liability that he or she is willing to accept. As a fiduciary, an estate trustee is obligated to pay the estate debts and may attract personal liability if they fail to appropriately apportion available funds among the deceased’s creditors. If an estate trustee makes a petition to have the estate declared bankrupt, then he or she will not only relinquish complete control of the estate to the appointed trustee in bankruptcy, but may also avoid personal liability if the estate assets are not appropriately proportioned among its creditors.
An estate trustee must avoid giving preferential treatment to creditors of the estate. This principle is codified in s. 50 of the Trustee Act, R.S.O. 1990, c. T. 23, and s. 5 of the Estate Administration Act, R.S.O. 1990, c. E.22. However, the priority of which estate debts ought to be paid differ depending on whether the estate is administered as an insolvent testamentary estate or a bankrupt estate. For instance, when in bankruptcy the Bankruptcy and Insolvency Act, provides that payment of support arrears will take priority over the payment of federal income taxes, while in the case of an insolvent estate, federal income taxes take priority.
Finally, an estate trustee must understand that it is not possible to retain any level of control over the administration of an estate once it has gone into formal bankruptcy proceedings. Accordingly, it would be prudent to first obtain advice in relation to the most effective and appropriate manner to move forward with the administration of an insolvent estate.
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Yesterday, the Supreme Court of Canada released its decision in Schreyer v. Schreyer (2011 SCC 35). The decision dealt with the issue of whether an equalization payment due to a spouse survived the bankruptcy of the owing spouse.
In determining the issue, the Court noted the perceived clash between family law and bankruptcy law.
In Schreyer, the parties separated in 1999 and filed for divorce in 2000. The husband was the owner of the family farm. The parties consented to an equalization of their assets. Before the equalization could be judicially considered, the husband filed for bankruptcy. The wife was not listed as a creditor, and the husband was discharged from bankruptcy in 2002. An equalization order was then made in favour of the wife, but the Manitoba Court of Appeal held that the wife’s claim was extinguished by the discharge of the husband’s bankruptcy. The wife appealed to the Supreme Court of Canada.
The Supreme Court of Canada agreed with the Manitoba Court of Appeal, and dismissed the appeal. Manitoba was said to be an “equalization jurisdiction”, and not a “division of property jurisdiction”. (Ontario is also an “equalization jurisdiction”.) The wife did not have any proprietary right in the husband’s property, and was therefore only a creditor of the husband.
As to the effect of bankruptcy, the wife’s claim was provable in the husband’s bankruptcy. It was neither proprietary, nor was it exempt from the effect of a discharge as a claim for support or maintenance. Upon the discharge of the husband, the husband was released from all claims provable in bankruptcy, including the equalization claim.
As to the fact that the wife was not notified of the husband’s bankruptcy or discharge, the Court noted that she could bring a claim in bankruptcy to remedy this. However, she would only be entitled to seek the dividend she would have otherwise received. In the case before the Court, there was not dividend paid to creditors, and thus, such a claim would prove fruitless.
Under Manitoba’s Judgments Act, the family farm was exempt from execution. The wife, however, could apply to the bankruptcy judge for leave to pursue her claim against the exempt property. Alternatively, the wife could pursue a remedy such as spousal support.
Although the appeal was dismissed, the Court did not award costs to the husband, “in light of the particular circumstances of this case”. The Court appeared to lament the fact that “In its current form, therefore, the [Bankruptcy and Insolvency Act] offers limited remedies to spouses in the appellant’s position”, and stated that “It seems to me that this matter is ripe for legislative attention so as to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes.”
Have a great weekend.
Paul E. Trudelle – Click here for more information on Paul Trudelle.