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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
Both debtors and creditors may initiate liquidation procedures. While no entities are explicitly barred from initiating such a procedure, they must meet certain criteria to have standing to commence the proceeding.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
A debtor may initiate a voluntary liquidation by filing an assignment for the general benefit of its creditors. Such an assignment is made with the official receiver in the debtor’s operating jurisdiction and must include a sworn statement listing:
- all of the debtor’s assets and liabilities;
- the names and addresses of its creditors; and
- the amounts owing to any creditors.
Creditors may initiate an involuntary liquidation by filing an application for a bankruptcy order with the court in the principal jurisdiction in which the debtor conducted business or resided during the year preceding the date of the application. The application must demonstrate that:
- the debtor committed an act of bankruptcy (the most common of which is a failure to meet its obligations as they become due) within the six months preceding the commencement of the bankruptcy proceedings; and
- the debt owing to the creditor is at least C$1,000.
A debtor will be deemed bankrupt if a proposal under the Bankruptcy and Insolvency Act fails to be ratified by the prescribed creditor voting thresholds.
A liquidation of a debtor’s asset may also occur through a Companies’ Creditors Arrangement Act proceeding. Companies’ Creditors Arrangement Act filings are typically made by the debtor, although they can be creditor led. A debtor must have at least C$5 million in debt to be eligible to file for protection under the Companies’ Creditors Arrangement Act.
A debtor’s assets may also be liquidated through a receivership proceeding. Typically, a receivership is an involuntary proceeding commenced by a creditor.
How are liquidation procedures formally approved?
The liquidation of a bankrupt company is a court-sanctioned process and formal approval is subject to compliance with the Bankruptcy and Insolvency Act. Other proceedings – such as a Companies’ Creditors Arrangement Act or court-appointed receivership – are governed by the courts, and any liquidation is subject to court approval.
What effects do liquidation procedures have on existing contracts?
Commencing liquidation procedures does not automatically terminate a contract. However, the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act provide the debtor with a statutory right to terminate or abandon any agreement that the debtor is subject to as of the date of filing, with certain enumerated exceptions.
What is the typical timeframe for completion of liquidation procedures?
The length of a liquidation procedure depends on the specific facts of each case and can range from weeks to years.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
In a bankruptcy, the liquidator is typically a trustee in bankruptcy that is appointed when a debtor makes a voluntary assignment or is adjudged bankrupt. A trustee is chosen by the debtor at the time of the voluntary assignment or by the creditor at the time of the commencement of an involuntary bankruptcy. The proposed trustee is confirmed at the first meeting of creditors. The method of liquidation is often approved by the court before the liquidation commences and the resulting sale, if outside the ordinary course of business or above a prescribed threshold, is also subject to court approval.
A separate liquidator or auctioneer may also be retained to liquidate the assets at public auction. If an auctioneer is retained, the powers and responsibilities will be set out in a contractual arrangement that is subsequently court approved.
What is the extent of the court’s involvement in liquidation procedures?
The court is the supervising authority over the proceedings and nearly all actions taken with respect to a liquidation proceeding require its approval.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
During the approval stage of any liquidation, regardless of the proceeding, the creditors with an economic interest in the assets will have an opportunity to object to the pending sale. The court will typically take the views of the economic stakeholders into account in making any order regarding the liquidation of the debtor’s assets.
A stay of proceedings becomes effective once a Companies’ Creditors Arrangement Act Initial Order is granted. When a stay is in place, creditors are not permitted to take any steps to enforce their rights or remedies against the debtor or its assets. There are exceptions to the stay of proceedings. In certain circumstances, secured creditors are not stayed from taking enforcement steps in a proceeding commenced under the Bankruptcy and Insolvency Act.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
In a Bankruptcy and Insolvency Act proceeding, the directors, officers and shareholders typically cease to have authority over the debtor’s assets. Specifically, the debtor’s assets will be automatically vested in the bankruptcy trustee. During a receivership, the receiver assumes the debtor’s role. Directors typically continue to be involved in a liquidating Companies’ Creditors Arrangement Act proceeding, wherein the debtor remains in possession and control of its assets. During such a proceeding, a monitor is appointed by the court to oversee the liquidation and report to the court.
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