Generally speaking, the policy of the Bankruptcy and Insolvency Act (“BIA”) is not to interfere with secured creditors, leaving them free to realize upon their security. While this makes sense in the abstract, the question that is most often posed by secured creditors is “what does this mean in a practical sense?  What exactly do I need to do to retrieve my secured asset?”

While secured creditors (once their security has been vetted by the Trustee in Bankruptcy and a release has been issued) are free to enforce their security as they would outside of a bankruptcy, the reality is that a Trustee in Bankruptcy, upon its appointment, will have secured the debtor’s premises, including changing the locks. As the Trustee’s primary goal is to maximize recovery for the unsecured creditors of the debtor, a Trustee will want to tread carefully before releasing any assets purportedly covered under a creditor’s Security Agreement. Not only will the Trustee need to get an opinion on the validity and enforceability of the creditor’s priority, but the Trustee may wish to assess the value of the asset to determine whether a possible surplus could result after realization. In fact, some Canadian courts have found that a seizure by a secured creditor is an offence unless the creditor has first obtained the permission of the Trustee. The rationale of course is that the immediate seizure could impair the Trustee’s ability to take an inventory of the bankrupt’s assets and ascertain its value.

The recommended course of action for a secured creditor prior to seizing its collateral is to file a Proof of Claim with the Trustee. Although they are not required to file a Proof of Claim under the BIA, this step can lend great assistance to a Trustee who may be faced with incomplete records. Alternatively, where the Trustee has only limited information on the debtor’s assets, it can serve a notice on the secured creditor compelling it to provide full particulars of its security under section 128(1) of the BIA. Should the creditor not respond to this request within 30 days, the Trustee is at liberty (with leave of the court) to sell or dispose of the property free of that security. In some cases, a Trustee may decide to redeem the security or ask the secured creditor for a postponement of realization to assess whether the inclusion of the secured asset in a liquidation sale could generate a surplus for unsecured creditors after full payment to the secured creditor.

Which form of Proof of Claim?

Should the secured creditor decide to file a Proof of Claim, the other question which arises quite often is which form of Proof of Claim should be filed with the Trustee? In most cases the standard form (Form 31) is the appropriate form of the Proof of Claim. The secured creditor is able to select the type of debt, enter the amount of its secured claim and provide a value for its secured assets. If there is a deficiency remaining after realization, the secured creditor can then amend its Proof of Claim (standard form) to downgrade its claim to an unsecured claim.

On the other hand, where the creditor has entered into a lease agreement with the debtor, it may also be prudent in some jurisdictions to file a Proof of Claim (Property) (Form 74) (“Property Claim”) under section 81(1) of the BIA on the basis that the lessor is the owner of the asset. The difference under this section is that the claimant is asserting a proprietary interest in the property, not a security interest. Upon receipt of the Property Claim, the Trustee has 15 days after either the receipt of the claim or after the first meeting of creditors (whichever is later) to either admit the Property Claim and return the asset to the claimant or give notice to the claimant that the claim is being disputed.

In some jurisdictions, the practice has been to file both a secured claim (as leases with a term for more than a year fall under the scope of the Ontario Personal Property Security Act) and a Property Claim with the Trustee. To ensure the correct form of Proof of Claim is utilized, secured creditors should speak to an insolvency lawyer in the appropriate jurisdiction.

In most cases, the process is a smooth one for secured creditors. Although a secured creditor may view the Trustee’s review as a hindrance, its gate-keeping function is an important step. A Trustee, having received an opinion that the secured creditor has priority, will generally allow the creditor to recover its collateral. In cases where the secured asset may help generate value for the unsecured creditors, it may be warranted for the Trustee to work with the secured creditor to find a way to maximize value for both the secured and unsecured creditors.