Deck 29: Creditors Rights

Question 1

A commercial proposal made by an insolvent person is an offer made by the debtor to its creditors

A)to not resist a receiving order.
B)whereby the debtor agrees to file for bankruptcy.
C)to make an assignment of all assets.
D)for providing an orderly repayment of its debts (or some part of its debt)over a period of time.
E)to reorganize its business and straighten out its affairs.

Answer 1

D

Question 2

Jumping Jellyfish Corporation is a Canadian business that is indebted to a number of persons and entities.On January 2,2003,the accountant of Jumping Jellyfish examines the books and makes the determination that the current debts of the corporation total $2 million,and the assets and cash total only $200 000.The accountant concludes that the corporation will be unable to pay its debts as they become due.The corporation is

A)insolvent and bankrupt.
B)insolvent.
C)a trustee.
D)a receiver.
E)bankrupt.

Answer 2

B

Question 3

Use the fact situation in Q2 to answer the related question that follows. In light of the history of the company prior to its bankruptcy,in determining whether the payment made to the largest supplier is a fraudulent preference,the court will also consider

A)that this supplier knew that the company was in poor financial condition.
B)that the payment of this supplier was made within 12 months preceding the bankruptcy of General Widgets.
C)that the payment of this supplier was made at the time the company was insolvent.
D)that this supplier was George's friend.
E)all of the above

Answer 3

A

Question 4

Use the fact situation in Q2 to answer the related question that follows. Given the bankruptcy of General Widgets,the incorporation of the new company by George is

A)a fraudulent assignment.
B)a reviewable transaction.
C)a fraudulent preference.
D)a fraudulent transfer.
E)none of the above

Question 5

Use the fact situation in Q2 to answer the related question that follows. Assume that the company was located in Ontario.In order to recover the assets of General Widgets that George transferred to the new company,the trustee in bankruptcy would

A)ask the court to review the transaction.
B)ask the court to set aside the transaction as being a settlement.
C)ask the court to set aside the transaction as being a fraudulent conveyance.
D)ask the court to nullify the transaction as being a fraudulent preference.
E)none of the above

Question 6

Use this fact situation to answer the related questions that follow. General Widgets is a large provincial manufacturing company that has been in business for a number of years,but when the economic recession began in 2008,the company found itself experiencing a lack of sales,which affected its ability to pay its suppliers.George is the principal shareholder of the company and has an outstanding shareholders loan of $100 000.00.Between January 2008 and February 2008,the company was managing to pay its creditors,although slowly,and its assets were sufficient to satisfy its indebtedness,but by the end of January 2008 its assets have shrunk well below its debt load.In March 2008,George ensures that the company repays his shareholders loan.Thereafter,in December 2008,the company actively decides to pay only its major creditor,a supplier with whom George is good friends.Also in December 2008,seeing that General Widgets is sinking deeper and deeper into debt,George decides to incorporate a new company into which he transfers $300 000.00 of General Widgets' assets.On March 1,2009,General Widgets makes a voluntary assignment in bankruptcy.
In this case,the fact that between January and February 2008 the company was just managing to pay its creditors probably means that

A)the company is bankrupt.
B)the company is insolvent.
C)the company is borderline insolvent.
D)the company is solvent.
E)none of the above

Question 7

In a bankruptcy proceeding,the creditors can,if they wish,appoint

A)any number of inspectors.
B)a substitute trustee.
C)the court of jurisdiction.
D)an official judicial observer.
E)the official receiver in bankruptcy.

Question 8

James had made a consumer proposal (Division II)to his creditors.He wanted a reduction and extension of time for the payment of his debts.A formal meeting was not requested by any of the creditors.Now the administrator must

A)run a public notice in the newspaper.
B)get approval of the proposal from the court.
C)notify and file the document with all creditors.
D)provide counselling to the debtor.
E)see that all the provisions meet Division I rules.

Question 9

Use the fact situation in Q2 to answer the related question that follows. Assume that the bank is a secured creditor of General Widgets and that its security is greater than the amount that the company owes to the bank,which enforces its security.In such a case,

A)the bank cannot enforce its security,but it will share rateably with the other secured creditors.
B)the bank cannot enforce its security during the bankruptcy of the company.
C)the bank can retain the full amount recovered under its security.
D)the bank must repay the trustee in bankruptcy any excess recovered over the amount of the debt owed it.
E)none of the above

Question 10

Under the Bankruptcy and Insolvency Act,the claims of unpaid employees against the assets of a bankrupt employer rank in priority

A)ahead of unsecured creditors.
B)partly as preferred creditors.
C)pro rata with secured creditors.
D)partly ahead of secured creditors.
E)none of the above

Question 11

The Superintendent of Bankruptcy has the power to

A)investigate where a bankruptcy offence may have been committed.
B)issue directives to trustees or receivers.
C)intervene in any bankruptcy court proceeding.
D)suspend or cancel a trustee's license.
E)all of the above

Question 12

Use the fact situation in Q2 to answer the related question that follows. In order to recover the amount of George's shareholders loan,the trustee in bankruptcy of General Widgets will

A)sue George for damages for breach of duty of care.
B)sue George for breach of fiduciary duty.
C)apply to the court to have the transaction nullified.
D)apply to the court to enquire whether it is a reviewable transaction.
E)all of the above

Question 13

Use the fact situation in Q2 to answer the related question that follows. Also in this case,the date on which it can be argued that the company is insolvent is

A)January 2008.
B)March 1,2009
C)February 2008.
D)March 2008.
E)the end of January 2008.

Question 14

Danny is thinking of bankruptcy for his business,but so far he has not made an assignment,nor is the business subject to a receiving order.Yet,because Danny meets all the requirements of bankruptcy,the Bankruptcy and Insolvency Act refers to Danny as

A)a candidate for bankruptcy.
B)an insolvent person.
C)an applicant for bankruptcy.
D)being bankrupt.
E)a consumer debtor.

Question 15

Use the fact situation in Q2 to answer the related question that follows. Assume that by March 2009,the company's business was starting to recover,but the company was still insolvent.In this case,instead of voluntarily assigning itself into bankruptcy,General Widgets could have

A)made a commercial proposal.
B)commenced winding-up proceedings.
C)made a consumer proposal.
D)obtained a receiving order.
E)all of the above

Question 16

Regarding bankruptcy,public policy would be primarily concerned with

A)making it easy and inexpensive to apply for bankruptcy.
B)the punishment of honest debtors who after bankruptcy simply re-engage in the same questionable business activities.
C)placing some limits on who can use bankruptcy proceedings.
D)forcing reputable creditors to accept an arrangement designed to save a debt-ridden company.
E)keeping economic initiative alive.

Question 17

Use the fact situation in Q2 to answer the related question that follows. In light of the bankruptcy of General Widgets,the payment of George's shareholders loan is probably

A)a reviewable transaction only.
B)both a reviewable transaction and a fraudulent transfer.
C)a fraudulent assignment only.
D)a fraudulent preference only.
E)a fraudulent transfer only.

Question 18

The Steamboat Co.is Charlie's sole creditor.He owes them $6500 from his sign painting business.In order to obtain a receiving order,Steamboat must

A)comply with all formalities required by the federal Bank Act.
B)make sure the debtor has committed an act of bankruptcy within the previous six months.
C)file a petition with the court in the creditor's judicial district.
D)provide the court with the name of the appointed trustee.
E)prove the facts alleged by any other petitioning creditor.

Question 19

Laura had made a commercial proposal (Division I)to her creditors.They have accepted it by a two-thirds vote.The next step is for the trustee to

A)schedule a hearing in the Bankruptcy Court.
B)apply to the court to have the proposal declared binding upon all the creditors.
C)get the approval of the receiver in bankruptcy.
D)determine if the agreement is prejudiced against general creditors.
E)file the document with the Superintendent of Bankruptcy.

Question 20

Use the fact situation in Q2 to answer the related question that follows. Given the bankruptcy of General Widgets,the payment to the company's largest supplier is probably

A)a fraudulent preference only.
B)a reviewable transaction only.
C)both a reviewable transaction and a fraudulent preference.
D)a fraudulent transfer only.
E)a fraudulent assignment only.

Question 21

The RRSPs of a bankrupt are exempt from seizure.

Question 22

Of the preferred creditors,the highest priority of claim is

A)up to $2000 arrears in wages per employee.
B)up to three months of rent due to the landlord.
C)expenses and fees of the trustee in bankruptcy.
D)up to two years of municipal taxes.
E)the amount required by government to be deducted from employees' salaries.

Question 23

As far as claims against the property of a bankrupted debtor go,the trustee pays the general creditors in priority to which of the following?

A)secured creditors
B)preferred creditors
C)super priority claims
D)deferred creditors

Question 24

You are a duly licensed and appointed trustee to handle the Markin Brothers bankruptcy.You have taken possession of both personal and business assets of Sam and Joe Markin.You have retrieved all the books and documents relating to their affairs.You also have the authority to do each of the following EXCEPT

A)borrow further money for the business by pledging any remaining unsecured assets.
B)negotiate with creditors to take specific assets in lieu of a money settlement.
C)dismiss any unqualified inspectors.
D)take over the management of the business.
E)employ a lawyer,who will be paid out of bankruptcy funds.

Question 25

A secured creditor does not have to prove its debt before its debt ranks as a claim against the bankrupt's estate.

Question 26

Businesses are often required to extend credit as a means of increasing sales.Before granting credit,businesses are encouraged to take any of the following steps EXCEPT

A)take advantage of the available public records of credit history,proposals,and bankruptcies.
B)search both the corporate name of the debtor and its directors and officers to determine if the company is merely a fresh start after a bankrupt business.
C)not request personal guarantees of the principals because the company's agreement to pay will always suffice.
D)take security in the goods provided.
E)set up a control system to monitor lien periods for building supplies and limitation periods.

Question 27

In bankruptcy proceedings,the term "settlements" refers to

A)the amount each creditor is willing to settle for to satisfy its claim.
B)the end results in the bankruptcy proceedings.
C)the negotiations between classes of creditors.
D)gifts of property made by the debtor before becoming bankrupt.
E)complying with each provision in the Bankruptcy and Insolvency Act.

Question 28

On a bankruptcy,preferred creditors rank in priority before secured creditors.

Question 29

In the context of bankruptcy proceedings,liquidating dividends are

A)proceeds from the sale of assets over and above the security claims.
B)funds distributed to shareholders when a corporation is in bankruptcy.
C)the distributed funds that are over and above the stated book value.
D)unexpected returns from assets that were unaccounted for in the books.
E)payments made to creditors from time to time as realization of the debtor's assets permits.

Question 30

Brianna,a framing contractor,has a duly registered builders' lien on the property owned by Bowing Development.This lien gives Brianna the right to

A)bring an action and obtain a court order appointing a trustee.
B)commence a legal action within 90 days against the general contractor.
C)place a claim on the owner's business assets.
D)obtain 15 percent of the statutory holdback.
E)personally take possession of the property in order to realize her claim.

Question 31

The court might refuse a debtor's discharge by bankruptcy for any of the following reasons EXCEPT that

A)the debtor caused the bankruptcy by living off of funds taken from the business.
B)the debtor neglected to keep proper books.
C)the debtor failed to satisfactorily account for losses or deficiencies in assets.
D)three months preceding bankruptcy the debtor gave an undue preference to a creditor.
E)the debtor's assets proved insufficient to pay the unsecured creditors more than fifty cents on the dollar.

Question 32

All creditors are considered to be equal in bankruptcy law.

Question 33

For five years,Maxine had been regularly receiving the same bill for $850 from Credit Landscaping.She didn't think she should pay it because they botched up the landscaping around her house.However,now,after these five years,she sends them a $425 cheque with a note saying,"Take this-it's all you're going to get." This move by Maxine will

A)start the time all over again on the statue of limitations.
B)get herself out of the liability.
C)have no effect on the limitation time period.
D)immediately give rise to a legal action.
E)spur Credit Landscaping to turn the balance owed over to a collection agency.

Question 34

Each of the following parties has a right to file a builders' lien EXCEPT the one that

A)is an architect and has prepared plans for the building.
B)sells tools or machinery to the contractor.
C)delivers goods directly to the contractor's premises and can prove that the goods were used in the construction.
D)rents equipment for use on the contract site.
E)delivers goods directly to the building site.

Question 35

Where,just before declaring bankruptcy,a person transfers title of real property to his children telling them that he wants to protect the property from bankruptcy,the transfer is a fraudulent conveyance or transfer.

Question 36

An unpaid seller who repossesses goods from a bankrupt and then sells them,can still make a claim for any deficiency in respect of those goods.

Question 37

Where an insolvent person transfers land which he owns to his spouse at one-third of its fair market value within 12 months of his bankruptcy,his spouse may be required to pay the difference gained to the trustee in bankruptcy.

Question 38

In most Canadian jurisdictions,a plaintiff must start court proceedings within a two-year period.Limitation periods are justified on any of the following grounds EXCEPT that

A)a person who fails to pursue a claim leaves the other party in a state of uncertainty that ought not to continue permanently.
B)as time passes,it becomes more difficult to produce the evidence concerning the facts of the case.
C)memories fade over time.
D)any unreasonable delay provides defendants with an opportunity to hide assets or become judgment proof.

Question 39

A bulk sale,as defined by provincial statutes,is a sale

A)of all goods in process and semi-finished inventories.
B)governed by the federal Bulk Sales Act.
C)of such a large portion of the assets that the business will cease to operate.
D)whose purpose is to deprive creditors of their equitable share in the assets of the company.
E)of essentially all the stock-in-trade,fixtures,and chattels of a business.

Question 40

Mike's business is not doing too well and he is contemplating bankruptcy unless things change soon.As he currently deals with his creditors,the guiding principle should be that

A)creditors of the same class should be treated equally.
B)preferences should not include family or friends.
C)all transactions within three months preceding bankruptcy are indefensible.
D)transfers of property such as the sale of inventory will be invalidated.
E)bankruptcy is an avenue of last resort and should be avoided at all cost.

Question 41

The Bankruptcy and Insolvency Act distinguishes between three classes of debtors.

Question 42

When is an undischarged bankrupt liable to a fine or imprisonment?

Question 43

What is a "vulture fund"? What role can a vulture fund play in helping creditors who are involved in bankruptcy proceedings?

Question 44

Regarding bankruptcy,what does it mean not to be dealing at "arm's length" with another party? When might this occur?

Question 45

A builder's lien is available only to creditors who participate directly as workers,or who supply material for use directly in the construction work.

Question 46

When a debtor makes an assignment is bankruptcy,the court will discharge the person from obligations to creditors.

Question 47

To what extent does building lien legislation really protect subcontractors,workers,and suppliers of goods,and who really benefits?

Question 48

A trustee in bankruptcy has the same general duties as does a normal trustee.Explain.

Question 49

Under the Bankruptcy and Insolvency Act,what is a commercial proposal?

Question 50

What is the object of bulk sales legislation?

Question 51

What is a bulk sale?

Question 52

Provincial legislation regarding fraudulent transfers goes further than the Bankruptcy and Insolvency Act.Explain.

Question 53

What is the difference between a bankrupt person and an insolvent person?

Question 54

What is a fraudulent preference? Give an example of a fraudulent preference.

Question 55

What conditions must be satisfied by the seller of unpaid goods in order to repossess them from a bankrupt business?

Question 56

In Ontario,on a sale of assets,what normal searches should the buyer conduct?

Question 57

Bo Red operated Bo's Appliance,a retail appliance business,from premises he was leasing.He sold his complete inventory to a competitor,Mom's Appliance Warehouse Inc. ,for $100 000.He then carried on business from the premises devoted solely to selling compact discs,records,and DVDs.This business operation was greatly diminished from the previous appliance operation.The creditors of Bo in relation to the appliance business are unpaid and just now discover,two months after the sale to Mom's Appliance,that Bo is no longer in the appliance business.What remedies,if any,do Bo's Appliance's creditors have?

Question 58

An assignment in bankruptcy is a procedure under which a person voluntarily declares bankruptcy.

Question 59

In respect to a statute-barred debt,under what circumstances is there a presumption of a new promise to pay the whole indebtedness?

Question 60

Robert Badger operated a hardware business as a sole proprietorship and owed $200 000 to creditors.On June 1,1998,he transferred $20 000 of inventory to Smith Supplies Inc.to pay in full the indebtedness he owed that company.At the time he was not paying his debts as they became due.Instead he paid some money towards accounts when pressed,or he negotiated with them to give him more time to pay.On July 15,he transferred a truck used in the business for one dollar to his cousin.On July 2h,a creditor obtained a default judgment and the sheriff seized goods on July 28 in relation to that judgment.The goods were later sold in a judicial sale.On July 29,he purchased on credit $15 000 worth of new inventory.On August 14,a creditor petitioned him into bankruptcy.List each incident where there is an act of bankruptcy.Discuss Robert's situation in relation to the provisions of the Bankruptcy and Insolvency Act.

Question 61

I.M.Construction Ltd.decided to profit from the real estate boom and build a small retail and office building on land that it owns.Before the building is complete I.M.Construction Limited becomes insolvent.The property is subject to a mortgage that is not fully advanced and to many builders' liens.There have been inquiries from a number of parties who would be interested in renting space in the building.The real estate market is still booming.What practical advice do you have for the mortgage company and the lien holders?