Question 1

Tony's Donuts makes a proposal to creditors whereby all secured creditors are placed in the same class and allowed to recover 100 cents on the dollar, all preferred creditors are placed in the same class and allowed to recover 80 cents on the dollar, and all unsecured general creditors are put in the same class and allowed to recover 5 cents on the dollar.Some unsecured creditors object to the proposal because they assert that the classifications proposed do not allow them to recover enough and they be in the same class as the secured creditors.That argument will certainly persuade a judge.

Accepted Answer

The argument that the unsecured creditors should be in the same class as secured creditors is not necessarily persuasive to a judge. While it is possible that a judge might rule in favor of the objecting unsecured creditors, it would depend on the specific facts and circumstances of the case and the applicable law. Ultimately, it is up to the judge to decide whether the proposed plan is fair and equitable, taking into account the interests of all creditors and the debtor.

Question 2

Which of the following statements is TRUE?

Accepted Answer

This statement is true. Being forced into bankruptcy typically means that an individual or corporation has committed an act of bankruptcy, such as being unable to pay debts as they become due, which is a sign of insolvency. However, not all insolvents are necessarily forced into bankruptcy.

Question 3

Chios Inc is in the business of importing luxury goods into Canada for the purpose of resale.The company prospered for many years.More recently, however, it has begun to struggle as a result of the government's decision to tighten up the laws governing the inspection and assessment of imported goods.When the government announced new amendments that will make the rules even more difficult to satisfy, Chios realized that, as currently structured, it has no hope of financial success in the future.The company therefore hopes to receive protection under the Companies' Creditors' Arrangement Act.As a matter of precedent, however, the company will not be entitled to that statutory protection unless and until it actually becomes insolvent.

Accepted Answer

The Companies' Creditors Arrangement Act (CCAA) in Canada allows companies that are insolvent or facing insolvency to restructure their business and financial affairs, potentially before they are actually insolvent, to avoid bankruptcy and ensure the continuation of operations.

Question 4

In Canadian bankruptcy law,

Accepted Answer

In Canadian bankruptcy law, a "proposal" is a court-approved arrangement that occurs outside of formal bankruptcy.

Answer: D
 In Canadian bankruptcy law, "goodwill" is formally defined as the amount by which a business' ability to borrow money exceeds that business' actual assets.

Question 5

Raheem is a registered massage therapist and does business as STRESSBUSTORZ, a mobile massage lab outfit located inside an old bus.The bus circulates all day around the downtown core in Toronto offering quick relief curbside to harried office workers for a fee.Raheem provides a variety of treatments for a price, including reiki, shiatsu, and Pilates.Cash is occasionally short and STRESSBUSTORZ needs to reorganize itself to gain some "breathing space." Raheem would like to remain in control of the business.STRESSBUSTORZ's best bet would be to agree to a liquidation proposal with its creditors.This would liquidate its debts, but allow the business to keep its assets and continue operating.

Accepted Answer

The best bet for STRESSBUSTORZ would not be to agree to a liquidation proposal with its creditors as this would result in the business being dissolved and its assets sold off to pay off debts. Instead, Raheem could seek alternative solutions such as negotiating payment plans with creditors, cutting costs, or seeking outside investment to help the business regain financial stability.

Question 6

Janine decides to make an assignment into bankruptcy.She has a number of creditors, including those that are secured (a bank has a mortgage against her house), preferred (the government, for some unpaid taxes), and general unsecured (all of the remainder).Janine would like to keep her household furniture worth $1500, but she will not be able to do so because all of her property must be made available to satisfy the claims of creditors.

Accepted Answer

This statement is false. Janine may be able to keep her household furniture worth $1500 if it is exempt from seizure under bankruptcy laws. The specific exemptions available vary by jurisdiction, but typically include some types of household items and personal property.

Question 7

Gene1, a biotech firm, is wholly owned by Steve McGuire, who houses the firm in a large, Victorian-era house in Vancouver.The house belongs to Gene1.Lately, however, the company has been going through some hard times.Its products are not well-received in the market and, in fact, one of its star pharmaceuticals, which though touted by stock analysts, fails to receive regulatory approval in Canada from the federal government.Sensing trouble ahead, Gene1's Board of Directors decides to deed the house to McGuire in April for $1000.In May, Gene1 makes an assignment into bankruptcy.The sale of the house will probably be reversed as a settlement.It may also be void as a preference to McGuire, if he is a creditor of the company.

Accepted Answer

The sale of the house to McGuire for $1000 may be reversed as a settlement in the bankruptcy proceedings, and it may also be voided as a preference if McGuire is considered a creditor of the company.

Question 8

Under the Bankruptcy and Insolvency Act, the methods for dealing with a debtor's affairs are

Accepted Answer

The correct methods for dealing with a debtor's affairs under the Bankruptcy and Insolvency Act include an application for a bankruptcy order by creditors, a proposal, and assignment into bankruptcy. These options provide a framework for resolving insolvency issues, allowing for both voluntary and involuntary processes, and offering a structured approach for debt repayment or discharge.

Question 9

Garuda Excavations purchased a 5 tonne excavator from Tonka Inc for $350 000 with the help of a secured loan for that amount from Bank X.The loan covered the full amount of the purchase and was secured against the machinery.Garuda used the excavator for two years, but notwithstanding Garuda's valiant efforts, the company was constantly in the red and was eventually petitioned into bankruptcy by its creditors.Upon learning of the petition, Bank X moved swiftly to realize on its security.It took immediate possession of the excavator, which it sold for $300 000.It will have an unsecured claim against Garuda's estate in bankruptcy for $50 000.

Accepted Answer

Bank X has the right to take possession of the excavator as it was secured against the machinery. The sale of the excavator for $300 000 allows the bank to recover a portion of the loan. The remaining unsecured claim against Garuda's estate in bankruptcy is indeed $50 000.

Question 10

The principle of creditor equality in bankruptcy essentially means that all creditors are to recover the same amount from the bankrupt's estate.

Accepted Answer

The principle of creditor equality in bankruptcy is actually not true. In bankruptcy, creditors are prioritized based on the type of debt they are owed. For example, secured creditors have the first claim on certain assets, while unsecured creditors are lower on the priority list. Additionally, certain debts such as taxes and child support may have higher priority than other unsecured debts. Therefore, not all creditors are treated equally in bankruptcy.

Question 11

It can accurately be said that almost all bankrupts are insolvent.

Accepted Answer

Insolvency refers to a situation in which an individual or a company is unable to pay off their debts as they fall due. Bankruptcy is a legal process that provides relief to people who are unable to meet their financial obligations. Therefore, it is accurate to say that almost all bankrupts are insolvent because they are unable to pay off their debts and have resorted to bankruptcy as a means of resolving their financial difficulties.

Question 12

A receiving order is a court order that entitles a creditor to receive payment of a debt, in accordance with the scheme established by the Bankruptcy and Insolvency Act.

Accepted Answer

A receiving order is a court order that declares a person bankrupt and appoints a trustee to manage their assets and distribute them among creditors. It does not entitle a single creditor to receive payment of a debt.

Question 13

Elaine's creditors decided that they wanted to apply for a bankruptcy order against her.In order to do so, they must prove before the Registrar in Bankruptcy that she owes each creditor at least $1000 and that she has committed an "act of bankruptcy" as defined by the Bankruptcy and Insolvency Act during the past six months.They are planning to assert that she has failed to pay her debts as they came due.

Accepted Answer

The answer of Elaine's creditors decided that they wanted to...

Question 14

After many long years in school, Kris graduated 16 months ago.He was excited about earning a good salary.He was even more excited that he no longer had to worry about finding enough money for food and rent each month.In fact, the expense of attending school caught up with him and he was forced into bankruptcy a little over a year ago.Just last week, however, he received his discharge from bankruptcy.Happy days indeed.That means that he certainly will not have to pay any of the debts that he incurred as a student.

Accepted Answer

Kris's discharge from bankruptcy does not necessarily mean that he will not have to pay any of his student debts. It depends on the specific terms of his bankruptcy agreement and the type of student loans he had. Some student loans may not be dischargeable in bankruptcy.

Question 15

In undertaking an assignment, Marie-Justine completes a preliminary statement of her affairs that sets out a list of her debts and the names of her creditors to the best of her recollection.This is the second time that Marie-Justine has had to file for bankruptcy and she feels badly.She also enrolls in mandatory credit-counselling classes, which teach her how to manage her financial affairs so that she does not have to file for bankruptcy ever again.With good behaviour, she can apply for an automatic discharge from bankruptcy within three months of the assignment.

Accepted Answer

The timeline for an automatic discharge from bankruptcy varies depending on several factors, including whether it is the individual's first or subsequent bankruptcy. For a second-time bankrupt without surplus income, the discharge could occur 24 months (2 years) after the bankruptcy is filed if no objections are raised, not within three months.

Question 16

Secured creditors often face a difficult choice: either enforce the security or sue the debtor for the outstanding debt.Because of the policy of protecting vulnerable debtors, a secured creditor is never entitled to both enforce the security and, if that does not generate enough money, compel the debtor to pay the deficiency.

Accepted Answer

Secured creditors typically have the right to enforce the security to recover the debt and, if the proceeds from the sale of the security are insufficient to cover the debt, they can also pursue the debtor for the deficiency, unless specific laws or agreements limit this right.

Question 17

Roulah is owed $50 000 by Freddie.It has been several months since the debt came due and Roulah is considering whether she should begin bankruptcy proceedings against Freddie to try to recover the loan.She can assign Freddie into bankruptcy.

Accepted Answer

Only Freddie himself or his creditors through a court process can initiate bankruptcy proceedings. Roulah, as a creditor, can petition the court for bankruptcy proceedings against Freddie but cannot unilaterally assign him into bankruptcy.

Question 18

Things have been difficult for Jill during the past few months and she is now contemplating an assignment in bankruptcy.Jill could be found to be a bankrupt by a court if she owes at least a $1000 in debt AND

Accepted Answer

According to the statement, Jill is contemplating an assignment in bankruptcy because she cannot meet her obligations as they become due. This aligns with choice B, which is the correct answer. The other choices are not relevant to the requirements for declaring someone bankrupt.

Question 19

A discharge is

Accepted Answer

A discharge is a formal pronouncement by a court that a debtor is released from bankruptcy. It means that the debtor is no longer legally obligated to pay off their debts and can start with a fresh financial slate.

Note: B is incorrect because it describes a lifting of the automatic stay, which a creditor can request if there is cause. C is incorrect because it describes the distribution of assets to creditors in a liquidation bankruptcy. D and E are incorrect because they don't accurately describe what a discharge means in a bankruptcy context.

Question 20

Pico has put his fashion clothing company into bankruptcy due to poor business conditions at the mall where the company's sole outlet is located.The company has secured, preferred, and general unsecured creditors.Only secured creditors will be permitted to immediately realize on their claims against the company.Other creditors will have to wait until the company's assets are liquidated for their share of the distribution.At that time, there may be nothing left, but this is a risk that they took when they extend credit to Pico's company.

Accepted Answer

This is true as per the given scenario that only secured creditors will be permitted to immediately realize on their claims against the company while other creditors will have to wait for the liquidation of the assets for their share of distribution, and there may be a possibility that nothing may be left for them.

Quiz 23: Dealing With Bankruptcy and Insolvency