Deck 23: Dealing With Bankruptcy and Insolvency

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.

Answer 1

False

Question 2

Which of the following statements is TRUE?
A.A bankrupt is never insolvent.
B.All insolvents are bankrupt.
C.An insolvent is never bankrupt.
D.All individuals and corporations forced into bankruptcy have committed an act of bankruptcy which usually means that they are insolvent.
E.An insolvent must become bankrupt.

Answer 2

D

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.

Answer 3

False

Question 4

In Canadian bankruptcy law,
A.a person is insolvent when no bank or lender will provide credit.
B."liquidation" is the amount, stated in precise dollars and cents, which is available to pay a bankrupt person's debts.
C.a "proposal" is a court-approved arrangement that occurs outside of formal bankruptcy.
D."goodwill" is formally defined as the amount by which a business' ability to borrow money exceeds that business' actual assets.
E.a "stay" occurs when a creditor decides that it will allow a debtor to continue carrying on business.

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.

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.

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.

Question 8

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

A)assignment into bankruptcy, an application for a bankruptcy order by creditors, and liquidation.
B)assignment into bankruptcy, an application for a bankruptcy order by creditors, and discharge.
C)assignment into bankruptcy, liquidation, and discharge.
D)an application for a bankruptcy order by creditors, liquidation, and discharge.
E)an application for a bankruptcy order by creditors, a proposal, and assignment into bankruptcy.

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.

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.

Question 11

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

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.

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.

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.

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.

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.

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.

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

A)moves out of her house but otherwise remains in Canada.
B)cannot meet her obligations as they become due.
C)quits her old job.
D)starts a new job.
E)votes in an election.

Question 19

A discharge is
A.a formal pronouncement by a court that a debtor is released from bankruptcy.
B.a formal pronouncement by a court that a creditor is released from the stay operating in bankruptcy and may sue the bankrupt independently.
C.a formal pronouncement by a court permitting the payment of the bankrupt's liquidated assets to creditors.
D.a formal pronouncement by a court that a debtor is no longer able to carry on business.
E.an informal pronouncement by the business community that a debtor is no longer able to carry on business.

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.

Question 21

ChazCo carries on an Internet service business.Unfortunately, because ChazCo is perilously close to becoming bankrupt, it has made a proposal to its many creditors.Under the Bankruptcy and Insolvency Act, a number of possibilities are available to ChazCo.That list of options includes

A)a composition, under which ChazCo's assets will be controlled by a trustee for the benefit of creditors while the proposal is being performed.
B)a scheme of arrangement, which is an agreement between ChazCo and its creditors, which the creditors agree to.
C)a fire sale, under which the creditors would unanimously approve ChazCo's plan to destroy all of its assets in order to receive insurance money.
D)a liquidation proposal, which would occur if ChazCo's biggest creditor took over the debts held by the other creditors.
E)a debt-equity swap, under which ChazCo would exchange its shares for outstanding debt.

Question 22

In the context of bankruptcy proceedings, an exemption is available to a debtor
A.for any and all money earned during bankruptcy.
B.only if the debtor is an individual rather than a corporation.
C.for personal items but not for assets used for business purposes.
D.under the Bankruptcy and Insolvency Act, but never under provincial legislation, because bankruptcy is a federal matter.
E.for physical assets, like clothes and a car, but never for intangible assets, like insurance policies and pension plans.

Question 23

In order to gain creditor (as opposed to court) approval for a proposal under the Bankruptcy and Insolvency Act, a proposal must command
A.a bare majority of all creditors in every class, plus the support of all secured creditors.
B.only the support of a majority of secured creditors.
C.the support of a majority of voting creditors in each class representing at least two-thirds of the face value of the debtor's debt in that class.
D.an absolute majority of all creditors in every class, plus the support of all secured creditors.
E.at least two-thirds of creditors.

Question 24

Within the context of Canada's bankruptcy system,

A)the Superintendent of Bankruptcy has wide powers to inspect and investigate bankrupts' estates, regulate and examine the work of trustees in bankruptcy, and intervene in bankruptcy court proceedings across Canada.
B)the Official Receiver gathers in and liquidates the debtors' assets and distributes the proceeds to creditors.
C)a trustee in bankruptcy is appointed, after a debtor has been discharged from bankruptcy, to provide advice and guidance on financial matters.
D)the Registrar in Bankruptcy hears appeals from decisions of the Bankruptcy Court.
E)an Inspector is a deputy judge with the power to and make interim orders in cases of urgency.

Question 25

The main difference between a transfer at undervalue and a preference is that

A)a transfer at undervalue involves an assignment, whereas a preference only involves a proposal.
B)a transfer at undervalue involves a transfer of property by the debtor for little or no value, whereas a preference gives preferential treatment to a particular creditor.
C)a transfer at undervalue involves a payment of money, whereas a preference involves other types of property.
D)a transfer at undervalue involves the Bankruptcy Court, whereas a preference involves the trustee.
E)a transfer at undervalue must be in writing, but a preference can be done orally or by conduct.

Question 26

Sanjana decided to make an assignment in bankruptcy after she lost her job.Times are tough and she just wants a fresh start in life.She put all of her goods into the hands of the trustee appointed in her case, including a '61 Thunderbird coupe that her father left her when he passed away several years before.Since then, the car has sat under a tarp in a neighbour's garage.Sanjana estimates that the trustee should be able to get at least $80 000 for such a fine vintage model.Sanjana can

A)require the trustee to seek the estimated amount before he sells, and if he does not achieve that price, buy it back.
B)try to auction the car herself and pay the proceeds to the trustee.
C)hold on to the car as part of her exempt property.
D)give the car to a particular creditor.
E)not stop the trustee from selling the car, but if the car pays all her creditors and the costs of the bankruptcy administration, she obtains the residual amounts in the estate.

Question 27

In making a proposal under the Bankruptcy and Insolvency Act, a composition would be most attractive to a creditor where

A)the debtor is generally able to pay its debts as they come due.
B)the creditor will receive more if the debtor is permitted to continue to operate under the proposal, than if the debtor is forced into bankruptcy.
C)the debtor does not want to part with voting control over the company.
D)the debtor cannot be trusted to pay its debts.
E)the debtor has given a security interest to the creditor in assets that, if sold, would yield proceeds exceeding the amount of the debt.

Question 28

Alexandra finished her college studies as a florist two years ago and has been operating her own florist shop in Victoria.Being a florist is a third career for Alexandra and she has several thousand dollars in student loans accrued from all of her years of study.Things in her new business are not going well, but Alexandra believes that if she can declare bankruptcy she'll be able to start afresh in her business with no debt.In assigning herself into bankruptcy,

A)Alexandra could most likely discharge her business debts but probably not her school loans.
B)Alexandra could most likely not discharge her business debts, but she could walk away from her school loans.
C)Alexandra could discharge all of her debts, regardless of their source.
D)Alexandra could not discharge any of her debts.
E)the discharging of categories of debt in Alexandra's case will be determined by the trustee in bankruptcy in consultation with Alexandra's creditors.

Question 29

Reiko notices new luxury watches in a jewelry store window and decides to buy one.She enters the store and purchases a watch with her credit card.A few weeks later her credit card bill arrives, with a substantial balance owing.Because she is a careful consumer, the credit card balance is Reiko's only debt, but unfortunately she does not have sufficient funds to pay it.Reiko

A)is the subject of a proposal.
B)is bankrupt if she owes at least $1000.
C)is an insolvent person.
D)has committed an act of bankruptcy and so must become bankrupt.
E)is a bankrupt.

Question 30

Ludmilla and Sudash formed ICING Inc, a caterer that specializes in frozen desserts and elaborate ice sculptures used for centerpieces.The corporation purchased a refrigerated truck with the help of a loan from Bank X.The bank took a security interest in the truck to secure the full amount of the loan, which was $70 000.Unknown to the bank, however, the truck was worth substantially more than the value of the loan.If ICING goes bankrupt and the Bank X seizes and sells the truck for $80 000, the bank will

A)be allowed to retain the entire proceeds of the sale, $80 000.
B)not be allowed to retain the $80 000 proceeds from the sale of the truck.Any value beyond $70 000 will have to be paid into the bankrupt's estate for distribution to other creditors.
C)have to share the $80 000 proceeds from the sale of the truck with ICING's other creditors, whether secured or unsecured.
D)have to share the $80 000 proceeds from the sale of the truck with other secured creditors on a pro rata basis.
E)be able to keep only a portion of the $80 000 proceeds from the sale of the truck and sue ICING Inc for any deficiency.

Question 31

Bill is in business as a contractor.He purchased a tractor worth $100 000 with a loan from Bank X.The full value of the loan was put towards the purchase price and the bank obtained and registered a security interest in the tractor.If Bill's business becomes bankrupt, the bank may

A)seize the tractor, sell it, and recoup any short fall from the proceeds of the sale as a secured creditor from the business' estate.
B)not seize the tractor and the bank has no claim against Bill's business for the debt.
C)seize the tractor, sell it, and recoup any short fall as a general unsecured creditor.
D)seize the tractor only if Bill agrees, but the bank has no claim for any short fall thereafter.
E)not seize the tractor, but the bank may sue Bill personally for misrepresentation.

Question 32

A debtor may avoid bankruptcy altogether as a result of
A.a successful assignment but not a successful application for a bankruptcy order or proposal.
B.a successful proposal.
C.a successful application for a bankruptcy order but not a successful assignment or proposal.
D.a successful application for a bankruptcy order but not a successful proposal.
E.a successful receiving order, a successful assignment, or a successful proposal.

Question 33

Edgar sells tax advice to businesses from a storefront operation in a local shopping mall.His sales efforts were not successful and, as a result, Edgar assigned himself into bankruptcy several months ago.He had the leased premises in the mall, two computers hooked up to a server, a printer, stationery, and books.The business was Edgar's only venture and it is unlikely that he could enter another line of business.As a result, he wants to know what he can keep out of the hands of creditors.

A)He can keep all of the office equipment, regardless of its value.
B)He can keep none of the office equipment, regardless of its value.
C)He may be able to keep office equipment, provided that it is found to be necessary "tools of the trade" and is worth no more than the allowable provincial exemption.
D)He may not be able to keep office equipment because this could be used as household furniture.
E)He may be able to keep the office equipment if it is secured property belonging to a bank that has promised it will not take action against him.

Question 34

In Canada, bankruptcy law
A.is based on a federal statute enacted by Parliament.
B.is governed entirely by provincial statutes.
C.is primarily created at a municipal level.
D.is mostly created by judges rather than legislators.
E.is a mix of federal and provincial laws, but provincial law dominates.

Question 35

Bankruptcy is superior to a common law debtor/creditor action because it
A.avoids a race to the courts, encourages multiple proceedings against the debtor, and gives the debtor a fresh start.
B.permits a race to the courts, prohibits multiple proceedings against the debtor, and can give the debtor a fresh start.
C.avoids a race to the courts, prohibits multiple proceedings against the debtor, and prohibits giving the debtor a fresh start.
D.avoids a race to the courts, prohibits multiple proceedings against the debtor, and gives the debtor a fresh start.
E.permits a race to the courts, prohibits multiple proceedings against the debtor, and gives creditors a fresh start.

Question 36

Under a proposal, a debtor

A)must include both secured creditors and unsecured creditors.
B)must include secured creditors, but not unsecured creditors.
C)must be approved by at least half of unsecured creditors, and those creditors must hold at least two-thirds of the face value of the debtor's unsecured debt.
D)must be approved by all secured creditors, but the unsecured creditors are not entitled to vote.
E)does not need to include any existing creditors in a proposal-only those who agree to lend money to the debtor in future.

Question 37

Bankruptcy law is intended to
A.keep lenders from extending credit to people who are not habitual customers.
B.relieve debtors of the consequences of poor choices.
C.ensure that ordinary creditor-debtor laws are used to deal with insolvent debtors.
D.create a guarantee that secured creditors receive payment from the government to the extent that debtors cannot pay.
E.serve a variety of goals, including the promotion of confidence and certainty in the credit system.

Question 38

The concept of a stay is most accurately described as

A)a requirement that the debtor, once placed in bankruptcy, must stay within the jurisdiction.
B)a freeze on all of the bankrupt's property pending distribution to creditors.
C)an order by the court that prevents debtors from counter-suing their creditors during the course of bankruptcy proceedings.
D)a freeze on creditors' property pending distribution of the bankrupt's estate.
E)an order by the court that prevents creditors of the debtor from bringing actions against the debtor for pre-bankruptcy debts.

Question 39

Tom, Lucinda, and Hye are friends of Ali and make various loans to him so that he can run his falafel-making business.The business requires cash as well as equipment to run.Tom has loaned Ali a stove worth $3000 which, under the terms of the loan agreement, Ali has pledged to return to Tom whenever Tom requests.Lucinda has lent Ali $3000 in cash, and Hye has given Ali 100 kilograms of sesame seeds worth $1000.Ali's obligations to Lucinda and Hye are simply to repay them when he can.In the event of Ali's bankruptcy, which of the following statements is TRUE?

A)Tom is considered an unsecured creditor, but Lucinda or Hye are not.
B)Tom is automatically considered an unsecured creditor, but so are Lucinda and Hye.
C)Tom is considered a secured creditor, but Lucinda and Hye are not.
D)The claims of Lucinda and Hye have priority over Tom's.
E)Tom is a preferred unsecured creditor compared to Lucinda and Hye because he advanced credit first.

Question 40

Milo's Pedantry Inc is in bankruptcy.The owner of the company wants to better understand the process of bankruptcy.He therefore has asked you to identify and briefly explain the various people involved in the process.Which of the following statements is TRUE?

A)The trustee will acquire legal title to the company's unsecured assets and, after assessing the various claims against the debtor, liquidate the assets and distribute the proceeds accordingly.
B)The superintendent is the person who supervises, in a hands-on manner, the administration of the bankruptcy proceedings.
C)The registrar is appointed by the federal cabinet to inspect and investigate bankrupt's estates.
D)The inspectors are appointed by the debtor for the purpose of verifying the creditors' claims.
E)The debtor remains in possession and control of the assets until the bankruptcy is completed.

Question 41

Carmen is an unsecured creditor of Joe's Popular Pizza, which has just gone bankrupt.She learns about the bankruptcy in the newspaper and realizes that she must file a claim if she is to get any money back.Carmen must file a proof of claim

A)within the stipulated time period or she will lose the right to receive payment on the debt.
B)only if she is a secured creditor.
C)if she wishes to argue about a void preference.
D)if she wants to pursue Joe's Popular Pizza in another province.
E)only if Joe's Popular Pizza has a counterclaim against her.

Question 42

Which of the following statements is TRUE with respect to the relationship between bankruptcy and insolvency?
A.A person can be bankrupt without being insolvent.
B.An act of insolvency automatically triggers bankruptcy.
C.Before a person can be put into bankruptcy involuntarily, a court must find that they have committed an act of bankruptcy, which includes being insolvent.
D.While an individual can be either bankrupt or insolvent, a corporation can be bankrupt but never insolvent.
E.Bankruptcy begins with a bankruptcy order, whereas insolvency begins with a receiving order.

Question 43

Xiang is an independent financial advisor.As a result of a few bad decisions, he has fallen on hard times.He is unable to meets his liabilities as they fall due.He believes, however, that he can avoid bankruptcy by persuading all of his creditors to agree to a proposal under which he would be given more time to pay his debts in exchange for his willingness to pay a higher rate of interest.Which of the following statements is TRUE?

A)The proposal process must include all of Xiang's creditors, both secured and unsecured.
B)Xiang's proposal will succeed only if two thirds of his creditors accept it.
C)If Xiang's proposal is rejected by his creditors, he automatically is placed into bankruptcy.
D)Xiang is entitled to make such a proposal only if he already is in bankruptcy.
E)The Bankruptcy and Insolvency Act does not say anything about Xiang's proposal.

Question 44

Within the context of bankruptcy and insolvency laws, which of the following statements is TRUE?
A.A preferred creditor is entitled to be paid before all other creditors.
B.Pro rata sharing is a system in which each class of creditors is paid the same amount, regardless of how many members it contains.
C.A preference occurs when the debtor pays one creditor, but not others, within a certain time prior to bankruptcy.
D.A share exchange is possible only under an assignment into bankruptcy.
E.Liquidation occurs only after the debtor is discharged from bankruptcy.

Question 45

Joel's business, which makes customized widgets, was clearly in financial trouble in May.The situation grew worse during the summer months.In September, Joel transferred the title to his yacht to his wife for $250 000.The property's market value was $500 000.A short time later, Joel filed for bankruptcy.The transfer of the yacht can be challenged by Joel's creditors
A.as a result of being a prescriptive transfer.
B.only if Joel filed for bankruptcy within one month of the transfer.
C.as a void preference if Joel was indebted to his wife, if the transfer occurred within three months of his bankruptcy, and if he intended to ensure that the property went to his wife rather than his other creditors.
D.as a fraudulent conveyance, but only if Joel was insolvent at the time of the transfer.
E.but only by using provincial legislation.

Question 46

The Companies Creditor's Arrangement Act
A.is available to individuals, but not corporations.
B.is seldom used because it provides less flexibility than the Bankruptcy and Insolvency Act.
C.is often preferred to the Bankruptcy and Insolvency Act if the insolvency of a large corporation crosses international borders.
D.is used only once it is clear that a business will become bankrupt and cannot be saved as a "going concern."
E.is restricted to debtors who owe less than $5 000 000 in total.

Question 47

Tae is insolvent.He has selected an Official Receiver to aide him in his bankruptcy proceedings.Tae tells the Official Receiver he wants to file a proposal.Which of the following is most likely to be TRUE?

A)Any one of his creditors can still apply for a bankruptcy order.
B)Only secured creditors can apply for a bankruptcy order.
C)Tae may include a composition, giving him more time to resolve his debts.
D)If Tae includes a scheme of arrangement, he must inform his creditors of all actions performed with his assets.
E)Tae may include a liquidation proposal, which is a similar process to bankruptcy, but with more control for the Tae.

Question 48

Natasha runs a lingerie business that caters to a select crowd.Notwithstanding her valiant efforts at promotion, the lingerie business struggles and she has over $100 000 in debts.She would like to continue operating, at least for a while, so she makes a proposal to creditors.She puts all of her creditors into three classes: one class for creditors claiming less than $1000, the second class for secured creditors, and the third class for preferred creditors.Which of the following statements is most likely to be TRUE? Natasha's proposal will

A)fail because Natasha is not allowed to classify all creditors.
B)fail because Natasha has too much debt to be able to make a proposal to creditors.
C)succeed as long as the secured creditors are not secured against the same assets and are satisfied in the proposal, and her creditors do not object to the classification as unfair.
D)succeed because all creditors will be fully satisfied.
E)fail because proposals are allowed for consumer debts, but not for business debts.

Question 49

The Bankruptcy and Insolvency Act defines a "consumer debtor" as
A.an insolvent individual whose debts, excluding those secured on their principal residence, do not exceed $250 000.
B.a corporation that is primarily indebted to consumers.
C.an individual whose debts arise exclusively from consumer purchases.
D.a corporation or an individual who purchases outstanding debts from creditors, and then uses various means to extract payment from the debtors.
E.any individual that is not carrying on a business.

Question 50

Noah, a bodybuilder, has a diet-supplement business.His supplements, GRO-BIG, are becoming increasingly popular, but it will take at least a year before they reach all of their target markets.Unfortunately, time may be running out.Although the future otherwise looks bright, several debts have fallen due and creditors are barking for payment.Noah's business recently became insolvent.If Noah wants to retain control of the business, his best bet would likely be to
A.make a proposal to his creditors to liquidate the GRO-BIG business.
B.encourage one of his creditors to apply for a bankruptcy order.
C.make an assignment into bankruptcy so that he can extend the time needed to pay his debts.
D.seek court approval of a scheme of arrangement under the Companies Creditor's Arrangement Act.
E.make a proposal that convinces the creditors that it is in their interest to give the business more time to pay its debts, rather than trying to demand full payment immediately.

Question 51

Martina is a bankrupt student in Ottawa.Her debts exceed $200 000.Of that total amount, $50 000 is owed in student loans.Her assets, in contrast, are worth only $100 000.Included in that total are (i) clothing worth $5000, (ii) household furnishings worth $7000, (iii) an insurance policy worth $20 000, and (iv) a Mercedes worth $75 000.Which of the following statements is most likely to be TRUE?

A)Although her situation currently seems bleak, Martina will be debt free once she is released from bankruptcy.
B)Martina is entitled to keep her car
C)Martina is entitled to retain the insurance policy.
D)Martina is entitled to retain only $5000 worth of household furnishings.
E)Martina can keep $3000 worth of her clothing.

Question 52

Within the context of creditors' entitlements on bankruptcy, which of the following statements is FALSE?

A)Claims by the Canada Revenue Agency are paid before claims by secured creditors.
B)A creditor who supplied goods to the debtor within 30 days of the debtor's bankruptcy is entitled to repossess the goods.
C)Claims by certain types of suppliers, including farmers, may be paid before claims by secured creditors.
D)Employees of a bankrupt company are entitled to be paid out before secured creditors.
E)A secured creditor is entitled to enforce its security against a debtor 10 days after giving notice of intent to enforce.

Question 53

Skynet is an insolvent company.It has approximately $6 million in debt that it cannot repay, but it wants to attempt to continue operating under its own control.Which of the following should Skynet pursue?
A.fraudulent conveyance law to prove its debt was given fraudulently
B.the BIA to begin bankruptcy proceedings
C.the WURA, but only if it is federally incorporated
D.the CCAA to begin a restructuring process
E.the proposal procedure to begin a scheme of arrangement

Question 54

Brandenburg Inc has become bankrupt.It has assets worth a total of $200 000.It has five creditors.Sebastien is owed $50 000 and holds security over an asset that is worth $100 000.Johann is owed $50 000 in wages.Bach Corp is owed $200 000.Goldberg Inc and Fugue Ltd are each owed $100 000.Which of the following statements is TRUE?

A)If the court finds that Goldberg received a preference, that will mean that Goldberg is entitled to be paid before Fugue.
B)Sebastien is entitled to receive $100 000 as a result of its security.
C)Bach is entitled to receive a total of $50 000.
D)Goldberg and Fugue are each entitled to receive nothing.
E)Sebastien is entitled to receive less than $50 000.

Question 55

Chopin Inc, a music publishing company, is bankrupt.It has four creditors.One of the creditors, Frederic Ltd, is owed $200 000, and holds security over Chopin's accounts receivable.None of the other claims is secured.The municipal government is owed $100 000 in unpaid taxes.Mazurka Inc is owed $60 000 and Polonaise Inc is owed $40 000.Chopin has assets worth a total of $160 000.Half of that amount consists of its account receivables.The remainder consists of various assets that have been sold to produce a fund of money.Which of the following statements is TRUE?

A)The municipality will receive $80 000.
B)Mazurka will receive $40 000.
C)Frederic is entitled to receive a total of $80 000.
D)Polonaise will receive $20 000.
E)Frederic is entitled to receive a total of $160 000.

Question 56

Wade's company, WaCo Inc, is insolvent and has committed an act of bankruptcy.Last year, Wade's friend, Jacques, went through personal bankruptcy last year.Wade is hoping to learn useful lessons from his friend's experience.Which of the following statements is most likely to be TRUE?

A)While Jacques made a proposal that merely required approval of half of his creditors, if WaCo makes a proposal, it must be approved by 75 percent of its creditors.
B)Unlike Jacques, Wade can make the debts disappear simply by dissolving WaCo.
C)Jacques was discharged from bankruptcy, but WaCo will be discharged from bankruptcy only if it pays all of its debts.
D)Exactly the same rules that applied to Jacques will apply to WaCo as well.
E)WaCo will have to hire his own trustee, whereas Jacques had one assigned to him.

Question 57

William is the sole shareholder and director of Blackstone Inc, which was created under the Canada Business Corporations Act.The company employs ten people.Unfortunately, as a result of losing a major account, the company has become insolvent.Its secured creditors are threatening to take action and its unsecured creditors are very anxious.William believes that Blackstone will become profitable again, but only if he is given a chance to perform for its current customers and find new ones.Which of the following statements is most likely to be TRUE?

A)Blackstone cannot use the Winding-Up Act because it is a federally incorporated company.
B)If Blackstone becomes bankrupt, William may be personally liable to pay the company's employees their unpaid wages.
C)Blackstone is entitled to use the Companies' Creditors Arrangement Act only if its debts are less than $5 000 000.
D)It is highly unlikely that Blackstone will seek protection under the Companies' Creditors Arrangement Act because that statute's procedures are rigid and inflexible.
E)Because Blackstone was incorporated under a federal statute, its employees have no special rights if the company becomes bankrupt.

Question 58

Domenico is a tradesman who works as an independent contractor.When the economy went into a recession and new construction projects dried up, he found it impossible to make ends meet.As a result, he has stopped meeting his debts as they fell due.Which of the following statements is TRUE?

A)Domenico is already bankrupt.
B)Because he is an individual, rather than a corporation, Domenico may be put into bankruptcy through the process of assignment but not through a creditor's application for a bankruptcy order.
C)Domenico's failure to pay his debts as they fall due constitutes an act of bankruptcy.
D)A court will issue a receiving order only if Domenico enters bankruptcy through assignment.
E)Domenico is not insolvent.

Question 59

Newfoundland and Labrador v AbitibiBowater Inc is best known for supporting the proposition that

A)an insolvent insurance company must use the Winding-Up and Restructuring Act rather than the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act.
B)debts arising from a student loan remain enforceable even after a discharge from bankruptcy.
C)a province can avoid the effects of a stay under the CCCA by dressing up a claim for money to look like an order to remediate a work site.
D)a province is entitled to suspend the driver's license of a person who has failed to pay a provincial debt, even if that person has been discharged from bankruptcy.
E)since bankruptcy is primarily a business issue, a court should apply a provincial statute rather than the Bankruptcy and Insolvency Act whenever there is a conflict between the statutes.

Question 60

Ashitaka has declared bankruptcy and his trustee is currently dividing his assets.Ashitaka has three creditors.The first, a bank, has security on a loan for $30 000.The second is his friend, who is owed $6000.The third is the government, which is owed $5000 in taxes.Ashitaka has only one relevant asset, a painting, with fair market value of $33 000. That painting is subject to the bank's security.Which of the following statements is most likely to be TRUE?
A.The bank gets $30 000, the government $3000, and his friend $0.
B.The bank gets $30 000, the government and his friend get $1500 each.
C.Each creditor gets $11 000.
D.The government gets $5000, the bank $28 000, and his friend $0.
E.The government gets $5000, his friend gets $1000, and the bank gets $27 000.

Question 61

What are two differences between corporate and personal bankruptcy?

Question 62

Bernice and her sister, Eda, run Sportfemina Inc, a company specializing in retailing women's sporting goods and apparel.They have a number of suppliers who are creditors of the company for the inventory they provide.This includes golf clubs, weights, racquets of all types, jogging shoes, various types of clothing, and other equipment.Sportfemina runs into trouble, however, and Bernice and Eda have a fairly clear idea that the company will have to enter bankruptcy shortly.They therefore transfer $700 000 worth of inventory free of charge to a competitor store, Sportstrac, that Eda has a part interest in.They also pay off its outstanding debts to two running shoe suppliers in the hope that, after the current trouble subsides, those companies will be eager to extend inventory to Bernice and Eda again.Finally, they assign all of the corporation's accounts receivable to their parents.A month later, Sportfemina enters bankruptcy.What can the trustee do to challenge the foregoing transactions?

Question 63

Explain the difference between bankruptcy and insolvency.Your answer should focus on how the two concepts are related, if at all.

Question 64

"Bankruptcy is an alternative to ordinary creditor-debtor action." Discuss this statement and offer business law examples.

Question 65

Explain how bankruptcy and insolvency law facilitates the operation of the market for credit in Canada.

Question 66

Josefina runs a house-cleaning business in Kanata, an Ottawa suburb known as "Silicon Valley North" due to its heavy concentration of tech company start-ups.Josefina now has several assistant housekeepers who travel around Kanata from client to client performing housekeeping chores on a half-day basis.Josefina's clients are busy professionals who lead busy lives and are happy to have her do their housework.The last thing that they want to do is to come home and clean.??However, after the tech stock bust many Kanata residents are into coupon-clipping and penny-pinching once again.Josefina's housekeeping services are among the first luxuries to go.As a result, she is now facing the prospect of either assigning herself into bankruptcy, submitting to an application by her creditors for a bankruptcy order or making a proposal.Which option should she choose?

Question 67

Explain why a creditor would accept a proposal in bankruptcy.

Question 68

For many years, A&P Travel Inc was a large and successful travel agency.After the events of September 11, 2000, however, the company began to struggle.Its difficulties were attributable to several causes: (a) increased airport security and heightened fears of terrorism discouraged some people from travelling, (b) the introduction of new travel-related taxes reduced the volume of air travel, and (c) the corporation's owners, brothers by the name of Aristotle and Plato Socratii, began to squabble over the operation of A&P Travel.The accumulated burden of these problems eventually became too much to bear, and the company went into bankruptcy.Aristotle and Plato are certainly sad to see their company disappear, but they take some solace in their belief that, even though they are the sole shareholders and directors of the corporation, they cannot be held personally liable for any debts or obligations associated with A&P Travel.Are they right? Can they be held personally liable? If so, explain the basis of that liability.

Question 69

Describe three types of proposals and under what conditions they will be used.

Question 70

Bank X has recently entered the business of extending loans secured on equipment.This means that it is willing to extend a loan for the estimated value of a piece of industrial equipment in return for a security interest in it.The security specifies that in the event of bankruptcy, Bank X retains the right to seize the equipment, sell it, and collect the proceeds in order to satisfy the loan.??Bank X's lawyer is unfamiliar with bankruptcy procedure and would like to know what happens if the amount collected from the sale of the equipment is worth more than the value of the security? What if it is less?

Question 71

What are the advantages of seeking protection under the Company Creditors' Arrangement Act versus under the Bankruptcy Act?

Question 72

Jim owns a chain of diners that does reasonably good business.Times are changing, however, and he watches with disbelief as more and more of his customers abandon the traditional diner format for "lite" fare and donuts at competitor establishments.Creditors are now biting at Jim's heels.He is worried that his creditors will seek a bankruptcy order against him and wants to know what this will entail.Discuss.

Question 73

Name three officials in the bankruptcy process and explain what they do.

Question 74

"The value of bankruptcy is in promoting certainty among borrowers and lenders, the orderly disposal of debt, and the rehabilitation of debtors." Discuss this statement.

Question 75

Explain why bankruptcy is a federal responsibility under Canadian law.