Business Law, Litigation

Oops, I forgot to show up in Bankruptcy Court…

Jun 17th, 2013

OK, you are very busy. Your controller received a petition in bankruptcy but he thought “come on, I know we are not bankrupt, we have plenty of cash!”

He left the Court document in your “in” basket and now… What! You have missed the Court date!!! You are calling your lawyer in a panic: “you can fix this now can’t you?”

This is not an unheard-of scenario. Some creditors have found a quicker way to get paid. Instead of instituting costly legal proceedings, they file a petition to force their debtor into bankruptcy in the belief that the threat of bankruptcy may cause their debtor to come running to them to pay.

What would happen if you do nothing or if you forget to show up in Court? You personally or your company could find itself in trouble because when a court grants a petition in bankruptcy, it is very difficult to go back in time to reverse it – it is definitely easier to do things right from the very beginning.

Should an order in bankruptcy be issued against your company or you personally, it may be possible  to ask for an annulment of a bankruptcy pursuant to the Bankruptcy and Insolvency Act (“BIA”), but it will not be easy.

The principles governing the annulment of a bankruptcy are the following:

  1. The decision to allow the annulment of a bankruptcy are at the discretion of the Court;
  2. This discretion has to be exercised with prudence;
  3. Only special circumstances justify to exercise this discretion and when the Court is convinced that a bankruptcy ought not have been made;
  4. Such circumstances exist when:
    A.            The debtor is not insolvent in accordance to the BIA; or
    B.            There is an abuse of your rights in accordance with the BIA;
  5. In an appeal, there is no intervention of the Court unless there is a demonstration that the discretion was not properly exercised or that the decision to annul the bankruptcy was unreasonable, namely if pertinent factors were ignored.

When the Court is evaluating if an annulment of a bankruptcy should be granted, you will need to prove that your assets exceed your liabilities. The Court will also look into:

i.              the capacity of the debtor to honor its obligations;

ii.            the debtor’s good faith;

iii.           the debtor’s employment opportunities; and

iv.           the requirements of its creditors;

In a nutshell, if you are served with legal proceedings seeking a bankruptcy order, don’t put it in the Inbox pile. Go speak with your lawyer quickly because something needs to be done, and soon.

If you failed that first chance then there may still be hope, but you will likely face an uphill battle.