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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
d. As a general rule, a judge is entitled to resolve a conflict between the Bankruptcy and
Insolvency Act and another statute dealing with the debtor–creditor relationship by asking
which piece of legislation provides the fairer result in the circumstances.
e. The Companies Creditor’s Arrangement Act provides an alternative to bankruptcy for all
business debtors.
32) 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 individual who purchases outstanding debts from creditors, and then
uses various means to extract payment from the debtors.
e. an individual that is not carrying on a business.
33) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
34) Individual consumers who become bankrupt are entitled to certain exemptions,
including
a. personal savings accounts up to $10 000.
b. all income earned while in bankruptcy.
c. damages for pain and suffering.
d. one vehicle for personal use.
e. all property acquired by way of gifts during the period of five years leading up to the act
of bankruptcy.
35) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
36) 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.
37) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
38) 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.
39) Martina is a bankrupt student. 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, and (iii) $20
000 in insurance proceeds. Which of the following statements is 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 clothing, largely because it is difficult for the trustee in
bankruptcy to realize a substantial profit by selling used clothes.
c. Martina is entitled to retain all of the money that she received under the insurance policy.
d. Martina is entitled to retain $4000 worth of household furnishings.
e. Martina can keep all of her clothing.
40) Blackstone Inc has become insolvent and has issued debentures in a series. Which of
the following statements is TRUE?
a. Blackstone has an absolute right to use the Companies’ Creditors Arrangement Act.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
b. If Blackstone successfully uses the Companies’ Creditors Arrangement Act, actions by
its secured creditors will be stayed.
c. Blackstone cannot use the Winding Up Act if it is a federally incorporated company.
d. If Blackstone begins by using the Bankruptcy and Insolvency Act, it may later switch to
the Winding Up Act if it is advantageous to do so.
e. A debenture is a special class of shares.
41) Which of the following is true?
a. All bankrupts must first be insolvent.
b. Bankruptcy requires the debtor to be at least $1000 in debt and have committed an act of
bankruptcy.
c. A bankrupt is never insolvent and an insolvent is never bankrupt.
d. Bankruptcy is the procedure to wind up the creditor’s affairs, paying debtor’s and, in
some cases, punishing the debtor for their behavior.
e. Bankruptcy requires a court order of insolvency prior to the court order of receivership.
42) Wade runs a company that is insolvent and has committed an act of bankruptcy. Last
year, his friend, Jacques, went through personal bankruptcy for three months before being
discharged. Wade is preparing for the same proceedings that his friend went though. Which
of the following should Wade be aware of?
a. Unlike his friend, he must have his form of proposal approved by a majority of creditors.
b. Unlike his friend, he can simply dissolve the company and be absolved of debt.
c. The company will probably only be discharged from bankruptcy if he pays back all of his
debt.
d. Wade is correct; the bankruptcy will be the same as his friend’s.
e. Wade will have to hire his own trustee, whereas his friend has one assigned to him.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
43) Kundai graduated with an arts degree 2 years ago. He financed his degree using $10
000 in student loans and a $10 000 loan from his parents. Since graduating, he has married
his high school sweetheart, Rhianni. She is currently pregnant, awaiting the birth of their
first child. Kundai has not been able to hold a steady job since graduating and has therefore
not been able to pay back his student loan or the loan from his parents. To make matters
worse, his lack of employment has created stress in his marriage and his wife has left him
and the family courts have ordered him to pay $500 per month in spousal support. He also
owes Revenue Canada over $15 000 in unpaid taxes. The only good news is he recently
received an insurance settlement on a car accident he was involved in 5 years ago. Kundai
feels his only option is to assign himself into bankruptcy. Which of the following is true?
a. In bankruptcy, Kundai will be discharged from all his debt.
b. Kundai will probably only be discharged from the student loan, the parents’ loan, but
will have to pay the taxes, the spousal support, and the insurance settlement.
c. Kundai will probably only be discharged from the loan to his parents, the taxes, and the
insurance settlement.
d. Kundai will probably only be discharged from the loan from his parents.
e. Kundai is not eligible for bankruptcy and could not discharge his debts.
44) Min, a carpenter, has recently declared bankruptcy. She has one loan for $10 000 and,
at the time when the bank calls for repayment, her total assets add up to $9000, which is
made up of $3000 in tools, $1200 in clothing, and $800 in furniture. When her assets are
distributed, which of the following is true?
a. The bank is entitled to all $9000.
b. The bank is probably only entitled to $4000.
c. The bank is probably only entitled to $5200.
d. Min cannot declare bankruptcy, as she does not meet the requirements.
e. Min will be discharged of all debt.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
45) Ashitaka has declared bankruptcy and his trustee is currently dividing his assets.
Ashitaka has three creditors. One, a bank, has a general security agreement on a loan for
$30 000. The second is his friend, who is owed $1000. The third is the government, owed
$5000. Ashitaka has only one asset, his car, with fair market value of $33 000. Which of
the following describes how the creditors will be paid?
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.
46) Ulysses has a number of creditors and has recently realized that within a year he will
have to declare bankruptcy. Ulysses transfers his house to his wife and uses most of his
remaining assets to pay owed taxes to the government in order to avoid possible
prosecution. He declares bankruptcy four months later. Which of the following is true?
a. Both actions are void.
b. The preference to the government is void, but not the settlement of the house.
c. The settlement of the house is void, but not the governmental preference.
d. Neither action is void.
e. Neither is void, but only if Ulysses has declared them to be arms-length.
47) Tae is insolvent and 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 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
48) 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
1) “Bankruptcy is an alternative to ordinary creditor–debtor action.” Discuss this statement
and offer business law examples.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
2) Explain the difference between bankruptcy and insolvency. Your answer should focus on
how the two concepts are related, if at all.
3) Name three officials in the bankruptcy process and explain what they do.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
4) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
later, Sportfemina enters bankruptcy. What can the trustee do to challenge the foregoing
transactions?
5) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
6) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
7) Explain how bankruptcy and insolvency law facilitates the operation of the market for
credit in Canada.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
8) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
9) What are the advantages of seeking protection under the Company Creditors’
Arrangement Act versus under the Bankruptcy Act?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
10) What are two differences between corporate and personal bankruptcy?
11) Explain why bankruptcy is a federal responsibility under Canadian law.
12) Explain why a creditor would accept a proposal in bankruptcy.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
13) “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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
14) Describe three types of proposals and under what conditions they will be used.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 24: Dealing with Bankruptcy and Insolvency
15) 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: (i) increased airport security and heightened fears of
terrorism discouraged some people from travelling, (ii) the introduction of new travel-
related taxes reduced the volume of air travel, and (iii) 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.
