Deck 24: Dealing With Bankruptcy and Insolvency

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

B

Question 4

The trustee in bankruptcy holds the property of the debtor "in trust" until such time as the debtor is able to manage their financial affairs again.At that point,the debtor's property is returned to them and they are allowed to continue as in the past without prior claims for debts being asserted against them.

Question 5

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 6

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.

Question 7

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.In court they will not be successful.

Question 8

Under Canadian law,bankruptcy is MOST accurately described as

A)a process for extending fresh credit to debtors.
B)a process for making new claims against debtors.
C)a procedure for winding-up debtors' affairs,paying creditors,and,in some cases,rehabilitating debtors.
D)a procedure for liquidating outstanding lawsuits against debtors.
E)a procedure for making sure that debtors can repay their debts.

Question 9

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 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

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 12

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

Question 13

Omium,a Montreal perfume manufacturer,needs time to reorganize its financial affairs after its latest fragrance,Tulipe,stinks up the retail market.The company has total outstanding debts of $5.5 million.Several years ago it issued debentures in series in order to be able to file under the Companies Creditors' Arrangement Act and remain in business.By doing so,it will be able to evade the claims of all creditors for a time.

Question 14

Garuda Excavations purchases 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 covers the full amount of the purchase and is secured against the machinery.Garuda uses the excavator for two years,but notwithstanding Garuda's valiant efforts,the company is constantly in the red and is eventually petitioned into bankruptcy by its creditors.Upon learning of the petition,Bank X moves swiftly to realize on its security.It takes immediate possession of the excavator,which it sells for $300 000.It will have an unsecured claim against Garuda's estate in bankruptcy for $50 000.

Question 15

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.

Question 16

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 of them at least $1000 and 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 17

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 18

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 and allow the business to continue operating.

Question 19

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 20

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 21

Civil suits against debtors differ from bankruptcy proceedings because

A)they are used only by secured creditors.
B)they usually involve creditors pursuing individual claims against the debtor.
C)they cannot be begun without the approval of the trustee in bankruptcy.
D)they are all dealt with in a single proceeding.
E)they can only be enforced with the permission of the trustee in bankruptcy.

Question 22

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 23

The main difference between a settlement and a preference is that

A)a settlement involves an assignment,whereas a preference only involves a proposal.
B)a settlement involves a transfer by the debtor of its property for little or no value,whereas a preference gives preferential treatment to a particular creditor.
C)a settlement involves a payment,whereas a preference does not.
D)a settlement involves the Bankruptcy Court,whereas a preference involves the trustee.
E)a settlement must be in writing,but a preference can be done orally or by conduct.

Question 24

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 25

Ludmilla and Sudash carry on a catering business.They form ICING Inc,a caterer that specializes in frozen desserts and elaborate ice sculptures used for centerpieces.The corporation purchases a refrigerated truck with the help of a loan from Bank X.The bank takes a security interest in the truck to secure the full amount of the loan,which is $70 000.Unknown to the bank,however,the truck is worth substantially more than the value of the loan.If ICING goes bankrupt and the bank seizes and sells the truck for $80 000,it 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 26

A debtor MUST include in a proposal

A)all its creditors and all its property.
B)all its secured creditors but not all its property.
C)all its unsecured creditors but not all its property.
D)whatever creditors the debtor chooses to include in its proposal.
E)none of its creditors.The debtor does not need to include any existing creditors in a proposal-only those who agree to lend money to the debtor in future.

Question 27

Alphonse is new to Canada and decides to start a tailoring business with a $30 000 loan from Bank X.Under the terms of the loan,Bank X may recall the loan at any time,but Alphonse has come to know the loan officer well.The officer has given Alphonse verbal assurances that the loan will not be called "unreasonably." Alphonse locates a store for rent on a busy street and decides to set up there.At first,business is good.Alphonse hires his wife and two apprentices from the nearby college to help out.Two more sewing machines are bought and Alphonse gives some thought to starting up a dry-cleaning business on the premises.One day,however,the loan officer stops by to tell Alphonse that the entire loan to Bank X must be repaid within 24 hours.No reason is given.If the loan is recalled,Alphonse will be insolvent and financially destroyed.Which of the following is TRUE?

A)Alphonse would likely be unsuccessful in a court suit challenging the reasonableness of the bank's actions.
B)The bank is entitled to demand its money back without notice.
C)The bank must always give at least one month's notice when demanding payment.
D)Alphonse may be successful in a court suit challenging the legality of the bank's actions.
E)The bank could seize all of Alphonse's assets if he does not repay the loan immediately.

Question 28

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 29

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 30

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 31

Bill is in business as a contractor and purchases a tractor worth $100 000 with a loan from Bank X.The full value of the loan is put towards the purchase price and the bank obtains and registers 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

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 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

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 35

Bankruptcy law is intended to ensure that

A)most people will not lend money in ordinary circumstances to people they do not know.
B)debtors are relieved of the consequences of their insolvency.
C)ordinary creditor-debtor laws are used to deal with insolvent debtors.
D)there is a central clearing house for information about debt in Canada.
E)debtors and creditors know what the consequences will be if debts cannot be repaid,and debtors may seek protection from creditors,including the orderly disposal of debtors' assets,and either winding up or rehabilitation of debtors.

Question 36

Reiko notices new luxury watches in a jewellery 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 commited an act of bankruptcy and so must become bankrupt.
E)is a bankrupt.

Question 37

Bankruptcy is a federally regulated procedure in Canada because

A)it is assigned to the federal government under the Constitution.
B)the provinces have no jurisdiction with respect to financial matters.
C)it helps to punish debtors who engage in fraudulent behaviour.
D)it is a federally regulated procedure in both the United States and the United Kingdom.
E)it helps to rehabilitate debtors.

Question 38

Charles is the sole shareholder of his corporation that carries on an Internet services business.The corporation has 10 employees.Unfortunately,Charles's corporation comes perilously close to going under when the Internet stock bubble collapses and it is forced to make a proposal to its creditors.The corporation was paying $3000 a month to the bank and $2000 a month to a computer leasing firm.Neither obligation is secured.Under the Bankruptcy and Insolvency Act Charles' corporation may NOT propose to do the following.

A)pay the full amount of the obligations due to both creditors
B)pay one half of the full amount of the obligations due to both creditors
C)sell all of its assets and use the proceeds to pay back both creditors in full
D)defer all its payments to both creditors for 6 months
E)pay the creditors whatever Charles wants regardless of how the creditors vote on the proposal.

Question 39

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 40

Sanjana decides to make an assignment in bankruptcy after she loses her job.Times are tough and she just wants a fresh start in life.She puts all of her goods in 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 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.

Question 42

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 43

Natasha runs a lingerie business that caters to a select crowd.Notwithstanding her valiant efforts at promotion,the lingerie business goes nowhere and she's left saddled with over $100 000 in debts.She would like to continue operating,at least for a while,and makes a proposal to creditors.She puts all creditors owed $1000 dollars or less in one class,puts her two large secured creditors in their own categories,and the preferred creditors in a third class.Is it likely that her proposal will succeed?

A)No,because Natasha is not allowed to classify all creditors.
B)No,because Natasha has too much debt to be able to make a proposal to creditors.
C)Yes,so 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)Yes,so long as all creditors are fully satisfied.
E)Yes,so long as Natasha promises that if the proposal does not work she will assign herself into bankruptcy.

Question 44

Joel's CD-making business is looking shaky in March,and in October he transfers the title to his house to his wife for $1.Immediately thereafter,he files for bankruptcy.The transfer to his wife could be challenged by creditors as

A)a stay of proceedings.
B)a discharge.
C)a preference,provided that Joel's wife owes him money.
D)a transfer to a relative.
E)a preference even if Joel's wife does not owe him money.

Question 45

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.

Question 46

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 47

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 48

Carmen is a creditor of Joe's Popular Pizza,an entity that 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 because

A)it is the required method of proving a claim in bankruptcy,providing notice and an opportunity for the debtor or other creditors to challenge the claim if necessary.
B)Carmen is a secured creditor.
C)she is claiming a settlement and not a preference.
D)Carmen wants to pursue Joe's Popular Pizza in another province.
E)Joe's whereabouts are unknown.

Question 49

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.

Question 50

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.

Question 51

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 52

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.

Question 53

The principal benefit of proceedings under the Companies Creditor's Arrangement Act is that

A)all actions against the debtor,other than those by secured creditors,are stayed.
B)all actions against the debtor may continue,but payment of any judgment is stayed unless a court orders otherwise.
C)all actions against the debtor,including actions by secured creditors,are stayed.
D)no actions against the debtor are stayed,but the debtor enjoys government protection in several phases of the proceedings.
E)no actions against the debtor are stayed unless a court so orders.

Question 54

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.
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.

Question 55

The debtor-creditor relationship is addressed by both the Bankruptcy and Insolvency Act and various other statutes.Which of the following statements is TRUE?

A)As a result of sections 91 and 92 of the Constitution,all of those statutes are enacted by the federal government.
B)All of those statutes establish various class action procedures that allow for the resolution of all of the debtor's financial difficulties at one time.
C)The federal Bankruptcy and Insolvency Act is the most important statute dealing with the debtor-creditor relationship of insolvent debtors and applies to all Canadian businesses and individuals.
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.

Question 56

Noah is a bodybuilder who enters the diet-supplement business.His supplements,GRO-BIG,become popular because they come in the form of chewable bars that can be sold in grocery and convenience stores.GRO-BIG grows very big indeed.Unfortunately,Noah's expenses are high and he has periodic cash flow problems,though he is not insolvent.His creditors are seeking payment.If he wants to retain control of GRO-BIG operations,his best bet would likely be to

A)make a proposal to his creditors to liquidate the GRO-BIGbusiness.
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 to the creditors that would give the creditors more if the business operates than if the business is liquidated in bankruptcy.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

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 61

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

Question 62

Explain why a creditor would accept a proposal in bankruptcy.

Question 63

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.

Question 64

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

Question 65

Explain why bankruptcy is a federal responsibility under Canadian law.

Question 66

"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 67

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.

Question 68

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

Question 69

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

Question 70

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 71

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.

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

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 75

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 76

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

Question 77

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 78

What are two differences between corporate and personal bankruptcy?