Some Bankruptcy Law Issues Affecting Division Of Assets And Support Under The 'Family Law Act'

INTRODUCTION

This paper is intended to discuss some issues arising as a result of the interplay between the Family Law Act, SBC 2001, c. 25 (the "FLA"), and the Bankruptcy and Insolvency Act, RSC 1985, c.B-3 (the "BIA").

Both the FLA and BIA purport to provide fairly comprehensive codes for regulating their respective fields. However, there are several issues that can arise when their fields of influence overlap.

Two of such issues of importance to family law practitioners are with respect to the division of property, and support obligations.

The BIA underwent considerable amendments in 2009, though most of its provisions relating to this interplay with family law have not been substantially amended. However, the family law regime has been considerably altered by the FLA, which has only been in effect for a little over one year. Therefore, much of the case law discussed below considered the effects of the former Family Relations Act (the "FRA"). In some respects, the existence of the FLA may not change much of this interplay, while in other respects, it may. Only time will tell.

BASIC BANKRUPTCY CONCEPTS RELEVANT TO DIVISION OF PROPERTY AND SUPPORT ISSUES

Before considering various scenarios involving the interplay between the division of property and support issues under the FLA and bankruptcy, it is useful to understand some relevant basic concepts of bankruptcy law that affect the consideration of those issues.

How Does Bankruptcy Occur?

In most family law contexts, bankruptcy occurs in one of three ways:

An Assignment for the General Benefit of Creditors - Under section 49 of the BIA, an insolvent person can make an assignment of his property by going to a licensed trustee in bankruptcy and filing an assignment form. The person must be a "insolvent person", which the BIA defines as a person who is not already bankrupt, who resides, carries on business or has property in Canada, whose liabilities to eligible creditors equal at least $1,000, and who is for any reason unable to meet his obligations as they generally become due; who has ceased paying his current obligations in the ordinary course of business as they generally become due; or the aggregate of whose property is not, at a fair valuation, sufficient to enable payment of all his obligations, due and accruing due. The process for making an assignment in bankruptcy can be carried out quickly. A Failed Proposal - The BIA allows insolvent persons to make proposals to their creditors. An individual can qualify to file a Division II Consumer Proposal if his debts, excluding a mortgage on his principal residence, are less than $250,000. Consumer Proposals' procedures are more streamlined than other proposals. Typically, a BIA proposal is made to negotiate debts with one's acknowledged creditors, and if the proposal succeeds, bankruptcy is avoided. However, for general proposals to succeed, the insolvent person must obtain the approval of a requisite majority of his creditors, and then obtain the court's approval. Additionally, once approved by the creditors and the court, the insolvent person must carry out the terms of the proposal. If the proposal is not approved by the creditors or the court, or the proposal is annulled due to the failure of the insolvent person to subsequently perform his obligations under the proposal, the insolvent person is deemed to have made an assignment in bankruptcy. Petition by Creditors - One or more creditors can petition the court to make a bankruptcy order against an insolvent person. There are a number of conditions that must be met to obtain a bankruptcy order; however, generally speaking, a creditor who is owed more than $1,000 and can prove that the person is insolvent and has committed an act of bankruptcy can cause a person to be ordered bankrupt. The typical act of bankruptcy relied upon is ceasing to meet liabilities generally as they become due. Date of Bankruptcy

The date of bankruptcy can be an important factor in determining a spouse's interest in family property, as discussed below. The date upon which a person becomes bankrupt is determined by the way in which his bankruptcy occurred:

Assignment - The date of bankruptcy is the date of the filing of the assignment; Failed Proposal - The date of the creditors' rejection of the proposal is the date the person is deemed to have made an assignment in bankruptcy. If the creditors approve the proposal, but the court rejects it, the date the court rejects the proposal is the date the person is deemed to have made an assignment in bankruptcy. If the proposal is accepted by the creditors and the court, but the proposal is later annulled, the date of the bankruptcy is the date of the order of annulment. Petition for Bankruptcy Order - The date of the bankruptcy is the date the bankruptcy order is made. Bankrupt's Property upon Bankruptcy

Upon a bankruptcy, the bankrupt's property vests in the trustee in bankruptcy, pursuant to section 71 of the BIA:

71 On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.

This provision is of special significance to issues regarding the division of property under the FLA, as described below.

Role of Trustee

Generally speaking, the trustee's role in a bankruptcy is to collect up and liquidate the bankrupt's property, and divide it among the established, or "proven", unsecured creditors of the bankrupt. To do so, the trustee has to assess the validity of claims of...