Bankruptcy, receivership, insolvency

In Canadian law, bankruptcy is a legal status under the Bankruptcy and Insolvency Act (BIA). Receivership occurs when a receiver has possession or control of a person's property. The Canada Revenue Agency describes both as legal proceedings carried out under the BIA and registered with the Office of the Superintendent of Bankruptcy, as set out on its receivership and bankruptcy page.

Insolvency is the wider term. An insolvent person is a person whose financial circumstances meet the BIA's insolvency criteria. Insolvency is the underlying financial or legal condition, while bankruptcy and receivership are particular statuses or proceedings that can follow from it. For a supplier, the three words are related but are not interchangeable.

How a receiver is appointed and what a receiver does

A receiver can be appointed by a court or privately by a secured creditor. Once appointed, the receiver may take control of property, supervise liquidation proceedings, and remit the proceeds according to statutory or legal priorities. The Canada Revenue Agency explains this on its receivership page.

The BIA also lets a court, on application by a secured creditor, appoint a receiver over all or substantially all of an insolvent person's inventory, accounts receivable, or other business property. That power is set out in the Bankruptcy and Insolvency Act.

Bankruptcy versus receivership versus insolvency

• Insolvency: the condition of a person who meets the BIA's insolvency criteria.
• Bankruptcy: a legal status under the BIA, registered with the Office of the Superintendent of Bankruptcy.
• Receivership: the situation in which a receiver holds possession or control of a person's property. The BIA treats a person whose property is under a receiver's possession or control as a person subject to receivership.

A business can therefore be insolvent without yet being bankrupt or in receivership. Bankruptcy and receivership are the formal steps that put a legal process around that condition.

Repossession rights for unpaid suppliers

The BIA gives a supplier of certain unpaid goods a possible right to repossess them if the purchaser becomes bankrupt or subject to receivership. The statutory conditions must be met. The supplier must generally present a written demand within 15 days after the purchaser becomes bankrupt or subject to receivership. The goods must generally have been delivered within 30 days before the bankruptcy or receivership. The full conditions are in section 81.1 of the Act.

These time limits are short, so a supplier with an exposed delivery needs to act quickly once a customer's status changes.

Insolvency events as contract termination triggers

Contracting authorities use these events as grounds for default or termination. An Allied Command Transformation solicitation from NATO states that the contract may be terminated if the contractor is adjudged bankrupt, is liquidated, or becomes insolvent. It also covers a contractor that seeks or receives a moratorium or stay, assigns assets for creditors, or has a receiver appointed because of insolvency. The wording is in the solicitation document.

What it means for a supplier bidding on Canadian public contracts

Treat insolvency status as a contract risk on both sides of a bid. As a contractor, a bankruptcy, a receiver's appointment, or insolvency can give a buyer grounds to end a contract where the solicitation includes terms like the NATO example above. Read the termination and default provisions in each solicitation and resulting contract before you bid.

As a seller of goods to a customer or prime contractor, the BIA's repossession provision may help if that customer becomes bankrupt or subject to receivership. Keep delivery dates and records of unpaid invoices on file, and act inside the 15-day demand window.