Bankruptcy and Insolvency Act
Q. Is there a difference between the terms, “bankruptcy” and “insolvency”?
A. Bankruptcy and insolvency are often used interchangeably; however, they do not mean the same thing. Bankruptcy is a legal status. Insolvency is a financial condition. An insolvent debtor is unable to meet its obligations generally as they become due or its liabilities exceed the value of its assets. When a commercial entity or individual becomes bankrupt, they lose the legal capacity to deal with their assets and a trustee in bankruptcy is appointed over those assets with a mandate to liquidate the assets and distribute the proceeds of sale to creditors.
Q. Does the Bankruptcy and Insolvency Act (BIA), Cap 303 of the Laws of Barbados deal only with Bankruptcy?
A. No, in addition to bankruptcy the BIA includes provisions to facilitate both the reorganization of companies and the liquidation of a company by way of appointment of a receiver (generally referred to as a receivership or compulsory liquidation).
Q. What is a Receivership?
A. A receivership is a remedy available to secured creditors under the BIA, which allows them to enforce their security upon default of payment of an outstanding debt by a debtor. This process involves the appointment of a receiver or receiver manager who is empowered to deal with the debtor company’s assets. This could including operating and managing the business in place of the existing management, closing shut down the business if the receiver concludes the continued operations will likely erode the recoveries for creditors or there is insufficient funding to continue operations, and taking possession of the assets secured under the security agreement in order to repay the debt owed to the secured creditor.
Q. How is a receiver or receiver-manager appointed?
A. A receiver or a receiver manager may be appointed by a secured creditor pursuant to the terms of a security agreement or by the Court. Receivers or Receiver managers appointed under a security agreement are regulated and accordingly must obtain a licence from the Office of the Supervisor of Insolvency in order to act as a receiver.
Q. What are some of the duties of a receiver?
A. A receiver who been has appointed under a security agreement must act in accordance with the terms of the instrument and if appointed by the Court must act in accordance with the Court’s directions. A receiver must act honestly and in good faith, deal with the property of the debtor in a commercially reasonable manner, and not later than 10 days after becoming a receiver, send a notice of that fact to the Supervisor of Insolvency, the trustee where the debtor is bankrupt, and where the debtor is not bankrupt, to the debtor, and to all creditors of the debtor that the receiver, after making reasonable efforts, has ascertained.
Q. How can an insolvent debtor reorganize or restructure its business under the BIA?
A. The reorganization provisions under the BIA, is known as the proposal process. An insolvent debtor may reorganize its business by presenting a proposal to its creditors in an attempt to avoid bankruptcy. The proposal is essentially an offer by the debtor to compromise the amount owing to its creditors in order to permit the debtor to carry on business. The benefit of such a proposal for the creditors is that the amount received under the proposal will likely be greater than what the creditor would have received if the debtor declared bankruptcy. A Proposal can be made to a company’s creditors to reduce the amount debt owed, to extend the amount of time to pay off the debt or provide for a combination of both.
Q. Who may make a Proposal?
A. Pursuant to Section 12(1) of the BIA, a proposal may be made by an insolvent person, a receiver (but only in relation to an insolvent person), a liquidator of an insolvent person’s property, a bankrupt and a trustee of the estate of a bankrupt.
Q. How are Proposal proceedings commenced?
A. Proposal proceedings may be commenced by filing a proposal or a notice of intention to make a proposal (“NOI”) with the Office of the Supervisor of Insolvency. Pursuant to Section 16(1) of the BIA an insolvent person may file a notice of intention to make a proposal with the Supervisor of Insolvency prior to lodging a proposal. The NOI is often filed when a debtor is concerned that a creditor may take action which would affect its ability to operate prior to the debtor having a chance to prepare and file a proposal.
Q. Is there a timeline for filing a Proposal with the Supervisor of Insolvency?
A. No, a proposal may be filed at any time by a licensed trustee acting on behalf of the insolvent debtor but where a NOI has been filed the proposal must be filed with the Supervisor within 30 days of filing the Notice of Intention to Make a Proposal, unless an extension of time for filing the proposal has been granted by the Court.
Q. What is the effect of filing a Proposal or a Notice of Intention to File a Proposal (NOI)?
A. On the filing a proposal or notice of intention to make a proposal there is a stay of proceedings with respect to the rights and remedies of all creditors. Once the NOI is filed there is an automatic stay for an initial 30 days (subject to the Court granting an extension for additional periods of up to 45 days each, for an aggregate total of up to 6 months). Once the proposal is filed, the stay continues until the meeting of creditors to vote on the proposal.
The stay applies to both unsecured and secured creditors, unless the secured creditor has delivered a notice under Section 10B of the BIA of its notice of intention to enforce security and the notice period provided for, has expired).
Q. What is the scope of the stay under an NOI?
A. The stay of proceedings under an NOI stays creditor action against the debtor and prohibits creditors from terminating contractual agreements because of the insolvency of the debtor or the filing of the NOI. Landlords cannot terminate leases because of rental arrears. Creditors can apply to lift the stay on demonstration of material prejudice or can oppose an extension of the stay if they can demonstrate, that the debtor is not acting in good faith.
Q. What if an extension of the stay is not granted by the Court?
A. If an extension of the stay is not granted by the Court, the debtor is deemed to have made an automatic assignment in bankruptcy.
Q. What is the role of the insolvent debtor in the Proposal process?
A. The insolvent debtor must provide the licensed trustee with a copy of the proposal setting out its terms, the particulars of any securities or sureties proposed and a statement showing their financial position at the date of the proposal. The insolvent debtor must also provide the trustee with access to all property, including the insolvent persons premises, books, records and other financial documents.
Q. What is the role of the licensed trustee acting under a Proposal?
A. The trustee has the responsibility for filing not the NOI and Proposal with the Office of the Supervisor of Insolvency. A trustee acting under a proposal has a duty to ensure that the information provided to the creditors is accurate given that the creditors rely on the trustee’s review of the insolvent debtor’s statement of affairs before accepting the proposal. In so acting the trustee must
- make or cause to be made an appraisal and investigation of the affairs and property of the debtor so as to enable him to estimate with reasonable accuracy the financial situation of the debtor and report the result of the appraisal and investigation to the meeting of the creditors.
- assure that the information in the cash-flow statement and report is reasonable.
- deliver a copy of the cash flow statement to any creditor upon their request unless otherwise ordered by the Court.
- monitor the insolvent person’s business and financial affairs; and
- file a report with the Supervisor of Insolvency and report to the creditors on any material adverse change in the statement or financial circumstances of the debtor.
Q. How does the proposal get approved by creditors?
A. Proposals are voted on at a meeting or meetings of the creditors called for that purpose. The meeting to consider the proposal must be called by the proposal trustee within 21 days of the filing of the proposal and at least 10 days’ notice must be given to each of the creditors.
Q. What if the proposal is not approved by unsecured creditors?
A. If the proposal is rejected by a class of unsecured creditors voting on the proposal, the debtor is deemed to have made an assignment in bankruptcy on the earliest of (i) the date the debtor filed the NOI, (ii) the date of the earliest outstanding application for a bankruptcy order, and (iii) the date the debtor filed its proposal.
Q. How does the proposal get approved by the court?
A. In addition to creditor approval, the proposal must be approved by the court. Within 5 days of the acceptance of the proposal by the debtor’s creditors, the proposal trustee must apply for a court hearing to have the proposal approved. The trustee acting under the proposal must give 15 days’ notice to the debtor, the Supervisor of Insolvency and each creditor who has proven its claim against the debtor.
Q. Who is bound by the proposal?
A. If the proposal is approved by the Court, it is binding on all unsecured creditors and on the secured creditors included in the proposal whose classes voted for the proposal in the requisite majorities.
Q. What if the proposal is not approved by the court?
A. If the proposal is not approved by the court, the debtor will be deemed to have made an assignment in bankruptcy on the earliest of (i) the date the NOI was filed; (ii) the date the earliest application for a bankruptcy order was issued; and, (iii) the date the debtor filed its proposal.
Q. How can an individual or a company become bankrupt in Barbados?
A. Under the provisions of the Bankruptcy and Insolvency Act, Cap 303 of the Laws of Barbados, (BIA) an individual or company may become bankrupt in one of three ways:
- Involuntarily. One or more creditors may apply to the Court for a receiving order (bankruptcy order) against a debtor where it is alleged that the debtor owes the petitioning creditor not less than $4000.00 and has committed an “act of bankruptcy” within 6 months preceding the date of the filing of the application. The acts of bankruptcy are enumerated in the BIA, with the most commonly alleged act being that the debtor has ceased to meet its obligations generally as they become due. It is not sufficient that the creditor allege that the debtor has failed to pay the obligations owing to such debtor, only. The Court will require cogent evidence of the facts alleged. The debtor has the right to object to the application, in which case a determination will be made by the court as to whether the receiving order should be issued.
- Voluntarily. Under Section 11 of the BIA, a debtor may make a voluntary assignment in bankruptcy for the general benefit of its creditors. To make a voluntary assignment, the debtor must be an “insolvent person” Companies, partnerships and income trusts are “persons” that may make an assignment if insolvent. An assignment is inoperative unless filed with the Supervisor of Insolvency.
- A debtor may also be deemed to have made an assignment into bankruptcy where the debtor makes a proposal to its creditors and the proposal is rejected by the creditors or the proposal although accepted by the creditors is not approved by the Court, or the on the failure of the proposal.
Q. How does bankruptcy affect the rights of secured creditors?
A. The rights of a trustee in bankruptcy are expressly subject to the rights of secured creditors. Generally, a bankruptcy does not affect the rights of secured creditors except to the extent necessary to allow the trustee to realize on any value in the collateral subject to the security, above and beyond what is owed to the secured creditor.
The trustee can require the secured creditor to prove its security; cause the secured creditor to value its security; inspect the collateral subject to the security; and, redeem the collateral subject to the security by paying the secured creditor the amount of the assessed value of the security.
To the extent that the amount of a secured creditor’s debt exceeds the value of the collateral subject to its security, a secured creditor may participate in the bankruptcy process and file a proof of claim in respect of the unsecured deficiency portion of its claim.