Deemed Annulments of Consumer Proposals and the Treatment of Moneys Available for Distribution

May 11, 2004

Subject

The purpose of this document is to communicate the Superintendent's position on two issues affecting the administration of consumer proposals. First of all, it will deal with the treatment of consumer proposals where a deemed annulment occurs without any of the steps set out in the Act having been taken. Secondly, it will look at the ancillary question of the distribution of moneys held at the time of the deemed annulment, or even collected after the fact.

Background

The consumer proposal system prescribed by the Bankruptcy and Insolvency Act (BIA) has seen constant growth over the past several years. Currently, there are approximately 50,000 ongoing consumer proposals. The reason for the increasingly frequent use of the consumer proposal system is doubtless the fact that a viable proposal is far more advantageous for the debtor and the creditors than a bankruptcy pure and simple. It has been noted that consumer proposals enable creditors to receive dividends that are on average seven (7) times greater than the average dividends distributed in bankruptcies. In addition, proposals enable debtors to maintain their property and avoid the stigma associated with bankruptcy.

Despite the regime's unquestionable success, it has been observed that approximately 35% of consumer proposals fail for a variety of reasons, and the vast majority of these failures give rise to what the BIA refers to as deemed annulments. Section 66.31 of the BIA reads as follows: 

66.31 (1) Independently of section 66.3, (a) where payments under a consumer proposal are to be made monthly or more frequently and the consumer debtor is in default to the extent of three months payments, or

(b) where payments under a consumer proposal are to be made less frequently than monthly and the consumer debtor is in default for more than three months on any payment, the consumer proposal shall thereupon be deemed to be annulled unless the court has previously ordered otherwise or unless an amendment to the consumer proposal has previously been filed, and the administrator shall forthwith so inform the creditors and file a report thereof in the prescribed form with the official receiver.
(2) Where an amendment to a consumer proposal filed before the deemed annulment of the consumer proposal by virtue of subsection (1) is withdrawn or refused by the creditors or the court, the consumer proposal shall thereupon be deemed to be annulled.
(3) A deemed annulment of a consumer proposal by virtue of subsection (1) or (2) does not prejudice the validity of any sale, disposition of property or payment duly made, or anything duly done under or in pursuance of the consumer proposal, and notwithstanding the deemed annulment of the consumer proposal, a guarantee given pursuant to the consumer proposal remains in full force and effect in accordance with its terms.
Source: Laybolt (2000), N.S.J. No. 285

Exemplary Practices

In order to comply with s. 66.31(1), the administrator/trustee should therefore: 

  1. Ensure proper monitoring of the proposal he or she is administering;
  2. As soon as the debtor is late with a payment that can not be remedied forthwith, and before default gives rise to the deemed annulment of the proposal, determine whether there is cause to present an amendment to the proposal or obtain a Court Order;
  3. As soon as the proposal is deemed annulled, so inform the creditors and the official receiver.

A well advised administrator/trustee will help the debtor to prepare a proposal that can satisfy the interests of the creditors while reducing the instances of default mentioned in the Act.

Problem

There have been instances in which the administrator/trustee did not immediately realize that a proposal had been deemed annulled, and did not inform the debtor, the creditors or the official receiver. In numerous cases, the administrator/trustee continued to accept payments from the debtor after the deemed annulment. In other cases, there has been a series of defaults which in theory would have caused several deemed annulments in the same proposal that have all gone unnoticed by the administrator/trustee. Finally, there have been situations in which, after the deemed annulment, the debtor has resumed making the payments provided for in the annulled proposal and has satisfied his or her financial commitments to the extent that the creditors have received the entire dividend anticipated in the proposal.

The courts have dealt with a number of these cases and have ruled on the scope of s. 66.31 BIA. After some hesitation, most of the jurisprudence concluded that the courts did not have jurisdiction to remedy a deemed annulment. In short, courts have ruled that their intervention should be sought before the proposal is deemed annulled, as anticipated in section 66.31 BIA.

Position of the Superintendent

While it is difficult to determine the exact number of proposals in which the problems described above have been encountered, it is believed that they are sufficiently numerous to warrant the Superintendent issuing a position statement on how to deal with such circumstances. This position is based on the following considerations in particular: 

  • the need to put an end to confusion with regard to the deemed annulment of consumer proposals;
  • ensuring fair and equitable treatment of debtors who have respected the terms of their proposals even after a deemed annulment;
  • ensuring fair and equitable treatment of creditors;
  • avoiding situations in the future in which proposals that are deemed annulled are not treated as such, i.e. in a manner not in accordance with the provisions of s. 66.31 BIA;
  • pursuing the legislator's goal of promoting and facilitating proposals as the preferred means of resolving situations of insolvency;
  • to the extent possible, avoiding burdening the courts with problems that are first and foremost of an administrative nature.
  1. Position of the Superintendent With Regard to Debtors:
    1. If, despite the deemed annulment of a proposal, the debtor has fully satisfied his or her financial obligations under the proposal prior to the administrator/trustee taking the actions prescribed by section 66.31, the administrator/trustee must forthwith issue a Certificate of Full Performance.
    2. If the administrator/trustee becomes aware of the deemed annulment after the debtor has resumed payments, but before the debtor has completely fulfilled his or her commitments pursuant to the proposal, and the administrator/trustee believes that the debtor will be in a position to pay the full amount anticipated in the proposal, the administrator/trustee must forthwith:
      1. Notify the creditors who have previously proven their claims and the official receiver of the situation in writing, and
      2. provide in the notice an opinion as to the likelihood that the debtor will be able to make all of the payments.

      In these situations, the proposal should be considered valid unless one or more creditors opposes its continuation within 10 days of the notice; and the administrator/trustee must provide the debtor with a Certificate of Full Performance as soon as the debtor has made all of the payments anticipated in the proposal.

    3. If the administrator/trustee becomes aware of the deemed annulment after the debtor has resumed payments, but is of the opinion that the debtor will not likely be in a position to make all of the payments anticipated in the proposal, the administrator/trustee must forthwith put an end to the proposal process by following the instructions in section 66.31 BIA and issuing Form 56.

    Application

    The position set out above with regard to debtors applies to all consumer proposals that are deemed to be annulled at the time the position is issued or within thirty (30) days of its issuance. This position is therefore temporary and is intended to deal with existing situations. After the expiry of the thirty (30) days, the Superintendent and his representatives will insist on the rigorous application of section 66.31.

    Administrators/trustees would therefore be well advised to review all of the consumer proposal files for which they are responsible in order to determine whether there are existing or anticipated situations of deemed annulment in their consumer proposal portfolios. Following this review, and no later than fifteen (15) days after the expiration of the thirty (30) days, administrators/trustees should inform the official receiver of any existing or anticipated cases of deemed annulment that have been identified and determine how they will be handled.

    In future, the Superintendent expects all administrators/trustees to ensure that the consumer proposals for which they are responsible are closely monitored so as to avoid, to the extent appropriate, situations of deemed annulment, and in cases where that is not appropriate, to take note of the annulment as soon as it arises and to comply with the provisions of section 66.31.

  2. Position of the Superintendent With Regard to the Treatment of Statements of Receipts and Disbursements

    In all of the situations described above, the OSB may issue a negative letter of comment after having taken into account all of the circumstances known to have given rise to the deemed annulment, particularly the diligence of the administrator/trustee in following up on it, the resumption of payments by the debtor, the amounts distributed to the creditors, and any other factors to which the administrator/trustee might call attention.

    In preparing their comments, the Superintendent's representatives will also take into account the administrator/trustee's general practices in administering consumer proposals, whether the administrator/trustee has been advised of deficiencies in this regard in the past, the type and frequency of deficiencies, and finally, their impact on the creditors and debtor.

    In order that they fulfill the monitoring mandate conferred on them by the Act, before issuing a letter of comment, the Superintendent's representatives will require that the administrator/trustee attach to each statement of receipts and disbursements a written certificate attesting to the fact that there has been no deemed annulment. This certificate, of which an example is appended, will be required for all proposals which were not the subject of a deemed annulment, and for which statements of receipts and disbursements will be produced after the publication date of this position statement.

  3. Position of the Superintendent With Regard to the Treatment of Moneys to be Distributed

    Ancillary to the problem of deemed annulments of consumer proposals is the issue of who should receive any money that is in the possession of the administrator/trustee at the time of the deemed annulment, or that he or she receives afterwards.

    It is the Superintendent's position that the moneys held by the administrator/trustee should be distributed to the proposal creditors, regardless of when these moneys were received. This position is based, among other things, on section 66.26, which states that "All moneys payable under the consumer proposal shall be paid to the administrator… the administrator shall distribute available moneys to the creditors in accordance with the terms of the consumer proposal" as well as the provisions of subsection 66.31(3) regarding the validity of actions taken pursuant to a proposal that is deemed annulled.

    This position serves to minimize losses to the proposal creditors and to avoid them having to share the receipts of the proposal with subsequent creditors whose remedies were not stayed. Furthermore, when the debtor made the payments to the administrator/trustee, it was in order to comply with the proposal, and therefore to reimburse the creditors of that proposal. This position statement applies regardless of whether or not the deemed annulment is followed by a bankruptcy.

    Application

    This position with regard to the treatment of moneys available for distribution applies as soon as it is published.

Annex

Attestation

I, space to insert name of administrator/trustee, administrator/trustee of the consumer proposal of space to insert name of consumer, hereby attest that at no time between the filing of this proposal on space to insert date and today's date, was the proposal deemed to be annulled as provided for in section 66.31 BIA.

Signed, this space to insert date

space to insert signature of Administrator/trustee
Administrator/trustee

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