The Personal Liabilities of Insolvency Practioners under Insolvency Legislation: A Comparative Analysis of the Canadian, English and American Positions — Part I

I  Introduction: Nature of Problem

Canadian insolvency legislation recognizes a variety of persons¹ who play a role in the administration of the estates of insolvent persons. These persons include a trustee in bankruptcy for liquidation purposes, a trustee in relation to a commercial proposal under Part III.1 of the Bankruptcy and Insolvency Act (BIA), an interim receiver under ss 46, 47 and 47.1 of the BIA, and a receiver under s 243(1) of the recently enacted but not yet proclaimed Bill C-55. In respect of the Companies' Creditors Arrangement Act (CCAA),³ there is the monitor, a receiver if appointed by the court at the request of a secured party, and arguably⁴ the directors of the debtor company while the company is under CCAA protection.

The purpose of this study is to determine the personal liabilities of an insolvency practitioner (IP) in the discharge of his mandate under this legislation and to compare the Canadian position with the rules obtaining under English and US insolvency law. By 'insolvency practitioner', we mean an individual or corporation in the private sector duly qualified or licensed to administer insolvency estates whether for liquidational or reorganizational purposes. The emphasis in this paper is on commercial, not consumer estates, but encompassing personal as well as corporate debtors. 'Personal liability' is used in this study to mean liability imposed under general principles of the common law in Canada, England and the US, or by statutory law in these countries, including the Quebec civil code, and whether or not the IP is also entitled to be indemnified by the estate in respect of his liability assuming there are enough assets in the estate to accomplish this purpose.

In considering the personal liabilities of IPs, it is important to distinguish between two very different types of liability. The first involves liabilities incurred by the IP while discharging his functions as administrator of the estate, including the operation or liquidation of any business associated with the estate. Typical examples are contractual debts for goods and services incurred by the IP during the winding up of the estate, payment of occupation rent to landlords, wages, vacation, termination pay and pension benefits owed to employees, and taxes owing to various levels of government arising out of the IPs administration during his term of office.

The second type of liability attaches to the IP because he has breached an obligation imposed on him by law. Examples are: negligent or fraudulent conduct in the administration of the estate, breach of the IP's fiduciary obligations, and various forms of strict liability arising out of the IP's activities. IPs' environmental liabilities can also be subsumed under this heading though they are really sui generis in character and belong to a category of their own.

The distinction between the two types of liability is of fundamental importance in Canadian insolvency law. If the IP is treated as the legal owner or (which amounts to the same thing) as trustee of the property of the estate, or occupies an equivalent position, basic common law doctrine dictates that the IP/trustee will be held personally liable for the debts of the estate or any breaches of contract committed during the trustee's watch whether by the trustee personally or by employees retained by the trustee. Absent statutory exculpatory provisions, the trustee can only escape personal liability by clearly excluding it in the contract. A different legal result ensues if the IP is only treated at law or by statute as an agent of the estate – the classical example is the status of a liquidator under the federal Winding Up and Restructuring Act (WURA)⁸ – or as a watchdog or monitor of the business and affairs of the debtor company. An interim receiver under s.46 of the BIA or a monitor appointed under the CCAA would seem to meet this test since neither acts as principal or owner of the assets of the estate although paradoxically the law still treats them as personally liable.⁹

Apart from this basic distinction (which is relevant in all three jurisdictions), the status and liabilities of IPs differs widely in Canada, England and the US. So do the statutory defences and exemptions from liability to which the IPs may be entitled. The purpose of this paper is to describe non-exhaustively these similarities and differences. An equally important goal is to consider what changes are desirable in the Canadian law: 

• To provide consistent treatment of the liabilities of IPs regardless of the particular status of an IP;
• Where appropriate, to confer explicit rights of indemnity on the IP;
• To clarify procedural requirements for actions against IPs, particularly those arising under section 215 of the BIA and section 11 of the CCAA.

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¹ The term 'persons', and not individuals, is used advisedly because both Canadian and US insolvency law permit corporations to act as trustees in bankruptcy and, in Canada's case, of other types of insolvency administrators as well. See, for Canada, the Bankruptcy and Insolvency Act, RSC 1985, c.B-3, as am., s.14.08 (BIA), and, for the United States, US Bankruptcy Code 1978 as am., s 321(a)(2). This paper is concerned with the liabilities of private insolvency practitioners involved in the administration of insolvent estates and does not address the liabilities of government officials who may also play a role, notably the Superintendent of Bankruptcy and the official receivers in Canada at the regional offices of the OSB, US Trustees in the US, and the Official Receiver in England. With respect to Canada and the US, the reason for the exclusion is that the indicated officials, while discharging very important public functions, are not directly implicated in the administration of individual estates but only play a supervisory and regulatory role. The position is different in England since there the Official Receiver and his staff are heavily involved in the administration of estates where an insolvency practitioner is not willing to act. Nevertheless, economically, the English official receiver is in a different position from private insolvency practitioners and it seems best not to complicate an already complex scenario by adding yet another dimension to it.

² 53-54 Elizabeth II, S.C. 2005, c. 47, assented to 25^th November, 2005. For the legislative history of Bill C-55, see J. Ziegel, "The Travails of Bill C-55" (2005) 42 CBLJ 440.

³ R.S.C. 1985, c.C-36 as am..

⁴ 'Arguably' because the CCAA assigns no formal administrative roles to directors in relation to the company's restructuring. However, except as otherwise provided in the CCAA or in a court order the directors retain their powers under the statute governing the incorporation of their companies; on principle, it would seem that the directors must also approve any plan of reorganization to be put before the company's creditors that is prepared by the company's officers.

⁵ Almost invariably the assets are insufficient, which is why the issue of the IP's personal liability arises to begin with. However, as explained below, there are many types of personal liabilities for which an IP may not be entitled to be indemnified, e.g., where the IP has guilty of negligence in the discharge of his functions or where he has breached his fiduciary obligations.

⁶ E.g., by making secret profits from the administration of the estate or occupying conflicting positions not permitted at law e.g., acting for the estate as well as for an individual creditor. (Exceptionally, and not without some difficulty, the BIA permits a trustee to act for the estate and as private receiver for a secured creditor subject to some minimal safeguards. See BIA s 13.4 and the perceptive comments in Bennett on Bankruptcy, 7^th ed. (2002), pp 29-30. The reason for the exception is a practical one. The secured creditor's claim frequently covers the total value of the estate. Because of this, unsecured creditors are usually not willing to underwrite the IP's fees and expenses if he agrees to serve; the secured creditor has a strong incentive to do so.

⁷ At common law, a person is guilty of the tort of conversion if he wrongfully converts the goods of another person even if the converter was not aware of the competing claim and acted in perfect good faith. IPs are particularly susceptible to committing this tort because they have no sure means of knowing whether personal property in the insolvents estate is subject to a competing claim except where the competing claim is a security interest which requires to be perfected. The British Insolvency Act has some protective provisions in the IP'S favour to cover such exigencies (see Insolvency Act 1986 as am., s.304(3)) as does the BIA, s.80(1).

⁸ RSC 1985, c. 11, as am.

⁹ For the reasons, see infra, Part II.B.2(a).