Sometimes, an estate’s debts and liabilities are greater than its assets. When that occurs, an estate trustee should consider assigning the estate into bankruptcy. This is for the protection of the estate trustee, as he or she may otherwise become personally liable for the estate’s unpaid debts and liabilities. If an estate is successfully assigned into bankruptcy, a bankruptcy trustee is appointed, and the estate trustee is discharged and no longer at risk of the aforementioned liabilities.
As set out under s. 49 of the Bankruptcy and Insolvency Act, assigning an estate into bankruptcy can only be done with leave of the court, which means a proceeding must be commenced. Once before the court, the estate trustee must be prepared to answer the following questions, as set out in Campbell Estate, 2011 SKQB 463:
- Whether the estate is insolvent; and
- Whether there is any indication that the bankruptcy will amount to an abuse of the Court’s process or a fraud on the creditors.
The definition of an “insolvent person” is found under s.2 of the Bankruptcy and Insolvency Act:
insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and
(a) who is for any reason unable to meet his obligations as they generally become due,
(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or
(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;
In determining whether an estate meets this definition, an estate trustee should be prepared to show the court that they have made adequate inquiries to locate and gather all the estate assets and obtained fair market valuation of these, a list of the estate’s creditors and debts owed to each.
Unfortunately, the task of putting together a list of the estate’s assets, liabilities, and obtaining updated valuations for each can extremely a time consuming. It can also be an expensive task that can require out of pocket expenses from the estate trustee personally. However, this is an important step that cannot be skipped. In the decision of D’Onofrio v Riley, 2023 ONSC 4764, the court declined to assign an estate into bankruptcy, finding that the estate trustee had not done enough to show the estate’s liabilities exceeded its assets, but inviting the estate trustee to try again once further efforts had been made.
