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Powers and Duties of a Trustee

The Trustee can do such things as employ a lawyer, borrow further money for the business by pledging or mortgaging its remaining free (unsecured) assets and negotiate with creditors for the acceptance by them of specific assets in lieu of money settlement of their claims. He may even engage the bankrupt debtor himself to assist in the administration of the bankrupt estate. To do these things, however, he must have specific authority from the inspectors.

A Trustee has the power and duty to recover property that under bankruptcy law should form part of the debtor's estate and thus be available to satisfy the claims of creditors.

The Trustee distributes liquidating dividends (payments on account) to the creditors from time to time as required by the inspectors and as realization of the debtor's assets permits. In doing so he must, of course, be careful to take account of the claims of the secured and preferred creditors.

If there is no hope for the successful operation of a company, liquidation is the only feasible alternative. The court declares the firm bankrupt and proceeds with a plan for orderly liquidation. Bankruptcy proceedings may be either voluntary or involuntary.

Duties of the Bankrupt Debtor

Following a receiving order or authorized assignment, the debtor must submit themself for examination by the Official Receiver to explain their conduct, the causes of their bankruptcy and the disposition of their property.

  • They must submit a sworn statement of their affairs to the Trustee, together with a list of the names and addresses of the creditors and the security held by them.
  • They must attend the first meeting of creditors and give the information they require.
  • They must deliver up possession of their property to the Trustee, co-operate with the Trustee and "aid to the utmost of their power in the realization of his property and the distribution of the proceeds among his creditors".

Priority of Claims

In the distribution of the proceeds of a liquidation, the priority of claims must be observed. The administrative costs involved in the bankruptcy, taxes and certain other claims must be paid before creditors are entitled to receive settlement. Secured creditors are entitled to the proceeds realized from the liquidation of specific assets on which they have a lien.

If any balance of the claim is not realized from the sale of the collateral, these creditors become general creditors. General creditors are paid liquidating dividends on a pro rata basis from the total liquidation of unencumbered assets. If all of these claims are paid in full, liquidating dividends then can be paid to subordinated debt holders, to preferred shareholders, and finally, to common shareholders. It is unlikely that common shareholders will receive much in the way of distribution from a liquidation.

Final Discharge

On the payment of all liquidating dividends, the bankrupt company is discharged, thereby being relieved of any further claim. The principal objective of bankruptcy proceedings is an orderly liquidation of assets and an equitable distribution to creditors on a formal basis.

An important objective of bankruptcy legislation is to clear an honest but unfortunate debtor of his outstanding debts and leave him free to resume his business life. The discharge of a bankrupt debtor usually cancels the unpaid portion of his debts remaining after their reduction by the liquidating dividends and gives the debtor a clean slate with which to start business again.

The discharge of a debtor is an official act of the Court. In deciding whether to grant or refuse a debtor's application for discharge, the Court consults the report of the Trustee.