Directive No. 10

Redemption of Security and Section 147 Levy of the BIA

Issued:  December 19, 1997

Purpose

This Directive is intended to specify the operation of section 147 of the BIA in the case of the liquidation of encumbered assets on behalf of a secured creditor. It is also aimed at ensuring greater transparency and uniformity in the trustee's presentation of the statements of receipts and disbursements, as well as a standard approach to the examination of these statements by bankruptcy officers.

In addition, the Directive is intended to ensure that the body of creditors is not penalized in any way and does not bear any cost for the trustee's liquidation of encumbered assets on behalf of a secured creditor.

Subject

This Directive is issued pursuant to paragraph 5(4)(b) of the Act and it establishes the circumstances in which trustees are viewed as acting in a double capacity and the circumstances in which they are considered to be making a redemption of security. This Directive also establishes the cases in which the levy prescribed by section 147 of the Act is payable on amount paid to secured creditors.

In addition, it establishes the procedure to be followed in presenting a redemption in the statement of receipts and disbursements.

Sections of the Act concerned: 

13.4; 128; 147; and 152.

Related Directive concerned: 

15R

Policy

Except in the cases listed below, the section 147 levy is payable on all payments by a trustee to a secured creditor. This principle stands even if a third party such as, for example, a notary public, a liquidator or an auctioneer makes the payment to the secured creditor for and on behalf of the trustee.

Since the redemption is not a "consensual operation", but rather a unilateral action taken by the trustee with the intention of obtaining an advantage for the estate, it therefore excludes the case of the trustee acting on behalf of the secured creditor.

A trustee acting in this capacity can redeem a security only through the mechanism provided for in subsection 128(3) of the Act.

Exceptions

1. The trustee obtained a mandate from the secured creditor and complied the provisions of section 13.4 of the Act, Directive No. 15R, sections 245 and following sections (if applicable), and the assets were sold while the trustee acted as an agent, receiver or mandatary but not as trustee.
2. The trustee proceeded with redemption of the security within the meaning of subsection 128(3) of the Act. In such a case, all of the following conditions must be fulfilled:
   1. The secured creditor must produce a proof of claim prior to the offering of the encumbered assets for sale. Should the secured creditor not produce a proof of claim, it is the trustee's responsibility to take advantage of the provisions of subsection 128(1) of the Act;
   2. the encumbered assets must be sold at a net price superior to, or at least equal to, either the total of the claim or the amount of the valuation of the security as established by the creditor in the creditor's proof of claim;
   3. to show that it is a redemption that fulfils these conditions, the trustee must file, with the statement of receipts and disbursements, an attestation pursuant to Appendix 1 of this directive.

The said attestation contains the following information:

• Date of receipt of the secured creditor's proof of claim;
• amount due to the secured creditor and valuation of the security established in the proof of claim;
• date the encumbered assets are offered for sale and date of sale of the said assets;
• gross price paid by the purchaser;
• trustee's disbursements and remuneration pertaining to the redemption; and
• date of redemption of the security.

For the purpose of this directive the net price is the gross price paid by the purchaser less the trustee's disbursements and remuneration pertaining to the redemption.

The receipts, the disbursements as well as the trustee's remuneration pertaining to the redemption must be recorded in the statement of receipts and disbursements. If the trustee makes several redemptions, the trustee must submit an equivalent number of Appendices with the statement.

In the event that the trustee sells unencumbered and encumbered assets in the same transaction, the disbursements must be shared pro rata between these two categories of assets. If another method is used, the trustee must indicate the method used and justify the choice.

Transitional Measures

The Office of the Superintendent of Bankruptcy will process statements of receipts and disbursements that indicate a redemption of security occurred prior to the issuance of this Directive the same way it did before the issuance of this Directive.

However, there are two exceptions to this principle and their occurrence shall be reflected in the letter of comments. They are:

1. that the general body of creditors sustained fees and/or disbursements as a result of the liquidation of secured assets; or
2. that the trustee's remuneration was not be fully disclosed in the statement.

The Superintendent of Bankruptcy
Marc Mayrand