Section 38 Of The Bankruptcy And Insolvency Act: How Creditors Can Pursue Claims When Trustees Refuse

What Is Section 38 of the Bankruptcy and Insolvency Act?

Section 38 of the Bankruptcy and Insolvency Act (BIA) gives creditors a powerful remedy when a trustee refuses to pursue claims that could benefit a bankrupt estate. It allows creditors, at their own risk and expense, to step into the trustee's shoes and advance litigation against the bankrupt themselves, ensuring potentially valuable claims are not abandoned.

Section 38 permits a creditor to seek court authorization to commence proceedings in the place of the trustee where:

• the creditor believes the proceeding would benefit the estate; and
• the trustee has refused or neglected to act.

The purpose of section 38 is asset preservation and fairness. The purpose of section 38 is asset preservation and fairness. Trustees may decline litigation for several reasons including lack of funds, cost‑benefit concerns, or litigation risk even where a claim has merit. Section 38 prevents potentially recoverable assets from being lost simply because the trustee will not act. At the same time, the provision protects fairness among creditors by requiring notice and court oversight, ensuring one creditor does not gain an improper advantage.

What Happens If the Order Is Granted?

If the Court grants the application of the creditor(s) allowing them to bring actions against the bankrupt, the following happens:

• The creditor litigates in its own name, at its own expense and risk;
• Any recovery first pays the creditor's claim and legal costs;
• Any surplus belongs to the bankruptcy estate; and
• Other creditors may participate if they choose, preserving collective fairness.

Why It Matters

Section 38 ensures that bankruptcy is not a shield for questionable pre‑bankruptcy conduct. It empowers motivated creditors to protect the integrity of the bankruptcy process, while preserving judicial oversight to prevent abuse. In practice, section 38 can be the difference between no recovery and a meaningful return.

Bottom Line

Section 38 is a critical creditor‑driven remedy. Where a trustee refuses to act, creditors are not powerless. Section 38 applications are regularly considered by courts across Canada, including in Saskatchewan, where creditors may seek relief when trustees decline to pursue viable claims. With court approval, creditors are able to take control, assume the risk, and pursue recovery, ensuring that potentially valuable claims do not simply disappear.

For more information, visit our Bankruptcy, Insolvency and Receivership webpage and get in touch with one of our lawyers. McKercher LLP provides suitable solutions for financial institutions, debtors, and creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.