Insolvency Case Law Digest 2004 — Part 1

Proposals

In the matter of Advanced Wing Technologies Corp.

British Columbia Supreme Court
Burnyeat J.

Citation:  2004 BCSC 236

Facts:  In December 2002, Advanced Wing Technologies Corp. (the "debtor") filed a notice of intention to file a proposal. On July 4, 2003, Drs. Cleator and Kane (the "creditors") reached a "Standstill Agreement" that allowed them to appoint a Receiver if US $34,000 were not paid by September 31, 2003. The proposal was approved and required a payment of $250,000 by September 8, 2003. As a result of a failure of payment, the creditors gave notice of their intention to realize on their security in a letter dated October 8, 2003. The creditors assigned all their rights in their security to 674921 B.C. Ltd. (the "Applicant"). C. Topley & Company and its parent company (the "Receiver") was appointed the Receiver of the debtor on November 17, 2003. The sole inspector appointed under the proposal waived the default to November 30, 2003. The applicant applied to annul the proposal.

Issues: 

1. Should the proposal be annulled?

2. In deciding this question, should it be shown that the creditors will gain from the bankruptcy of the debtor?

Decision: The proposal was annulled. In addition, the trustee had to expose the assets of the debtor to the market and any inspectors appointed had to approve any sale.

Discussion:  In deciding the issue, it had to be shown that the creditors would gain from the bankruptcy of the debtor.

A default under the proposal had taken place since the payment due by the end of September, 2003, was never made. Under section 62.1 of the Bankruptcy and Insolvency Act (BIA), a trustee must inform all creditors and the Official Receiver if default is made in the performance of any provision of a proposal and the default has not been waived by the inspectors. The bases for which it is appropriate to annul a proposal are provided in the case law. A proposal can be annulled if there is gain for the creditors in the event of a bankruptcy, but this is not a precondition but only one factor to be considered. Furthermore, in reference to section 63 of the BIA, the debtor had failed to show that the creditors would receive less under a bankruptcy than the $250,000 that would be received under a proposal. Since there was no suggestion that any such payment was expected in the future, the creditors could not vote on a new proposal if the proposal was refused. In addition, refusing to annul the proposal would be costly with respect to the validity of security now held by the Applicant and would not be in the interest of the creditors when considering the fact that the Applicant could file another proposal for the consideration of creditors.

Appealed

In the matter of the proposal of Charles Gregory and Rachael Rahnee

Ontario Superior Court of Justice
Registrar Sproat

Citation:  [2004] O.J. No. 4257

Facts:  The debtors were spouses who owned and operated a catering business. The venture led to a state of indebtedness that resulted in the insolvency of the debtors. They wished to file a joint Division I proposal. They moved for an order directing the Official Receiver to accept the filing of a joint proposal and the accompanying documentation prescribed by the Bankruptcy and Insolvency Act (BIA). The Office of the Superintendent of Bankruptcy (the "OSB") attended on the motion, not to oppose the filing but rather to make submissions as to the OSB's policy on the acceptance of filing joint Division I proposals.

Issues: 

1. Should the OSB be obliged to automatically accept a joint Division I proposal where it does not on its face meet the eligibility criteria set out in the BIA?

2. Must an order from the court permitting debtors to file a joint Division I proposal be obtained prior to doing so, as per the OSB's policy?

Decision:  Under s. 62(1) of the BIA, the Official Receiver has no right to reject the filing of proposals. Therefore, it is possible to file a joint Division I proposal without prior authorization from the court to do so.

Discussion:  The OSB argued that it has a certain discretion to reject the filing of a joint proposal when it does not on its face meet the eligibility criteria set out in the BIA. The Registrar failed to see any evidence that supports this claim. However, she stated that the filing of a proposal must be accompanied by the necessary documents as prescribed by the BIA.

According to the OSB, the BIA does not deal with joint Division I proposals. Due to this legislative silence, the OSB argued that the legislature has not laid out specific criteria for the approval of such a proposal. The Registrar rejected this argument citing Re Roosenboom and sections of the BIA that support the opposite position. She held that a proposal must be filed by an "insolvent person" and that the definition of "person" in the BIA includes "a partnership …" She concluded that even though the BIA does not deal with joint Division I proposals expressly, it does so implicitly. Since, the Official Receiver has no right to reject a regular Division I proposal, he or she does not have the right to reject a joint proposal.

In regards to the requirement of prior authorization by the court to file a joint proposal, the OSB submitted its policy dated May 17, 2002. It stated that the OSB would accept such a filing in cases where the trustee administering the estate will have obtained prior authorization from the court to do so. The Registrar pointed out the many flaws of this policy, namely the absence of legislative authority giving jurisdiction to the courts to grant such an order. Other deficiencies included the accumulation of delays and costs for the debtor as well as the possibility of estoppels. Considering these flaws, the Registrar ruled that the best procedure would be to allow joint filings and allow interested parties to oppose them when the situation calls for it.

In the matter of a proposal of Sandra Marie Slaney

British Columbia Supreme Court
Master Bolton

Citation: 2004 BCSC 388

Facts:  Ms. Slaney filed a proposal, which was accepted by the creditors on March 27, 2000. One of her debts was a "Royal Bank Student Loan" in the amount of $27,700. The Royal Bank consented to the proposal in a voting letter, binding the administrators of the student loan program. On June 19, 2001, the trustee issued a certificate to the effect that Ms. Slaney had complied with all of her obligations. Subsequently, the Attorney General of Canada sought to recover payment of the loan on the basis that, under s. 178 of the Bankruptcy and Insolvency Act (BIA), this debt survived the discharge from the proposal. In response, Ms. Slaney applied for a declaration that the debt in question did not survive the discharge by referring to s. 62(2) of the BIA and argued that, since the creditor assented to the proposal, s. 178 did not preserve the debt.

Issue:  Under 62(2) of the BIA, should the approval of the proposal bind the Crown in respect of a debt under s. 178 and release the debtor from it?

Decision:  The application was dismissed. The special treatment of a creditor under s.178 should not be different whether its application arises in the context of a bankruptcy or that of a proposal. If a proposal should have the effect of releasing the debtor from a s. 178 debt, the statute should say so explicitly.

Discussion:  The Crown argued that the word "assents" towards the end of s. 62(2) means "assents to the release of a s. 178 debt" rather than "assents to the proposal". The Registrar's approach was to consider the matter as perfectly ambiguous, and he considered the practical justice of the issue. In doing so, he concluded that no one reading the voting letter sent out to the creditors was put on notice that assent to the proposal would cancel a debt that would otherwise have survived bankruptcy. In his opinion, if a proposal were to have the effect of releasing the debtor from a s. 178 debt, it should say so explicitly, rather than pursuant to an implication read into a statute that one could find ambiguous. The purpose of s. 62 is not to allow an insolvent person to make a proposal when faced with a s.178 debt. Rather, it is to permit such proposals generally, and the provisions made for s.178 debts are necessary qualifications to the general procedure.

In the matter of the proposal of Plancher Héritage Ltée / Heritage Flooring Ltd.

New Brunswick Court of Queen's Bench
Glennie J.

Citation:  2004 NBQB 168

Facts:  Heritage Flooring ("Heritage") entered into a complex loan agreement similar to a revolving line of credit with the Royal Bank of Canada (the "Bank"). Through this agreement, Heritage had a credit limit that fluctuated depending on various factors, such as the deposit of receipts into a blocked account and a weekly report of inventory and accounts. Three years into the agreement, Heritage was notified that it was in default of the provisions of the margin working Capital Loan Agreement (the agreement) and that it had 15 days to pay its debt in full. In response to the Bank's demand, Heritage filed a Notice of Intention (the "notice") to make a proposal and the Bank was so notified by the trustee. Under section 69 of the Bankruptcy and Insolvency Act (BIA), a stay of proceedings was in effect and no creditor could seek remedies against Heritage. Following the notice, the Bank notified the trustee that it would no longer provide overdraft privileges to Heritage and that furthermore, the amount of available credit in the account was capped to the amount available the day prior to the filing of the notice. The Bank also required that the procedures under the agreement be continued throughout the stay of proceedings. On February 20, 2004, while the stay was still in effect, the Bank seized $200,000 from Heritage's account, which it applied against Heritage's operating facilities in accordance with the procedures of the loan agreement. The trustee contested this action under s. 69 of the BIA. The Bank replied by stating that, under s. 65.1(4)(b) of the BIA, it was not required to provide further advance of credit, since doing so would prejudice the Bank's position by decreasing its security. In addition to contesting the Bank's action, Heritage applied for an extension on the stay of proceedings, which was contested by the Bank.

Issues: 

1. Could an extension of the stay of proceedings be granted to Heritage?

2. Did the Bank act contrary to the stay provisions of s. 69 of the BIA by seizing Heritage's operating account and capping its operating facility subsequent to the date Heritage filed its Notice of Intention?

Decision: 

1. Heritage was granted an extension of the stay of proceedings.

2. The Bank was not entitled to seize Heritage's operating account and cap the amount available as of the date of its filing of the Notice. By unilaterally capping Heritage's revolving line of credit, the Bank exercised a remedy contrary to the stay provisions of the BIA.

Discussion: The Court concluded that a) Heritage was acting in good faith and with diligence, b) Heritage would likely make a viable proposal if an extension were granted, and c) no creditor would be prejudiced if an extension were granted, hence fulfilling the conditions required to grant an extension of the stay. Paragraph 69.(1)(a) of the BIA states that no creditor has any remedy against the insolvent person or his property. Case law has established that "remedy" must be given a broad interpretation. In that regard, the Court interpreted the provisions of paragraph 65.1(4)(b) of the BIA to mean that the status quo intended by the BIA be protected and preserved. Neither party to a loan agreement can unilaterally amend its terms. Failure to maintain the status quo would be contrary to the fundamental objective of the stay of proceedings of the BIA as it relates to an insolvent person being authorized to file a proposal. By capping the revolving line of credit, the Bank exercised a remedy against Heritage that was contrary to the BIA's stay provisions. The Court added that the purpose of the stay was to allow an insolvent person to continue business in accordance with its existing arrangements with its creditors.

The Court then differentiated among the types of loans, namely demand, term, and revolving, in order to determine whether a secured creditor was required to continue to operate existing credit agreements in accordance with loan agreements with the debtor. In this regard, the Bank had no authority to cap Heritage's line of credit as of the day immediately preceding the filing of its notice of intention since a secured creditor could not enforce its security during the stay period. Furthermore, in response to the Bank's argument under paragraph 65.1(4)(b) of the BIA, the Court indicated that the Bank would not have been advancing credit to Heritage by maintaining the revolving line of credit. Rather, it would simply have been operating a revolving process in accordance with the margins and conditions agreed to by both parties. Paragraph 65.1(4)(b) of the BIA must be read in the context of the Bank's agreement with Heritage.

Stay of Proceedings

In the matter of Laing v. French

British Columbia Supreme Court
Dorgan J.

Citation: 2004 BCSC 851

Facts:  Mr. Laing ("Laing") advanced the amount of $2,267,976 to Mr. French ("French") for investment purposes. French guaranteed a 10 percent annual rate of return on the money advanced and predicted that the investments would generate from 19.2 to 23.4 percent annually. Those gains were not generated and no payments were ever made to Laing. French used part of the funds to build a house on a property that was subsequently transferred to his wife's name and then sold. In 2003, French made an assignment into bankruptcy. Laing filed a proof of claim as an unsecured creditor and motioned before the Court to have the stay of proceedings against the bankrupt lifted with respect to his claims under s. 69.4 of the Bankruptcy and Insolvency Act (BIA). In fact, he intended to bring an action to compel French to repay the amount invested and to request that his obligations resulting from the judgment survive a bankruptcy discharge, pursuant to paragraphs 178(1) e) and h) of the BIA. Laing also sought a declaration that the proceeds arising from the sale of the property be subject to a constructive trust in his favour. Laing agreed to forward any moneys received as a result of this action to the trustee. However, before Laing could bring this action, the Court first had to grant his application to lift the stay of proceedings against the bankrupt.

Issues: 

1. Was Laing's proof of claim as an unsecured creditor inconsistent with his claim that Ms. French's property was held in trust for him?

2. If Laing was permitted to bring an action, should the Court have granted his motion to lift the stay?

Decision:  The Court ruled in favour of Laing. All three requirements to lift the stay of proceedings were met.

Discussion:  A secured creditor may be deemed to have surrendered his security if he files a proof of claim as an unsecured creditor. In this case, Laing clearly stated that he had the intention of turning over to the trustee all funds recovered from this action so that other creditors would not suffer any prejudice if a judgment were to be rendered in his favour. The Court therefore found that Laing was not a secured creditor under s.2 of the BIA with respect to his constructive trust claim. As a result, the Court turned to Laing's submissions as to why the stay should be lifted. In Re Advocate Mines Ltd¹, Registrar Ferron listed three compelling reasons for lifting a stay. First, the debt must be one to which a discharge is not a defence. Laing's arguments convinced the Court that his claim of fraudulent misrepresentation could eventually be upheld in Court and survive a bankruptcy discharge under paragraphs 178 (1) (e) and (h) of the BIA. Secondly, the bankrupt must be a necessary party to solve the issues at hand. Because it was impossible to adjudicate on the constructive trust claim against Mrs. French, a non-bankrupt, without first determining whether the bankrupt was guilty of fraudulent misrepresentation, the Court concluded that the bankrupt was a necessary party. Finally, the valuation of the debt must be complex, thus making it inappropriate to follow a summary procedure. Accordingly, the Court could not deal with the allegations of fraud in the case at bar through a summary procedure and needed to conduct a full trial on the issue.

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¹ Re Advocate Mines Ltd. (1984), 52 C.B.R. (N.S.) 277 (Ont. S.C. in Bankruptcy)

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Trustees: Duties and Taxation

In the matter of De Stefanis

British Columbia Supreme Court
Goepel J.

Citation: 2004 BCSC 10

Facts:  The matter involves an application by the Law Society of British Columbia ("Law Society") to secure its custodian's fee. On November 13, 2002, the Law Society appointed a custodian to take over the assets and liabilities of the firm Hean Wylie Peach De Stefanis ("firm"), which was insolvent. On June 16, 2003, the custodian billed the Law Society for fees and disbursements related to its administration of the firm. In the petition in bankruptcy that commenced these proceedings, the Law Society sought an order that the custodian be granted an administrative charge over the firm's assets in priority to all security agreements, charges, liens and encumbrances. The Royal Bank of Canada and the Canada Customs and Revenue Agency opposed this matter.

Issue:  Should the custodian's charges be considered as administrative charges that can be paid from the firm's assets?

Decision:  The judge decided that the Law Society cannot claim the administrative charges of the custodian from the assets of the firm.

Discussion:  In accordance with the Law Society's argument, the judge compared the duties as a custodian, a receiver and a monitor appointed pursuant to the Companies' Creditors Arrangement Act. The custodian is appointed to protect the interests of the law firm's clients, not the creditors. Both a receiver and a monitor act on behalf of all interested parties. Also, the Law Society, being a self-regulating body, has the mandate to serve and protect the public interest. That is why the judge believed that the costs were properly borne by the Law Society. According to the Legal Profession Act of British Columbia, the Law Society is allowed to recover the costs of a custodianship from the lawyers. Since the application for an administrative charge was dismissed, the Law Society must claim the costs where it is impossible for the lawyers to reimburse those fees.

Appealed

In the matter of Cyrenus Joseph Dugas, appellant, and PricewaterhouseCoopers Inc., respondent

New Brunswick Court of Appeal
Drapeau C.J.N.B., Rice and Deschênes JJ.A.

Citation:  2004 NBCA 15

Facts:  In 2001, Peter Gaudet, Adam Gaudet, 508571 N.B. Ltd. and 100167 P.E.I. Inc. (the "Creditors") obtained a consent judgment of the Court of Queen's Bench of New Brunswick against Mr. Dugas (the "Appellant"). Still outstanding from this award is the sum of $2,050,000. The summer following the judgment, the Appellant fished for crab, earning gross revenues in excess of $800,000. Immediately following the end of the crab season, he made an assignment in bankruptcy in which the Creditors were the only ones to file a proof of claim. The Appellant "failed, without justification, to complete Form 65 in any useful manner." The trustee, lacking the information required to fix the amount that the bankrupt was required to pay out of his earnings in accordance with subsection 68(3) of the Bankruptcy and Insolvency Act (BIA) and considering the real and substantial possibility that those earnings may dissipate, applied to the Court of Queen's Bench for an asset-prevention order under subsection 183(1) of the BIA. On May 27, 2003, Justice Léger allowed the trustee's application and ordered that the revenues from the appellant's crab-fishing license for the year 2003 be paid directly to the trustee. In his appeal, the Appellant contended that Justice Léger and the Court of Queen's Bench lack jurisdiction to make such an order.

Issue:  In circumstances where the trustee cannot determine the surplus income and a real and substantial possibility that earnings may dissipate exists, does subsection 183(1) of the BIA authorize the Court of the Queen's Bench to make an order granting the trustee temporary control over the bankrupt's earnings, despite the silence of s. 68 on the subject?

Decision:  The appeal was dismissed. The order under appeal fell squarely within the broad jurisdiction recognized by subsection 183(1) of the BIA.

Discussion:  The Court cited a decision from the Ontario Court of Appeal in which it held that in regards to "a motion brought for the purpose of preserving a potential asset in anticipation of a future determination of the parties' rights under s. 68, […] the motions judge had jurisdiction to direct that any moneys awarded by the arbitrator as compensation for lost wages be paid into court until the parties' rights under s. 68 were determined."¹ In the case at bar, the Court of Appeal went one step further by stating that the court's earnings-related jurisdiction under subsection 183(1) of the BIA is not limited to making an order directing their payment into court. Under subsection 183(1) of the BIA, the Court of Queen's Bench may authorize acts required "for the due administration and protection of the bankrupt estate, even though there is no specific provision in the [BIA] expressly conferring such power and jurisdiction"². Justice Léger concluded that the Appellant's earnings from crab-fishing were in need of protection and that the best approach was to proceed with the May 27, 2002, order. The Court of appeal concurred.

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¹ Landry (Re) (2000), 192 D.L.R. (4^th) 728 (Ont. C.A.)

² Houlden & Morawetz, 2004 Annotated Bankruptcy and Insolvency Act, (Toronto: Carswell, 2004), p. 774

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In the matter of the bankruptcy of Earl Miles Cook Guilbride

British Columbia Supreme Court
Registrar Bouck

Docket: Victoria 160891

Facts:  All of Mr. Guilbride's (the "bankrupt") assets, valued at over $1.2M, were transferred to Jeanne Carol Guilbride in an uncontested divorce order, dated four months prior to the proposal and subsequent bankruptcy. Due to the lack of funds in the estate and the considerable legal fees that would have been involved, Mr. Glover (the "trustee") did not apply to the Court to set aside the divorce order, nor did he pursue the transferred assets. Creditor Baker brought a motion pursuant to s.38 of the Bankruptcy and Insolvency Act (BIA) against the bankrupt and Ms. Guilbride, which was followed by an action alleging fraudulent preferences of the transferred assets. A settlement was reached, and the defendants were released and the opposition to the bankrupt's discharge was withdrawn. In his testimony, inspector Frame opposed the trustee's remuneration and submitted that it should be limited to 7.5% of the receipts on the basis that he provided no value for his services. He alleged that the matrimonial home was sold for an "unusual" price, even though he had opposed the sale, claiming another developer would soon be making a higher offer. There were also many delays in the administration of the bankruptcy due, in part, to the aforementioned s.38 application. The trustee applied for an order fixing his remuneration in which he claimed the fees would consume the entire amount realized by the estate.

Issue:  Given the opposition of one of the inspectors, was the trustee entitled to the claimed remuneration?

Decision:  The trustee's conduct was appropriate at all times and he exercised sound judgment. Despite the delays in administering the bankruptcy, the creditors suffered no prejudice. Therefore, the trustee's claim was justified.

Discussion:  Considerable weight should be given to the inspectors' approval or disapproval because they act on behalf of the creditors and are in a strong position to judge. On the basis of the objectives of the BIA, the Registrar stated that the trustee should be permitted to charge fees for the time spent and the results achieved. However, a trustee cannot expect the Court to accept overly generous charges that would cause prejudice to the estate. The Court should be cautious when exercising its discretion in adjusting the trustee's claim, especially when the inspectors have approved the fees. In the case at bar, two of the three inspectors had done so. The Registrar added that a balance must be achieved between both the creditors' and the bankrupt's interests. The trustee achieved this balance. He acted at the discretion of the majority of the inspectors. "He is not obliged to blindly follow the wishes of one creditor regardless of the potential cost to the estate and he is not obliged to pursue potential claims arising from allegedly fraudulent transactions in the absence of sufficient funds to do so." At no time did he act inappropriately.

In the matter of the bankruptcy of Lama Transport & Handling Ltd

Quebec Superior Court
Richard J.C.S.

Citation:  [2004] J.Q. No. 7298

Facts:  Lama Transport & Handling Ltd had signed a proposal and an agreement with a trustee, which stipulated that the latter would be paid $25,000 for "the complete administration of the proposal". On November 28, 2002, the Court granted two creditors' appeal of the trustee's decision to disallow their claims and, in doing so, had refused to approve the submitted proposal. As a result, Lama Transport was deemed bankrupt. December 2, 2002, the National Bank of Canada (the "Bank"), a secured creditor, mandated the trustee to act as its receiver to realize on the Bank's securities. As per this mandate, the trustee would receive a 5% commission on realized assets. The trustee realized $500,000 and received a commission of $24,372, but the Superintendent of Bankruptcy did not receive any levy pursuant to s.147 of the Bankruptcy and Insolvency Act (BIA). At the meeting of creditors held December 19, 2002, the trustee disclosed the mandate and was replaced by another trustee (the "trustee-petitioner"). On March 5, 2004, the original trustee presented two statements for taxation. The first was for the amount of $25,000 plus special fees of $6,508, which covered the period ranging from August 6 — the notice of intention — to the November 28 ruling. The second statement for taxation covered the period from November 28 to December 19 and was in the amount of $49,390. The Registrar taxed the statements as submitted. The trustee-petitioner therefore appealed to have the taxation reviewed.

Issues:  Could the trustee act as such while acting for the benefit of a secured creditor? Should the appeal of the taxation be allowed?

Decision:  The trustee could act for the benefit of a secured creditor while exercising his functions as a trustee. The Court ruled that the fees and disbursements should have been taxed at $25,000, as per the original agreement.

Discussion:  In regards to the first statement, the Court determined that the trustee could not have ignored the fact that the rejection of the proposal would lead to bankruptcy and that the mandate would then continue until the first meeting of creditors. The trustee's duties had not closed upon the Court's refusal to approve the proposal. He was obliged to ensure the conservation of the estate, as indicated by subsection 61(2) of the BIA. Furthermore, the Registrar should not have taxed the legal fees in the amount of $6,508 incurred in the appeal of the decision to disallow claims made by two creditors.

Before ruling on the merit of the second statement, the Court had to establish whether the trustee could act as such and as the agent of the Bank at the same time. The BIA formally prohibit this situation unless certain conditions are met. In Meubles Daveluyville ltée v. Roynat Inc. & Ass., [2000] J.Q. no 926, the Court of Appeal recognized that a trustee who was acting pursuant to a mandate given from a secured creditor and who had met the requirements of s.13.4 could act as such while being exempt from the application of provisions such as s. 147 of the BIA. In the present case, the trustee had abided by the provisions of s. 13.4 of the BIA. In the execution of his mandate for the Bank, he had acted outside of the purview of the bankruptcy. He could therefore not expect to be taxed in this context as against the estate. He was allowed to act for the benefit of the Bank rather than for the unsecured creditors, but this did not give him any right to claim fees from the estate deriving from his activities under the mandate.

Appealed