Introduction:

The life of a creditor in the commercial world is not always easy. Debtors will manufacture defences, avoid summary judgment etc. Debtors may sometimes turn to the Bankruptcy and Insolvency Act (BIA) for relief. They make an assignment into bankruptcy to bring their financial problems to a resolution, usually in the hopes of paying less than 100 cents on the dollar.

Creditors can challenge an assignment into bankruptcy through section 181(1) of the BIA. The section so empowers a court to annul an assignment where it finds that it ought not to have been made.

Annulment Tests:

The tests to be used by the court in such circumstances were laid down by  the Ontario Superior Court of Justice (ONSC) in Re Wale (1996) as follows:

An annulment will be granted only where it is shown either the debtor was not an insolvent person when he made the assignment or where it is shown that the debtor abused the process of the court or committed a fraud on his creditors.

Insolvent Person:

The BIA in section 2 defines an insolvent person as follows:

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.

A Recent Case:

The Ontario Court of Appeal (ONCA) had to deal with such a situation recently in Kormos v Fast. There the fight was between neighbours, one of whom had obtained a judgement against the other in Small Claims Court for approximately $25,000.00. The creditor attempted to enforce the judgment and moved for a debtor examination. The debtor subsequently filed for bankruptcy. The creditor brought an application under section 181(1) of the BIA but was unsuccessful. The issue was the validity of the debtor’s claim of insolvency. The creditor appealed.

ONCA Result:

The Appeal was successful, and the bankruptcy was annulled. The ONCA had before it the same record as did the applications judge. It was clear that the debtor, as disclosed in her Statement of Affairs, had assets ($1,435,922) exceeding her liabilities ($653,313.19). Also, the applications judge found that the fair market value of the real properties held by the debtor was much higher than claimed.

The issue for the applications judge was the debtor’s monthly income and debt statement. It showed that the debtor’s monthly expenses exceeded her monthly income by just over $2,000.00. Hence he concluded that the debtor was insolvent or at least that the creditor had not shown her to be able to meet her obligations as they become due or that she had not ceased paying her current obligations in the ordinary course of business.

The ONCA was clear that the debtor at the date of her bankruptcy was not an insolvent person as defined in section 2 of the BIA. Her assets were clearly of sufficient size to retire all of her debts and obligations. The unexplained monthly deficit did not detract from that finding. All the evidence but the monthly statement showed that the debtor was able to comply with her monthly obligations. She met none of the criteria of an insolvent person.

Take Aways:

1. Assignments into bankruptcy are to be reserved only for the clear cut cases of established liabilities exceeding assets or the ability to pay one’s debts once due;
2. The evidence used to establish insolvency must be based on sound and convincing evidence; and
3. Debtors should not be allowed to make assignments where the sole purpose is to stay the enforcement of a legitimate claim in debt.

At Milosevic & Associates, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes to complex multi-party commercial claims including dealing with claims of oppression. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online for a consultation.