Allegations of Fraud and its Effect on a Bankrupt’s Discharge:

In November 2013, RBC obtained bankruptcy orders against the bankrupts. While they were all first-time bankrupts, RBC opposed the automatic discharge and by October 2015 it became apparent that there was no end in sight thus taking it upon themselves to get their discharge hearing scheduled.

The discharge hearing was ultimately adjourned by Justice Conway, pending the outcome of the fraudulent conveyance action which she found would bear on the discharge. While not expressly in the court’s decision, the court rejected and/or dismissed the arguments presented by the bankrupt, including the following:

1. to balance the scales if the creditor does not succeed. There are no consequences should the fraud action fail in circumstances where the bankrupts’ discharge hearing can be delayed for years;

2. It could create a regime ripe for abuse;

3. The bankrupts’ inability to move on financially thereby forcing them to linger in bankruptcy without the right to a discharge hearing is unfair, unjust and contrary to the fundamental principles of the Bankruptcy and Insolvency Act;

4. RBC and the trustee took the approach of “guilty until proven innocent” with the bankrupts being forced to endure the consequences of being found liable for fraud without the accusations being proven. A reverse onus in a quasi-criminal statute.

The takeaway of this decision is that a system is being created that is ripe for abuse by creditors who can theoretically extend the bankruptcy of a debtor indefinitely through unproven allegations of fraud and that there is no consequence if the creditor does not succeed.

The Cost of Opposing a Discharge:

There are many reasons why a creditor may choose to oppose a bankrupt’s discharge. Unfortunately for most creditors, there is a cost that comes with such opposition, even when they are successful.

In general, the courts have failed to award meaningful cost awards on opposed discharge hearings, rendering it practically cost-prohibitive for the creditor to prosecute a proper opposition. This is an issue that creditors must be mindful of and one that will weigh on their decision to oppose a discharge, even when they feel they have a valid reason for doing so.

In the recent case, Re Berthiaume 2019 ONSC 2727, the bankrupt sought to have his bankruptcy discharged but was opposed by the trustee and two creditors. The opposing creditors were ultimately successful in their opposition to discharge as it was determined that the bankrupt had misled the trustee and his creditors about numerous items including income, assets disposed of before the bankruptcy and his extravagant lifestyle involving a luxurious wedding and numerous vacations.

The court emphasized that the system set up by the Bankruptcy and Insolvency Act was supposed to help honest, but unfortunate debtors and it must be safeguarded from people who would attempt to get away with inappropriate conduct. The court found that the bankrupt was neither honest nor unfortunate and that his conduct mocked the integrity of the Bankruptcy and Insolvency Act. Despite the egregious conduct of the bankrupt and the success of the opposition, the creditors were awarded costs at a mere $1,000.00.

This inadequate cost award is all too common on successful discharge oppositions and does not reflect the level of effort that goes into preparing for this type of hearing, which often is similar to a trial.

Criminal Sanctions for Bankrupts Who Fail to Comply with their Duties:

In accordance with the Bankruptcy and Insolvency Act, a bankrupt who, without reasonable cause, fails to comply with an order of the court to do any of the things required of the bankrupt, is guilty of an offence and is liable:

(a) On summary conviction, to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding one year, or both; or

(b) On conviction on indictment, to a fine not exceeding ten thousand dollars or to imprisonment for a term not exceeding three years, or both.

In R v Yaremkevich, 2002 ABPC 174, the court considered what the underlying objectives were in sentencing bankruptcy offences, the two main objectives being denunciation and deterrence. The court found that protection of the public, and creditors, as well as rehabilitation of the bankrupt, have been articulated as purposes of the legislation, and that it would be at odds with the purposes of the legislation to allow a debtor to avail himself of the protection of the Act, despite flagrant disregard for their duties. The above offence provisions therefore provide a means by which to deter such disregard.

Furthermore, the court found that it would be inconsistent with those purposes to allow a bankrupt to act dishonestly and it is consistent with the Act to recognize deterrence when sentencing those who are dishonest and fail to fulfill their specific duties.

The court acknowledged that, while denunciation and deterrence are important factors, their importance will vary on a case by case basis based on the circumstances of both the offender and the offence.

It is clear from this case that the court seeks to uphold the integrity of the Act, while protecting the public and the creditors, and the offence provisions of the BIA offer a mechanism to safeguard these aspects and deter future reprehensible behaviour from the debtor. However, despite these provisions, historically, the courts have taken a lax approach to their enforcement showing an apparent lack of interest and experience in prosecuting such offenses, thus failing to live up to the objective of the deterrence.