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Insolvency - BIA - Creditor Bankruptcy Application [BIA s.43]. Stevens v. Hutchens
In Stevens v. Hutchens (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal of an interlocutory insolvency motion that ordered "a pooled distribution of the assets of the individual debtors and three corporate debtors controlled by one of the individual debtors".
Here the court considered a creditor interest issue:[21] We see no error in the motion judge’s findings disallowing certain interest charges on legal accounts claimed by the appellants. She correctly disallowed interest claimed by the appellant after the date of the receivership on the basis that, as an unsecured creditor, the appellant was barred from claiming interest after the date of the receivership order: Deloitte & Touche Inc. v. Shoppers Trust Co. (2005), 2005 CanLII 7878 (ON CA), 74 O.R. (3d) 652 (C.A.). . Medcap Real Estate Holdings Inc. (Re)
In Medcap Real Estate Holdings Inc. (Re) (Ont CA, 2022) the Court of Appeal considered the interesting case of a debtor vigorously resisting being ordered into bankruptcy (and thus canvassing the criteria for that thoroughly):Analysis
[6] Section 43(1) of the BIA provides:Subject to this section, one or more creditors may file in court an application for a bankruptcy order against a debtor if it is alleged in the application that
(a) the debt or debts owing to the applicant creditor or creditors amount to one thousand dollars; and
(b) the debtor has committed an act of bankruptcy within the six months preceding the filing of the application. [7] Medcap does not contest the application judge’s conclusion that Groia established the prerequisites for a bankruptcy order under s. 43(1) of the BIA, namely that Medcap owed it a debt exceeding $1,000 and that Medcap had committed an act of bankruptcy within six months preceding the filing of the application.[1] The application judge found that by failing to pay Groia’s debt, which had been reduced to a judgment, despite demands, Medcap had ceased, in the relevant period, to meet its liabilities as they generally came due, which is defined as an act of bankruptcy in s. 42(1)(j) of the BIA.
[8] Medcap argues that, notwithstanding proof of these matters, the application judge erred in failing to exercise his power under s. 43(7) of the BIA to dismiss the application. Section 43(7) provides:If the court is not satisfied with the proof of the facts alleged in the application or of the service of the application, or is satisfied by the debtor that the debtor is able to pay their debts, or that for other sufficient cause no order ought to be made, it shall dismiss the application. [Emphasis added.] [9] Despite the mandatory language of s. 43(7) (“it shall dismiss the application”), all counsel referred to the power under it as discretionary. This accords with the description given to the power under s. 43(7) in the case law: see Ivaco Inc. (Re) (2006), 2006 CanLII 34551 (ON CA), 83 O.R. (3d) 108 (C.A.), at para. 37, leave to appeal granted but appeal discontinued, [2006] S.C.C.A. No. 490. In essence, the judge hearing a bankruptcy application has a discretion to determine what qualifies as sufficient cause for not making an order, thus triggering the power to dismiss an otherwise proven application.
[10] Medcap accepts that as the power is discretionary, this court may only intervene on limited grounds. In the absence of a palpable and overriding error of fact, an appellate court will defer to an exercise of discretion unless the application judge made an error in principle or if the exercise of discretion results in an order that is plainly wrong: Cowper-Smith v. Morgan, 2017 SCC 61, [2017] 2 S.C.R. 754, at para. 46.
[11] Medcap makes three arguments as to why this court should interfere: (i) that the application judge erred in not finding that Medcap had the ability to pay its debts; (ii) that he erred in failing to find the application was brought for an improper motive; and (iii) that he erred in failing to appreciate that a bankruptcy order would serve no purpose.
Ability to Pay Debts
[12] While acknowledging that s. 43(7) places the onus on Medcap to prove that it was able to pay its debts, Medcap submits that the evidence met that onus. It points to the fact that the application judge dismissed the applications of Bennington, Heffner, and Physiomed because he was not satisfied that they had established a debt; they had claims that were contested and mired in litigation. Medcap goes on to point out that the debt in favour of Groia had been paid prior to the hearing of the application. Some outstanding tax liabilities had also been paid, as had all but a portion of the interest component of Wilson’s debt. The application judge erred, according to Medcap, when he said: “Payment to the applicants and other creditors identified after the date of the application and [in] some cases, on the eve of the application, does not satisfy that onus.”
[13] In my view, the application judge did not err in rejecting Medcap’s argument. An application for a bankruptcy order is not merely for the benefit of the applicant creditor, but rather for all creditors: Emms (Re), [2003] O.J. No. 4961, at paras. 17, 21-23, aff’d [2005] O.J. No. 859 (C.A.). Arrangements between the applicant creditor and the debtor will not justify the withdrawal or dismissal of a bankruptcy application unless the court is satisfied that the debtor is solvent and other creditors will not be prejudiced by the withdrawal or dismissal: Lloyd W. Houlden, Geoffrey B. Morawetz & Janis P. Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf (2022-Rel. 4), 4th ed. (Toronto: Thomson Reuters, 2009), at para. 3-55.[2]
[14] To meet the test of an ability to pay debts as contemplated in s. 43(7), the focus must be on all of the debts. A debtor is required to lead evidence sufficient to establish what all of its debts are and also of its ability to pay them – in other words, that it is solvent. “To be sufficient, such evidence would have to indicate the financial position of the debtor and this would require that financial accounts or statements be submitted”: 484030 Ontario Ltd. (Re) (1992), 1992 CanLII 7417 (ON SC), 8 O.R. (3d) 243 (Gen. Div.), at p. 254.
[15] Medcap did not lead such evidence. It did not establish its overall financial position, who all of its creditors were, and why its resources were sufficient to satisfy each of them. Medcap was not entitled to ask the court to assume that its only creditors were those discussed in the evidence, given that it did not endeavour to meet its onus of showing its overall financial position.
[16] Nor could a conclusion that Medcap had the ability to pay its debts be drawn simply from payments to some creditors, such as Wilson and Groia, since Medcap did not show that such payments were made by it or from its own resources, or by taking on obligations it had the ability to satisfy.
[17] For example, although it was an agreed fact below that the debt in favour of Groia was paid between the filing and the hearing of the application, Medcap itself points out that the agreed fact was not that Medcap had made the payment. Rather, it was a co-debtor, Medcap’s principal, who paid the debt to Groia. Indeed, Medcap describes the application judge’s reference in his reasons to Medcap having made the payment as an error. Medcap points out that a co-debtor who paid would have subrogation rights against the one who did not. In other words, Medcap did not show even that it had the ability to pay the Groia debt, or that its payment improved its financial position. The payment that was made may have left Medcap liable for the same amount to its co-debtor. Accordingly, an ability to pay debts generally could not be inferred from this type of payment.
Improper Motive
[18] Medcap notes that where a creditor has an ulterior motive for bringing an application for a bankruptcy order, this can be “sufficient cause” within the meaning of s. 43(7) for dismissing the application: Frank Bennett, Bennett on Bankruptcy, 23rd ed. (Toronto, Lexis Nexis: 2021), at p. 208.
[19] The existence of a motive is a question of fact. The application judge considered, and rejected, the suggestion that there was such an ulterior motive:I do not consider that the applications were brought, as Medcap submits, because the applicants were not getting the result they desired in the various court proceedings they are involved with. That is certainly not the case with respect to Groia. There is no question that Medcap is engaged in litigation with the applicants. I am satisfied, however, in all the circumstances that it is not the litigation that has motivated this application but rather the actions of Medcap in dealing with its property and refusing to pay debts justly due. [20] In my view, this finding was open to the application judge on the record, and I see no basis to interfere with it.
No Purpose to a Bankruptcy
[21] Finally, Medcap argues that the application judge erred in failing to find that no purpose would be served by a bankruptcy, and that he ought to have dismissed the application on the basis that there was nothing to be gained by making a bankruptcy order.
[22] Medcap essentially argues that a bankruptcy would serve no purpose for two reasons. First, it says that effective dealing with claimants such as Bennington and Heffner, against whom Medcap has claims, is better served by allowing Medcap to continue to litigate with them, rather than by turning responsibility for the allowance of creditor claims and the pursuit of Medcap’s own claims to a trustee. Second, Medcap says that it owns two properties – on Upper Wentworth Street and Centennial Parkway South – that have secured debt owing against them, and there is no evidence their value exceeds the security. Secured creditors do not need, and will not be affected by, a bankruptcy, and there may be nothing left for any unsecured creditors.
[23] In my view, a debtor who has (a) committed an act of bankruptcy consisting of not paying debts as they generally come due, and (b) failed to lead evidence to satisfy the court that it has the ability to pay its creditors bears a very heavy onus to show that a bankruptcy would nonetheless serve no purpose. The application judge did not err in finding that Medcap had not fulfilled that onus.
[24] The protection of creditors is central to insolvency legislation. Medcap does not argue that a better result will be achieved for creditors if it were permitted time to restructure under the proposal provisions of the BIA or the provisions of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Nor is it suggested that doing either would have the requisite creditor support. Medcap, in effect, argues that matters should simply be left in its hands. But Parliament’s statutory scheme for the protection of creditors of an insolvent where restructuring is not an option is liquidation under the BIA, under which “the debtor’s assets may be liquidated and debts paid from the proceeds according to statutory priority rules”: Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 12.
[25] Under s. 71 of the BIA, subject to the rights of secured creditors, the property of the bankrupt vests in the trustee, who has the power to pursue the bankrupt’s rights of action.[3] Section 38 of the BIA also provides creditors with a mechanism “to proceed with an action when the trustee refuses or fails to act; thereby ensuring that assets of the bankrupt, which may otherwise go unrecovered, are available to creditors willing to finance the litigation”: Houlden, Morawetz & Sarra, at para. 2-138. As well, the trustee is charged with the responsibility of only allowing valid creditor claims. The trustee’s conduct is subject to court review, and s. 37 of the BIA gives courts wide discretion to reverse or modify actions or decisions of the trustee. Medcap’s argument that other creditors will be protected only if it controls the review and contestation of the Bennington and Heffner claims and the pursuit of its own claims is unpersuasive.
[26] Although secured creditors stand largely outside the BIA process, Medcap has not shown either the non-existence of unsecured creditors, or that the value of its property that is subject to security does not exceed the secured claims. Accordingly, it has not shown that a BIA liquidation cannot serve a purpose.
[27] Although Medcap complains that the application judge did not properly consider the situation at its Upper Wentworth property, I see no error. The application judge noted that a maturing secured debt on that property was not paid by Medcap but by a related party who took an assignment of the security. He also noted that the only tenant of the property was a non-arm’s length entity. Viewed from the standpoint of the protection of creditors, these facts were relevant to the question of whether Medcap had shown that matters should simply continue to be left in its hands.
[28] Similarly, I see no error in the application judge’s consideration of events at Medcap’s Centennial Parkway property, including various litigation positions Medcap had taken with creditors. The application judge described these as raising serious concerns as they fell outside the bona fide raising of claims and defences. That finding was open to him to make.
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