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Insolvency (BIA) - Proposal. In the Matter of the Bankruptcy of Selvamurugan Gunaratnam
In In the Matter of the Bankruptcy of Selvamurugan Gunaratnam (Div Court, 2024) the Divisional Court, citing authority, denies the approval of a bankruptcy proposal. The approval was opposed only by the Office of the Superintendent in Bankruptcy ('OSB'):[1] The Trustee in respect of the Amended Proposal of Selvamurugan Gunaratnam (the “Debtor” or the “Bankrupt”) seeks approval of the Amended Proposal dated July 28, 2022. The Debtor supports the relief sought. The Royal Bank of Canada (“RBC”) one of the creditors of the Debtor, also supports the Amended Proposal.
[2] The Office of the Superintendent in Bankruptcy (“OSB”) opposes the relief sought, on the basis of what it submits is the continued lack of disclosure and transparency on the part of the Bankrupt, among other things.
[3] The relevant provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, (the “BIA”) relevant to the approval of proposals are ss. 59(2) and (3):(2) Where the court is of the opinion that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors, the court shall refuse to approve the proposal, and the court may refuse to approve the proposal whenever it is established that the debtor has committed any one of the offences mentioned in sections 198 to 200.
(3) Where any of the facts mentioned in section 173 are proved against the debtor, the court shall refuse to approve the proposal unless it provides reasonable security for the payment of not less than fifty cents on the dollar on all the unsecured claims provable against the debtor’s estate or such percentage thereof as the court may direct. [4] As observed by Morawetz, J. (now Chief Justice) in Kitchener Frame Limited (Re), 2012 ONSC 234 (“Kitchener Frame”) at paras. 19 – 22:[19] In order to satisfy s. 59(2) test, the courts have held that the following three-pronged test must be satisfied:
(a) the proposal is reasonable;
(b) the proposal is calculated to benefit the general body of creditors; and
(c) the proposal is made in good faith.
See Mayer (Re) (1994), 1994 CanLII 7461 (ON SC), 25 CBR (3d) 113; Steeves (Re), 2001 SKQB 265 (CanLII), 25 CBR (4th) 317; and Magnus One Energy Corp. (Re), 2009 ABQB 200 (CanLII), 53 CBR (5th) 243.
[20] The first two factors are set out in s. 59(2) of the BIA while the last factor has been implied by the court as an exercise of its equitable jurisdiction. The courts have generally taken into account the interests of the debtor, the interests of the creditors and the interests of the public at large in the integrity of the bankruptcy system. See: Farrell (Re), 2003 CanLII 39370 (ON SC), 2003, 40 CBR (4th) 53.
[21] The courts have also accorded substantial deference to the majority vote of creditors at a meeting of creditors: see Lofchik, Re, [1998] O.J. No. 322 (Ont. Bkrptcy). Similarly, the courts have also accorded deference to the recommendation of the proposal trustee. See Magnus One, supra.
[22] With respect to the first branch of the test for sanctioning a proposal, the debtor must satisfy the court that the proposal is reasonable. The court is authorized to only approve proposals which are reasonable and calculated to benefit the general body of creditors. The court should also consider the payment terms of the proposal and whether the distributions provided for are adequate to meet the requirements of commercial morality and maintaining the integrity of the bankruptcy system. For a discussion on this point, see Lofchik, supra, and Farrell, supra. [5] The decision in Re Mernick, (1994) 1994 CanLII 7459 (ON SC), 24 C.B.R. (3d) 8 (Ont. S.C.) reflects the same principles.
[6] As set out in the 2023 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz and Sarra, Thomson Reuters Canada, Toronto, 2023 at §4:71 and §4.80:In deciding whether the proposal should be approved, the court must take the following interests into account: a) the interests of the debtor in making a settlement with creditors; b) the interests of creditors in procuring a settlement that is reasonable and that does not prejudice their rights; and c) the interests of the public in the fashioning of a settlement that preserves the integrity of the bankruptcy process and complies with the requirements of commercial morality: Re Gardner (1921), 1921 CanLII 948 (ON SC), 1 C.B.R. 424 (Ont. S.C.); Re Sumner Co. (1984) Ltd. (1987), 1987 CanLII 7591 (NB KB), 64 C.B.R. (N.S.) 218 (N.B.Q.B.); Re Stone (1976), 22 C.B.R. (N.S.) 152 (Ont. S.C.); Re National Fruit Exchange Inc. (1948), 29 C.B.R. 125 (Que. S.C.); Re Man With Axe Ltd. (No. 2) (1961), 2 C.B.R. (N.S.) 12 (Man. Q.B.).
In order for the court to approve a proposal, it must be satisfied that the terms are reasonable: s. 59(2). To be reasonable, the proposal must have a reasonable possibility of being successfully completed in accordance with its terms: McNamara v. McNamara (1984), 53 C.B.R. (N.S.) 240 (Ont. S.C.); Re Gareau (1922), 2 C.B.R. 265 (Que. S.C.). ....
[18] The OSB opposes approval of the Amended Proposal on the basis that it is not reasonable, not to the benefit of the general body of creditors, and not made in good faith. The OSB emphasizes that recovery for unsecured creditors is approximately 12%, and not close even to fifty cents on the dollar.
[19] It submits that the lack of good faith and the fact that approval of the Amended Proposal would compromise the integrity of the bankruptcy system is illustrated in part by the fact that there is no evidence as to whether or not the Debtor was a dupe or a knowing participant in the fraud committed on the banks who were induced to advance the loans.
[20] This uncertainty has been exacerbated rather than addressed by the Debtor who has failed to make full disclosure of all books and records including bank accounts, and has failed to provide answers to highly relevant questions, all of which would shed light on the issue of whether or not the Debtor was a dupe or a willing participant in the fraud, as well as on other issues such as the use of the funds.
[21] The OSB submits that the interests of the public at large in the integrity of the bankruptcy system are not served by the Amended Proposal since the Debtor is contributing only $2500 in funds, the gifts of money from family of the Debtor do not address individual responsibility/culpability issues, and a number of the facts referred to in s. 173 of the BIA are established here, with the result that that section, and particularly subsections 173(1) (a), (b), (d), (e) and (o), apply here.
[22] The OSB submits that the Debtor either could not, or would not, provide satisfactory answers regarding the basis for his bankruptcy, which was described simply as “business losses”. No particulars were provided as to the names of the individuals who were involved or why the businesses were never operated.
....
[28] As a result of all of the above, the OSB came to the conclusion that the Debtor’s reliance on family and friends to aid in his proposal payments does not fulfil the requirement of reasonable security as required by s. 59(3) of the BIA and that notwithstanding his undertakings to do so, he failed to satisfactorily disclose where the funds will come from to pay into his proposal.
[29] The OSB observed that his was the only signature on the proposal and that there was no signature of the other individuals who, he submits, have agreed to contribute to his proposal. A guarantee of performance provided as security may not be acceptable to the court if there is no evidence to show that the individual providing the guarantee has assets to support it: Re National Fruit Exchange Inc., (1948) 29 C.B.R. 125 (Que. S.C.).
[30] Finally, the OSB concluded that s. 170(6) applies and the Debtor has not given notice to the Trustee specifying the statements in the Report that he proposes to dispute, and indeed has not explained or answered the concerns expressed by the OSB at all.
[31] I accept the position of the OSB. As a result of all of the above, I am not satisfied that the Debtor is acting in good faith or that approval of the Amended Proposal is in the interests of the public at large in protecting the integrity of the bankruptcy system.
[32] Given the refusal of the Debtor to answer the questions on his Examination, I am unable to conclude otherwise. Moreover, the questions asked but refused were centrally relevant and in fact fundamental and basic: What caused the vaguely described business losses? What caused those losses particularly when the business of Concept Wrap was never in fact operated? What happened to the proceeds of the loans advanced by RBC and BMO?
[33] In the absence of satisfactory answers to those questions, I cannot be satisfied, particularly given the chronology of the filings and proposals as set out above, that the integrity of the bankruptcy system is maintained. Nor can I be satisfied given the Debtor’s refusal to answer these questions (whether satisfactorily or not), that he is acting in good faith.
[34] The record before me contains the Report of the Official Receiver, and that is unchallenged, since the record does not contain a transcript of the Examination, and nor, as noted above, is there any statement from the Debtor himself taking issue with or explaining the concerns raised by the Official Receiver.
[35] Finally, the position of the Debtor is not assisted by the fact that he is contributing only $2500, and even that modest amount is contributed over time, with the overwhelming bulk of the funds necessary for the Amended Proposal coming from his sisters who have not signed the Amended Proposal.
[36] In short, the Debtor seeks to get out from under his bankruptcy, but to do so by contributing only $2500 of his own funds as against debts of over $514,000 owing to unsecured creditors and maintaining his refusal to answer basic but highly relevant questions. As noted above, even if the proposed contribution from his sisters are accepted as being firm and irrevocable, recovery for unsecured creditors is still in the order of only approximately 12%.
[37] I accept the submission of the Trustee, supported by the Debtor himself and by RBC, that if the Amended Proposal is not approved, the funds from the Debtor’s sisters will not be available for distribution to creditors. I further accept the position of RBC that it would like to recover something, rather than nothing (or a de minimus amount).
[38] However, that is not the test, and such a motivation on the part of a creditor, while not improper and reasonable in its own self-interest, does not assist me with respect to the good faith of the Debtor or the integrity of the bankruptcy system. The elements set out in Kitchener Frame do not support the relief sought here, and I am satisfied that the facts described in ss. 173(1)(a),(d),(e) and (o) are made out here.
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