“The best way to predict the future is to create it.” – Peter Drucker

Numerous strategic considerations play into how, and even whether, to pursue a piece of litigation. In addition to pursuing strategies that increase their chances of winning the case, litigants should be equally mindful of strategies that increase the chances that they will be able to collect any judgment or award from the opposing party.

A recent decision in Kochhar v. McCall & Co., 2024 ONSC 4522 (“Kochhar”) serves to highlight one of these strategies: obtaining a declaration that proactively – though indirectly – provides that a judgment cannot be discharged in bankruptcy.

Section 178(1) of the Bankruptcy and Insolvency Act (“BIA”) sets out various categories of debts that cannot be discharged in bankruptcy.[1] The Supreme Court of Canada recently provided welcome guidance on the exceptions for fines, penalties and restitution orders (s. 178(1)(a)) and debts resulting from obtaining property or services by false pretences or fraudulent misrepresentation (s. 178(1)(e)).[2] Last week, the Supreme Court heard an appeal on the exception for student loan debts and reserved its decision (s. 178(1)(g)).[3]

The decision in Kochhar is a reminder that while courts are loathe to grant declarations that a particular judgment will survive any bankruptcy discharge before the defendant has actually commenced bankruptcy proceedings, courts may be willing to grant declarations characterizing the judgment in a way that reflects the language of the section 178(1) exceptions, giving the plaintiff essentially the same thing. In other words, the court will not declare what the claim will be in the future – i.e. exempt from discharge. It will only declare what the claim is – i.e. a liability resulting from obtaining property by false pretences. However, that current declaration is likely to create the future result – an exemption from discharge in the event of bankruptcy – that is desired.

Background

The Plaintiff, Mr. Kocchar, hired McCall & Co. to renovate the basement of his home. Mr. Kocchar paid over $36,000 but the contractor never showed up to complete the work despite promising that the work would start on a particular date on four separate occasions. Mr. Kocchar eventually terminated the contract and demanded the return of his money. McCall & Co. did not do so. The two principals of the business were charged with fraud over $5,000. One of them pled guilty.[4]

Mr. Kocchar brought a civil claim against McCall & Co. and its two principals. They did not file a defence, were noted in default and Mr. Kocchar sought a default judgment against them.

Declarations That Can Be – and Cannot Be – Granted

The Court readily accepted that the Defendants were liable for the amount claimed. As part of the judgment, Mr. Kocchar sought a declaration that the judgment fell within the exceptions in section 178(1)(d) and/or 178(1)(e) of the BIA and would survive any bankruptcy discharge. There was no evidence that any of the Defendants had commenced bankruptcy or other insolvency proceedings. Following existing authority, Justice MacNeil held that:

1. It was not appropriate to declare that the debt fell within the section 178(1)(e) exception and would survive a bankruptcy discharge as such a declaration would be premature and hypothetical.[5] None of the Defendants had commenced bankruptcy proceedings or had yet to refuse to pay the debt. Such a declaration can only be issued where a creditor seeks to enforce a liability and the debtor relies on his/her discharge in resisting enforcement.
2. It was appropriate to declare that the judgment debt arose from the Defendants obtaining Mr. Kochhar’s property by false pretences or fraudulent misrepresentation, which tracks the language of section 178(1)(e).[6]

Having this latter declaration in hand has the potential to provide a judgment creditor with a number of benefits, including:

• The judgment creditor will be very strongly positioned to obtain the former declaration, if necessary, in the event the debtor commences insolvency proceedings.
• The judgment creditor may be in a better position to negotiate a payment plan that is acceptable to it, as the debtor will know that they cannot have the debt discharged in a bankruptcy and the only way they are going to be able to get rid of it is to pay it.
• The judgment creditor may be more likely to obtain a lift stay to allow it to pursue enforcement remedies if the debtor commenced insolvency proceedings.[7]

As a result, if a claim potentially falls within one of the section 178(1) exceptions, litigants may want to consider proactively asking for this nuanced declaration in any judgment that is obtained, even if there is no allegation that the defendant is currently in any financial difficulty.

[1] Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”), s. 178(1).

[2] Poonian v. British Columbia (Securities Commission), 2024 SCC 28.

[3] Izabela Piekut v. His Majesty the King in Right of Canada as Represented by the Minister of National Revenue, SCC Docket No. 40782.

[4] The other one did not appear at any of his court dates and there is a bench warrant for his arrest.

[5] Kochhar at paras. 52-54. See also: Royal Bank of Canada v Elsioufi, 2016 ONSC 5257 at para. 7; B2B Bank v. Batson, 2014 ONSC 6105 at para. 18.

[6] Kochhar at para. 55. See also: Bank of Montreal v. 1886758 Ontario Inc., 2022 ONSC 4642 at para. 45; B2B Bank v. Batson, 2014 ONSC 6105 at para. 19.

[7] Courts have held that a debt being exempt from discharge is one of the bases for lifting the stay of proceedings. See e.g. Re Ramgulam-Rafiq, 2024 ONSC 6085.