Skip to content.

Catch Me If You Can: The Court’s Jurisdiction to Annul Bankruptcies Commenced in Other Provinces

In Arrangement relatif à Ferreira, 2018 QCCS 3891 (“Ferreira”), the Quebec Superior Court recently annulled an assignment in bankruptcy that had been filed in Ontario in an attempt to subvert bankruptcy proceedings already underway in Quebec. The judgment confirms that creditors of a bankrupt are able to bring an annulment application in the jurisdiction that is the “locality of the debtor” instead of being required to proceed in the jurisdiction that the bankrupt has (improperly) made an assignment.

Bankrupt Absconds to Ontario

The lengths that the bankrupt in Ferreira went to in order to frustrate the ability of judgment creditors to enforce their judgment were predictably egregious:

  • On May 7, 2017, a judgment was issued against the bankrupt, who resided in Montreal, in the amount of $177,169.
  • On June 29, 2017, the judgment creditors commenced execution and were appointed guardian of the bankrupt’s movable assets, which prohibited her from moving or disposing of these assets.
  • On July 10, 2017, the bankrupt abandoned her apartment in the middle of the night and moved her assets to Toronto. On August 28, 2017, the bankrupt cashed out her various investments.
  • A year later, on June 6, 2018, the judgment creditors filed an application for a bankruptcy order which was served on the bankrupt. The bankrupt’s lawyer appeared at the hearing on July 6, 2018 and contested the order on the basis that she was now residing in Toronto. The judge dismissed these arguments and found that the “locality of the debtor” was Montreal.
  • On July 19, 2018, the day before the bankruptcy application was to proceed in Montreal, the bankrupt filed an assignment in bankruptcy in Toronto and a trustee was appointed. When submitting the necessary forms, the bankrupt answered “No” to the question “Previous or current BIA proceeding?” and failed to disclose various assets that remained in Montreal.

Abuse of Process Warranted Annulment

The judgment creditors brought an application before the bankruptcy court in Montreal to annul the assignment that had been filed in Toronto, pursuant to section 181(1) of the Bankruptcy and Insolvency Act (BIA”), which reads:

Power of court to annul bankruptcy

181 (1) If, in the opinion of the court, a bankruptcy order ought not to have been made or an assignment ought not to have been filed, the court may by order annul the bankruptcy.

In order to grant an annulment, the court must be satisfied either that (i) the debtor was not an insolvent person when they made the assignment, or (ii) the debtor abused the process of the court (Wale, Re, 1996 CanLII 8275 (ON SC) at para. 17). The debtor’s motive is the primary consideration in determining whether the assignment was an abuse of process, and the following list of questions have been developed to ascertain that motive:

(1) Is the debtor’s financial situation genuinely overwhelming or could it have been managed?

(2) Was the timing of the assignment related to another agenda or was bankruptcy inevitable in the near or relatively near future?

(3) Was the debtor forthcoming in revealing his situation to his creditors or did he hide assets or prefer some creditors over others?

(4) Did the debtor convert money or assets to himself which would otherwise have been assets in the bankruptcy?

(5) What had been the debtor’s relationship with his creditors, particularly his major ones? Was it such that they might have assisted him, if he had approached them, by granting time or terms of repayment or had any goodwill been destroyed by past unfulfilled promises?

(6) Are there other relationships–business partnerships shareholder arrangements, spousal, competitors for an asset, or simply personal associations which could cast light on a possible bad faith motive for making an assignment? (Wale at para. 26)

In this case, the assignment in Ontario was clearly an abuse of process. The bankrupt unsuccessfully challenged the jurisdiction of the bankruptcy court in Montreal and instead of appealing that ruling or participating in the bankruptcy proceeding, instead deliberately concealed the existence of those proceedings in filing an assignment in Ontario.

Applications for Annulment May be Brought in the Locality of the Debtor

The more interesting question is where the judgment creditors needed to bring that annulment application. This question does not appear to have been squarely addressed in the case law, and the Court in Ferreira recognized that circumstances where bankruptcy proceedings were instituted by a creditor in one province and an assignment in bankruptcy was filed subsequently by the debtor in another province were extremely unusual, if not completely unprecedented.

Section 181(1) provides that “the” court may annul a bankruptcy. Based on the plain language of the section, prior to Ferreira there would have been an argument that such an application had to be brought before the bankruptcy court in the jurisdiction where the annulment is sought (i.e. in Ontario).

The Court in Ferreira held that it had jurisdiction to annul the assignment in Ontario as Montreal was identified as the “locality of the debtor” and the bankrupt attorned to the jurisdiction of the Quebec court by making submissions on that issue. Since the bankrupt did not appeal that decision, it was res judicata and the bankrupt could not subsequently ignore the jurisdiction of the Quebec court.

While it appears that, after Ferreira, an application for annulment doesn’t have to be brought in the jurisdiction where the proceedings sought to be annulled were commenced, it is clear that the applicant cannot proceed wherever they please. In Deziel, Re, 4 C.B.R. (N.S.) 215, a 1962 decision of the Quebec Superior Court not referenced in Ferreira, an application for an annulment of an assignment filed in Ontario was dismissed by the Quebec Court on the basis that Ontario was the “locality of the debtor.”

As a result, an application for an annulment may be brought in the “locality of the debtor” regardless of where the proceedings were commenced. The “locality of the debtor” is defined in the BIA as the principal place (a) where the debtor has carried on business during the year immediately preceding his or her bankruptcy, (b) where the debtor has resided during such year, or (c) in cases not coming within (a) or (b), where the greater portion of the property of the bankrupt is situated.

Allowing annulment applications to proceed in the locality of the debtor regardless of where the other proceedings are commenced prevents creditors from absconding in the middle of the night, filing an assignment in another province and forcing creditors to chase them to that other province (and other provinces that they may subsequently hop to) in order to have the bankruptcy annulled. As the Court noted in Ferreira “the essential goals sought by the BIA are not only to allow a bankrupt debtor to start afresh, but mainly to protect the interests of its creditors and assure an orderly realization, disposition and distribution of its assets.  The Act is not to be misused or abused for the benefit of a bankrupt debtor to the detriment of its creditors.”

What if the Locality of the Debtor is Uncertain?

In easy cases like Ferreira where the bankrupt commenced proceedings in Ontario for the sole purpose of thwarting its creditors, this does not pose an issue. However, what would happen in the case of a bankrupt that has recently moved from Quebec to Ontario for legitimate reasons and the “locality of the debtor” is not clear? In that circumstance, where creditors have obtained a bankruptcy order in Quebec but the bankrupt has filed an assignment in Ontario, should the creditors be able to seek an annulment in Quebec and force the bankrupt to litigate the issue of locality on its turf (i.e. Quebec)? This question remains open despite the helpful guidance provided in Ferreira.

Authors

Subscribe

Stay Connected

Get the latest posts from this blog

Please enter a valid email address