By Matilda Lici, Associate, Aird & Berlis LLP

The Ontario Superior Court of Justice in Re Singh, 2024 ONSC 837 recently considered whether courts have the authority under the Bankruptcy and Insolvency Act (the “BIA”) to annul a consumer proposal in circumstances where the proposal has been approved by creditors and fully performed by the debtor, and where the administrator has been discharged.

In February 2019, the Debtor was sued by his former father-in-law (the “Moving Creditor”) for payment of $87,000 plus interest and costs. In April 2019, the Moving Creditor obtained default judgment against the Debtor in the amount of $91,403.50 and costs of $1,404, and effected the filing of a writ of seizure and sale with the Sheriff in the Regional Municipality of Durham in those same amounts.

The Debtor subsequently filed a consumer proposal with the administrator for the consumer proposal (the “Administrator”) in September 2019. Notably, the Debtor did not list the Moving Creditor as a creditor in the list of creditors or his statement of affairs. A meeting of creditors occurred in December 2019, at which time an amended proposal was voted on and approved in accordance with the provisions of the BIA.

The Administrator ultimately completed a Certificate of Full Performance of Proposal, which confirmed that the amended proposal was fully performed as of March 2, 2023, as well as a Certificate of Compliance and Deemed Discharge of Administrator, which resulted in the Administrator being discharged as of June 2, 2023. The Moving Creditor subsequently brought a motion to annul the Debtor’s consumer proposal pursuant to s. 66.3(1) of the BIA.

In granting the Moving Creditor’s motion and annulling the consumer proposal, the Court provided important guidance on the interpretation of s. 66.3 of the BIA and the conduct expected of consumer debtors.

1. Section 66.3 provides the authority to annul a completed consumer proposal

A consumer proposal, once accepted, or deemed accepted, by the creditors of the debtor and approved by the court is binding on creditors of all unsecured claims, subject to certain exceptions. Subsection 66.3(1) of the BIA, however, provides that a court may annul a consumer proposal where default is made in the performance of any provision in a consumer proposal, or where it appears to the court that, among other things, the debtor was not eligible to make a consumer proposal when the consumer proposal was filed.

There is nothing in the wording of s. 66.3(1) that restricts when such an application for an annulment of a consumer proposal may be made. This stands in contrast to the language of subsection 66.3(3), which provides that a consumer proposal may be annulled after it is “accepted or approved” where the consumer debtor is afterwards convicted of any offence under the BIA.

The Court confirmed that s. 66.3(1) provides clear and unlimited authority to the Court to annul a consumer proposal if the debtor was not eligible to make a consumer proposal when the proposal was filed. This authority cannot hinge on how long the debtor’s true financial affairs are unknown—whether due to any advertent or inadvertent actions on the part of the debtor or others. To interpret the provision in any other way could result, in theory, in a consumer proposal not being annulled even where the approval of the court was obtained by fraud, simply because the consumer proposal was completed prior to the discovery.

2. Consumer debtors must disclose disputed claims to administrators

The Debtor admitted that he was personally served with the Moving Creditor’s statement of claim, but claimed that he had forwarded the claim to his criminal lawyer with the expectation that it would be disputed. Ultimately, the Debtor did not take any steps to defend the claim, and default judgment was issued against him.

The Debtor also alleged that he was not served with a copy of the default judgment obtained by the Moving Creditor, and did not receive any further documents from the Moving Creditor because he was no longer able to collect his regular mail at the matrimonial home following his arrest and the issuance of a restraining order against him. The Debtor argued that he was not aware of the existence of the default judgment when he had discussions with the Administrator prior to filing his consumer proposal, nor at the meeting of creditors.

Finally, the Debtor argued that even if he had had knowledge of the default judgment and the registration of the writ at the time when he first met with the Administrator, he would not have disclosed them to the Administrator because he did not believe that he owed any money to the Moving Creditor. The Debtor maintained that the funds advanced by the Moving Creditor were joint gifts to the Debtor and his former spouse, and that he, with the assistance of his mother, had repaid $63,410 to the Moving Creditor in installments.

The Court held that the Debtor was required by the BIA to provide the Administrator with information about any potential claims against him, even those he may dispute. This was in line with prior case law that the foundation of the consumer proposal process is that all proper debts and liabilities must be disclosed by debtors seeking the protection of the BIA. It was open to the Debtor to take the position with the Administrator that the Moving Creditor’s claim should be listed as a contingent amount, but nothing absolved him from the obligation to notify the Administrator of the fact that he had been served with a statement of claim.

3. A proposal is not invalid by reason only of the debtor’s ineligibility to make a proposal

Relying on s. 66.3(1)(a) of the BIA, the Moving Creditor argued that the consumer proposal should be annulled because, at the time of filing of the proposal, the Debtor was ineligible to file same. The Moving Creditor relied on the fact that his claim of $94,027.98, coupled with approximately $162,000 in proven claims, resulted in the Debtor exceeding the $250,000 consumer proposal threshold.

The Court found that the Debtor would not have been eligible to complete a consumer proposal by the time of the meeting of creditors if the Moving Creditor’s default judgment had been known to the Administrator at the time. Nevertheless, the fact that the Debtor was no longer eligible to make a proposal was not, in and of itself, dispositive of the Moving Creditor’s motion to annul the proposal.

If an administrator determines, after the filing of a consumer proposal, that it should not have been filed because the debtor was not eligible to make a consumer proposal, the administrator is required to promptly inform the creditors of this fact. Thereafter, it is for the creditors to commence an application to annul the consumer proposal.

Takeaways

The Court’s interpretation of s. 66.3(1) of the BIA is in line with one of the two main purposes of the BIA, namely, the equitable distribution of the debtor’s assets among their creditors. Pursuant to the completed proposal, the Debtor’s creditors received around $35,000 in dividends on account of over $162,000 in proven claims—reflecting a recovery of merely 21 cents on the dollar. While there is generally a public interest in the finality of court-supervised processes under the BIA, this interest must be balanced with need to uphold the integrity of the consumer proposal process.

In the circumstances, it would have been unfair for the Debtor to be permitted to pay only $35,000 in dividends to creditors and retain over $100,000 from the proceeds of the sale of his matrimonial home simply because the Debtor elected or failed to inform the Administrator of the existence of the Moving Creditor’s claim. Any benefit occasioned from the lack of disclosure of a material fact would undermine public confidence in the administration of consumer proposals.

The decision serves as a caution for consumer debtors to make full and frank disclosure of their financial affairs to the administrator of the proposal.