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Are There Limits On A Proposal Trustee’s Investigatory And Remedial Powers?*

by David R. M. Jackson of Taylor McCaffrey LLP

While Proposal Trustees are not typically the chosen tool for investigating or challenging pre-filing transactions they do have similar powers of Bankruptcy Trustees. For example:

              a)       BIA s. 66(1) states that “all provisions of this Act, except Division II of the Proposal, insofar as they are applicable, apply, with such modifications the circumstances require to Proposals made under this Division”;

              b)       BIA s. 101.1(1) specifically provides that the remedial provisions available to Bankruptcy Trustees for setting aside preferences, transfers under value and so forth under BIA ss. 95-101 apply under Division I Proposals unless the Proposal expressly provides otherwise;

              c)       Available jurisprudence[1] consistency affirms that a Proposal Trustee has the same authority to utilize the examination powers that a Bankruptcy Trustee has under BIA ss. 163 and 164;

             d)       To the extent that the Proposal Trustee is to utilize the investigatory, remedial or other provisions of the BIA there is jurisprudence[2] to suggest that such intentions should be spelled out in the actual Proposal.

Just how and when these powers may be used in a BIA Proposal became an issue in Manitoba in PricewaterhouseCoopers Inc. v. Ramdath 2018 MBCA 71.

Finding itself in financial difficulties during the summer of 2017 R. Litz & Sons Company Limited (“Litz Crane”) lodged a Notice of Intention to Make a Proposal under the BIA. Within just a few weeks of filing the NOI the Chief Financial Officer (“Ramdath”) tendered his resignation. Shortly thereafter Litz Crane discovered an apparent fraud by Ramdath initially identified in excess of $3 million and sought several additional Orders from the Court of Queen’s Bench on an ex parte basis including:

              a)       An Interim Receivership Order under BIA s. 47.1 appointing the Proposal Trustee as Interim Receiver with specific investigatory and tracing powers;

              b)       An Order for Mareva Injunction restraining Ramdath from disposing of his assets.

Ultimately, the Interim Receiver produced several reports of its investigations which were and continue to be of use to the stakeholders in unravelling the fraud.

As Litz Crane proceeded with restructuring efforts with a view to completing its Proposal, the Proposal Trustee recognized that once the BIA Proposal was approved by the Court the Interim Receivership would expire in accordance with BIA s. 47.1(1.1). In determining what should be done in contemplation of this expiry, Litz Crane and the Proposal Trustee considered whether to motion the Court to convert the Interim Receiver into an “Investigative” Receiver; or if there were other alternatives. Given the Interim Receiver’s ongoing obligation to administer the Proposal, as well as the existing powers available to a Proposal Trustee under the BIA to also carry out investigations and prosecute remedial action it was decided that it would be more efficient and cost effective to allow the Interim Receivership to expire but have both the Proposal and the Approval Order provide for transitioning the responsibilities of the Interim Receiver to the Proposal Trustee.

The Proposal tendered by Litz Crane to its creditors in late 2017 set out the terms for the creditors consideration including that the Proposal Trustee had the power and discretion to utilize the investigatory or remedial powers existing under the BIA to continue the investigation of Ramdath initiated by the Interim Receiver. The Proposal was approved by the requisite majority votes of creditors, in particular 90 percent of the number of creditors voting representing 98.2 percent of the proven claims.

The Proposal Trustee filed the motion materials necessary to seek Court approval. The only party appearing in opposition to the Proposal Approval Order was Ramdath who objected the Proposal on several grounds including:

              a)       That the Proposal Trustee’s remedial and investigatory powers expired once a BIA Proposal had been approved. While there was no jurisprudence to support this assertion, the argument was made that the investigatory powers were to be used in the context of satisfying the Proposal Trustee and stakeholders that the Proposal to put to the creditors should be approved and not for the collateral purpose of assisting the debtor’s fraud action against Ramdath;

              b)       Allowing the Proposal Trustee to proceed with its remedial and investigatory powers against Ramdath under BIA would create unfairness given the continuation of the Mareva injunction and the prosecution of that civil action. In effect, a double jeopardy situation where Ramdath would be exposed to not only the ordinary civil discovery process but the extraordinary statutory powers afforded Bankruptcy Trustees.

It should be noted that at no time was Ramdath a creditor, a shareholder or had any financial interest in the company.

Following submissions before the Chambers Judge the Proposal Approval Order was granted following which, and without seeking leave to appeal, Ramdath filed a Notice of Appeal to the Manitoba Court of Appeal. Upon the Proposal Trustee’s motion the Court confirmed that Ramdath did not have a right of appeal[3] and directed that leave to appeal would need to be sought to the Court of Appeal Chambers Judge in accordance with BIA s. 193(a).

Ultimately, Cameron, J.A. dismissed Ramdath’s motion for leave to appeal and acknowledged that:

              a)       There is nothing in the BIA that states the powers or duties of the Proposal Trustee automatically expire upon Court approval of the Proposal. In particular she stressed that neither BIA s. 66(1), which provides that all provisions of the BIA apply to Proposals’ nor BIA s. 101.1(1), which deals with the Proposal Trustee’s ability to exercise the Bankruptcy Trustee’s remedies, have a set expiry;

              b)       The mere possibility that procedural unfairness may occur is not sufficient to prevent the Proposal Trustee from exercising its powers and remedies. The fundamental principal is that the “law assumes that concurrent proceedings on the same facts can be conducted fairly”. It would be premature for a Court to restrict the Proposal Trustee’s powers unless or until actual prejudice and unfairness occurred.

Stakeholders in BIA Proposal scenarios should keep this forensic tool in mind.

*Originally prepared as part of the Annual Cross-Country Update, 2018 Annual CBA National Insolvency Law Conference – September 14, 2018 – Vancouver, British Columbia

[1] Re Amonson 1985 CanLii 1201 at para. 7 (MBQB); Man with an Axe, Re (No. 2) 1961 Carswell Man. 4 at para. 7 (MBQB)

[2] See for example Brunco Leasing v. Zutphen Bros. Construction (1994) Carswell NS 31 at 37

[3] PricewaterhouseCoopers Inc. v. Ramdath 2018 MBCA 41.