Can a creditor’s bankruptcy application be fatally flawed if certain information is missing?
The debtors sought dismissals of the applications for bankruptcy orders brought by the creditor. They argued that the applicant secured creditor did not comply with s. 43(2) of the Bankruptcy and Insolvency Act, which requires the creditor to abandon its security for the benefit of all creditors, or value its security—in either case to show an unsecured component (minimum $1,000) of its claim.
The creditor provisionally amended its application to add what it viewed as the necessary information. The debtors argued that the s. 43(2) information is mandatory, that its omission is not a “formal defect” or “irregularity” (i.e. it is a substantive defect), that the information cannot be added (e.g. by amendment) later, and that, accordingly, the applications must be dismissed. The creditor agreed that the information is mandatory but asserted that s. 187(9) permitted an amendment to fill the gap.
An application for a bankruptcy order is clearly a “proceeding in bankruptcy”, as s. 43 itself confirms. Someone contends that the proceeding is defective, in light of mandatory information missing. At that stage, the question is whether the shortfall is a “formal defect … or irregularity” within the meaning of s. 187(9). If so, the focus shifts to whether “substantial injustice” results. If substantial injustice results, the question becomes whether it can be remedied by court order. If not, the proceeding is invalidated. If there is no substantial injustice, an amendment may be permitted.
The orthodox view is that s. 187(9) governs defects of form, not substance. If it is a matter of substance, s. 187(9) is not available to relieve against the failure; what is a matter of form and what is a matter of substance depends on the circumstances of each case. The Court considered whether the s. 43(2) omission was a substantive, versus formal, defect.
Canadian courts have examined various s. 43(2) deficiencies, categorizing them as substantive (and thus beyond s. 187(9)’s reach) or as a “formal defect or irregularity” (and thus potentially curable under it). They have unanimously held that amendments are permitted to remedy section 43(2) deficiencies in petition and bankruptcy-order applications. Expressly or implicitly, they treat the omission as a “formal defect … or irregularity”, not as an unamendable “substantive” defect.
In this case, the s. 43(2) gap did not cause substantial injustice to the debtors. The debtors produced no evidence of any injustice, let alone substantial injustice, caused by the s. 43(2) omission. They argued that the omission kept them from “knowing the case they had to meet.” But allowing the amendment actually helped in that case. If and when the bankruptcy-order application proceeds, the debtor will know the creditor’s position on the s. 43(2) information and the grounds for it.
The Court concluded that the “formal defect or irregularity” here did not cause substantial, or any, injustice. Alternatively, if it did, it was remediable by way of amendment. In answer to the debtors’ s. 43(2) objection, the creditor amassed and provided various information that it saw as sufficient to get over the s. 43(2) hurdle. The debtors had a reasonable opportunity to scrutinize that material and to consider and make their arguments, both in their brief and at the application, on the “proceeding in bankruptcy” character of a bankruptcy-order application, the nature of the defect, “substantial injustice”, and the amendment mechanics. They did not point to any particular shortfall in their response attributable to the creditor’s “cure approach.”
The debtors’ arguments about whether the amendments actually satisfied s. 43(2) were premature. Whether the creditor has actually cleared the s. 43(2) hurdle is an issue for the bankruptcy application, if and when it proceeds.
The Court concluded that the creditor had staved off “fatal defect” dismissal of its bankruptcy-order applications. It now has amendments in place which address, or may address, the requirements of s. 43(2).
Counsel: Ryan Zahara and Molly McIntosh of MLT Aikins LLP for the Plaintiff/Applicant and Richard Hajduk of Hajduk Gibbs LLP for the Defendants/Respondents
Judge: the Honourable Mr. Justice M.J. Lema