Gagnon (Re), 2019 ONSC 3229

Can a debtor be compelled to submit to an examination before a bankruptcy application is resolved?

The Royal Bank of Canada (“RBC”) simultaneously commenced an application for a bankruptcy order arising out of the Debtor’s alleged inability to pay a debt of $3 million, and an action for judgment on the same debt. Both proceedings arose out of the same factual matrix. In both proceedings, RBC alleged that the Debtor fraudulently conveyed his half interest in the matrimonial home to his wife. In the action alone, however, RBC asserted an entitlement to a certificate of pending litigation over the matrimonial home, pending resolution of the action.

The Debtor filed a Notice of Dispute of the application and a Statement of Defence in the action. By virtue of the Notice of Dispute, the bankruptcy application would necessarily be heard before a judge of the Superior Court of Justice sitting in bankruptcy, though no date had been set for this hearing.

RBC brought a motion in the action for a certificate of pending litigation, which was supported by the affidavit of an RBC representative. The Debtor filed a responding affidavit, and RBC sought to cross-examine the Debtor on it. The Debtor objected to being compelled to submit to any examination before the bankruptcy application was resolved. He relied on the well-settled principle that an applicant for a bankruptcy order will not be permitted to establish its case by compelling evidence in support of the petition from the responding debtor (the “Re Debtor principle”).

The Master in bankruptcy found that there was a conflict between Rule 14 of the Bankruptcy and Insolvency Act, which requires leave of the court to examine the bankrupt, and Rule 39 of the Rules of Civil Procedure, which entitles a party to cross-examine on any affidavit filed in support of a motion. She concluded that the quasi-penal nature of a bankruptcy and a debtor’s right in the bankruptcy context not to be compelled to give evidence against himself must prevail over the Rules of Civil Procedure pending the determination of the petition. RBC appealed from the decision.

There was nothing improper in RBC commencing parallel civil and bankruptcy proceedings. While the two proceedings arose from the same factual matrix, however, the remedies available were very different. The remedy of a CPL was not available in a bankruptcy petition as the matrimonial home was solely in the Debtor’s wife’s name. In the civil action, RBC challenged the conveyance of the Debtor’s half interest to his wife and sought to have it set aside. The interest sought to be attached if a CPL was granted, therefore, was that of the Debtor’s wife. In the context of the CPL motion, the Debtor did not have to file an affidavit; he chose to do so. Whether or not the CPL motion is granted would have no impact on the bankruptcy petition.

The appellate court rejected the Master’s conclusion that, in order to avoid entirely undermining a core principle of bankruptcy law, a plaintiff in a civil proceeding must be prohibited from conducting any examination of the debtor in the civil proceeding prior to the hearing of the petition. The Re Debtor principle is not absolute. There is a prima facie right to cross-examine the Debtor on his affidavit in the civil action. The test for a CPL necessarily involves some preliminary consideration of the merits of the claim regarding an interest in land. Thus, the Debtor’s cross-examination on his affidavit in the CPL motion might well involve questions that the Debtor could not be compelled to answer in the context of evidence for the pending bankruptcy petition. The Re Debtor principle would only be thwarted or undermined if RBC attempted to use the evidence given in cross-examination to bolster its case against the Debtor in the bankruptcy petition.

What evidence may be tendered or used in the contested bankruptcy petition, if it ever proceeds, will be within the sole and exclusive jurisdiction of the Superior Court judge hearing the application to decide. This includes the jurisdiction to decide whether all, some or none of the Debtor’s evidence from the CPL motion may be tendered or used at the hearing of the petition.
The Court set aside the Master’s decision, and held that the Debtor could be cross-examined on his affidavit in the civil action for the purpose of the CPL motion.

CounselSteven Graff and Miranda Spence of Aird & Berlis LLP for the Royal Bank of Canada and Colby Linthwaite of Fred Tayar & Associates Professional Corporation for Pierre Gagnon

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