Does a single creditor need to prove special circumstances to petition a debtor into bankruptcy?
The Creditor held a judgment against the Debtor in the amount of $488,871.04 plus costs and post-judgment interest. Despite the Creditor’s demand for payment, the Debtor paid nothing. On August 23, 2021, the Creditor sought to have the Debtor adjudged bankrupt and to appoint a trustee in bankruptcy of the Debtor’s estate.
The Creditor asserted that it was entitled to file the application in reliance on s. 43(1) of the Bankruptcy and Insolvency Act because the Debtor owed a debt of at least one thousand dollars and the Debtor had committed an act of bankruptcy within the six months preceding the filing of the application. Section 43(6) of the BIA requires a creditor to prove the facts alleged in the application. If the court is satisfied with the proof, it may make a bankruptcy order.
The Debtor opposed the Creditor’s application. The issue was whether the Court should exercise its discretion to decline to grant the application on the basis that the Creditor had not proven that the Debtor was insolvent and had ceased to meet her liabilities generally as they come due, or on the basis that a declaration of bankruptcy could deprive her of an ability to earn an income as a mortgage broker.
The Debtor asserted that the Creditor was a single creditor in this application and should not be permitted to petition the Debtor into bankruptcy for the purposes of collecting its debt. The Court disagreed, holding that the Creditor was not precluded from bringing its petition as a single creditor since it relied on s. 42(1)(e) (which speaks to the debtor permitting any execution or other process issued against the debtor under which any of the debtor’s property is seized, levied on or taken in execution to remain unsatisfied) as the basis for the application.
The Debtor also asserted that to succeed in its application, the Creditor, as a single creditor, must establish the existence of “special circumstances” to satisfy the Court that the process was not being used for collection purposes to compel payment of a debt where the debtor is solvent, or to prevent the debtor from defending itself against a disputed claim.
“Special circumstances” exist where a) repeated demands for payment have been made within the six-month period; b) the debt is significantly large and there is fraud or suspicious circumstances in the way the debtor has handled its assets which require that the processes of the BIA be set in motion; and c) prior to the filing of the petition, the debtor has admitted its inability to pay creditors generally without identifying the creditors.
The Court held that where an act of bankruptcy alleged is one included in s. 42(1)(e), as opposed to one included in s. 42(1)(j) (which speaks to the debtor ceasing to meet liabilities as they come due), a single petitioning creditor could succeed without establishing some “special circumstances” (in addition to proving an act of bankruptcy). The Creditor had made written demand for payment within the meaning of s. 42(1)(e). Accordingly, the Creditor was not required to establish the existence of special circumstances.
The Court granted the Creditor’s application.
Judge: Justice Dietrich
Counsel: J. Ross Macfarlane of Flett Beccario for the Creditor, RBC, and Howard Manis of Manis Law for the Debtor, Mai Anh Tran
By Matilda Lici