• Post category:Court Cases

In the matter of the proposal of Masterfile Corporation

Is a trustee authorized to distribute dividends to creditors via electronic means such as Paypal?

On April 5, 2017, the Debtor lodged a proposal with the Trustee pursuant to Part III, Division I of the Bankruptcy and Insolvency Act (the “Proposal”). The creditors voted to accept the Proposal and the Court ordered the approval of the Proposal on May 23, 2017. The Debtor complied with its financial obligations under the Proposal and paid to the Trustee the money required to be distributed to creditors. The Trustee anticipated that it would be able to make the first distribution to creditors in the Fall of 2018.

The Proposal was silent on the frequency of distributions to creditors. The Trustee took into account the costs associated with issuing a distribution by way of printed cheques, including mailing costs, bank fees and administrative costs. The costs of processing and distributing cheques on an anticipated semi-annual basis were significant. As at December 15, 2018, there were 273 unsecured creditors who had proven claims, and 254 unsecured creditors who had not yet filed or proven their claims. Many of the unsecured creditors were located in various countries around the world.

The Trustee informed creditors of the risk that international creditors may have trouble negotiating Canadian denominated and issued cheques. Many of the creditors would have received a distribution of less than $81, and the costs incurred in cashing semi-annual cheques would have been disproportionately high when measured against the funds that stood to be received from the Trustee. The creditors requested that the Trustee seek the Court’s advice and direction authorizing the Trustee to make distributions to creditors using electronic transfers instead of printed cheques. Most of the Debtor’s creditors were accustomed to receiving payments from the Debtor electronically, and sought to extend this practice in respect of distribution payments.

The Trustee proposed to use the services of VersaBank and The Toronto-Dominion Bank (“TD”) for payments made to creditors in Canada and the United States, and PayPal for all other creditors. TD is the bank where the Trustee maintained its trust account in respect of the Debtor’s Proposal. The Trustee argued that electronic transfer payments would: 
  • eliminate the cost associated with cheque production;
  • reduce postage and/or distribution expenses;
  • decrease staff time spent on administration; and
  • increase accuracy through electronic banking. 
Section 25(2) of the BIA provides that payments made by a trustee be made by cheque or “in such manner as is specified in directives of the Superintendent”. Pursuant to Directive 5R5 of the BIA, a trustee may apply to the Office of the Superintendent of Bankruptcy for approval to make payments electronically from a trust account, rather than by signed printed cheque, utilizing the services of a bank, as that term is defined under s. 2 of the BIA. Section 2 provides that a “bank” includes: 
  • every bank and authorized foreign bank within the meaning of s. 2 of theBank Act;
  • every other member of the Canadian Payments Association established by the Canadian Payments Act (the “CPA“); and
  • every local cooperative credit society, as defined in the CPA.
Both VersaBank and TD are chartered banks and members of the Canadian Payments Association and, accordingly, come within the meaning of “bank” under s. 2 of the BIA. PayPal, however, is not considered a “bank”. It is an American publicly-held company that offers a worldwide online payment system that supports online money transfers and serves as an electronic alternative to cheques.
Under the proposed electronic distribution, the Trustee would authorize PayPal to debit its trust account for the value of the distribution and forward the money to payees using their respective email addresses and PayPal accounts. In accordance with the BIA Directive, the Trustee would be obliged to obtain the consent of each creditor/recipient who was to receive payment electronically, and creditors would have an ongoing ability to opt out of receiving electronic payments.
The Trustee acknowledged that while the Debtor made electronic transfer payments to its vendors in the ordinary course of business, not all of the Debtors’ creditors/distribution recipients may wish to receive payments from the Trustee in that manner. As such, the Trustee recommended that prior to making the first distribution, it provide notice to all creditors with proven claims of the proposed electronic distribution of funds and give them 30 days within which to opt out of receiving payment in this way.

The Court approved the Trustee’s motion, and authorized and directed it to make distributions to creditors in the manner proposed in the Trustee’s report to the Court.

CounselE. Patrick Shea of Gowling WLG (Canada) LLP for the proposal trustee, MNP Ltd.