Can a debtor be forced to disclose privileged information in an insolvency proceeding?
In August 2018, Mr. Langille, together with his wife, made a consumer proposal under the Bankruptcy and Insolvency Act (the “BIA“). PPI was a creditor in the proposal. In order to qualify for a Division II proposal, the Langilles pooled their respective limits and claimed just under $500,000 in cumulative debt. They reported an estimated net realizable value of $107,788, later amended to $103,292. This amount apparently did not include Mr. Langille’s interest in his company, Maritime.
Prior to making a consumer proposal, the Langilles had commenced a civil action against PPI. That action proceeded through discovery and disclosure, an expert witness report was filed, and the trial was scheduled for late 2016. During discovery and disclosure, the the Langilles produced Maritime’s financial statements. The matter was adjourned in the fall of 2016 and the trial has never been rescheduled.
PPI moved for leave to lift the implied undertaking not to use information disclosed or discovered in the civil proceeding for a purpose outside the proceeding. It argued that the implied undertaking should be set aside to allow it to put Maritime’s financial statements before the other creditors in the insolvency proceeding.
The Maritime financial statements were subject to the implied undertaking rule. Mr. Langille refused to waive the undertaking. He argued that Maritime had stopped operating and had no assets. PPI suggested that Mr. Langille may have transferred some of Maritime’s earnings to his investment company and to a family trust. PPI sought to put the Maritime documents before the proposal administrator in the insolvency proceeding, arguing that creditors should know about any related-party debt before deciding whether to accept the proposal.
PPI argued that the administration of justice and the proper functioning of the BIA were a prevailing public interest. The proper functioning of the BIA requires fulsome disclosure to the creditors of the debtor’s affairs, and particularly the debtor’s assets. PPI argued that there would be little harm in lifting the implied undertaking. It would either demonstrate that the company dissolved at the end of 2014, or it would place Mr. Langille’s present business affairs before the creditors as required for the consumer proposal process.
Documentary and oral information obtained on discovery is not to be used by the other parties except for the purpose of that litigation, unless and until the scope of the undertaking is varied by a court order or other judicial order or a situation of immediate and serious danger emerges. The undertaking is imposed in recognition of the examinee’s privacy interest, and the public interest in the efficient conduct of civil litigation, but those values are not, of course, absolute. They may, in turn, be trumped by a more compelling public interest.
The leading authority on lifting the implied undertaking rule is the Supreme Court of Canada’s decision in Juman. An application to modify or relieve against an implied undertaking requires an applicant to demonstrate to the court on a balance of probabilities the existence of a public interest of greater weight than the values the implied undertaking is designed to protect, namely privacy and the efficient conduct of civil litigation.
If satisfied that the interest of justice outweighs any prejudice that would result to a party who disclosed evidence, the court may order that the implied or “deemed” undertaking does not apply to the evidence or to information obtained from it, and may impose such terms and give such directions as are just.
Where discovery material in one action is sought to be used in another action with the same or similar parties and the same or similar issues, the prejudice to the examinee is virtually non-existent and leave will generally be granted. On the other hand, courts have generally not favoured attempts to use the discovered material for an extraneous purpose, or for an action wholly unrelated to the purposes of the proceeding in which discovery was obtained in the absence of some compelling public interest.
The Court found that Langille had made various assertions about the Maritime financial statements. The information in the documents may impact the decision of the creditors as to whether to accept the proposal. In these circumstances, the interest in ensuring the necessary information is made available in deciding on the proposal was pronounced, while it was not clear what serious harm could come from disclosing the financial statements of a defunct company.
On a balance of probabilities, in the particular circumstances of this motion, the proper functioning of the BIA process was a superior public interest that justified lifting the implied undertaking.
The order sought by PPI was granted.
Counsel: John O’Neill for the Plaintiffs and Matthew Moir of Weldon McInnis for the Defendant PPI