• Post category:Court Cases

MacIntyre (Re), 2018 ABQB 380

Can a trustee take an assignment of future GST refunds from a bankrupt to cover future obligations?

The trustee and the Office of the Superintendent of Bankruptcy (the “OSB”) brought three matters before the Court, all of which raised the same issue: can Goods and Services Tax Refunds (“GST Refunds”) be assigned for use by the trustee to meet the financial obligations of the bankrupt and, if yes, what is the appropriate process for  the assignment?

The trustee’s common practice was to have a bankrupt execute a document called an “Assignment”, which purportedly allowed the trustee to apply any GST Refunds collected on behalf of the bankrupt towards any outstanding financial obligations set out in a conditional discharge order. The likely effect was that the bankrupt would be discharged from bankruptcy earlier than expected. The Trustee suggested that this process was commercially efficient and kept the bankrupt’s costs to a minimum.  
 
The trustee argued that the “Assignment” assigned all rights and interest in a GST Refund to the trustee. Upon execution of the document, the GST Refund became the ordinary funds of the bankrupt and could be used in a similar manner to any other unencumbered funds of the bankrupt.
 

The OSB suggested that s. 67(1)(b.1) and Rule 59 of the Bankruptcy and Insolvency Act precluded the assignment of the GST Refund in this manner, because the intent of these provisions was to ensure that the GST Refund was available to a bankrupt who might find him/herself in financial need during the bankruptcy. It was for the bankrupt to decide whether to use the GST Refund for living expenses or pay down his/her indebtedness faster in order to be discharged from bankruptcy sooner. Upon receipt of a GST Refund for the bankrupt, a trustee ought to provide a cheque to the bankrupt in the amount of the GST Refund. Only after the bankrupt cashes said cheque, does Rule 59 no longer apply. Then, the bankrupt may decide whether to retain the funds for living expenses or return the funds to the trustee to be applied towards his/her outstanding obligations.

The Court agreed with the OSB that the GST Refund does not form part of the property of the bankrupt and cannot be distributed to the estate creditors pursuant to s. 67(1)(b.1) except as permitted by Rule 59. A trustee who receives a GST Refund must return those funds to the bankrupt without deduction. 

The Court held that a properly worded assignment, which validly transferred the rights and interests in the GST Refund, could relieve the trustee of the cumbersome multiple deposits and withdrawals proposed by the OSB. However, trustees must carefully assess whether the bankrupt understands the assignment in the context of what it may mean in the future, when a conditional discharge is being considered. Executing the assignment at the beginning of the bankruptcy may not always be appropriate, because that is when the bankrupt is most likely not to have the benefit of independent legal advice on the significance of the assignment. Depending on the bankrupt, the appropriate timing for executing an assignment may be when the issue of application of the GST Refund arises and the bankrupt is better able to determine whether the immediate need for the funds is greater than the incentive of an early discharge.

The Court directed the trustee to pay to the bankrupts a sum equivalent to the GST Refunds. 

Counsel: N/A. Appearances by James Moses and Kathleen Jacob for the Licensed Insolvency Trustee, Moses Advisory Group and Ken Pawlyna for the Office of the Superintendent of Bankruptcy.

Full case: http://canlii.ca/t/hrxct