Can a bankrupt revoke a discharge to sue a trustee?
In July 2013, the appellant McKibbon made an assignment into bankruptcy. BDO acted as the corporate trustee. During the administration, issues arose in calculating the appellant’s surplus income and tax payable to Canada Revenue Agency. The appellant achieved a full discharge from bankruptcy in February 2016—31 months after making an assignment into bankruptcy. This was 10 months longer than a discharge without opposition is generally expected to take for a first‑time bankrupt. In August 2016, BDO sought a discharge as trustee.
At some point, the appellant became aware of information that he believed revealed errors in calculating his surplus income and tax payable. He argued that, without those errors, he would have more quickly obtained a full discharge from bankruptcy. Instead, he argued that BDO miscalculated the amounts he owed to the estate and there was prolonged uncertainty surrounding the tax payable because of disagreement between BDO and CRA. In the interim, he was not able to return to his usual line of work while he remained an undischarged bankrupt.
The appellant filed an application under s. 215 of the Bankruptcy and Insolvency Act for leave to commence a civil action for negligence, misrepresentation, breach of contract and breach of fiduciary duty. The appellant also applied for revocation of BDO’s discharge as corporate trustee on grounds that the trustee had suppressed or concealed material facts pursuant to s. 41(8) of the BIA. The application judge dismissed the application.
The application judge held that an applicant seeking revocation must establish that any steps taken by the trustee at the time of its discharge to suppress or conceal facts were done fraudulently or with some element of fraud in the circumstances. It is not sufficient for the applicant to establish that the failure to disclose a material fact was due to negligence or professional fault. An applicant has the onus to establish that the trustee purposely suppressed or concealed the alleged material facts with the intent to defraud the court, the creditors or the applicant.
The question on appeal was whether a revocation based on “suppression” or “concealment” requires proof of a deceptive, dishonest or similarly culpable state of mind. The Court of Appeal held that the test for revocation by suppression or concealment did not, as the application judge held, require proof of conduct “purposely” intended to “defraud the court, the creditors or the applicant”. However, an applicant for revocation based on suppression or concealment must show that the trustee intentionally withheld or prevented access to material facts with a deceptive, dishonest or similarly culpable state of mind.
Section 41(8) is an immunity provision. It affords trustees certainty and finality in their role and seeks to avoid the threat of litigation impairing their ability to perform their duties. The only stated exception is liability for fraud. The words “suppression” and “concealment” in s. 41(8) require an interpretation that gives meaningful effect to the objective of the provision. If the purpose of s. 41(8) is to safeguard certainty, finality and flexibility in the performance of the role by “[wiping] the slate completely clean” other than for fraud-related conduct, the test for revocation of a discharge must be strictly construed.
Revocation of a trustee’s discharge is only available where the applicant establishes on a balance of probabilities that the trustee obtained or procured a discharge by fraud or by intentionally suppressing or concealing one or more material facts in fraud‑like circumstances. “Fraud-like” circumstances are those in which the trustee has purposefully withheld or otherwise prevented access to information material to the obtaining of a court‑ordered or deemed discharge, knowing that non‑availability of the information misrepresents the true state of affairs.
In obtaining a discharge, BDO did not conduct itself dishonestly, with a fraudulent intent. When it applied for a discharge, BDO believed it had properly managed the surplus income and tax issues. There was no evidence that BDO intentionally failed to disclose material facts, and no evidence of fraudulent intent. Accordingly, the Court dismissed the appeal.
Counsel: Aubin Calvert and H. Cook (articling student) of Hunter Litigation Chambers for the appellant McKibbon; Steven Dvorak of Davison Lawyers for the respondent BDO
Judges: Stromberg-Stein, Fenlon and DeWitt-Van Oosten, JJ.A.