British Columbia Court of Appeal Affirms Law for Single Creditor to Obtain Bankruptcy Order

The Recent Case

In the recent case of Solid Holdings Ltd. v. Grant ThorntonLimited, 2019 BCCA 231, the British Columbia Court of Appeal (the “BCCA“) affirmed the decision of Solid Holdings Ltd. (Re), 2019 BCSC 126(the “Judgment“), wherebyGrant Thornton Limited (“GT Ltd.“),a single creditor applicant, obtained a bankruptcy order against Solid HoldingsLtd. (“Solid Holdings“).

This decision is significantas it is the first time the BCCA has affirmed the process for a single creditorto obtain a bankruptcy order under the Bankruptcy and Insolvency Act, R.S.C.1985, c. B-3 (the “Act“).

The Facts

Pursuant to a Gold Sale/ Purchase Agreement dated February 13, 2017 (the “Agreement“), the Crystal Wealth Enlightened Factoring Strategy(the “Crystal Factoring Fund“)advanced $300,306.00 to Solid Holdings (the “Advance“), to be repaid in accordance with the terms of theAgreement.

On April 26, 2017, twomonths after the Agreement was executed, Crystal Wealth Management SystemsLimited (“Crystal Wealth Limited“)was placed into receivership. GT Ltd.was appointed as receiver and manager of all of the assets, undertakings andproperties of Crystal Wealth Limited, including the Crystal Factoring Fund.

On December 27, 2017,Solid Holdings wrote GT Ltd. and provided written notice that it terminatingthe Agreement (the “TerminationNotice“). Prior to the Termination Notice, the most recent notional goldpurchase and sale transaction under the Agreement occurred on December 13, 2017,where the Crystal Factoring Fund “Purchased“a total of 232.57 ounces of gold, yielding a total amount of $367,676.20 owingby Solid Holdings to the Crystal Factoring Fund (the “December 13 Transaction“).

By letter dated January8, 2018, GT Ltd. wrote Solid Holdings and demanded payment for the December 13Transaction (the “Receiver Demand“).By letter dated April 16, 2018, the Receiver’s counsel wrote Solid Holdingsmaking further demand for payment of the amounts owing under the Agreement (the“Counsel Demand“, togetherwith the Receiver Demand, the “Demands“).

Despite the Demands,Solid Holdings failed to provide payment to GT Ltd. for the December 13Transaction (the “Debt“).

The Hearing

By Motion filed August30, 2018 (the “Motion“),GT Ltd. sought an Order that Solid Holdings be adjudged bankrupt (the “Bankruptcy Order“). In the Motion,GT Ltd. alleged that the Debt was outstanding and that Solid Holdings had committed an “act ofbankruptcy” within the six months preceding the filing of the Motionby ceasing to meet its liabilities generally as they became due.

On December 14, 2018,the Motion was heard by the Honourable Madam Justice Jackson (the “Trial Judge“).

The Law

The process for obtaining a bankruptcy order is wellestablished in Canada. Pursuant to Section 43(1) of the Act, the applicant creditor must show:

1. the debts or debt owing to the applicant creditor or creditors amount to $1,000 (the “First Leg of the Test“); and

2. the debtor has committed an act of bankruptcy within the six months preceding the filing of the application (the “Second Leg of the Test“).

The onus is on the applicant creditor to establishboth the First Leg of the Test and the Second Leg of the Test[1],and clear-cut evidence must be put forward.[2] Althoughthe civil “balance of probabilities“standard applies, the evidencemust be scrutinized with particular care, and the allegations of fact and theact of bankruptcy must be fully and strictly proven due to the seriousconsequences that flow from a bankruptcy.[3]

AlthoughSection 43(1) of the Act explicitlystates “one or more creditors mayfile in court an application for a bankruptcy order“, the law withrespect to a single creditor filing an application for a single “debt“, as opposed to “debts“, is less established.

Wherethere is a single creditor applicant, the Court must “be vigilant to ensure that the process is not being used for“collection” purposes — for instance, to compel payment of a debtwhere the debtor is solvent, or to prevent the debtor from defending itselfagainst a disputed claim“.[4] For this reason, thereis a presumption that a bankruptcy order is unavailable to a single applicantcreditor, except under “specialcircumstances.”[5] Threerecognized categories of “specialcircumstances” are as follows:

• where repeated demands for payment have been made within the six-month period;

• wherethe debt is significantly large and there is fraud or suspicious circumstancesin the way the debtor has handled its assets which require that the processesof the Act be set in motion; and

• priorto the filing of the petition, the debtor has admitted its inability to paycreditors generally without identifying the creditors[6]

(collectively,“Special Circumstances“).

Abankruptcy order will not be made if a debtor can establish it has chosen notto pay a particular debt for a justifiable reason (i.e. there is a bonafide dispute). The role of the Court in hearing a bankruptcyapplication is not “to determine thevalidity of the debtor’s dispute, but only whether the dispute is bona fide.” If there is a bona fide dispute regarding the subjectdebt “the matter must be decided inproceedings in the ordinary courts, rather than in the bankruptcy court“.[7]

If itis shown the debtor has failed to pay the debts owing, either to multiplecreditors or to a single creditor where repeated demands have been made, thereis a presumption the debtor is not meeting its liabilities generally as theybecome due.[8] Oncethis presumption is triggered, the onus shifts to the debtor to prove itsability to pay the subject debt.[9]

In orderto satisfy the Court it is able to meet its liabilities generally as theybecome due, the debtor is required to provide “clear and independent evidence” of that fact, detailing itsfinancial position, such as financial accounts or statements.[10] It is insufficient toput forward “unsupportedgeneralizations” or a “self-servinggeneral averment” of financial health and stability.[11] 

The Parties’ Positions

As asingle creditor applicant, GT Ltd. relied on the first category of SpecialCircumstances, namely, that repeated demands for payment of the Debt were madewithin the six months preceding the filing of the Motion.

Underthe First Leg of the Test, the parties did not dispute that the Advance hadbeen made or that Solid Holdings had not made payment to the Crystal FactoringFund or GT Ltd. SolidHoldings argued the Crystal Factoring Fund defaulted in its obligations underthe Agreement by failing to make or to complete the “scheduled agreed monthly payments” (i.e. 11 additionalpayments), causing Solid Holdings to suffer damages and giving rise to acounterclaim.

GT Ltd. described theAgreement as a term loan to Solid Holdings, to be repaid upon maturity ineither gold or cash. On the 13th of every month, a “Settlement” and “Purchase” calculation would occur where the loan would “roll” over, without money exchanginghands, based on the then current price of gold. Each monthly “Settlement” and “Purchase” was an academic exercise for making the calculation as tothe current value of the indebtedness owing by Solid Holdings to the CrystalFactoring Fund under the Agreement.

The Findings and the Order

On February 1, 2019, theJudgment was released and the Trial Judge granted the Bankruptcy Order.

In relation to the First Leg of the Test, the Trial Judge dismissed Solid Holdings’argument it had a bona fide claimagainst the Crystal Factoring Fund and determined that, based on the words ofthe Agreement, considered in light of the facts of the case, there was soundand convincing evidence of the Debt from the December 13 Transaction.

With respect to theSecond Leg of the Test, the Trial Judge concluded that repeated demands for theDebt were made within the six months preceding the filing of the Motion, whichsatisfied the requirement for Special Circumstances. As a result, there was apresumption that Solid Holdings was not meeting its liabilities generally asthey became due, and the onus shifted to Solid Holdings to prove itsliabilities were being paid. Here, not only did Solid Holdings fail to submitclear and independent evidence of its detailed financial stability, theevidence it did put forward, including its assertions about its damagedbusiness model and cancellation of its credit facilities, supported theopposite conclusion.

Based on the evidence,or lack thereof, the Trial Judge concluded that, in the six months precedingthe filing of the Motion, Solid Holdings had committed an act of bankruptcy byceasing to meet its liabilities generally as they became due.

The Appeal

OnFebruary 8, 2019, Solid Holdings filed a Notice of Appeal, alleging the TrialJudged errored in her interpretation of the Agreement and her application ofthe law (the “Appeal“).

The BCCA noted, as iswell-established, the interpretation of a contract is treated as a finding offact, attracting a deferential standard of review, requiring Solid Holdings todemonstrate the Trial Judge made a palpable and overriding error in her interpretationof the Agreement.

By Judgment made June18, 2019, the BCCA rejected Solid Holdings’ arguments on the Appeal, concludingthat the findings of fact underlying the Judgment were open to the Trial Judgeon the evidence, the Trial Judge had not misapprehended the evidence in anymaterial respect, and that there was no error in her application of therelevant legal principles to the facts.

Takeaway

If you are a creditor wishingto obtain a bankruptcy order against a debtor, and are having difficultylocating additional creditors, make multiple demands (at least two), andproceed as a single creditor, relying on the first category of SpecialCircumstances.

Prepared by:

MLTAikins LLP

Suit 2600, 1066 WestHastings Street

Vancouver, BC V6E 3X1

WilliamE.J. Skelly and Thomas W. Clifford – Counsel for Grant Thornton Limited

[1] 0757376B.C. Ltd., Re, 2011 BCSC 1268 (B.C. S.C.) at para. 12.

[2] Obie International Inc. v.Aquasure Technologies Inc. (2008),168 A.C.W.S. (3d) 252 (Ont. S.C.J.) at para. 6.

[3] Ball,Re, 2004 BCCA 647 at para. 5.

[4] StancroftTrust Ltd. v. Asiamerica Capital Ltd. (1992), 72 B.C.L.R. (2d)353 (C.A.) at para 12.

[5] RealTime Fibre Supply Ltd., Re, 2007 BCSC 371 at paras. 44-45 [Real Time]

[6] Valente v Fancsy Estate, [2004] OJ No 635, 70 OR (3d) 31, 183 OAC 191, 47 CBR (4th)317, 129 ACWS (3d) 453, 2004 CarswellOnt 681 atpara. 8.

[7] BearcatExplorations Ltd., Re, 2003 ABCA 365 at para. 15.

[8] Real Time, supra note 5, at paras.41-44; Servus Credit Union Ltd. v. Smith, 2013 ABQB 151 (Alta. Q.B.) at para. 12.

[9] Hayes (Re), [1979] BCJ No 1447, 34 CBR (NS) 280, 1979CarswellBC 589 at para. 2.

[10] Chung, Re, 2004 BCSC 1669 at para. 19.

[11] Ibid, citing with approval Moody v. Ashton, [1997] S.J. No. 544 atp. 41 and 484030 Ontario Ltd., Re(1992), 12 C.B.R. (3d) 302 at pp. 313-314.