Lokhandwala v. Khan, 2021 ONSC 2324

April 21, 2021

What is the test for the transfer of bankruptcy proceedings to another court?

The husband and wife married in September 2002 and separated in September 2018. After immigrating to Canada, the husband incorporated Cellicon for the purpose of operating his cell phone business. Because of limitations on his ability to work imposed by Immigration Canada, all the shares of the company were placed in his mother’s name. However, he was the sole operating mind of Cellicon.

The wife claimed that she worked with the husband in the business and her mother-in-law was a bare trustee who held 50% of the shares in trust for the wife. In the divorce proceedings, the wife also claimed an unequal division of net family property, support and restitution, all of which depended on a determination of Cellicon’s value and financial viability at the time of and following separation.

After discovering that the husband was attempting to sell the shares in Cellicon, the wife obtained an injunction, which restrained the husband from selling, transferring or encumbering his ownership interest in Cellicon. In February 2021, the husband, as operating mind of Cellicon, gave notice to Cellicon’s creditors of its intention to make a proposal under the Bankruptcy and Insolvency Act. Cellicon was later automatically placed into bankruptcy.

The wife argued that Cellicon’s bankruptcy proceedings, which were commenced in Toronto, must be heard together with the debt and divorce proceedings in Brampton, because the cases were inextricably linked. Cellicon was at the forefront of both proceedings. Specifically, both proceedings engaged the issue of whether Cellicon was a bankrupt and, if so, whether that resulted from the husband stripping assets from the company. The husband and Cellicon’s trustee argued that the proceedings did not have anything in common, and the wife was not a proper party to the bankruptcy proceedings.

The jurisdiction to transfer bankruptcy proceedings comes from s. 187(7) of the BIA. Because the BIA and the General Rules under it are a complete code, provincial rules and statutes do not apply. The aim of the BIA is to protect creditors of the estate and to ensure that the estate is administered in an orderly, timely, and efficient manner. The wife was not a creditor of Cellicon.

Her claim was that she was either a 50% shareholder, or that her mother-in-law, as the legal owner of the shares, was a bare trustee who held 50% of those shares in trust for her. Her interest was to have Cellicon valued for the purpose of division of property, and for income for spousal support purposes. Under the BIA, equity holders’ interests are subordinate to creditors’ interests, in that the creditors’ interests are contingent on there being anything remaining in the estate after the claims of the creditors have been satisfied. Equity holders do not have any vote on any proposal unless the court orders otherwise.

None of the wife’s interests were sufficient to order the transfer of the bankruptcy proceedings out of the specialized bankruptcy court and into Brampton. Her interests could be protected through disclosure of the company’s books and records in the family litigation. On the other hand, Cellicon’s creditors would suffer prejudice if the action was transferred to Brampton. They would not have the benefit of a specialized court with expertise to address the bankruptcy in an orderly, timely, and efficient manner, nor such offices as the Registrar in Bankruptcy, which only sits in the assigned city in the district.

Finally, the injunction did not prevent Cellicon from making a proposal or from going bankrupt. Therefore, Cellicon’s trustee was not required to come to the court in Brampton to seek relief from the injunction.

The court denied the wife’s motion and awarded costs to the husband and Cellicon’s trustee.

Counsel: Sarah Boulby and Kenneth Fishman of Boulby Weinberg for the Applicant in the Family Action; David Milosevic of Milosevic Fiske for the Defendant Shahinda Lokhandwala in the Debt Action; Heather Hansen and Jonathan Robinson of McCarthy Hansen & Company for the Respondent Imran Khan and agent for Zarinataj Khan and Ishaq Khan in the Family Application; Scott Price of Pallett Valo for the Defendant Imran Khan in the Debt Action; Linda Galessiere of Camelino Galessiere for certain landlord creditors; Graham Phoenix of Loopstra Nixon for the Trustee in Bankruptcy for 932293 BC Ltd., cob as Cellicon; Harvey Chaiton of Chaitons for 22 Location Operators in the Debt Action; Hershel Sahian of Wagner Sidlofsky for Pls in the Debt Action, Zameer & Sherazad Lokhandwala

Judge: Trimble J.