Making a bankruptcy order without a full financial picture?

Miceli v. Stagewest Winery Limited Partnership, 2023 BCCA 357
How should a court address a bankruptcy application where it is unclear whether the debtor has failed to pay its liabilities generally as they fell due?

Overview: In this case, the Court of Appeal upheld a judge’s decision to stay a bankruptcy application pending the payment of certain funds into court and the making of enquiries into the debtor’s financial affairs. This was a sensible step where it was unclear whether the debtor had failed to pay its liabilities generally as they fell due.

The Applicants had sought an order declaring the Respondent, Stagewest Winery LP (“Stagewest”), to be bankrupt. Pursuant to section 43 of the Bankruptcy and Insolvency Act, two conditions must be satisfied before a person may be declared bankrupt: the debtor must (1) be indebted to creditor(s) in an amount exceeding $1,000, and (2) have committed an “act of bankruptcy” within the six months preceding the filing of the creditor’s application. In this instance, the Applicants asserted that Stagewest had ceased to meet its liabilities generally as they became due.

The application judge found that the Applicants had established that Stagewest had indebtedness amounting to more than $1,000. The judge did not make an express finding that Stagewest had ceased to meet its liabilities generally as they became due, but the Applicants suggested that this could be inferred. Instead of making that finding, the judge had reviewed and recounted the evidence of Stagewest, stating, among other things, “[while] there is not a full financial picture before the court, I am satisfied that the respondents have made substantial efforts to inquire into the outstanding debts and to resolve those issues.” In the circumstances, the judge found that rather than granting or refusing the petition, it would be “helpful” to stay the proceeding on terms that would “address outstanding concerns” while Stagewest’s financial situation was being clarified.

The most important term of the judge’s stay order was that Stagewest was to pay into court the sum of $365,375.74 within two business days to secure payment of any amount ultimately determined to be owing by it to the Applicants. The required sum was indeed paid into court.

The Applicants appealed from the decision of the application judge. They argued that the application judge had made factual findings that each of the conditions for bankruptcy set forth at para. 43 of the BIA had been satisfied on the evidence and, accordingly, these findings ought to have led to the bankruptcy order being granted. The judge erred by purporting to exercise the statutory discretion that was not available on the facts and evidence before him.

The Court of Appeal held that the latter argument—that the court had “no discretion” to declare the Respondent a bankrupt—ignored the very existence of ss. 43(10) and (11). Section 43(10) provides such a discretion where the debtor denies the truth of the facts alleged in the application; s. 43(11) allows a stay to be granted “for other sufficient reason”, either “altogether” or “for a limited time”. The application judge determined that if s. 43(10) was not available to him, then the wider discretion in s. 43(11) was.

The onus was on the Applicants to satisfy the Court that the statutory conditions for a declaration of bankruptcy were met. As evidenced by the application judge’s reasons, he was not satisfied that an act of bankruptcy was shown. He commented that a “full financial picture” of Stagewest was not before the Court, and, therefore, stopped short of making such a finding. In order to succeed on their appeal, the Applicants had to demonstrate that the conclusion was clearly and palpably wrong, which they failed to do.

Even if the judge had found that the two conditions had been met, sections 43(10) and 43(11) could still be invoked by the bankruptcy judge. The very purpose of these subsections is to give the court options other than granting the order, in appropriate circumstances. Otherwise, the exceptions would be meaningless. The application judge found the Respondent’s evidence was sufficiently detailed and believable to show that the relationship between debtor and creditor was not a “usual” one and further information was required. Accordingly, he made an order that was designed to secure the Applicants’ position while permitting the Respondent to clarify whether it was unable to pay its debts generally, or was in a complex dispute with the applicants that could be resolved by less drastic means than bankruptcy. Coupled with an order for the posting of security, this was a reasonable and sensible response.

The Court of Appeal dismissed the appeal on the merits.

Judges: The Honourable Madam Justice Newbury, The Honourable Madam Justice DeWitt-Van Oosten and The Honourable Justice Skolrood

Counsel: Vicki Tickle and Danielle DiPardo of Cassels for the Respondent, Stagewest Winery LP

Scott Anderson of Lawson Lundell for the Appellants, Giulio Miceli and Miceli Investments Ltd.