Medcap Real Estate Holdings Inc. (Re), 2022 ONCA 318

May 04, 2022

In what circumstances should the court exercise its discretion to dismiss a bankruptcy application?

The respondents brought an application for a bankruptcy order against the appellant, Medcap, pursuant to s. 43(1) of the Bankruptcy and Insolvency Act. The application judge granted the application and made a bankruptcy order against the property of Medcap. Medcap appealed the bankruptcy order on a single ground, that the application judge erred in failing to exercise his discretion under s. 43(7) of the BIA to dismiss the application even though the prerequisites to the making of a bankruptcy order—a debt owing to an applicant of at least $1,000 and the commission of an act of bankruptcy within six months of the commencement of the application—had been proven. Section 43(7) provides that the judge hearing a bankruptcy application has a discretion to determine what qualifies as sufficient cause for not making an order, thus triggering the power to dismiss an otherwise proven application.

Medcap argued that the application judge erred: (i) in not finding that Medcap had the ability to pay its debts; (ii) in failing to find the application was brought for an improper motive; and (iii) in failing to appreciate that a bankruptcy order would serve no purpose. The Court of Appeal was not persuaded.

First, an application for a bankruptcy order is not merely for the benefit of the applicant creditor, but rather for all creditors. Arrangements between the applicant creditor and the debtor will not justify the withdrawal or dismissal of a bankruptcy application unless the court is satisfied that the debtor is solvent and other creditors will not be prejudiced by the withdrawal or dismissal. To meet the test of an ability to pay debts as contemplated in s. 43(7), the focus must be on all of the debts. A debtor is required to lead evidence sufficient to establish what all of its debts are and also of its ability to pay them.

Medcap did not lead such evidence. It did not establish its overall financial position, who all of its creditors were, and why its resources were sufficient to satisfy each of them. Accordingly, Medcap was not entitled to ask the court to assume that its only creditors were those discussed in the evidence, given that it did not endeavour to meet its onus of showing its overall financial position.

Second, the application judge considered, and rejected, Medcap’s suggestion that there was an ulterior motive for bringing an application for a bankruptcy order. The existence of a motive was a question of fact, and the Court of Appeal concluded that this finding was open to the application judge on the record.

Finally, Medcap argued that the application judge erred in failing to find that no purpose would be served by a bankruptcy, and that he ought to have dismissed the application on the basis that there was nothing to be gained by making a bankruptcy order. However, a debtor who has (a) committed an act of bankruptcy consisting of not paying debts as they generally come due, and (b) failed to lead evidence to satisfy the court that it has the ability to pay its creditors bears a very heavy onus to show that a bankruptcy would nonetheless serve no purpose. The application judge did not err in finding that Medcap had not fulfilled that onus.

Medcap did not argue that a better result would be achieved for creditors if it were permitted time to restructure under the proposal provisions of the BIA or the provisions of the Companies’ Creditors Arrangement Act. Medcap, in effect, argued that matters should simply be left in its hands. This argument was unpersuasive. Parliament’s statutory scheme for the protection of creditors where restructuring is not an option is liquidation under the BIA, under which “the debtor’s assets may be liquidated and debts paid from the proceeds according to statutory priority rules”.

Accordingly, the Court dismissed the appeal.

Judges: Trotter, Zarnett and Favreau JJ.A.

Counsel: F. Scott Turton for the appellant; and Ivan Y. Lavrence and Ronald Allan for the respondents

By Matilda Lici