Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925

January 05, 2022

What conduct is captured by the phrase “debt or liability resulting from obtaining property or services by false pretences” in s. 178(1)(e) of the BIA?

A discharge from bankruptcy releases the insolvent debtor from pre-bankruptcy debts or liabilities, subject to certain exceptions. One exception, under s. 178(1)(e) of the Bankruptcy and Insolvency Act is “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation”. That kind of debt or liability is not released, and thus remains enforceable against the debtor post-bankruptcy.

In 2018, the respondent successfully obtained judgment against the appellant and others for misappropriating the respondent’s trade secrets and confidential information. The quantum of the damages and the granting of other relief was to be determined at a subsequent hearing. However, before that could occur, the appellant made a proposal to his creditors under the BIA, which automatically stayed the proceedings. The proposal was rejected by a majority of those creditors and, consequently, the appellant was deemed to have made an assignment into bankruptcy, which had the effect of continuing the stay.

The respondent then brought a motion seeking: (a) a declaration that any discharge from bankruptcy granted to the appellant will not release him from any debts or liabilities arising from the claims in the action against him by the respondent; and (b) a declaration that the stay under s. 69(1) of the BIA no longer operates with respect to the respondent’s claim against the appellant in the action.

The motion judge granted the relief sought, finding that the appellant was a deceitful wrongdoer who should be precluded from benefitting from his dishonesty. The motion judge’s list of findings by the trial judge refers to only one incident of lying. The reference was to the appellant having lied on his examination for discovery. The motion judge found a causal connection between the wrongful conduct and the debts that arose under the trial judgment. He also declared that the stay that the BIA imposes on proceedings or enforcement steps against a bankrupt did not apply to the respondent’s claims against the appellant.

The crux of the appeal was what conduct is captured by the phrase “debt or liability resulting from obtaining property or services by false pretences” in s. 178(1)(e) of the BIA? Section 178(1)(e) requires that the debt or liability owed to the creditor have resulted from the debtor having obtained property or services by false pretences. “False pretences” is not defined in the BIA but is defined in the Criminal Code. Reference to the Criminal Code definition underscores that to come within the false pretences branch of s. 178(1)(e), the debt or liability to the creditor must have arisen from the debtor having made, or being responsible for, a knowingly false statement, designed to induce another person to act upon it.

The Court of Appeal held that s. 178(1)(e) only applies to a debt or liability that has resulted from the bankrupt having obtained property or services by making a statement that is false to the knowledge of its maker (including through wilful blindness or recklessness). It does not apply to other kinds of lying or wrongdoing, no matter how morally objectionable. Although lying on examination for discovery reflects on whether the appellant was honest, it is not the type of false statement that satisfies s. 178(1)(e). A false statement on discovery may be reprehensible but is not the source of the appellant’s liability. It is not a statement on the basis of which he obtained property or services.

In the absence of deceitful statements from which the liability arose, the motion judge’s findings that the appellant was not an honest but unfortunate debtor, or that his conduct was morally objectionable, were insufficient to bring the matter within s. 178(1)(e). The Court of Appeal allowed the appeal and set aside the declaration that s. 178(1)(e) applied to prevent the release of any debts or liabilities arising from claims in the action.

Judges: Strathy C.J.O., Zarnett J.A. and Wilton-Siegel J. (ad hoc)

Counsel: Ian J. Klaiman of Lipman Zener & Waxman for the Appellant; Charles D. Hammond for the Respondent

By Matilda Lici