Stoddard (re), 2021 NSSC 81

September 15, 2021

Are EI overpayments discharged in a bankruptcy?

The bankrupt filed her second bankruptcy on September 22, 2017 (her first, from 2006, ended in an automatic discharge nine months later). Of her $58,499 in declared total debt (all unsecured), $32,000 was an Employment Insurance (EI) overpayment. Another $3,500 was to the Canada Revenue Agency for tax. EI thus made up 55% of her declared debt, and public debt accounted for over 60%. The remainder of the list was unremarkable – a vehicle deficiency, payday lenders, utilities, a credit card, a small overdraft.

At her discharge hearing, the bankrupt freely admitted that the EI overpayment was the result of knowingly false filings. She implied, without detail, that these were made under some duress but admitted that they were with full knowledge of their falsehood and that she knew at the time of filing that she “shouldn’t have done it.”

Section 178(1)(e) of the Bankruptcy and Insolvency Act (the “BIA”) preserves debts and liabilities resulting “from obtaining property or services by false pretenses or fraudulent misrepresentation. In this case, the knowing filing of false EI claims, and obtaining money as a consequence, unquestionably comes under paragraph 178(1) (e).

Although there was no trial or adjudication with respect to the EI overpayment, there was a clear admission on the part of the bankrupt that she knowingly effected false or misleading filings, in order to obtain payments to which she was not eligible. She was, indeed, not “entitled to her entitlements.” And she knew it.

The EI authorities, for some reason, appear over time to have “done a full 180” on their approach to overpayments in a bankruptcy. In prior years, it is understood that they took the position in most if not all cases that the overpayments survived the bankrupt’s discharge under one or more provisions of s. 178(1). Now, they appear to take the position for whatever reason that they will never, or almost never, resume collection efforts following the bankrupt’s discharge.

When asked about EI overpayments when there has been a proof of claim, the court noted that the answer from trustees has been universal – that the authorities will not resume collection efforts. By implication at least, it seems they accept that the debt will as a matter of course be discharged; at the very least, they are ambivalent about whether they have rights that remain in force.

The court did not accept the proposition that this debt is discharged, always and as a matter of course. Where it is clear that a debt comes within s. 178(1)(e), the debt is not discharged as a matter of law, whatever the view or even level of interest of the debtor or creditor. It can, should the creditor so seek, be pursued post-bankruptcy in the ordinary Courts and using ordinary collection methods.

The court noted that it could not make the EI authorities pursue this, but it could make it crystal clear that the order would not release the debt. What EI collection officers do about that as a means of protecting the integrity of its programs and the interests of the millions of employers and employees who pay into it, and of the state which is ultimately responsible for its fair administration, is something the court cannot order. It is only something it can behold with some sense of astonishment and bewilderment.

The court then took the issue one step further. It noted that not only does the EI overpayment at issue survive the bankruptcy, but it is a s. 173(1) fact that precludes it from issuing an absolute order, though it noted that additional significant sanctions would not serve any useful purpose here, as the preservation of well over half of the filed debt will be quite enough, come what may the response of the public creditor.

Appearances: Kristi Neilsen, for the Trustee, Grant Thornton Limited

Judge: Raffi A. Balmanoukian, Registrar