What is the test for setting aside a bankruptcy order?
The Bankrupt was adjudged a bankrupt on the application of Servus Credit Union Ltd. (“Servus”). The Bankrupt applied for an order setting aside the bankruptcy order on the grounds that he intended to contest the bankruptcy; he had a meritorious defence; and he was not guilty of any wilful or deliberate default. Servus opposed the application because the proceeding was brought under the Bankruptcy and Insolvency Act, which provides its own process for the reconsideration of bankruptcy orders, and there was no basis to set aside the bankruptcy order under the BIA.
Section 187(5) of the BIA was the applicable provision to consider in this application. Where a debtor does not appear at a bankruptcy hearing of which he or she has notice, the court may exercise its discretion under s. 187(5) of the BIA to rescind the bankruptcy order where the applicant establishes special circumstances. The court must be satisfied that the debtor should be given an opportunity to defend the bankruptcy application based on the following factors:
- Whether the debtor had a bona fide intention to oppose the bankruptcy application and when that intention was formed;
- Whether the failure to attend the bankruptcy application was the fault of the debtor or due to circumstances beyond the debtor’s control;
- Whether there has been any undue delay in bringing the application to rescind the bankruptcy order;
- Whether the debtor has a meritorious defence to the bankruptcy; and
- Whether it would be just to give the debtor an opportunity to defend the bankruptcy application when that opportunity is balanced against any prejudice occasioned to those who may have relied upon the bankruptcy order.
Servus filed its application to declare the Bankrupt a bankrupt on December 23, 2019 and the application was adjourned to February 2020. The Bankrupt retained counsel in early January 2020, but filed no materials in opposition to the bankruptcy. He deposed that he was ill and had no ability to “closely monitor” his telephone calls and voice mails. He did not give his counsel instructions to attend the application because he alleged that he was not aware that his counsel was seeking instructions to do so. Once the bankruptcy order was made, the Bankrupt instructed his counsel to move to set aside the bankruptcy order in March 2020, but the application was delayed by the Covid-19 pandemic. The Court found that the Bankrupt’s desire to contest the bankruptcy was renewed once the bankruptcy order was made.
No one other than the Bankrupt could be faulted for his failure to appear at the bankruptcy application. Though he sought to excuse his failure by suggesting that an illness kept him from receiving messages from his counsel, the Court could not accept that his illness was so severe that he could not contact and instruct counsel. He was aware that the bankruptcy application was adjourned to February 18, 2020. Had he intended to oppose the bankruptcy, he would have contacted his counsel. However, once he commenced his application, the Bankrupt took steps to rescind the bankruptcy order without any undue delay. The delay that occurred was wholly attributable to restrictions on court hearings resulting from the pandemic.
Finally, the Court held that it was not required to judge the strength of the Bankrupt’s defences to the bankruptcy. The question was whether he had a meritorious defence. The Court concluded that the potential defences raised by Mr. Podollan had some merit. Given the serious nature of the allegations made against the Bankrupt and the lack of evidence of any prejudice to Servus that could not be adequately addressed, the Court concluded that justice required that the Bankrupt be given the opportunity to contest the allegations of bankruptcy.
Accordingly, the February 2020 bankruptcy order was rescinded.
Judge: Justice Hori
Counsel: Martin Sennott of Boughton Law for the Bankrupt, David Podollan; Scott Andersen of Lawson Lundell for the Trustee in Bankruptcy, The Bowra Group Inc.; Chuck Russell, Q.C. of McLellan Ross for the Creditor, Servus Credit Union Ltd.; Scott Stephens of Owen Bird for the Receiver, PricewaterhouseCoopers Inc.