When must an appellant post security for costs in an insolvency matter?
The applicants sought orders requiring the respondent, in its capacity as trustee for the bankrupt estate, to post security for costs for the respondent’s appeal. Following bankruptcy, the respondent sued the applicants and brought an application seeking to set aside one of several transactions on the basis that, inter alia, the transaction constituted a transfer at undervalue. Alternatively, the respondent sought damages against the applicants personally in the minimum amount of $217,570,800.
The applicants filed applications to stay the respondent’s application and to dismiss the respondent’s claims. The chambers judge struck the respondent’s oppression claim on two grounds. First, the respondent was not a “proper person” that would accord it standing as a “complainant” entitled to make this claim under the Alberta Business Corporations Act. Second, the respondent had no cause of action in respect of oppression because the Supreme Court of Canada has nullified the claim. The respondent appealed the chamber judge’s decisions and the applicants sought security for costs for this appeal.
Security for costs is a discretionary order involving the balancing of the right to the economic security of one party with the other party’s right to legal process. A party’s right to access the legal process does not mean that they can advance an appeal without the fear of costs consequences. The applicants bear the initial burden of establishing, on a balance of probabilities, that it is just and equitable to order security for costs or that the respondent will be unable to pay its costs. If the applicants satisfy this onus, the evidentiary burden shifts to the respondent to satisfy the court that the court should not exercise its discretion to grant security for costs.
Before these applications were brought, the applicants requested the respondent to confirm that it would be personally liable for a costs award, or that it would post commercially reasonable security for the appeal. The respondent failed to do so. Since the respondent would not post security, the focus is on the financial situation of the bankrupt estate.
The applicants argued that no funds would remain in the bankrupt estate to pay an adverse costs award after the claims of secured creditors were paid. It remained open to the respondent to provide meaningful rebuttal evidence. Instead, the respondent filed an affidavit merely stating that there were sufficient funds available to pay a costs award in favour of the respondents.
The applicants attempted to cross-examine the respondent’s representative on this point. The Court noted numerous instances of non-responses and refusals to provide relevant and material financial information about the estate or to reference financial documents put before the representative. As such, the Court held that the only conclusion was that the respondent was intentionally preventing the discovery of relevant and material financial information of the estate for the purpose of these applications.
The applicants requested that the respondent make the accounts and financial records of the estate available for use in these applications. The applicants also requested undertakings that the respondent produce the most recent costs estimate for the estate, the books and records of the estate, cash flow projections for the estate, and the respondent’s position on the secured creditors’ claims in the estate and their dollar amounts. The respondent refused these requests. The Court, therefore, concluded that the respondent would be unlikely and unable to pay costs.
Given the respondent’s lack of cooperation, it was unclear whether an order requiring the estate to post security for costs would prevent the respondent from bringing this appeal. It is expected that a trustee, as an officer of the court, will act consistently with his duty of candour and disclose any prejudice, or lack thereof, that would result from such an order. The respondent took the position that it was in the best interest of the estate to pursue the appeal and it was willing to use the estate’s available funds to finance the appeal. There was no evidence to suggest that an order for security for costs would hinder the respondent from pursuing its appeal.
Given the above, the Court was satisfied that the tests for security for costs were met.
Counsel: Rinus de Waal and Luke Rasmussen of De Waal Law for the Respondent, Daniel McDonald, Q.C. and Paul Chiswell of Burnet, Duckworth & Palmer LLP for the Applicants Perpetual Energy Inc., Perpetual Operating Trust and Perpetual Operating Corp. and Steven Leitl and Gunnar Benediktsson of Norton Rose Fulbright for the Applicant, Susan Riddell Rose