Can a bankruptcy application be dismissed as an abuse of process?
Dell Balfour (the “Creditor”) is an unsecured judgment creditor of David Tarasenko (the “Debtor”). Over a two-year period commencing in 2012, the Creditor lent approximately $1.5 million to StormCloud Network (Canada) Incorporated—a company that the Debtor was a director and manager of. Litigation ensued and in 2016, the Court of Appeal granted judgment to the Creditor in the amount of $200,000 plus interest and costs against the Debtor and his wife (the “Judgment”).
The Debtor and his wife have paid nothing towards the Judgment. In the meantime, the Debtor commenced two actions against the Creditor and he advanced a third action in his capacity as an agent for the plaintiff in that case. The Creditor also commenced an action against the Debtor, alleging a fraudulent conveyance of property. The Creditor applied to have the Debtor adjudged bankrupt. The Debtor asked the Court to dismiss the application on the basis that it amounted to an abuse of process.
The Debtor claimed that the Creditor’s motivation for seeking a bankruptcy order against him was to effectively put an end to the various lawsuits between the parties. In support, he pointed to some of the Creditor’s testimony about the Debtor being “penniless” and unable to pay the judgment and his desire to stop the Debtor from bleeding money in the three other actions involving the parties.
The Debtor acknowledged that he meets the definition in s. 42(1)(j) of the Bankruptcy and Insolvency Act (the “BIA“), in that he has ceased to meet his liabilities generally as they become due. The leading issue for the Court to determine was whether to dismiss the Creditor’s application as an abuse of process pursuant to s. 43(7) of the BIA.
The Creditor’s evidence indicated that he had no idea of the true state of the Debtor’s finances. After examining the Debtor’s evidence, the Court held that the Debtor had not been transparent about his finances. Any reasonable creditor of the Debtor would be concerned about how much money he actually earned, how he spent it and whether he preferred certain creditors over others. As such, the Court found that there was a meaningful role for a trustee in bankruptcy to investigate the Debtor’s finances and ensure an orderly and fair repayment of debts to his creditors.
The Court had no qualms about the Creditor’s acknowledged desire to “stop the bleeding”, given the circumstances of this case. The Creditor reasonably wanted to limit his legal expenses, especially when procedural relief sought in some of the actions would effectively lead nowhere. Of the three actions initiated by the Debtor against the Creditor, two could have been advanced by way of Counterclaim, one was initiated on the eve of the hearing of the Creditor’s application for a bankruptcy order, and all are tenuous. The Court concluded that these actions demonstrate the Debtor’s desire to bury the Creditor in litigation.
A trustee in bankruptcy would be able to assess the merits of all the litigation between the parties and reasonably determine whether to abandon, settle or pursue each of them. It may well be that the interests of the Debtor’s creditors will be better served by having the Debtor work towards retiring his debts rather than pursuing litigation.
The Court rejected the Debtor’s submission that the Creditor’s application ought to be dismissed as an abuse of process. The Debtor was adjudged bankrupt and a trustee was appointed over the estate.
Counsel: Roy Sommerey of Doak Shirreff Lawyers LLP for the applicant.
Full case: http://canlii.ca/t/hqnpt