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Runaway Bankrupt: Court Proposes Procedure for Discharge of Trustee Where Bankrupt Has Flouted Bankruptcy Process

7 minute read

In Frost (Re), 2021 NSSC 296, the Supreme Court of Nova Scotia recently set out a suggested path for trustees to obtain their discharge when faced with a debtor that has refused to comply with their obligations under the Bankruptcy and Insolvency Act (the “BIA”) and provided a template letter to be sent to all creditors informing them of the discharge and the consequent lifting of the stay of proceedings against the debtor.

The procedure and messaging set out in the decision and summarized below will be of interest to trustees, creditors and debtors alike.

Background: Debtor Moves to UK and Refuses to Comply With BIA Duties

Andrew David Frost made an assignment in bankruptcy in July 2017. In mid-2018, Mr. Frost moved to the UK and told the trustee repeatedly that he would not complete his duties under the BIA. In light of this non-compliance, the trustee initially requested an adjournment of the bankruptcy sine die (in perpetuity) in June 2019, however Registrar Raffi A. Balmanoukian of the Supreme Court of Nova Scotia refused to do so, stating in his inimitable direct manner:

I considered that to be an inadequate response to a bankrupt who availed himself of the BIA’s protections while in Canada as was his right, but then then quite explicitly flipped the bird to stakeholders, including this Court.

In December 2020, Registrar Balmanoukian refused Mr. Frost’s application for a discharge and directed the trustee to seek its discharge if Mr. Frost did not complete all of his duties under the BIA within three months. Mr. Frost did not do anything in that period. In June 2021, Registrar Balmanoukian indicated that he would discharge the trustee. On October 18, 2021, Registrar Balmanoukian released his written reasons and directions to the trustee.

Procedure for Obtaining Discharge

Registrar Balmanoukian indicated that in the vast majority of cases where the debtor has deliberately flouted his obligations under the BIA, the trustee should bring the matter to the Court’s attention, instead of seeking its discharge through the Office of the Superintendent of Bankruptcy under BIA General Rules 62-65 in summary administration estates. Once brought to the Court’s attention, it would be appropriate for the Court to:

  • direct the trustee to obtain its discharge from the Court, after providing fair warning to the bankrupt of the consequences of the trustee doing so;
  • order the discharge of the trustee, with or without other orders respecting the bankrupt as the circumstances warrant; and
  • arrange to highlight to creditors that this has occurred and what is the result of the trustee’s discharge.

Informing Creditors that the Stay of Proceedings has been Lifted

Registrar Balmanoukian noted that once the trustee was discharged, the stay against Mr. Frost would be lifted and creditors may pursue their remedies against Mr. Frost notwithstanding that he remained an undischarged bankrupt. While there previously was conflicting case law and commentary about whether the stay continued to apply in these circumstances, which Registrar Balmanoukian reviewed in detail in the decision, the 2009 amendments to the BIA added section 69.3(1.1), excepted below, which makes it abundantly clear that stay no longer applies in these circumstances:

69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

(1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged. [emphasis added]

Registrar Balmanoukian held that the stay of proceedings being lifted should be brought to the attention of creditors in an overt fashion instead of being tucked away in the trustee’s statement of receipts and disbursements. There is the potential for some creditors to obtain an advantage over others if they find out about the discharge and lift stay first and exercise their rights and remedies against the debtor or their remaining property before others have a chance to do so.

Registrar Balmanoukian accordingly directed the trustee to send the following form of covering letter in at least 14-point type to all known creditors (whether they had proven a claim or not) with its statement of receipts of disbursements. Registrar Balmanoukian expected that this would serve as a template for trustees in similar situations:

To:   All known creditors of the estate of [bankrupt]

[Date]

Please be advised that the Trustee of the estate of [bankrupt] was discharged by order of the Supreme Court of Nova Scotia in Bankruptcy and Insolvency on [date], by reason of non-compliance by the bankrupt with duties imposed under the Bankruptcy and Insolvency Act.  A copy of that order, and of the Trustee’s statement of receipts and disbursements, are enclosed.

The effect of the Trustee’s discharge is to lift the stay of proceedings against the bankrupt, by virtue of s. 69.3(1.1) of the Bankruptcy and Insolvency Act.  Creditors may now pursue any rights and remedies they have at law, directly against the bankrupt.  The bankrupt’s last known address and contact information is:

[insert last known information, including telephone and email if available]

Yours very truly,
[Trustee signature, as former Trustee of the estate of {bankrupt}]

Enclosures:
Order of the Supreme Court of Nova Scotia in Bankruptcy and Insolvency
Statement of Receipts and Disbursements

Takeaways

  • For trustees, this decision provides a suggested path for obtaining a discharge in the face of a deliberately non-compliant debtor (and seems to encourage trustees to seek a discharge in those circumstances), and suggested messaging to creditors to ensure they each have similar notice that the stay has been lifted. It remains to be seen whether this practice and messaging will be adopted outside of Nova Scotia.
  • For creditors, this impact of this decision may be mixed:
    • On the plus side, it is a welcome further confirmation that creditors may pursue their rights and remedies against an undischarged bankrupt where the trustee has been discharged without the creditor having to incur the expense of bringing a motion to lift the stay of proceedings. If the suggested messaging is adopted outside of Nova Scotia, creditors will also be comforted by knowing that they will receive a specific notice in these circumstances and it will be less likely that another creditor can get a leg up by finding out about the discharge and the consequences thereof more promptly.
    • On the negative side, by encouraging trustees to seek a discharge when faced with a recalcitrant debtor, this may make it more likely that each creditor will have to exercise their rights and remedies against the debtor’s property individually, instead of being able to rely on the trustee to realize on the debtor’s assets for the benefit of all creditors. For smaller creditors, it may not be cost-effective for them to pursue the debtor. A greater proportion of the debtor’s assets may end up going to the larger creditors as a result, with smaller creditors losing out on the pro rata distribution that they would have been entitled to receive if the bankruptcy had continued.
  • For debtors, this decision reinforces that if they refuse to comply with their obligations under the BIA, the trustee may seek its discharge and the stay of proceedings against the debtor will be lifted. In addition, trustees may specifically notify creditors that they can pursue any rights and remedies that they may have against the bankrupt, and give them the debtor’s most recent contact information making it easier for the creditors to exercise those rights and remedies. In both cases, debtors have further incentive to comply with their obligations under the BIA.

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