In the Matter of EnerNorth Industries Inc. [Indexed as: EnerNorth Industries Inc., Re]
96 O.R. (3d) 1
Court of Appeal for Ontario,
Simmons, Blair and Juriansz JJ.A.
July 3, 2009
Bankruptcy and insolvency -- Proof of claim -- Creditor not having unqualified right on application pursuant to s. 135(5) of Bankruptcy and Insolvency Act to challenge validity of judgment debt based on decision of court of competent jurisdiction if court considered merits of claim in granting judgment -- Creditors of bankrupt moving for order under s. 135(5) challenging proof of claim filed by judgment debtor based on Singapore judgment -- Issues of mitigation and set-off raised by creditors having been finally determined in Singapore proceedings -- Creditors being privies of bankrupt -- Doctrine of res judicata applying -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 135(5).
EnerNorth and Oakwell were parties to a joint venture agreement concerning the construction and operation of two power plants in India. They incorporated the Project Company to finance, construct and operate the Project. Disputes arose between EnerNorth and Oakwell which were ultimately resolved by way of a Settlement Agreement in which EnerNorth agreed to buy out Oakwell's interest in the Project Company. They agreed that any disputes would be governed by Singapore law and subject to the non-exclusive jurisdiction of the Singapore courts. EnerNorth did not make the required payments under the Settlement Agreement. It sold its interest in the Project Company to VBC. Oakwell entered into negotiations with VBC directly, resulting in a Licence Agreement pursuant to which the Project Company was to pay Oakwell certain "technical fees". Oakwell sued EnerNorth in Singapore to recover the outstanding amounts under the Settlement Agreement. EnerNorth counterclaimed. The action was successful and the counterclaim was dismissed. The Singapore Court of Appeal dismissed EnerNorth's appeal. EnerNorth did not pay the Singapore judgment. Oakwell commenced enforcement proceedings in Ontario. Those proceedings were successful, and EnerNorth filed an assignment in bankruptcy. Oakwell made a claim in that bankruptcy which was based entirely upon the Singapore judgment. Other creditors of EnerNorth (the "appellants") moved before the Bankruptcy Court for an order pursuant to s. 135(5) of the Bankruptcy and Insolvency Act ("BIA") challenging the proof of claim filed by Oakwell. Oakwell brought a cross-motion to dismiss that motion on the ground that the issue raised by the appellants, i.e., whether the Licence Agreement payments had to be set-off against any payments made to Oakwell under the Settlement Agreement, had been finally determined in the Singapore proceedings. The cross-motion was granted. The appellants appealed.
Held, the appeal should be dismissed. [page2 ]
While the court's power to expunge or reduce a proof of claim on an application under s. 135(5) of the BIA is wide, there is no basis for holding that an applicant pursuant to s. 135 should have an unqualified right to challenge the validity of a judgment debt that is based on a decision of a court of competent jurisdiction on the merits of the claim or that res judicata should not apply, where appropriate, in such circumstances. In the absence of fraud, collusion or some legitimate concern that there has been a genuine miscarriage of justice, a judgment of a court of competent jurisdiction should almost invariably satisfy a trustee or a court regarding the legitimacy of a claim under s. 135 if, in awarding the judgment, the court has considered the merits of the claim.
The doctrine of res judicata applies in bankruptcy proceedings. The appellants were precluded by res judicata from advancing their contention that Oakwell's proof of claim had to be expunged or reduced by reason of the mitigation/set-off issue. Two of the appellants were the president and chairman of EnerNorth, respectively, at the time of the Singapore proceedings. For the purposes of the bankruptcy proceedings, the trustee stood in the shoes of EnerNorth, and for the purposes of the proposed s. 135(5) hearing, the creditors in effect stood in the shoes of the trustee because they sought to have the court do what the trustee had declined to do. They were identified with EnerNorth for purposes of comparison between the Singapore proceedings and the proposed s. 135(5) hearing, and there was a community or privity of interest between them in that regard. The appellants were privies of EnerNorth for the purpose of the res judicata analysis in the s. 135(5) context. The mitigation/set-off argument was considered and rejected by the trial judge in the Singapore proceedings. The appellants were barred from re-litigating that issue in their efforts under s. 135(5) of the BIA to accomplish what EnerNorth failed to do in the Singapore courts and the Ontario courts.
APPEAL from the order of C.L. Campbell J. (2009), 2008 40226 (ON SC), 92 O.R. (3d) 392, [2008] O.J. No. 3137 (S.C.J.) granting a cross- motion to dismiss a motion for an order challenging a proof of claim.
Cases referred to Fraser (Re); Ex parte Central Bank of London, [1892] 2 Q.B. 633 (C.A.); Van Laun (Re); Ex parte Chatterton, [1907] 2 K.B. 23 (C.A.), affg [1907] 1 K.B. 155 (K.B. Div.), consd Other cases referred to A Debtor (Re) (1915), 113 L.T. 704 (K.B.); Angle v. Canada (M.N.R.), 1974 168 (SCC), [1975] 2 S.C.R. 248, [1974] S.C.J. No. 95, 47 D.L.R. (3d) 544, 2 N.R. 397, 74 D.T.C. 6278; Arnco Business Services Ltd. (Re), [1983] O.J. No. 973, 38 C.P.C. 226, 23 A.C.W.S. (2d) 91 (H.C.J.); Bank of Montreal v. Maple City Ford Sales (1986) Ltd. (2001), 2000 22716 (ON SC), 51 O.R. (3d) 523, [2000] O.J. No. 5701 (S.C.J.); Banque Nationale de Paris (Canada) v. Canadian Imperial Bank of Commerce (2001), 2001 24099 (ON CA), 52 O.R. (3d) 161, [2001] O.J. No. 53, 195 D.L.R. (4th) 308, 145 O.A.C. 349, 2 C.P.C. (5th) 1, 102 A.C.W.S. (3d) 302 (C.A.); Canada Asian Centre Developments Inc. (Re), [2003] B.C.J. No. 34, 2003 BCSC 41, 10 B.C.L.R. (4th) 161, 39 C.B.R. (4th) 35, 119 A.C.W.S. (3d) 8; Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No. 2), [1967] A.C. 853, [1966] 2 All E.R. 536, [1966] 3 W.L.R. 125, [1967] R.P.C. 497 (H.L.); Chaban v. Chaban (Trustee of), 1999 12238 (SK CA), [1999] S.J. No. 112, 172 D.L.R. (4th) 312, [1999] 6 W.W.R. 174, 177 Sask. R. 139, 9 C.B.R. (4th) 5, 87 A.C.W.S. (3d) 222 (C.A.); Danyluk v. Ainsworth Technologies Inc., [2001] 2 S.C.R. 460, [2001] S.C.J. No. 46, 2001 SCC 44, 201 D.L.R. (4th) 193, 272 N.R. 1, J.E. 2001-1439, 149 O.A.C. 1, 34 Admin. L.R. (3d) 163, 10 C.C.E.L. (3d) 1, [2001] CLLC Â210-033, 7 C.P.C. (5th) 199, 106 A.C.W.S. (3d) 460; Fallis v. United Fuel Investments Ltd., 1962 96 (SCC), [1962] S.C.R. 771, [1962] S.C.J. No. 63, 34 D.L.R. (2d) 175, 4 C.B.R. (N.S.) 209; Flatau (Re); Ex parte Scotch Whisky Distillers, Ltd. (1888), 22 Q.B.D. 83 (C.A.); Gibson Mining Co. v. Hartin, 1940 256 (BC CA), [1940] B.C.J. No. 21, [1940] 2 D.L.R. 605, [1940] 2 W.W.R. 155, 55 B.C.R. 196, 21 C.B.R. 403 (C.A.); Grossman (Re), [1998] A.J. No. 498, 1998 ABQB 381, 222 A.R. 139, 3 C.B.R. (4th) 267, [1998] 4 C.T.C. 197, 79 A.C.W.S. (3d) 449; [page3 ][cf2]Las Vegas Strip Ltd. v. Toronto (City) (1997), 1997 3841 (ON CA), 32 O.R. (3d) 651, [1997] O.J. No. 1033, 99 O.A.C. 67, 70 A.C.W.S. (3d) 153 (C.A.), affg (1996), 1996 8037 (ON SC), 30 O.R. (3d) 286, [1996] O.J. No. 3210, 13 O.T.C. 308, 38 C.R.R. (2d) 129, 34 M.P.L.R. (2d) 233, 65 A.C.W.S. (3d) 851 (Gen. Div.); Oakwell Engineering Ltd. v. Energy Power Systems Ltd. (April 27, 2004), CA129/2003/Y (Sing. C.A.), affg [2003] SGHC 241; Oakwell Engineering Ltd. v. Enernorth Industries Inc. (2006), 2006 19327 (ON CA), 81 O.R. (3d) 288, [2006] O.J. No. 2289, 211 O.A.C. 262, 19 B.L.R. (4th) 11, 30 C.P.C. (6th) 253, 148 A.C.W.S. (3d) 897 (C.A.), affg (2005), 2005 27149 (ON SC), 76 O.R. (3d) 528, [2005] O.J. No. 2652, [2005] O.T.C. 534, 7 B.L.R. (4th) 256, 140 A.C.W.S. (3d) 70, 141 A.C.W.S. (3d) 208 (S.C.J.) [Leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 343]; Orpen v. Roberts, 1925 2 (SCC), [1925] S.C.R. 364 at 367, [1925] S.C.J. No. 14, [1925] 1 D.L.R. 1101 Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 135 [as am.], (1), (2), (3) [as am.], (4) [as am.], (5), 193 Authorities referred to Houlden, Lloyd W., Geoffrey B. Morawetz and Janis P. Sarra, The 2009 Annotated Bankruptcy and Insolvency Act (Toronto: Thomson Carswell, 2008) Lange, Donald J., The Doctrine of Res Judicata in Canada, 2nd ed. (Markham, Ont.: LexisNexis Canada Inc., 2004) Spencer-Bower, George, and Alexander Kingcome Turner, The Doctrine of Res Judicata, 2nd ed. (London: Butterworths, 1969)
Douglas G. Garbig, for appellants Fieldstone Traders Limited, Milton Klyman, Hagen Gocht, 1420041 Ontario Inc., Trigel Energy Inc., Reid Hill Enterprises Ltd., Richard Barrer, Hurricane Management Ltd. and Les's Mechanical Service Ltd. Paul D. Guy, for appellants Sandra J. Hall and James C. Cassina. Matthew I. Milne-Smith and Shelby Z. Austin, for respondent Oakwell Engineering Limited.
The judgment of the court was delivered by
BLAIR J.A.:-- I. Overview
[1] EnerNorth Industries Inc. is bankrupt. Its various creditors are squabbling amongst themselves over the amount owing to one of them, Oakwell Engineering Limited. To sort this out, the appellant creditors sought to obtain an order under s. 135(5) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B- 3 (the "BIA"), entitling them to challenge and determine the validity of the proof of claim filed by Oakwell. That proof of claim is [page4 ]founded upon a judgment rendered in Singapore prior to EnerNorth's assignment in bankruptcy.
[2] Justice Colin Campbell dismissed the creditors' motion on res judicata and issue estoppel grounds, holding that the very issue they wished to have determined had already been decided in the proceedings before the courts in Singapore. In my view, he was correct in arriving at this conclusion, and I would dismiss the appeal for the reasons that follow. II. Facts
The genesis of the problem
[3] EnerNorth and Oakwell were parties to a joint venture agreement concerning the construction and operation of two power plants in the State of Andhra Pradesh in India. They incorporated a company (the "Project Company") to finance, construct and operate the Project. EnerNorth held an 87.5 per cent interest, and Oakwell a 12.5 per cent interest, in the Project Company.
[4] The Project did not develop according to plan and various disputes arose between the parties. The disputes were ultimately resolved in December 1998, by way of a Settlement Agreement in which EnerNorth agreed to buy out Oakwell's interest in the Project Company. In exchange, EnerNorth was to pay Oakwell: (1) 1.85 million EnerNorth shares, in lieu of payment of approximately US$3 million; (2) US$2.79 million, payable within 30 days after successful financing of the Project ("Financial Closure"); and (3) a royalty equivalent to 6.25 per cent of the actual cash flow of the Project Company for the first five years of its commercial operation, according to a formula set out in the Settlement Agreement.
[5] Under the Settlement Agreement, both parties agreed to do all things necessary to give effect to the agreement. They also agreed that any disputes would be governed by Singapore law and subject to the non-exclusive jurisdiction of the Singapore courts.
[6] EnerNorth did not achieve Financial Closure. Although it transferred the 1.85 million shares to Oakwell, it never paid Oakwell either the $2.79 million or the 6.25 per cent annual royalty.
[7] EnerNorth's inability to realize Financial Closure and to make the payments under the Settlement Agreement was [page5 ] attributable to the fact that EnerNorth -- perhaps in recognition of its inability to complete the Project -- sold its interest in the Project Company (including the newly acquired Oakwell portion) to another group of companies, known as The VBC Group, in August 2000. I will refer to the August 2000 agreement between EnerNorth and the VBC Group as the "VBC Agreement". Although Oakwell had been aware of VBC's interest in the Project, it was initially unaware of the VBC Agreement. When it discovered what had occurred, it protested to VBC and entered into negotiations with VBC directly, arguing that EnerNorth and VBC were not entitled to exclude it completely from the Project under Indian law because of its position as original promoter of the Project.
[8] These negotiations led to a series of agreements between Oakwell and the VBC Group (including the Project Company) on July 4, 2001. Principal amongst these was a Technology Transfer, Collaboration and Licence Agreement (the "Licence Agreement") pursuant to which the Project Company was to pay Oakwell "technical fees" totalling US$6 million "in acknowledgement of the technical services and know-how provided and to be provided by [Oakwell] since 1995" and for the granting of a certain licence. Of the $6 million, $2 million was to become payable on registration of the Licence Agreement with the Reserve Bank of India. The other $4 million was payable in respect of technical services in the event they were required after signing the Licence Agreement.
[9] It is the payments made, or to be made, under this Licence Agreement, and how they were treated before the Singapore courts, that provide the grist for the dispute on this appeal.
[10] In August 2002, Oakwell sued EnerNorth in Singapore to recover the outstanding amounts under the Settlement Agreement and other damages for the breach of the Settlement Agreement. EnerNorth defended the suit, arguing, in part, that the Licence Agreement was a sham and that payments made under it were simply camouflaged substitutions for the very payments Oakwell was alleging EnerNorth owed it under the Settlement Agreement. They submitted, for example, that the $2 million payment paralleled the $2.79 million called for on Financial Closure under the Settlement Agreement, less credit for a payment of US$790,000 made by EnerNorth to the order of Oakwell in July 1999 to discharge certain debts owing by Oakwell to various third parties in India. The remaining $4 million was to satisfy the royalty obligation under the Settlement Agreement.
[11] Before this court, Oakwell insists that any payments received, or to be received, by it under the Licence Agreement are separate and apart from its claim against EnerNorth arising [page6 ]out of the Settlement Agreement and that this issue has already been determined in its favour in the Singapore proceedings. The appellants -- EnerNorth's creditors -- argue here that the Singapore proceedings are not dispositive. As EnerNorth did in the Singapore proceedings, they assert that any payments received by Oakwell as a result of the Licence Agreement are, in effect, a substitute for the Settlement Agreement payments and must therefore be deducted from any amounts owing by EnerNorth to Oakwell in relation to the Settlement Agreement; in the result, there would be more money to be distributed amongst the appellant creditors.
[12] Before returning to this debate, I turn briefly to a history of the legal proceedings between EnerNorth and Oakwell, and a history of the bankruptcy proceedings involving the appellant creditors.
The Singapore action
[13] Oakwell succeeded in the Singapore proceedings. On October 16, 2003, the Singapore High Court rendered judgment in its favour and dismissed EnerNorth's counterclaim.
The trial proceedings
[14] In the Singapore proceedings, Oakwell alleged that EnerNorth had (i) breached its obligation under the Settlement Agreement to achieve Financial Closure, and (ii) repudiated the Settlement Agreement by entering into the VBC Agreement. It claimed damages of US$2.79 million, representing the sum due on Financial Closure (less credit for two offset amounts discussed below) and damages for loss of the 6.25 per cent annual royalty fees. These issues were all determined in Oakwell's favour: Oakwell Engineering Ltd. v. Energy Power Systems Ltd., [2003] SGHC 241 (Sing. H.C.).
[15] EnerNorth's defence -- as set out in its pleadings and in its opening and closing submissions at trial -- was to argue: (a) that the Settlement Agreement had been frustrated as a result of a reduction in tariffs imposed by the Indian government and reducing the amounts payable to the Project Company, thus rendering Financial Closure impossible and the performance of the Project economically non-viable; (b) if the Settlement Agreement had not been frustrated, that EnerNorth had not breached or repudiated it; and that, (c) even if EnerNorth had breached or repudiated the Settlement Agreement, Oakwell had suffered no damages because [page7 ]Oakwell had mitigated its losses by entering into the Licence Agreement with VBC -- any past or future payments received from VBC under the Licence Agreement would have to be set-off against any payments payable by EnerNorth under the Settlement Agreement (the "mitigation/set-off issue").
[16] In addition, EnerNorth counterclaimed that Oakwell had breached the Settlement Agreement by entering into the Licence Agreement with VBC, in effect selling the same interest in the Project to VBC that was to be relinquished to EnerNorth as part of the Settlement Agreement. Accordingly, EnerNorth sought an order requiring Oakwell to disgorge any and all "shares, monies or other benefits" received, or to be received in the future, under the Licence Agreement.
[17] With the exception of two voluntary credits offered by Oakwell, the Singapore trial judge rejected EnerNorth's defences in their entirety and dismissed its counterclaim. The first voluntary reduction consisted of the US$790,000 payment referred to above. The second -- which takes on some significance for the purposes of this appeal -- was a payment of US$350,000 made by VBC to Oakwell under the Licence Agreement prior to the commencement of the Singapore action. Oakwell conceded that both of these amounts should be credited to EnerNorth in the proceedings.
[18] The trial judge ordered that EnerNorth pay to Oakwell: (1) US$2.79 million (less the sums of US$790,000 and US$350,000) in relation to the failure to achieve Financial Closure; and (2) US$2,560,210 in damages in respect of the 6.25 per cent annual royalty under the Settlement Agreement.
[19] He also ordered that EnerNorth's counterclaim be dismissed.
The Singapore appeal
[20] EnerNorth unsuccessfully argued the same issues in its appeal before the Singapore Court of Appeal, including the mitigation/set-off issue. In its written appeal case brief, it contended that "If [EnerNorth] did repudiate the Settlement Agreement on or before 10 August 2000, Oakwell mitigated its losses". The appeal case argued:
One of [the] ways that Oakwell agreed to receive the Royalty under . . . the Settlement Agreement was by entering into an agreement directly with the Project Company [i.e., the Licence Agreement with VBC] whereby the company would pay Oakwell "as technical or consultancy fees" an amount equal to the Royalty. One of the agreements Oakwell entered into on 4 July 2001 [page8 ]was an agreement with the Project Company whereby Oakwell would receive a lump sum as a "Technical Fee". Accordingly, Oakwell contracted directly with the Project Company for the very thing it had agreed to accept from the Project Company under the Settlement Agreement.
Therefore, even if [EnerNorth] had breached the Settlement Agreement on 10 August 2000, in respect of the Royalty, Oakwell had fully mitigated its losses by directly entering into the very contract with the Project Company that under the Settlement Agreement it had agreed to accept as payment for the Royalty. . . . . .
Oakwell, in other words, had a duty to mitigate its (claimed) losses arising out of [EnerNorth's] repudiation of the Settlement Agreement (if indeed that is what [EnerNorth] did) and Oakwell did in fact mitigate its losses by conveying the interests it had relinquished to [EnerNorth] under the Settlement Agreement to VBC for valuable consideration. Therefore, the Court erred by awarding damages to Oakwell in these circumstances and in effect gave Oakwell double recovery. (Emphasis added)
[21] The appeal was dismissed, without reasons: Oakwell Engineering Ltd. v. Energy Power Systems Ltd. (April 27, 2004), CA129/2003/Y (Sing. C.A.).
The Ontario enforcement proceedings
[22] EnerNorth did not pay the Singapore judgment, and as a result, Oakwell commenced enforcement proceedings in Ontario. EnerNorth opposed enforcement principally on the basis that the Singapore proceedings were biased and unfair.
[23] One of the bases advanced in support of this argument was that the judgment permitted double recovery since Oakwell was allowed to retain the remaining US$1,650,000 of the $2 million to be paid to it by VBC under the Licence Agreement (after credit of $350,000) without having to deduct that amount from the damages awarded. As Mr. Cassina -- the then chairman of EnerNorth -- said in an affidavit, "Oakwell, in effect, got to have its cake and eat it too" at the expense of EnerNorth.
[24] Justice Day rejected EnerNorth's arguments and ordered that the Singapore judgment be enforced in full: Oakwell Engineering Ltd. v. Enernorth Industries Inc. (2005), 2005 27149 (ON SC), 76 O.R. (3d) 528, [2005] O.J. No. 2652 (S.C.J.). His decision was upheld in this court: (2006), 2006 19327 (ON CA), 81 O.R. (3d) 288, [2006] O.J. No. 2289 (C.A.). Leave to appeal to the Supreme Court of Canada was sought but denied on January 18, 2007, [2006] S.C.C.A. No. 343.
[25] On March 20, 2007, EnerNorth filed an assignment in bankruptcy. RSM Richter Inc. ("Richter") was appointed trustee in bankruptcy the following day. [page9 ]
The bankruptcy proceedings
[26] Oakwell's claim in the bankruptcy is for CDN$6,807,130.43. It is based entirely upon the Singapore judgment, plus interest and costs.
[27] The appellants, Ms. Hall and Mr. Cassina, are minor creditors of EnerNorth. They are its former president and chairman, respectively. Ms. Hall has filed a proof of claim in the amount of $20,142.38, for outstanding salary, vacation pay and directors' fees. Mr. Cassina's claim is for $73,222.06, for outstanding consulting and directors' fees.
[28] At the first meeting of creditors, Ms. Hall raised the issue of whether Oakwell's claim should be reduced by a further US$1,650,000, allegedly received from VBC under the Licence Agreement following the date of the Singapore judgment. The other unsecured creditors -- whom I shall call the appellant group of creditors -- took up the cause along with her. While Oakwell does not specifically concede that it has received the additional funds, it accepts that these proceedings should be decided on the basis that it has.
[29] Richter made enquiries about these allegations and concluded that it had not been provided with any confirmable information that would warrant reducing Oakwell's proof of claim. Accordingly, it proposed to admit Oakwell's proof of claim in full.
[30] Ms. Hall and Mr. Cassina moved before the Bankruptcy Court for an order pursuant to s. 135(5) of the BIA challenging the proof of claim filed by Oakwell. They were supported by a companion motion filed on behalf of the appellant group of creditors. Oakwell brought a cross-motion to dismiss these motions on the ground that the issue of whether the Licence Agreement payments had to be set-off against any payments made to Oakwell under the Settlement Agreement had already been finally determined in the Singapore proceedings.
[31] Justice Campbell granted the cross-motion and dismissed the appellants' motion. The appeal is from that order. III. Analysis
The motion to quash
[32] Oakwell moved to quash the appeals on the ground that leave to appeal is required under s. 193 of the BIA and leave had not been sought.
[33] Section 193 states:
- Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases: [page10 ] (a) if the point at issue involves future rights; (b) if the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings; (c) if the property involved in the appeal exceeds in value ten thousand dollars; (d) from the grant of or refusal to grant a discharge if the aggregate unpaid claims exceed five hundred dollars; and (e) in any other case by leave of a judge of the Court of Appeal.
[34] We dismissed the motion to quash after argument of the motion. Given the reach of the appellants' position that s. 135(5) applicants have an "unqualified right" to attack the validity of any judgment issued by a court of competent jurisdiction in a hearing under that section, the implications of the appeal are widespread and the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings: s. 193(b). Even if that were not the case, however, we were satisfied that the property involved in the appeal exceeds $10,000 in value. The test for the value of property involved in the appeal is the amount of the loss or gain which the granting or refusal of the claimed right would entail: Orpen v. Roberts, 1925 2 (SCC), [1925] S.C.R. 364, [1925] S.C.J. No. 14, at p. 367 S.C.R.; Fallis v. United Fuel Investments Ltd., 1962 96 (SCC), [1962] S.C.R. 771, [1962] S.C.J. No. 63, at p. 774 S.C.R. Here, the loss or gain to Oakwell or to the creditors, in terms of the quantum of Oakwell's claim in the bankruptcy, is in the millions of dollars.
The issues on the appeal
[35] The appellants raise three issues on the appeal: (1) Do the appellants, as creditors, have "an unqualified right" under s. 135(5) of the BIA to challenge Oakwell's proof of claim? (2) Does the existence of a judgment granted against a bankrupt prior to bankruptcy displace the ability of creditors under s. 135(5) to challenge a proof of claim filed on the basis of that judgment? (3) If a s. 135(5) hearing could be denied on the basis of the doctrine of res judicata, does res judicata or issue estoppel apply in the circumstances of this case?
Issues 1 & 2: The right to challenge a proof of claim and go behind a valid judgment under s. 135(5) of the BIA is not "unqualified"
[36] I shall deal with the first and second issues together. [page11 ]
[37] Section 135 of the BIA deals with a trustee's examination, acceptance or disallowance of proofs of claim filed by creditors in bankruptcy proceedings. Subsection 135(1) provides that the trustee is to examine proofs of claim or of security and the grounds therefore and "may require further evidence in support of the claim or security". Subsection 135(2) deals with the right of the trustee to disallow a claim, and subsections 135(3) and (4) provide for notice of that determination and for finality and conclusiveness of that decision subject to an appeal from the trustee's decision. Subsection 135(5) states:
Expunge or reduce a proof
135(5) The court may expunge or reduce a proof of claim or a proof of security on the application of a creditor or of the debtor if the trustee declines to interfere in the matter.
[38] The appellants' argument that they have "an unqualified right" to challenge Oakwell's proof of claim under s. 135(5) is based on the unsupported theory that the only precondition to a creditor being entitled to a hearing under s. 135(5) is that the trustee must have declined to interfere in the matter. I do not read the provision in such a restricted manner. Their premise that the Singapore judgment cannot "displace" their "unqualified" right is founded on quite old English authority which -- if it ever stood for the proposition advanced -- should no longer be followed, in my view.
[39] In the first of these decisions, Fraser (Re); Ex parte Central Bank of London, [1892] 2 Q.B. 633 (C.A.), at pp. 635-37 Q.B., Lord Esher M.R. said:
As a matter of law the judgment, therefore, stands as a good judgment against John Fraser, and it cannot be questioned by him in any Court, except the Court of Bankruptcy. . . . The mere fact that there is a judgment for the debt does not prevent the registrar from saying that there is no good petitioning creditor's debt. The Court of Bankruptcy can go behind the judgment, and can inquire whether, notwithstanding the judgment, there was a good debt. In so doing, the Court of Bankruptcy does not set aside the judgment. If I may use the expression, the Court goes round the judgment, and inquires into the subject-matter. . . . The existence of the judgment is no doubt prima facie evidence of a debt; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor.
[40] Lord Justice Kay concurred, at pp. 637-38 Q.B., saying:
It is old law in bankruptcy that, neither upon an attempt to prove a debt, nor upon a petition for an adjudication of bankruptcy or a receiving order against a debtor, is a judgment against him for the debt conclusive. . . . Can this judgment be treated as conclusive in bankruptcy because the debtor has unsuccessfully attempted to set it aside? I think not, and I cannot see how the matter is any more res judicata because there has been an unsuccessful appeal to this Court. I agree in all that the Master of the Rolls has said on this point. [page12 ]
[41] Later, in Van Laun (Re); Ex parte Chatterton, [1907] 2 K.B. 23 (C.A.), Cozens-Hardy M.R. adopted a similar approach. At p. 29, he said:
[I]f a judgment had been obtained upon the covenant, it is competent and it is the duty of the Court of Bankruptcy to go behind the judgment, to open the judgment and to say, "That is the judgment, but the creditor can only prove for the amount which is justly and truly due upon it."
[42] In language adopted by the Master of the Rolls, the trial judge in Van Laun (Re) had said, at [1907] 1 K.B. 155 (K.B. Div.), at pp. 162-63:
The trustee's right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him.
[43] While I accept the first statement of Cozens-Hardy M.R. cited above, with respect to those eminent jurists, I disagree with the balance of their sweeping statements. They cast the net of the trustee's ability to assess a proof of claim based upon the judgment of a court of competent jurisdiction, and the court's ability to expunge or reduce such a proof, too broadly.
[44] Lord Esher M.R., himself, suggested as much in an earlier decision, Flateau (Re); Ex parte Scotch Whisky Distillers, Ltd. (1888), 22 Q.B.D. 83 (C.A.), at p. 85. In that case, the bankruptcy was based upon a judgment debt which was under appeal. The registrar in bankruptcy refused to adjourn the bankruptcy petition pending the outcome of the appeal. His decision was affirmed by the Court of Appeal. On the issue of the right to re-try the issues in Bankruptcy Court, Lord Esher M.R. said, on that occasion (at p. 85):
It is not necessary now to repeat that, when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to inquire into the validity of the debt. But that the Court of Bankruptcy is bound in every case as a matter of course to go behind a judgment is a preposterous proposition. (Emphasis added)
[45] In the same decision, Lopes L.J. was equally succinct, at p. 87:
It has been argued that the registrar was bound to hear evidence upon issues which had been already tried by a judge and jury, and that he had no discretion in the matter. In my opinion such a contention cannot be for a moment [page13 ]maintained. Proceedings in bankruptcy are already scandalously long; if this contention were well founded they would be almost interminable. (Emphasis added)
[46] In other decisions, English authorities have distinguished Fraser (Re) and its progeny on the basis that it involved a default judgment where there had been no determination of the claim on the merits: see, e.g., A Debtor (Re) (1915), 113 L.T. 704 (K.B.), at p. 705. I note as well, that Van Laun (Re) involved a default judgment.
[47] In Canada Asian Centre Developments Inc. (Re), 2003 BCSC 41, [2003] B.C.J. No. 34, 39 C.B.R. (4th) 35 (S.C.), at para. 26, Burnyeat J. drew the same distinction, noting that the comments of Cozens-Hardy M.R. in Van Laun (Re) were obiter. Lord Justice Fry made the point in Flateau (Re), at p. 86, as well:
It is true that in some cases the Court of Bankruptcy has gone behind a judgment, when it has been obtained by fraud, collusion, or mistake. But this power has never, so far as I am aware, been extended to cases in which a judgment has been obtained after issues have been tried out before a Court.
[48] I see no basis for holding that an applicant pursuant to s. 135(5) of the BIA should have "an unqualified" right to challenge the validity of a judgment debt that is based on a decision of a court of competent jurisdiction on the merits of the claim or that res judicata should not apply, where appropriate, in such circumstances. Take, for example, the case of a debtor with $10 million in assets and judgment debts spread amongst five creditors of $5 million each. Suppose that each $5 million judgment debt resulted from lengthy and costly litigation from trial, through intermediate appeal to the Supreme Court of Canada and that the debtor has failed at each stage. As EnerNorth did here, the debtor makes an assignment in bankruptcy following its last loss in the highest court. It surely contravenes every imaginable principle of judicial economy, finality and fairness to say that the Bankruptcy Court can now, indiscriminately, re-open each hotly contested dispute in order to satisfy itself, in its own mind, that "there really is a debt due to the . . . creditor" (Fraser (Re)) or that "the debt on which the proof is founded is a real debt" (Van Laun (Re)). I do not accept such a proposition.
[49] I agree that the trustee's power to allow or disallow a proof of claim, and the court's power to expunge or reduce it on an application under s. 135(5) of the BIA, is wide. However, to say that the attacking creditor or debtor has an "unqualified" right to challenge the proof of claim where the claim is based upon a valid and enforceable judgment that is no longer subject to appeal is going too far. The appellant's submission goes beyond the proposition that a judgment creditor is precluded from making a [page14 ]"double recovery", that is, that the Bankruptcy Court may examine whether the amount claimed in the proof of claim is the true amount remaining to be paid under the judgment. The Bankruptcy Court may make such an enquiry. But, in the absence of fraud, collusion or some legitimate concern that there has been a genuine miscarriage of justice, a judgment of a court of competent jurisdiction should almost invariably satisfy a trustee or a court regarding the legitimacy of a claim under s. 135 if, in awarding the judgment, the court has considered the merits of the claim: see Canada Asian Centre Developments Inc. (Re), as cited in Lloyd W. Houlden, Geoffrey B. Morawetz and Janis P. Sarra, The 2009 Annotated Bankruptcy and Insolvency Act (Toronto: Thomson Carswell, 2008), at G67.1.
Issue 3: The doctrine of res judicata applies in this case
[50] The central issue on this appeal is whether Ms. Hall, Mr. Cassina and the appellant group of creditors are precluded by the doctrine of res judicata from advancing their contention that Oakwell's proof of claim must be expunged or reduced by reason of the mitigation/set-off issue. Like the application judge, I have concluded that they are.
[51] As the application judge noted, the appellants' essential submission is that Oakwell's proof of claim, based on the Singapore judgment, represents an attempt by Oakwell to "double collect" to the extent of sums it has received under the Licence Agreement. Regardless of the validity of the judgment, double recovery is not permitted. However, that very issue has already been determined against the interests of EnerNorth in the Singapore proceedings, in my view.
The standard of review
[52] Whether res judicata applies is a question of law. What is determined in a legal proceeding and whether res judicata applies in the circumstances are essentially legal decisions, attracting little, if any, deference. The standard of review on this issue is, therefore, correctness.
The doctrine of res judicata and its application in bankruptcy proceedings
[53] The doctrine of res judicata is a common-law doctrine that prevents the re-litigation of issues already decided. It is founded on two central policy concerns: finality (it is in the interest of the public that an end be put to litigation); and fairness (no one should be twice vexed by the same cause). The [page15 ]doctrine is part of the general law of estoppel and is said to have two central branches, namely, "cause of action estoppel" and "issue estoppel".
[54] Cause of action estoppel refers to the determination of the cause or causes of action before the court. The applicable form of res judicata in this case, however, is issue estoppel. Issue estoppel prevents a litigant from re-litigating an issue that has been clearly decided by a court of competent jurisdiction in a previous proceeding between the same parties or their privies even if the new litigation involves a different cause of action. As the Supreme Court of Canada observed in Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460, [2001] S.C.J. No. 46, at para. 18:
An issue, once decided, should not generally be re-litigated to the benefit of the losing party and the harassment of the winner. A person should only be vexed once in the same cause. Duplicative litigation, potential inconsistent results, undue costs, and inconclusive proceedings are to be avoided.
[55] Canadian authorities confirm that res judicata may apply in bankruptcy proceedings, including those involving the establishment of a proof of claim. In Chaban v. Chaban (Trustee of), 1999 12238 (SK CA), [1999] S.J. No. 112, 172 D.L.R. (4th) 312 (C.A.), the Saskatchewan Court of Appeal held that a trustee in bankruptcy was not permitted to resort to its power under s. 135(2) to disallow a claim (by the debtor's father/mortgagee) that had already been determined in the father's favour in previous proceedings. Speaking for the court, Chief Justice Bayda said, at para. 31:
Section 135(2) is an empowering provision. But the power vested in the trustee is not absolute. . . . In my respectful view, the power cannot be invoked where to do so results in the reliance upon a procedure that conflicts with the procedure prescribed by a subsisting order of a superior court. Parliament did not intend s. 135(2) to be used by a trustee in those cases where to do so would amount to a collateral attack upon a subsisting order of a superior court or where it would amount to something akin to an abuse of process. . . . (Emphasis added)
[56] A Bankruptcy Court, acting under s. 135(5), is in no different a position than a trustee in bankruptcy in such circumstances.
[57] Other Canadian decisions have also held that res judicata applies in bankruptcy proceedings. In Arnco Business Services Ltd. (Re), [1983] O.J. No. 973, 38 C.P.C. 226 (H.C.J.), for example, judgment creditors petitioned for a receiving order and the debtor defended on the basis that the judgment underlying the claim that he was bankrupt should be set aside. Gray J. refused, holding (amongst other things) that "the principle of res judicata can be raised as a bar to a subsequent bankruptcy proceeding" [page16 ](at p. 235 C.P.C.). If res judicata may be raised as a bar to the bankruptcy proceeding itself, it can be raised -- where appropriate -- in answer to a plea that a proof of claim should be disallowed, expunged or reduced: see, also, Gibson Mining Co. v. Hartin, 1940 256 (BC CA), [1940] B.C.J. No. 21, [1940] 2 D.L.R. 605 (C.A.); Grossman (Re), 1998 ABQB 381, [1998] A.J. No. 498, 222 A.R. 139 (Q.B.).
The mitigation/set-off issue is res judicata
[58] Here, the question is whether res judicata applies to preclude the appellants from asserting in the bankruptcy proceedings that moneys received by Oakwell under the Licence Agreement, post-Singapore judgment, are to be set-off against moneys owing by EnerNorth to Oakwell on the judgment awarding damages for breach of the Settlement Agreement, thus reducing or eliminating the Oakwell proof of claim in the bankruptcy. For that to be the case, the same issue must have been decided by a court of competent jurisdiction in a prior proceeding involving the same parties or their privies. The decision must have been final, fundamental in the sense that it was not collateral to the first proceeding, and made on the merits: see Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No. 2), [1967] A.C. 853, [1966] 2 All E.R. 536 (H.L.), at p. 935 A.C.; Angle v. Canada (M.N.R.), 1974 168 (SCC), [1975] 2 S.C.R. 248, [1974] S.C.J. No. 95, at pp. 254-55 S.C.R.; Banque Nationale de Paris (Canada) v. Canadian Imperial Bank of Commerce (2001), 2001 24099 (ON CA), 52 O.R. (3d) 161, [2001] O.J. No. 53 (C.A.), at para. 16.
[59] Two of these requirements call for consideration. First, did the Singapore proceedings involve the same parties (or their privies) as the proposed s. 135 proceedings? Secondly, was the mitigation/set-off issue determined in those earlier proceedings? The other criteria are not at issue on this appeal. (i) Whether the Singapore proceedings involved the same parties or their privies
[60] For res judicata or issue estoppel to apply, the previous proceedings must have involved the same parties or their privies. Although Ms. Hall and Mr. Cassina were the president and chairman of EnerNorth, respectively, at the time of the Singapore proceedings -- indeed, Mr. Cassina was a witness for EnerNorth in the proceedings -- the appellant group of creditors argues that its members were in no way involved, nor could they have been. One of the criteria for the application of res judicata has accordingly not been met, they say.
[61] I do not accept this argument. While there is little authority directly on point, I am satisfied that Ms. Hall, Mr. Cassina and the appellant group of creditors are all "privies" of EnerNorth for [page17 ]the purposes of the s. 135 hearing analysis. As officers of EnerNorth, Ms. Hall and Mr. Cassina were clearly aligned with its interests in the Singapore proceedings and, in the present context, continue to be so. It is clear that directors and officers may be considered the privies of their companies: see, for example, Donald J. Lange, The Doctrine of Res Judicata in Canada, 2nd ed. (Markham, Ont.: LexisNexis Canada Inc., 2004), at p. 79, citing Bank of Montreal v. Maple City Ford Sales (1986) Ltd. (2001), 2000 22716 (ON SC), 51 O.R. (3d) 523, [2000] O.J. No. 5701 (S.C.J.). In the latter case, Gillese J. (as she then was) noted that to the extent that the former directors and a creditor of the bankrupt "come to this court to advance the claims of [the bankrupt] they are a privy" (at p. 525 O.R.).
[62] Gillese J. went on to observe, at p. 526 O.R., that:
Privies within the context of the doctrine of res judicata means a situation where there is a sufficient degree of identification between two persons to make it just to hold that the decision to which one was a party should be binding in the proceedings to which the other is a party. [See Note 1 below]
[63] The appellant creditors as a class, fall within this description. For purposes of the bankruptcy proceedings, the trustee stands in the shoes of EnerNorth, and for purposes of the proposed s. 135(5) hearing, the creditors in effect stand in the shoes of the Trustee, because they seek to have the court do what the Trustee has declined to do. They are "identified" with EnerNorth for purposes of the comparison between the Singapore proceedings and the proposed s. 135(5) hearing, and there is a "community or privity of interest" between them in this regard: see George Spencer-Bower and Alexander Kingcome Turner, The Doctrine of Res Judicata, 2nd ed. (London: Butterworths, 1969), at p. 209. The appellants are only entitled to argue that Oakwell's proof of claim should be expunged or reduced if EnerNorth is entitled to make the mitigation/set-off claim. As creditors, therefore, they have "a sufficient degree of identification" with EnerNorth's claim in the Singapore proceedings "to make it just to hold that the decision to which one was a party should be binding in proceedings to which the other is a party": Bank of Montreal v. Maple City Ford Sales (1986) Ltd. at para. [12]
[64] I conclude, therefore, that Ms. Hall, Mr. Cassina and the appellant group of creditors are all "privies" of EnerNorth for purposes of the res judicata analysis in the s. 135(5) context. [page18 ] (ii) Whether the mitigation/set-off issue was determined in the Singapore proceedings
[65] The application judge concluded, at para. 22, that the appellants "seek to litigate precisely the issue that was before the Singapore Court, namely, the entitlement of Oakwell to receive funds from VBC and at the same time pursue its entitlement under the Settlement Agreement against EnerNorth". In his view, "[t]he fact that the precise amount was not dealt with in the Singapore trial, apart from the concession in respect of $350,000, [did] not invalidate Oakwell's entitlement under the judgment against EnerNorth". To permit the s. 135 challenge to proceed would therefore violate the principles of res judicata.
[66] I agree.
[67] The appellants submit that the mitigation/set-off issue was not determined in the Singapore proceedings and, indeed, that the trial judge specifically indicated that the issue was "not a matter before [him]". Alternatively, to the extent the issue may have been determined, they say it was determined in EnerNorth's favour because the trial judge in fact deducted the $350,000 that had been received by Oakwell from VBC to that point. A review of the trial judge's reasons in their entirety does not bear out this analysis, however.
[68] There is no doubt the mitigation/set-off issue was squarely before the trial judge. It was raised in both the defence and counterclaim. It was the subject of evidence. It was argued in EnerNorth's written submissions at the opening and the close of trial. But was it decided? That question is somewhat more difficult to answer.
[69] It is true that the Singapore trial judge gave little direct consideration to the question of whether moneys received by Oakwell from VBC under the Licence Agreement had to be deducted from moneys received by Oakwell from EnerNorth under the Settlement Agreement, except simply to deduct the amount conceded by Oakwell. He made no specific finding one way or the other on that point. However, the appellants' submission that he said the mitigation/set-off issue was not before him is not accurate. What he said was that Oakwell's claim that VBC had breached the Licence Agreement by failing to pay the remaining amount of $1,650,000 under that Agreement was "not a matter before [him]". That issue is quite different than the mitigation/set-off issue as between EnerNorth and Oakwell.
[70] Read as a whole, the trial judge's reasons -- and, more importantly, the judgment he rendered -- reveal that he rejected the mitigation/set-off argument. The judgment rendered does [page19 ]not make sense unless premised on the rejection of EnerNorth's arguments by way of defence and counterclaim, in their entirety.
[71] For example, at para. 69, the trial judge stated that "[Oakwell's] claim against the VBC Group was to be settled by the payment of the sum of US$2 million in respect of past technical services and any ongoing technical services and advice, if required, which [Oakwell] rendered for the benefit of the Project Company since 1995". It necessarily follows that he accepted Oakwell's position that the Licence Agreement and the Settlement Agreement dealt with different matters -- that is to say, Oakwell had not mitigated its losses by entering into the Licence Agreement with VBC. This conclusion is reinforced by the trial judge's rejection of EnerNorth's counterclaim that any moneys or benefits received by Oakwell from VBC under the Licence Agreement had to be disgorged to EnerNorth.
[72] Moreover, I cannot accept the appellants' contention, based on the $350,000 reduction in damages, that the mitigation/set-off argument was decided in their favour. If EnerNorth's mitigation/set-off argument had actually been accepted, the judgment would not have required EnerNorth to pay -- as it does -- damages "less the sums of US$790,000 and US$350,000". The judgment would have provided for payment of damages less any moneys or benefits received or to be received by Oakwell under the Licence Agreement. It did not. Viewed in this way, the judgment rendered is consistent only with the trial judge having rejected EnerNorth's submissions on the mitigation/set-off issue that were clearly put before him.
[73] I realize that the $350,000 deduction is at odds with the rejection of EnerNorth's position. However, I do not view it as either an acceptance of EnerNorth's mitigation/set-off position (for the reasons outlined above) or an indication that he was only dealing with payments already received by Oakwell from VBC and leaving the issue of what was to be done with future payments to a future determination.
[74] As I read the judgment, the trial judge simply reduced the amount of the award by the two conceded amounts because Oakwell had voluntarily agreed to those reductions. The trial judge made no finding that Oakwell was obliged to make the deduction or that any amounts received under the Licence Agreement should be set-off and, as I have explained, his judgment as a whole is incompatible with such a conclusion. His judgment is very full and thorough. In my view, it makes no sense for him to have rejected EnerNorth's defence and dismissed its counterclaim -- both of which he did -- without also rejecting the mitigation/set-off argument. I am not convinced that he left open to future proceedings the resolution of whether [page20 ]the bulk of the moneys that were the subject of the debate (the US$1,650,000 and US$4 million) were to be set-off against the Settlement Agreement damages and/or disgorged.
[75] In the end, I am satisfied that the mitigation/set-off issue was both fully argued and determined in the Singapore proceedings. EnerNorth's creditors are barred from re- litigating that very issue in their efforts under s. 135(5) of the BIA to accomplish what EnerNorth failed to do in the Singapore courts and the Ontario courts. IV. Disposition
[76] For the foregoing reasons, I would dismiss the appeal.
[77] Oakwell is entitled to its costs of the appeal, payable jointly and severally by all appellants, and fixed in the amount of $13,500 inclusive of fees, disbursements and GST.
Appeal dismissed.
Notes
Note 1: This statement, as she indicated, is adopted from Las Vegas Strip Ltd. v. Toronto (City) (1996), 1996 8037 (ON SC), 30 O.R. (3d) 286, [1996] O.J. No. 3210 (Gen. Div.) (Sharpe J.), affd (1997), 1997 3841 (ON CA), 32 O.R. (3d) 651, [1997] O.J. No. 1033 (C.A.).