COURT OF APPEAL FOR ONTARIO

CITATION: Impact Tool & Mould Inc. (Re), 2015 ONCA 393

DATE: 20150603

DOCKET: C59719

Feldman, van Rensburg and Huscroft JJ.A.

In the Matter of the Bankruptcy of Impact Tool & Mould Inc. of the City of Windsor, County of Essex

BETWEEN

Doyle Salewski Inc., in its capacity as Court Appointed Interim Receiver of Impact Tool & Mould Inc.

Applicant (Appellant)

and

BDO Dunwoody Limited, Trustee of the Estate of Impact Tool & Mould Inc., a Bankrupt and Kevin O’Brien

Respondents

Justin R. Fogarty and Jason Dutrizac, for the appellant

Benjamin G. Blay, for the respondent BDO Dunwoody Limited

Nicolas M. Rouleau, for the respondent Kevin O’Brien

Heard: May 4, 2015

On appeal from the order of Justice Joseph G. Quinn of the Superior Court of Justice, dated November 25, 2014, reported at 2014 ONSC 6811.

ENDORSEMENT

Introduction

[1] The appellant is the interim receiver of a subsequently bankrupt company, who filed a proof of claim with the respondent trustee in bankruptcy claiming fees and disbursements incurred in the course of its duties. The trustee disallowed the proof of claim under s. 135(2) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). The interim receiver appeals the dismissal of its appeal of the trustee’s disallowance.

[2] The sole issue on this appeal is whether the interim receiver’s claim ought to have been disallowed. For the reasons that follow, the appeal is dismissed.

Facts

[3] The appellant Doyle Salewski Inc. (“DSI”) was appointed interim receiver of Impact Tool & Mould Inc. (“Impact”), pursuant to s. 47 of the BIA and s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, by the order of Patterson J. dated March 7, 2003. The appointment was made on the application of the two major shareholders of Impact who were also secured creditors and officers of Impact. The appointment order granted DSI a priority charge over Impact’s property for its fees and disbursements properly incurred in its role as interim receiver. The order stated that the charge was binding on all persons, including any trustee in bankruptcy of Impact. The order also provided that DSI “shall from time to time pass its accounts”. DSI has never been discharged as interim receiver.

[4] As interim receiver, DSI sold Impact’s assets – with court approval – to Impact’s two major shareholders. On May 20, 2003, DSI assigned Impact into bankruptcy at the request of Unique Tool & Gauge Ltd. (“Unique”), an unsecured judgment creditor of Impact. The respondent BDO Dunwoody Limited (“BDO”) was appointed trustee in bankruptcy. The respondent O’Brien, a representative of Unique, was appointed as an inspector of the estate. The fees of the trustee and inspector were paid by Unique.

[5] There are currently no assets in Impact’s estate. However, DSI and the trustee have been embroiled in litigation since 2006. The details of the various disputes are not material to the issue before this court, although they provide context and illustrate why the parties are continuing to litigate over the disallowance of an interim receiver’s proof of claim at a stage when there are no assets left in the bankrupt estate. In 2010, DSI applied under s. 37 of the BIA for an order that the fees of BDO and O’Brien, paid by Unique, be “returned” to Impact’s estate because of alleged contraventions of the BIA. BDO moved to dismiss the application on the basis that DSI was not a “creditor” of Impact, and therefore was a stranger to the estate. Section 37 of the BIA provides:

Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just.

[6] DSI had previously filed a proof of claim for fees and disbursements with the trustee in 2003. The context was a demand for the payment of monies in Impact’s lawyer’s trust account which were paid to BDO post-bankruptcy. That proof of claim asserted a secured claim for $15,000 and referred to DSI’s charge against all property, assets and undertaking of Impact pursuant to the appointment order. Attached to the proof of claim was a statement of account showing all invoices and receipts of the receiver from March 13, 2003 to July 23, 2003. BDO ultimately paid to DSI the funds it received from the lawyer’s trust account.

[7] In 2011, DSI filed an amended proof of claim with BDO for $457,040.29, which included a secured claim of $96,561.74 and an unsecured claim of $360,744.93. DSI again referred to its charge against all property, assets and undertaking of Impact pursuant to the appointment order, and claimed as security, funds due “to be returned by the Trustee and Inspector Kevin O’Brien in the total amount of $96,561.74.”

[8] The trustee disallowed DSI’s amended proof of claim on September 17, 2014, five days before the scheduled hearing of the motion to dismiss the s. 37 application. The reason for the disallowance was communicated to DSI as follows:

The debt claimed is not a debt or liability, present or future, to which the bankrupt was subject on May 20, 2003 or to which the bankrupt would become subject before the bankrupt’s discharge by reason of any obligation incurred before May 20, 2003 and is therefore not a provable claim in the bankruptcy.

[9] DSI brought an application to appeal the disallowance to a Superior Court judge under s. 135(4) of the BIA.

Decision Below

[10] In his reasons for dismissing DSI’s appeal of the trustee’s disallowance, the application judge formulated the question before him as follows: Was DSI a creditor with a debt provable in Impact’s bankruptcy, under s. 121(1) of the BIA?

[11] Section 121(1) provides:

All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

[12] The application judge concluded that DSI was never a creditor of Impact and did not have a claim provable in Impact’s bankruptcy. He observed that DSI was appointed under the order of Patterson J. as interim receiver, and once appointed became an officer of the court. DSI’s powers and method of remuneration as interim receiver were provided for in the appointment order. The appointment order provided security to DSI for its accounts through a priority charge, but did not create a “debt” or a creditor-debtor relationship between Impact and DSI.

Analysis

(1) Improper Procedure

[13] The narrow question at both levels of appeal was whether DSI, a court-appointed receiver, can have a claim for its fees and disbursements provable under s. 121(1) of the BIA that should not have been disallowed by the trustee.

[14] However, the subtext of this proceeding is the impending s. 37 application and the issue of whether DSI is a “creditor” within the meaning of the BIA for the purpose of that application. What appears to have occurred here is that DSI filed an amended proof of claim after BDO gave notice of its motion to dismiss the s. 37 application, which motion was brought on the argument that DSI was not a creditor of the bankrupt estate. BDO then took the step of disallowing DSI’s proof of claim just five days before the motion to dismiss the s. 37 application was scheduled to be heard. It appears that the purpose of DSI’s filing of its proof of claim was to establish its status as a creditor of the bankrupt estate; the purpose of BDO’s subsequent disallowance was to refute that status, resulting in DSI’s appeal of the disallowance. The effect was to have the “creditor” issue decided in the context of the appeal from the disallowance of the proof of claim rather than in the context of the s. 37 application.

[15] This was the next move in what appears to be a strategic game that was not fully explained to the court, despite numerous questions posed during oral argument. There was no need for the appeal of the disallowance of the proof of claim to be heard and decided before the previously scheduled motion in the s. 37 application, where the “creditor” issue was to be argued. However, that is what occurred.

(2) The Requirement that a Receiver Pass its Accounts

[16] In Re Confectionately Yours Inc. (2002), 2002 CanLII 45059 (ON CA), 164 O.A.C. 84 (C.A.), leave to appeal to S.C.C. refused, (2003), 41 C.B.R. (4th) 28 (also referred to as Re Bakemates International), this court discussed the purpose of requiring court-appointed receivers to pass accounts. The court endorsed the statement in F. Bennett, Bennett on Receiverships, 2nd ed. (Toronto: Carswell, 1999), at pp. 459-460, that the purpose of passing accounts is to satisfy the court that the fees and disbursements incurred were fair and reasonable, and to afford interested parties the opportunity to question the receiver’s activities and conduct. The court reproduced, at para. 36, the following excerpt from Bennett on Receiverships:

The passing of accounts allows for a detailed analysis of the accounts, the manner and the circumstances in which they were incurred, and the time that the receiver took to perform its duties. If there are any triable issues, the court can direct a trial of the issues with directions.

[17] The court held, at paras. 37-38, that it is a receiver’s duty to pass detailed accounts and provide an accompanying affidavit to substantiate the hours spent and the disbursements incurred.

[18] Court supervision of receivers’ remuneration is essential to the integrity of the insolvency regime. An interim receiver is not entitled to bypass the procedural requirement of passing accounts by submitting its unliquidated and non-approved fees to a trustee in bankruptcy in the form of a proof of claim. An appeal from a trustee’s disallowance is not the proper forum in which to obtain court approval of such costs.

[19] The appointment order of Patterson J. explicitly required DSI to pass its accounts from time to time. There is nothing in the record that indicates why DSI should be permitted to omit this procedural step prior to asserting any claim. The trustee was therefore entitled to disallow DSI’s proof of claim.

[20] That conclusion is sufficient to address the issue of the propriety of the disallowance of the proof of claim by the bankruptcy trustee and to dismiss the appeal.

[21] There is no need for the court to decide in this proceeding whether a court-appointed receiver is a “creditor” of the bankrupt estate that was the subject of the receivership. In this case that issue should be decided on the motion to dismiss the s. 37 application.

Conclusion

[22] For these reasons, the appeal is dismissed. Costs are payable by the appellant to the respondents, in the sum of $10,000 to the respondent BDO and the sum of $5,000 to the respondent O’Brien, both amounts inclusive of applicable disbursements and taxes.

“K. Feldman J.A.”

“K. van Rensburg J.A.”

“Grant Huscroft J.A.”