Court File and Parties

Citation: In the Matter of the Bankruptcy of Selvamurugan Gunaratnam, 2024 ONSC 1693

District of Ontario Division No.: 09 – Toronto Court File No.: BK-22-02748574-0031 Estate No.: 31-2748574 Date: 2024-03-15

Ontario - Superior Court of Justice – In Bankruptcy and Insolvency

In the Matter of the Bankruptcy of Selvamurugan Gunaratnam of the City of Toronto in the Province of Ontario

Re: Selvamurugan Gunaratnam, Debtor / Bankrupt

Before: Peter J. Osborne J.

Counsel: Philip Gertler, for the Trustee in Bankruptcy Jane Martin, for the Debtor / Bankrupt Jacob Blackwell, for the Office of the Superintendent in Bankruptcy Rachel Moses, for the Royal Bank of Canada Gregory Judd, for Kunjar Sharma & Associates Inc. in its capacity as Trustee

Heard: June 1, 2023

Endorsement

[1] The Trustee in respect of the Amended Proposal of Selvamurugan Gunaratnam (the “Debtor” or the “Bankrupt”) seeks approval of the Amended Proposal dated July 28, 2022. The Debtor supports the relief sought. The Royal Bank of Canada (“RBC”) one of the creditors of the Debtor, also supports the Amended Proposal.

[2] The Office of the Superintendent in Bankruptcy (“OSB”) opposes the relief sought, on the basis of what it submits is the continued lack of disclosure and transparency on the part of the Bankrupt, among other things.

[3] The relevant provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, (the “BIA”) relevant to the approval of proposals are ss. 59(2) and (3):

(2) Where the court is of the opinion that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors, the court shall refuse to approve the proposal, and the court may refuse to approve the proposal whenever it is established that the debtor has committed any one of the offences mentioned in sections 198 to 200.

(3) Where any of the facts mentioned in section 173 are proved against the debtor, the court shall refuse to approve the proposal unless it provides reasonable security for the payment of not less than fifty cents on the dollar on all the unsecured claims provable against the debtor’s estate or such percentage thereof as the court may direct.

[4] As observed by Morawetz, J. (now Chief Justice) in Kitchener Frame Limited (Re), 2012 ONSC 234 (“Kitchener Frame”) at paras. 19 – 22:

[19] In order to satisfy s. 59(2) test, the courts have held that the following three-pronged test must be satisfied:

(a) the proposal is reasonable;

(b) the proposal is calculated to benefit the general body of creditors; and

(c) the proposal is made in good faith.

See Mayer (Re) (1994), 1994 7461 (ON SC), 25 CBR (3d) 113; Steeves (Re), 2001 SKQB 265, 25 CBR (4th) 317; and Magnus One Energy Corp. (Re), 2009 ABQB 200, 53 CBR (5th) 243.

[20] The first two factors are set out in s. 59(2) of the BIA while the last factor has been implied by the court as an exercise of its equitable jurisdiction. The courts have generally taken into account the interests of the debtor, the interests of the creditors and the interests of the public at large in the integrity of the bankruptcy system. See: Farrell (Re), 2003 39370 (ON SC), 2003, 40 CBR (4th) 53.

[21] The courts have also accorded substantial deference to the majority vote of creditors at a meeting of creditors: see Lofchik, Re, [1998] O.J. No. 322 (Ont. Bkrptcy). Similarly, the courts have also accorded deference to the recommendation of the proposal trustee. See Magnus One, supra.

[22] With respect to the first branch of the test for sanctioning a proposal, the debtor must satisfy the court that the proposal is reasonable. The court is authorized to only approve proposals which are reasonable and calculated to benefit the general body of creditors. The court should also consider the payment terms of the proposal and whether the distributions provided for are adequate to meet the requirements of commercial morality and maintaining the integrity of the bankruptcy system. For a discussion on this point, see Lofchik, supra, and Farrell, supra.

[5] The decision in Re Mernick, (1994) 1994 7459 (ON SC), 24 C.B.R. (3d) 8 (Ont. S.C.) reflects the same principles.

[6] As set out in the 2023 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz and Sarra, Thomson Reuters Canada, Toronto, 2023 at §4:71 and §4.80:

In deciding whether the proposal should be approved, the court must take the following interests into account: a) the interests of the debtor in making a settlement with creditors; b) the interests of creditors in procuring a settlement that is reasonable and that does not prejudice their rights; and c) the interests of the public in the fashioning of a settlement that preserves the integrity of the bankruptcy process and complies with the requirements of commercial morality: Re Gardner (1921), 1921 948 (ON SC), 1 C.B.R. 424 (Ont. S.C.); Re Sumner Co. (1984) Ltd. (1987), 1987 7591 (NB QB), 64 C.B.R. (N.S.) 218 (N.B.Q.B.); Re Stone (1976), 22 C.B.R. (N.S.) 152 (Ont. S.C.); Re National Fruit Exchange Inc. (1948), 29 C.B.R. 125 (Que. S.C.); Re Man With Axe Ltd. (No. 2) (1961), 2 C.B.R. (N.S.) 12 (Man. Q.B.).

In order for the court to approve a proposal, it must be satisfied that the terms are reasonable: s. 59(2). To be reasonable, the proposal must have a reasonable possibility of being successfully completed in accordance with its terms: McNamara v. McNamara (1984), 53 C.B.R. (N.S.) 240 (Ont. S.C.); Re Gareau (1922), 2 C.B.R. 265 (Que. S.C.).

[7] The Trustee relies upon the Third Supplemental Report prepared for the hearing of June 1, 2023, the Report prepared for the hearing of December 7, 2022 and the Supplementary Report prepared for the hearing dated December 7, 2022. Defined terms in this Endorsement have the meaning given to them in the Reports unless otherwise stated.

[8] This matter already has a lengthy history. The Amended Proposal has been before this Court a number of times already, and after clarification that the OSB was indeed opposing approval of the Amended Proposal, it came on before me.

[9] As set out in the Third Report, pursuant to the terms of the Amended Proposal, payments are provided for in the total amount of $87,500. Unsecured creditors are owed $514,623.28, with the result that they will receive a dividend equal to approximately 12.42%, net of fees and expenses and payment of all Proven Claims.

[10] The Amended Proposal was accepted by two of the three voting creditors holding a total of six claims (i.e., a majority in number) representing 78.78% in value (i.e., more than two-thirds in value) of the Proven Claims by creditors who voted at the meeting.

[11] The total payment due under the Amended Proposal of $87,500 is to be funded overwhelmingly by two sisters of the Debtor, who together will contribute $82,000 of the total payment due. The Debtor himself is contributing the modest balance of $5500, $2000 of which is to be paid over time by preauthorized transfers.

[12] The funds received from the two sisters of the Debtor are all to be sourced from their respective Bank of Montréal (“BMO”) lines of credit, and both BMO and the Royal Bank of Canada (“RBC”) have confirmed to the Trustee that those parties are not on RBC’s list of people subject to investigation in the proceeding in which the Debtor is named as a defendant.

[13] The Trustee submits that the Amended Proposal has been approved by the inspectors as required by s. 50(3) of the BIA, and has been accepted by the creditors representing a majority in number and two-thirds in value as required by s. 54(2). Accordingly, it seeks the approval of this Court pursuant to s. 59(2) of the BIA.

[14] In this case, the Trustee submits that the Debtor has met the three-part test set out in Kitchener Frame. As this is an in-bankruptcy proposal and the Debtor is already bankrupt, he is already subject to the oversight of two inspectors, one of which is the nominee of RBC.

[15] The Trustee submits that in the circumstances, the Amended Proposal is reasonable and has been approved by two of the three inspectors. The Trustee further submits that the Amended Proposal is in the best interests of creditors since there is a significant contribution of funds from the Debtor’s sisters. If the Amended Proposal is not approved, those funds will be returned to source and will therefore not be available for the general benefit of creditors.

[16] RBC accepts the Amended Proposal, submitting that it accepts the affidavit of the Debtor to the effect that the funds proposed to be contributed by the Debtor’s sisters are not being funded as a result of tainted conduct.

[17] The Debtor also submits that the funds from his sisters are gifts, and not loans. Moreover, the Debtor submits that even if the BMO loan was procured by fraud, at least BMO and the other creditors will receive some recovery under the Amended Proposal if approved.

[18] The OSB opposes approval of the Amended Proposal on the basis that it is not reasonable, not to the benefit of the general body of creditors, and not made in good faith. The OSB emphasizes that recovery for unsecured creditors is approximately 12%, and not close even to fifty cents on the dollar.

[19] It submits that the lack of good faith and the fact that approval of the Amended Proposal would compromise the integrity of the bankruptcy system is illustrated in part by the fact that there is no evidence as to whether or not the Debtor was a dupe or a knowing participant in the fraud committed on the banks who were induced to advance the loans.

[20] This uncertainty has been exacerbated rather than addressed by the Debtor who has failed to make full disclosure of all books and records including bank accounts, and has failed to provide answers to highly relevant questions, all of which would shed light on the issue of whether or not the Debtor was a dupe or a willing participant in the fraud, as well as on other issues such as the use of the funds.

[21] The OSB submits that the interests of the public at large in the integrity of the bankruptcy system are not served by the Amended Proposal since the Debtor is contributing only $2500 in funds, the gifts of money from family of the Debtor do not address individual responsibility/culpability issues, and a number of the facts referred to in s. 173 of the BIA are established here, with the result that that section, and particularly subsections 173(1) (a), (b), (d), (e) and (o), apply here.

[22] The OSB submits that the Debtor either could not, or would not, provide satisfactory answers regarding the basis for his bankruptcy, which was described simply as “business losses”. No particulars were provided as to the names of the individuals who were involved or why the businesses were never operated.

[23] In addition, the Trustee submits that by virtue of the Debtor having filed a Division II proposal, then a voluntary assignment in bankruptcy, followed in turn by the filing of a Division I proposal (which acts to annul his bankruptcy once approved by the court), he seeks to circumvent the BIA and any attempts to further investigate his conduct and to investigate any section 173 facts.

[24] The response of the Trustee to this submission is to the effect that each filing was done for proper purposes and in good faith. The Trustee submits that in the case of the consumer proposal, the two bank creditors had ongoing and concurrent investigations for fraudulent loan activity where there was concern that the Debtor may have been involved. As a result, when the consumer proposal was filed, the banks were not prepared to negotiate or accept terms offered through the consumer proposal until their investigations were complete.

[25] When the Debtor was advised of the position of the banks, he withdrew his consumer proposal and filed a voluntary assignment in bankruptcy. The Trustee is of the view that in so doing, the Debtor was not attempting to circumvent the provisions of the BIA. Ultimately, the Trustee was advised by RBC that it was prepared to forgo any further pursuit of the Debtor if the Debtor was able to present a proposal that included financial terms providing for a substantial recovery to creditors.

[26] As reflected in the Third Supplementary Report, the Debtor then consulted with family members and they apparently confirmed a willingness to support a proposal if it annulled the bankruptcy of the Debtor since they did not want the Debtor to have a bankruptcy on has record.

[27] I am concerned about the conduct of the Debtor in the circumstances of this case. The following is clear from the Written Intervention of the OSB, attached to the Third Supplementary Report as Exhibit “B”:

a. on April 23, 2021, the Debtor filed a Division II Consumer Proposal listing $215,350 on his Statement of Affairs;

b. at the time, he was unemployed;

c. the Statement of Affairs listed his cause of financial difficulty as “accumulation of debt due to financial mismanagement”;

d. the Statement of Affairs also stated that the Debtor operated a business through 13631454 Canada Corporation operating as “Concept Wrap, Food Chain” and that the company was operating from January 1 to December 31, 2020;

e. the Statement of Affairs listed liabilities owing to three creditors: BMO, RBC and Blue Chip Leasing Corporation;

f. the minutes of the First Meeting of Creditors held June 28, 2021 are internally inconsistent in that they reflect that the consumer proposal was withdrawn by the debtor, but later reflect that it was rejected following a vote. However, in any event, as a result of the fact that the consumer proposal was not approved by the creditors at the meeting, the Debtor withdrew it;

g. the Trustee was then appointed and filed its Report dated March 29, 2022, which stated in relevant part that:

i. per s. 173(1)(a), the assets of the Bankrupt did not have a value equal to fifty cents on the dollar;

ii. per s. 173(1)(j), with respect to previous bankruptcies, the Debtor had filed a consumer proposal on April 21, 2021 which was deemed annulled on June 21, 2021;

iii. per 173(1)(o), the Debtor had failed to perform the duties imposed on him under the Act;

iv. the Debtor did not submit the Declaration, Income and Expense Sheet within the duration of his bankruptcy as required;

v. the Debtor indicated it was his intention to file an in-bankruptcy consumer proposal to resolve the outstanding issues of the bankruptcy, with the result that the discharge hearing was adjourned and a meeting of creditors was called for the purpose of obtaining creditor approval to file the in-bankruptcy proposal;

vi. the inspectors were appointed at that meeting and resolved to allow the Debtor to file the in-bankruptcy proposal on March 31, 2022;

vii. a Notice of Examination before the Official Receiver was sent to the Debtor on April 4, 2022 and the examination was conducted on April 19 and June 6, 2022;

viii. the Official Receiver submitted the Report on the Examination of the Bankrupt on June 7, 2022;

ix. the Report of the Official Receiver (which is in the record before me) confirmed that:

1. the Debtor failed to fully answer questions put to him regarding the small business loans and personal bank loans he obtained;

2. the Debtor would not disclose to the Official Receiver the names of the person or persons who aided him in the preparation of various small business bank loans;

3. notwithstanding his sworn Statement of Affairs, the Debtor never in fact opened or operated a business called Concept Wrap;

4. the Debtor refused to answer questions regarding the proceeds of funds advanced to him from various lending institutions;

5. the Debtor allegedly knew that the representations made to various lending institutions were made with reckless disregard to the truth, with the result that the liabilities resulting from the funds advanced may be considered as non-dischargeable pursuant to section 178; and

6. sections 173(1)(a),(b) and (e) were cited as facts for which is discharge may be refused, suspended or granted;

x. although he confirmed that he would pay into the proposal funds from future employment and assistance from family or friends, the Debtor stated that he was called back to work as a baggage handler at Pearson International Airport after having been laid off due to the Covid 19 pandemic, and further he could not fully answer questions on his Examination about the income and ability of his family in relation to their proposed contribution of over $80,000 into the Amended Proposal; and

xi. the Debtor failed to fully answer questions relating to the loans received from BMO, RBC and Blue Chip Leasing, and the use of the proceeds advanced under the loans.

[28] As a result of all of the above, the OSB came to the conclusion that the Debtor’s reliance on family and friends to aid in his proposal payments does not fulfil the requirement of reasonable security as required by s. 59(3) of the BIA and that notwithstanding his undertakings to do so, he failed to satisfactorily disclose where the funds will come from to pay into his proposal.

[29] The OSB observed that his was the only signature on the proposal and that there was no signature of the other individuals who, he submits, have agreed to contribute to his proposal. A guarantee of performance provided as security may not be acceptable to the court if there is no evidence to show that the individual providing the guarantee has assets to support it: Re National Fruit Exchange Inc., (1948) 29 C.B.R. 125 (Que. S.C.).

[30] Finally, the OSB concluded that s. 170(6) applies and the Debtor has not given notice to the Trustee specifying the statements in the Report that he proposes to dispute, and indeed has not explained or answered the concerns expressed by the OSB at all.

[31] I accept the position of the OSB. As a result of all of the above, I am not satisfied that the Debtor is acting in good faith or that approval of the Amended Proposal is in the interests of the public at large in protecting the integrity of the bankruptcy system.

[32] Given the refusal of the Debtor to answer the questions on his Examination, I am unable to conclude otherwise. Moreover, the questions asked but refused were centrally relevant and in fact fundamental and basic: What caused the vaguely described business losses? What caused those losses particularly when the business of Concept Wrap was never in fact operated? What happened to the proceeds of the loans advanced by RBC and BMO?

[33] In the absence of satisfactory answers to those questions, I cannot be satisfied, particularly given the chronology of the filings and proposals as set out above, that the integrity of the bankruptcy system is maintained. Nor can I be satisfied given the Debtor’s refusal to answer these questions (whether satisfactorily or not), that he is acting in good faith.

[34] The record before me contains the Report of the Official Receiver, and that is unchallenged, since the record does not contain a transcript of the Examination, and nor, as noted above, is there any statement from the Debtor himself taking issue with or explaining the concerns raised by the Official Receiver.

[35] Finally, the position of the Debtor is not assisted by the fact that he is contributing only $2500, and even that modest amount is contributed over time, with the overwhelming bulk of the funds necessary for the Amended Proposal coming from his sisters who have not signed the Amended Proposal.

[36] In short, the Debtor seeks to get out from under his bankruptcy, but to do so by contributing only $2500 of his own funds as against debts of over $514,000 owing to unsecured creditors and maintaining his refusal to answer basic but highly relevant questions. As noted above, even if the proposed contribution from his sisters are accepted as being firm and irrevocable, recovery for unsecured creditors is still in the order of only approximately 12%.

[37] I accept the submission of the Trustee, supported by the Debtor himself and by RBC, that if the Amended Proposal is not approved, the funds from the Debtor’s sisters will not be available for distribution to creditors. I further accept the position of RBC that it would like to recover something, rather than nothing (or a de minimus amount).

[38] However, that is not the test, and such a motivation on the part of a creditor, while not improper and reasonable in its own self-interest, does not assist me with respect to the good faith of the Debtor or the integrity of the bankruptcy system. The elements set out in Kitchener Frame do not support the relief sought here, and I am satisfied that the facts described in ss. 173(1)(a),(d),(e) and (o) are made out here.

[39] For all of the above reasons, the Amended Proposal is not approved.

[40] Order to go to give effect to these reasons.

Osborne J.