Rod Byrnes

A creditor in a bankruptcy proceeding sought a declaration permitting set-off of a substantial costs award owed to the bankrupt against the creditor’s proven unsecured claim in the bankruptcy estate.

The court considered whether the claim satisfied the requirements for legal or equitable set-off under the Bankruptcy and Insolvency Act.

It held that legal set-off was unavailable because the costs debt arose after the bankruptcy and lacked the necessary mutuality with the creditor’s claim against the estate.

Equitable set-off was also unavailable because the adverse costs award related to a discrete tort claim and was not sufficiently connected to the contractual debt forming the creditor’s proven claim.

The motion for set-off was dismissed, and the court granted the bankrupt’s counsel a charging order over the costs award pursuant to the Solicitors Act, giving the solicitor priority as a secured creditor.

A bankrupt sought a discharge under s. 169 of the Bankruptcy and Insolvency Act.

Two creditors opposed the discharge and requested authorization under s. 38 of the Act to pursue recovery proceedings in the trustee’s name where the trustee declined due to lack of funds.

The court reviewed the complex financial history of the bankrupt, including transfers of real property, potential settlements within five years of bankruptcy, and substantial payments relating to the bankrupt’s spouse’s medical care.

The court concluded that a creditor‑initiated s. 38 proceeding could provide the only realistic opportunity for recovery for the estate and imposed conditions for creditor notice, participation, and court approval of any settlement.

The discharge hearing was adjourned pending further developments.