SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY OF Howard Paul Ivany

BEFORE: D. M. Brown J.

COUNSEL:
H. Reininger, for the Applicant

M. Ross, for the Respondent

HEARD: December 6, 2012

REASONS FOR DECISION

I. Application for bankruptcy order

[ 1 ] 1171085 Ontario Limited applied for an order adjudging Howard Paul Ivany bankrupt on the basis that Ivany had committed two acts of bankruptcy under the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B.3 – (i) he had ceased to meet his liabilities generally as they had become due ( BIA , s. 42(1)(j)) and (ii) he had exhibited to a meeting of his creditors a statement of his assets and liabilities which showed that he was insolvent ( BIA , s. 42(1)(f)).

[ 2 ] Ivany opposed the application, contending that he had not committed an act of bankruptcy and that the applicant had filed the application for an improper purpose, namely to harass him.

[ 3 ] For the reasons set out below, I grant the application.

II. Procedural issue: use by the applicant of the transcript of the debtor’s judgment debtor examination

[ 4 ] At the start of the hearing I was faced with two motions: a motion by the applicant for an order declaring that Ivany had committed an act of bankruptcy, and a cross-motion by Ivany dismissing the application. Underlying both motions was the desire of the applicant to adduce as evidence in support of its application the transcript of an examination-in-aid-of-execution conducted by the applicant of Ivany on April 25, 2012 (the “JD Examination”). That JD Examination was performed in aid of efforts by the applicant to execute on a February 8, 2012 judgment which it had obtained against Ivany in the amount of the Canadian dollar equivalent of U.S. $207,299.36 (the “February Judgment”).

[ 5 ] The applicant contended that during his JD Examination Ivany admitted that he had committed acts of bankruptcy.

[ 6 ] In support of this somewhat unusual method of proving its case the applicant indicated that it was relying on a procedure approved by this Court in Re Green . [1] In that case the applicant had invoked Rule 51.06 of the Ontario Rules of Civil Procedure which provides as follows:

51.06(1) Where an admission of the truth of a fact or the authenticity of a document is made,

(a) in an affidavit filed by a party;

(b) in the examination for discovery of a party or a person examined for discovery on behalf of a party; or

(c) by a party on any other examination under oath or affirmation in or out of court,

any party may make a motion to a judge in the same or another proceeding for such order as the party may be entitled to on the admission without waiting for the determination of any other question between the parties, and the judge may make such order as is just.

[ 7 ] In the Re Green case the applicant argued that in light of admissions made by the respondent on a judgment debtor examination, an order should be made, in advance of the hearing of the bankruptcy application, that the respondent had committed an act of bankruptcy. Ground J. accepted that submission, writing:

I do not think that there is any provision in the BIA or the bankruptcy rules which is inconsistent with the provisions of Rule 51.06 . Subsection 43 (6) of the BIA provides that, at the hearing of the Petition, the court shall require proof of the facts alleged. I know of no reason why the hearing of this motion cannot constitute a hearing of that part of the Petition respecting the commission of an act of bankruptcy but in any event, the proof of the act of bankruptcy could be established at the hearing of the Petition by submitting a declaratory order made pursuant to Rule 51.06 that an act of bankruptcy has been committed. I agree with Miss Habas' submission that a Rule 51.06 motion could be brought at the opening of the hearing of the Petition. I also agree with Miss Huff that this is not a reason to dismiss the motion at this time. The admissions are clear. The order under Rule 51.06 should be made so that the issue of the commission of an act of bankruptcy is disposed of and there will be no need to lead evidence or call witnesses in that respect at trial. [2]

[ 8 ] Given how this motion by the applicant unfolded at the hearing before me, it did not become necessary to consider the availability of Rule 51.06(1) in the circumstances of the present case. I would simply observe that applications for bankruptcy orders are designed to proceed on a summary, timely basis. I query whether the use of Rule 51.06(1) to bifurcate issues on a bankruptcy application, such as occurred in the Re Green case, remains available any longer in Ontario in light of the introduction into the Rules of Civil Procedure in 2008 of Rule 6.1.01 which authorizes a court to order the bifurcated hearing of issues only “with the consent of the parties”.

[ 9 ] In any event, a much simpler and more direct forensic tool is available to an applicant – the applicant may call the debtor as an adverse party witness pursuant to Rule 53.07 and ask the debtor “to reveal the information necessary to determine whether the act of bankruptcy alleged in the petition has occurred”. [3] If, on an examination at trial under Rule 53.07, a debtor gives evidence inconsistent with that given on a previous judgment debtor examination, the transcript of that examination can be used in the normal way to impeach on a prior inconsistent statement.

[ 10 ] In the present case the applicant had served a summons to witness on Ivany, and respondent’s counsel acknowledged that the applicant was entitled to call and examine Ivany pursuant to Rule 53.07. The hearing proceeded on that basis, and therefore it was not necessary for me to rule on the motions.

III. First alleged act of bankruptcy: Ceasing to meet liabilities generally as they became due

A. Applicable principles of law

[ 11 ] To secure a bankruptcy order an applicant must prove that the debtor has a debt outstanding to the applicant creditor in the amount of at least $1,000 and that the debtor has committed an act of bankruptcy within the six months preceding the filing of the application: BIA , s. 43(1). The first act of bankruptcy alleged by the applicant in this case is that the respondent debtor ceased to meet his liabilities generally as they became due. As is the case with all alleged acts of bankruptcy, this act must be strictly proved. [4]

[ 12 ] To demonstrate that a debtor has ceased to meet his liabilities generally as they become due generally requires, in the absence of special circumstances, (i) proof of the outstanding debt owed to the applicant and (ii) evidence that the debtor has ceased to meet his liabilities to its creditors in general. [5] The existence of unpaid creditors is not sufficient, in and of itself, to establish an act of bankruptcy; the applicant must prove, on the balance of probabilities, that the debtor has ceased to meet its liabilities generally as they become due. [6] Since the machinery of the BIA is for the benefit of the creditors of a debtor as a class, establishing that a debtor has ceased to meet his liabilities generally requires some evidence that the debtor has ceased to meet liabilities other than those incurred towards the applicant creditor. [7] As Henry J. put the matter in Re Holmes :

The Court ought not to be asked to draw inferences with respect to the class on the basis of one creditor's experience where evidence of the debtor's conduct towards other members of the class could, with reasonable diligence, be discovered and produced. [8]

B. Analysis

[ 13 ] Janet Hilson, the President of 1771085 Ontario Limited, filed an Affidavit of Truth of Statements in Application in which she deposed that Ivany was indebted to the applicant in the amount of U.S. $207,299.36. Hilson testified at the hearing. There was no dispute that the applicant had obtained the February Judgment, and Ivany admitted that he had not paid any amount of the judgment. A judgment operates as a continuing demand for payment by the judgment creditor, just as the failure to satisfy the judgment is a continuing refusal to pay by the judgment debtor. [9]

[ 14 ] In the present case the applicant did not contend that special circumstances existed to support a finding of an act of bankruptcy based only on debts owed to a single creditor. The applicant submitted that another creditor had an unsatisfied debt against Ivany – the Canada Revenue Agency

[ 15 ] The applicant did not call or adduce any independent evidence of Ivany’s debt to the CRA. The applicant relied solely on information it had obtained from Ivany, specifically: (i) a March 28, 2012 CRA Statement of Account produced by Ivany which showed an amount owing as of March 21, 2012 of $37,181.39, and (ii) Ivany’s admission at the hearing that he continues to owe the CRA that amount.

[ 16 ] Ivany testified that his indebtedness to CRA arose as a result of re-assessments for the 2003 and 2004 tax years. As disclosed by Exhibit 3, by letter dated November 25, 2011, CRA demanded payment from Ivany of $47,903.02 in respect of income tax arrears for 2003 and 2004. By Requirements to Pay dated March 2, 2012 the CRA garnished funds in one of Ivany’s bank accounts. Ivany testified, however, that since this past March the CRA had not taken any further enforcement steps. Ivany stated that following the garnishment of his funds he had contacted CRA, explained to it that he was involved in several legal proceedings and he would need some time to handle his affairs. Ivany testified that the CRA had agreed to allow him some time to do this and since March, 2012 the CRA had not made any further demands for payment from him.

[ 17 ] Hilson testified that the applicant had not contacted the CRA to ascertain the status of Ivany’s indebtedness to it.

[ 18 ] Ivany submitted that his debt to the CRA was a stale debt, arising as it did from 2003 and 2004 assessments, and he contended that because the CRA had taken no further steps to enforce that debt, his failure to pay that debt should not be considered evidence of his ceasing to meet his liabilities “generally” as they become due. Counsel placed before me some case law which has interpreted BIA section 42(1)(j) to mean that ceasing to do anything more about a liability already due cannot be expanded to include ceasing to meet liabilities as they become due. [10]

[ 19 ] Section 43(1) of the BIA requires an applicant to prove that the debtor had committed an act of bankruptcy “within the six months preceding the filing of the application”. That statutory language indicates an intention to exclude stale acts of default on the part of a debtor. [11] Professor Roderick Wood, in Bankruptcy & Insolvency Law , [12] wrote that although a creditor cannot rely on a stale act of bankruptcy to obtain a bankruptcy order, “the cases are divided on the question of timing where the alleged act of bankruptcy is the debtor’s ceasing to meet liabilities as they generally become due.” He concluded his analysis on the point by writing:

In principle, the focus of the inquiry should not be on whether a demand for payment occurred within the six-month period. The issue is whether in the six-month period before the bankruptcy application the debtor has ceased to meet liabilities generally. If the application for a bankruptcy order is based upon a failure to pay a single creditor the special requirements for this type of claim must be satisfied. If it is based upon a failure to pay more than one creditor, it must be shown that the creditors are generally not being paid. The court must make a determination on the evidence before it whether or not this had occurred, and a failure to make a current demand is only one element that must be considered. A court may very well conclude that a failure to make a current demand is of no relevance, such as the case where it would be clearly futile for the creditor to do so. [13]

[ 20 ] In the present case the application was filed on June 7, 2012. It is not in dispute that in March, 2012, within six months prior to the filing of the application, Ivany owed the CRA tax arrears and the CRA had taken enforcement steps to collect tax arrears owing by Ivany. That conduct by CRA clearly signified that it did not regard Ivany’s debts as stale but, on the contrary, very much alive and subject to collection. At the hearing Ivany admitted that he had not made any further payments to the CRA since the March garnishment of his bank account and that his present debt to CRA exceeded $37,000.00.

[ 21 ] The the applicant has established that (i) within the six months prior to the filing of the application Ivany was indebted both to the applicant and the CRA, (ii) both debts remained outstanding and unpaid on the date the application was filed, and (iii) three months prior to the filing of the application the CRA had taken enforcement steps to collect Ivany’s tax arrears. This evidence, in my view, certainly establishes a prima facie case that within the six months prior to the filing of the application Ivany had failed to meet his liabilities generally as they became due.

[ 22 ] Nevertheless, Ivany submitted that his evidence concerning CRA’s agreement not to take further steps to collect the tax arrears until he had sorted out his affairs constituted evidence that the CRA debt was stale and he had not failed to meet his liabilities generally as they became due.

[ 23 ] In Tysak Ltd., Re Saunders J. wrote:

While the attitude of a creditor is not relevant to the issue of whether his account is overdue, the fact that a creditor is not pressing and is willing to tolerate delay in payment is, in m y opinion, one circumstance that may be taken into account in determining whether a debtor has ceased to meet its liabilities. [14]

[ 24 ] The question in the present case, then, is: does the evidence disclose that the CRA is willing to tolerate delay in payment of Ivany’s tax arrears such that his debt to the CRA no longer may be taken into account in determining whether Ivany has ceased to meet his liabilities? That question, in my view, in turn is linked to whether Ivany has discharged his evidentiary obligations under section 43(7) of the Bankruptcy Act which provides as follows:

43(7) Where the court is not satisfied with the proof of the facts alleged in the application or of the service of the application, or is satisfied by the debtor that he is able to pay his debts , or that for other sufficient cause no order ought to be made, it shall dismiss the application. (emphasis added)

That portion of section 43(7) dealing with proof by the debtor that he is able to pay his debts was considered by Ground J. in 484030 Ontario Ltd. (Re) . After an extensive review of the case law, he wrote:

These decisions would appear to support the position that if the debtor can establish by clear and independent evidence that it was meeting its liabilities generally as they became due, this will rebut the presumption that, because the petitioning creditor and the other creditors named in the petition had not been paid, the debtor was not meeting its liabilities generally as they became due. I do not find that the debtor has satisfied this onus in the case before the court.

If the debtor asserts that its liabilities have generally been met as they became due, sufficient evidence to satisfy the court must be presented. To be sufficient, such evidence would have to indicate the financial position of the debtor and this would require that financial accounts or statements be submitted. [15]

[ 25 ] At the end of the day I am not satisfied that Ivany has demonstrated that he has an agreement or arrangement with the CRA sufficient to remove his indebtedness to it from the consideration of whether he has failed to meet his liabilities generally as they become due. Ivany did not file any documentary evidence supporting such an arrangement. Nor did he file any documents or financial statements which would support a finding that at present he is generally meeting his liabilities as they become due. I am left only with assertions by Ivany, unsupported by any independent evidence.

[ 26 ] As a result, I conclude that the applicant has demonstrated that within the six months preceding the filing of the application, Ivany had ceased to meet his liabilities generally as they became due.

IV. Second alleged act of bankruptcy: exhibiting a statement to a meeting of creditors

[ 27 ] The second act of bankruptcy alleged by the applicant was based on section 42(1)(f) of the BIA which states that a debtor commits an act of bankruptcy:

(f) if he exhibits to any meeting of his creditors any statement of his assets and liabilities that shows that he is insolvent, or presents or causes to be presented to any such meeting a written admission of his inability to pay his debts.

[ 28 ] The applicant proved that on his JD Examination Ivany had produced to examining counsel, in the presence of Hilson, the applicant’s President, a handwritten statement which showed that his liabilities exceeded his assets.

[ 29 ] The case law on this act of bankruptcy appears sparse. The statement referred to in section 42(1)(f) must be in writing. [16] Further, a representation made by a debtor at a meeting with representatives of one creditor that the company would have to be liquidated if the creditor pressed for payment because the company lacked funds to pay the account was not made at a “meeting of creditors” within the meaning of the section. [17]

[ 30 ] In the present case the judgment debtor examination did not constitute a “meeting of creditors” within section 42(1)(f) of the BIA - not because only the representative of one creditor was present; but because of the nature of a judgment debtor examination. As Rule 60.18(2) of the Ontario Rules of Civil Procedure makes clear, an examination in aid of execution is not a “meeting”, but a compelled examination of a judgment debtor by a creditor in whose favour an order has been made. Whatever the scope of the term “any meeting of his creditors” found in BIA s. 42(1)(f), it does not include a compelled examination of a judgment debtor by a judgment creditor in aid of the enforcement of a court order. The applicant therefore has not established this act of bankruptcy.

V. Allegation of improper purpose

[ 31 ] In his Notice Disputing Bankruptcy Application Ivany stated that the application had been filed “for an improper purpose: to harass Ivany”.

[ 32 ] A court has the power to dismiss a bankruptcy application despite the fact that all necessary prerequisites and grounds alleged in the bankruptcy application have been proven. Section 43(7) of the BIA provides, in part, that if “sufficient cause” exists that no bankruptcy order ought to be made, it shall dismiss the application. Such sufficient cause has included where a court is satisfied that the applicant brought an application for an improper purpose, such as where the application was brought against the debtor out of spite or vengeance, as part of a vendetta, in order to obtain a business advantage such as the elimination of a competitor or the termination of a contract , [18] or trying to force a creditor to deal with him to the exclusion of, or in priority to, other creditors. [19]

[ 33 ] In the present case I am not satisfied that sufficient cause exists to refuse to grant the bankruptcy order requested. There is no doubt that the applicant is pressing to collect on its February Judgment. Hilson acknowledged that the applicant had commenced a civil action this past May claiming an interest in Ivany’s home. Those pleadings were not placed in evidence before me. Although the bankruptcy process is meant to benefit the class of a debtor’s creditors, not the civil interests of a single creditor, as I stated in Re Diena , another case involving an application by a judgment creditor, “it is not surprising that [the] judgment creditor now seeks to invoke one of the legal mechanisms available to unsecured creditors; unpaid judgment creditors tend to do that”. [20] Or, as put by the Court of Appeal:

[I]f a petitioner can satisfy the requirements of the BIA , I see no reason for denying him access to the process and remedies of the Act because there may be other civil routes open to him. The BIA is not a second-rate or fallback statute that can only be invoked if other avenues fail.

The fact that the petitioning creditor desires, as he candidly admitted when he was cross-examined on his Affidavit of Verification in support of the petition, to collect on the debt owing to him, is not an impermissible or disqualifying feature. Virtually every creditor who initiates a bankruptcy petition would have this as an objective. [21]

[ 34 ] Here, Ivany testified that up until last year on average he earned about $200,000 in fees as a mortgage agent. Although he did not know what the number would be for 2012, it probably would be less. Ivany acknowledged that he has made no payments against the February Judgment, nor has he made any voluntary payments to CRA in respect of tax arrears. Ivany did not adduce independent evidence of his ability to pay his creditors. Finally, he admitted in his testimony that his liabilities presently exceed his assets. Given that state of affairs, I see no basis on which to conclude that sufficient cause exists to refuse the order sought by the applicant.

VI. Conclusion

[ 35 ] For these reasons I grant the application, adjudge Howard Paul Ivany bankrupt, and appoint SF Partners Inc. as trustee in bankruptcy of his estate.

D. M. Brown J.

Date : December 12, 2012

[1] (2002), 2002 49593 (ON SC) , 34 C.B.R. (4 th ) 38 (S.C.J.)

[2] Ibid., para. 1.

[3] Re Freedman (1982), 50 C.B.R. (N.S.) 106 (Ont. H.C.J.), para. 7 .

[4] Re Holmes; Re Sinclair (1975), 1975 667 (ON SC) , 9 O.R. (2d) 240 (S.C.), para. 3 .

[5] Arthur Ali Inc. (Re) (2008), 45 C.B.R. (5 th ) 293 (Ont. S.C.J.), para. 13 .

[6] La Hougue Financial Management Services Ltd. v. One Shaftesbury Community Association (2005) 2005 25954 (ON SC) , 13 C.B.R. (5 th ) 217 (Ont. S.C.), para. 25 .

[7] Valente v. Fancsy Estate (2004), 2004 8018 (ON CA) , 70 O.R. (3d) 31 (C.A.), para. 13 , quoting with approval Re Holmes, supra., p. 243.

[8] Re Holmes , p. 243.

[9] Malstrom v. Platt (2001), 2001 24037 (ON CA) , 53 O.R. (3d) 502 (C.A.), paras. 10 , 11, 18 and 19.

[10] Ibid. , para. 9.

[11] Brown v. England Estate , 1923 543 (BC CA) , [1923] 2 D.L.R. 738 (B.C.C.A.), para. 4 .

[12] Roderick J. Wood, Bankruptcy & Insolvency Law (Toronto: Irwin Law, 2009)

[13] Ibid. , pp. 66-67.

[14] (1981), 38 C.B.R. (N.S.) 142 (Ont. H.C.J.), para. 24 .

[15] (1992), 1992 7417 (ON SC) , 8 O.R. (3d) 243 (Gen. Div.), paras. 37 and 38 .

[16] Brown v. England Estate , 1923 543 (BC CA) , [1923] 2 D.L.R. 738 (B.C.C.A.), para. para. 2.

[17] Re King Petroleum Ltd. (1973), 1973 540 (ON SC) , 2 O.R. (2d) 192 (H.C.J.), para. 9 .

[18] See the cases collected and discussed in Diena (Re) , 2012 ONSC 5849 , paras. 10 and 11 .

[19] Mastronardi (Re) (2000) 17002 (C.A.), para. 35.

[20] Diena (Re) , para. 22 .

[21] Mastronardi , paras. 28 and 36.