SUPERIOR COURT OF JUSTICE – ONTARIO

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Court File

COURT FILE NO.: 31-208039-T
DATE: 20150923

In the Matter of the Bankruptcy of

SHS SERVICES MANAGEMENT INC./GESTION DES SERVICES SHS INC. and SHS SERVICES LIMITED PARTNERSHIP of the City of Toronto, in the Province of Ontario

BEFORE: L. A. Pattillo J.

COUNSEL:
M. Starnino and R. Walker
For Paul and Stephen Verhoeff and Theresa Lea

Brett Harrison
For Pricewaterhouse Coopers Inc., in its capacity as Trustee

Adam Slavens
For Sears Canada Inc.

HEARD: April 21, 2014

ENDORSEMENT

Introduction

[1] This is a motion by PricewaterhouseCoopers Inc., in its capacity as trustee in bankruptcy (the “Trustee”) of SHS Management Services Inc./Gestion des Services SHS Inc. (“SHS Management”) and SHS Limited Partnership (“SHS LP”) (together, the “Bankrupt”) for an order:

a) Compelling Paul Verhoeff and Stephen Verhoeff (together the Verhoeffs”) and Teresa Lea (“Lea”) (collectively the “Respondents”) to attend examinations under oath by the Trustee pursuant to s. 163(1) of the Bankruptcy and Insolvency Act (“BIA”) and

b) Compelling the Respondents to deliver to the Trustee all documents listed in Schedule “A” to the Notices of Appointment previously served on them no less than seven days prior to the examinations.

[2] For the reasons that follow, the motion is granted.

Background

[3] SHS Management carried on business in the retail and home appliance business. It was created to acquire the home services business operated by Sears Canada Inc. The Verhoeffs are the former directors of SHS Management. They were intimately involved in the establishment of the Bankrupt and its management. Lea was an officer of SHS Management. The shareholders of the Bankrupt are, among others, certain family trusts associated with the Respondents. The Respondents reside in Calgary.

[4] The Trustee was initially appointed as interim receiver of the Bankrupt on December 13, 2013 and receiver on January 9, 2014. The Trustee was appointed in the bankruptcy proceedings on July 31, 2014. During the course of executing its duties in the bankruptcy proceedings, the Trustee reviewed the records of the Bankrupt to identify and evaluate transactions that may be subject to review under the BIA and other relevant legislation (the “Transactions”). In the course of its investigation, the Trustee obtained limited disclosures from the Verhoeffs.

[5] As a result of information it obtained, the Trustee obtained a resolution from the Bankrupt’s inspectors to conduct examinations of people involved in the creation and management of the Bankrupt concerning its affairs pursuant to s. 163(1) of the BIA, including the Respondents.

[6] On or about January 25, 2015, the Verhoeffs were advised by the Trustee’s counsel of the Trustee’s intention to examine them pursuant to s. 163(1) of the BIA. The trustee intended to conduct the examinations within a week or two. The Verhoeffs asked for a delay of the examinations to accommodate both their need to travel to Toronto for the examination and their counsel’s availability. The trustee agreed to a delay to accommodate the Verhoeffs.

[7] On February 11, 2015, counsel for the Trustee served notices of appointment on the Respondents (the “Notices of Appointment”). The Notices of Appointment required the Verhoeffs to attend to be examined under oath pursuant to s. 163(1) of the BIA at 10:00 a.m. on March 17, 2015. The Notices of Appointment set out a list of documents in Schedule “A” that the Respondents were required to bring with them to their respective examinations and produce to the Trustee (the “Documents”).

[8] On March 17, 2015, neither the Verhoeffs nor Lea attended for examination or produced the Documents.

[9] After some investigation of the Transactions and consultation with the creditors of the Bankrupt and legal counsel, the Trustee determined that a cause of action likely existed against certain parties, including the Respondents in respect of the payment of millions of dollars in dividends to shareholders of the Bankrupt, including trusts beneficially owned by the Verhoeffs and Lea on March 4, 2013 (the “Dividend Transaction”).

[10] On February 27, 2015, and in the absence of being able to reach a tolling agreement to avoid any limitation issues, the Trustee issued a statement of claim in relation to the Dividend Transaction (the “Action”). The Verhoeffs and Lea are named as defendants in the Action.

Position of the Parties

[11] The Trustee submits that it needs to examine the Respondents in order to obtain information about the finances and operations of the Bankrupt, including information related to certain dispositions of the Bankrupt’s assets.

[12] The Respondents submit that, having commenced the Action against them, in the absence of “exceptional circumstances” the Trustee cannot use s. 163(1) of the BIA to examine them. Further, there are no exceptional circumstances which justify the order sought. The Trustee will have access to the information it seeks through discovery in the Action and should not be afforded a “dress rehearsal” for the Action.

Discussion

[13] Section 163(1) gives trustees broad powers of examination. It provides:

163. (1) The trustee, on ordinary resolution passed by the creditors or on the written request or resolution of a majority of the inspectors, may, without an order, examine under oath before the registrar of the court or other authorized person, the bankrupt, any person reasonably thought to have knowledge of the affairs of the bankrupt or any person who is or has been an agent or a mandatary, or a clerk, a servant, an officer, a director or employee of the bankrupt, respecting the bankrupt or the bankrupt’s dealings or property and may order any person liable to be so examined to produce any books, documents, correspondence or papers in that person’s possession or power relating in all or in part to the bankrupt or the bankrupt’s dealings or property.

[14] The purpose of the trustee’s examination power is to collect information assist the trustee in carrying out its duties in administering the bankrupt estate. See: Re Rieger Printing Ink Co, 2009 7766 (ON SC), [2009] O.J. No. 755 (S.C.J.) at para. 10; Re 303687 Ontario Ltd. (1986) CarswellOnt 166 (S.C.) at para. 6.

[15] While s. 163(1) confers wide powers on the trustee and restrictions on the powers should be avoided, the court must remain vigilant to ensure the powers are not abused. See: Holden and Morawetz, Bankruptcy and Insolvency Analysis, H§9 (1) - Generally.

[16] In support of their position, the Respondents rely on Re Franks; Ex parte Gittins, [1892] 1 QB 646 (Queens Bench). The issue in Re Frank was somewhat similar to the issue before the court. The trustee wished to examine one Campbell pursuant to s. 27 of the Bankruptcy Act, 1862 concerning the affairs of the bankrupt who was deceased. At the same time, there was an action extant involving the trustee and Campbell concerning who was entitled to the proceeds of a life insurance policy which the bankrupt had assigned to Campbell for value a few months before his bankruptcy.

[17] In directing that the bankruptcy examination be postponed, Vaughan Williams J. noted that the trustee’s powers of examination cannot be treated as a “mere step in the action” while at the same time the trustee is entitled to “reasonable information.” In the end, the learned judge directed that the trustee provide a written statement of the admissions required and if reasonable and fairly answered that would end the matter. If not, he would then decide if the examination should proceed.

[18] Re Frank notes the competing interests that arise between the trustee’s right to examine to facilitate the administration of the estate and avoiding the power being used to promote litigation.

[19] Re Aarons (1914), 111 L.T. 411 (K.B.) adopts the view of Vaughn Williams J. in Re Franks but notes that such examination may proceed in “exceptional circumstances.” In that case there appeared to be improper dealings between the bankrupt and the person sought to be examined.

[20] In my view, a requirement of “exceptional circumstances” to permit a s. 163(1) examination is too high. In considering the interests at stake, in order to permit a s. 163(1) examination to proceed, the court must be assured the examination is necessary for the due administration of the bankrupt’s estate and not “a mere step in the action”.

[21] Based on the evidence filed, I am satisfied that the Trustee’s proposed s. 163(1) examination is necessary for the due administration of the Bankrupt. The proposed examination will deal with many issues concerning the affairs of the Bankrupt beyond the transaction which is the subject of the Action. The Respondents were directly involved with the Bankrupt.

[22] Further, it is clear that the proposed examination is sought by the Trustee not merely as a step to further the Action but to obtain information about the administration of the Bankrupt’s estate. The Trustee sought to hold the examinations well before the Action was commenced. It was only when the Trustee agreed to delay the examination to accommodate the Respondents that the issue of the limitation period arose necessitating the commencement of the Action.

[23] Nor in my view is it any answer to say that the Trustee can obtain any information in the discoveries in the Action. First, and as noted, the Trustee wishes to examine on issues not covered by the Action. Further, any information obtained in the Action could not be used in the bankruptcy given the implied undertaking rule.

[24] Further, I am not prepared to direct that the Trustees s. 163(1) examination be limited to issues apart from the Action. In my view, given the circumstances, the Trustee is entitled to examine the Respondents on all issues concerning their involvement with the Bankrupt. In so ordering and to prevent duplication, I direct that the portion of the s.163(1) examination dealing with the issues in the Action apply as discoveries in the Action so that they not be repeated.

Conclusion

[25] The Trustee’s motion is therefore allowed.

[26] The Respondents are ordered to attend examinations under oath pursuant to s. 163(1) of the BIA and to deliver to the Trustee all documents listed in Schedule “A” to the Notices of Appointment previously served no later than seven days before the examination, all at their own expanse.

[27] The Trustee is entitled to costs of the motion which counsel have agreed upon at $5,000.00. Having regard to the issues on the motion, I consider that amount to be fair and reasonable. Accordingly, costs payable by the Respondents fixed at $5,000.00 in total.

L. A. Pattillo J.

Released: September 23, 2015