Court File and Parties

Court File No.: 31-OR-208344-T Motion Heard: 20190312 Superior Court of Justice – Ontario (In Bankruptcy and Insolvency)

Re: Pierre Gagnon a.k.a. Pierre Gaston Gagnon, Bankrupt

Before: Master J. E. Mills

Counsel: C. Linthwaite, Counsel, for the Debtor M. Spence, Counsel, for the Petitioning Creditor, Royal Bank of Canada

Heard: March 12, 2019

Reasons for Decision

[1] The debtor brings this motion seeking a declaration prohibiting the applicant creditor, Royal Bank of Canada (“RBC”) from conducting a cross-examination of the debtor in respect of his affidavit sworn on January 10, 2019 and filed in response to a motion brought by RBC for a Certificate of Pending Litigation (“CPL”) in civil matter CV-18-0061369 (the “Action”). For the reasons that follow, the motion is granted. A copy of this endorsement is to be placed in court file CV-18-0061369.

[2] RBC commenced an application for a bankruptcy order against the debtor on December 7, 2018 (the “Application”). The Application states the debtor is justly and truly indebted to RBC in the sum of $3,000,000, as at November 26, 2018 plus accrued interest and recovery costs (the “Indebtedness”). The grounds for the Application are stated to be a failure to meet his liabilities generally as they become due and more specifically, it is alleged the debtor fraudulently conveyed his interest in the real property known municipally as 10 Maple Grove Drive, Suite 10, Oakville ON (the “Real Property”) to his spouse within twelve months of the Application, thereby preferring his spouse over his other creditors.

[3] Also on December 7, 2018, RBC commenced the Action seeking payment of $3,000,000 plus interest and costs in respect of the debtor’s personal guarantee of a corporate indebtedness. The Statement of Claim also seeks a declaration that the transfer of the Real Property is a fraudulent conveyance or in the alternative is void as against RBC as being a preference. A claim seeking leave to issue a CPL is asserted.

[4] The Action and the Application are in respect of the same alleged debt and precisely the same alleged conduct by the debtor.

[5] The debtor filed a Notice of Dispute to the Application on December 20, 2018 and delivered a Statement of Defence on January 10, 2019.

[6] RBC brought its motion to obtain a CPL on December 14, 2018, returnable on January 14, 2019. The grounds for the motion and the supporting affidavit both state the motion and the Action are in respect of the Indebtedness and rely on the allegations of a fraudulent conveyance of the Real Property against the debtor and his spouse to support the issuance of a CPL.

[7] The debtor filed a responding affidavit to the CPL motion to oppose the motion and ensure it did not proceed on a default basis. The importance of the motion called for direct evidence as opposed evidence being proffered on the basis of information and belief. That necessitated the debtor filing an affidavit in his own capacity. RBC seeks to cross-examine the debtor on this affidavit in advance of the CPL motion.

[8] Counsel conceded that RBC intended to also use any information obtained from the cross-examination at the return of the bankruptcy Application, but claims it would be solely for the purposes of impeaching the debtor. It is not RBC’s intention to rely on the information for proving the alleged acts of bankruptcy in support of the merits of the Application. It is RBC’s position that the cross-examination ought to be permitted, leaving it to the judge to determine what, if any, evidence is admissible on the Application.

[9] It is well settled law that an applicant for a bankruptcy order will not be permitted to establish its case by compelling evidence from the respondent debtor. The applicant must prove its case on its own evidence. This is commonly referred to as the Re Debtor principle, and was adopted by our courts in Re Media-1-Stop (London) Limited. Simply stated, discovery is not allowed to enable a petitioner to prove the allegations in a bankruptcy application.

[10] The Re Debtor principle has been broadly applied to preclude examination and cross-examination in circumstances where the effect is to indirectly obtain evidence of the debtor in disputed bankruptcy petitions. The examination of a creditor is not even permitted pending the hearing of a disputed petition, as seen in Re Kaiser Resources at paras. 3 and 5.

[11] The Re Debtor principle is not absolute. If the debtor files a responding affidavit to contest the bankruptcy petition, cross-examination on that affidavit is permitted on the basis that the evidence was voluntarily provided by the debtor in circumstances where it was not required to be given. Further, in the Zurich Indemnity Co. of Canada v. Reemark Rideau Developments Ltd. case, the debtor did not deny the debt or the alleged act of bankruptcy; rather, a cross-claim was asserted in the affidavit which, if proven, would effectively undermine the basis for the petition. Cross-examination on the debtor’s affidavit was permitted.

[12] The circumstances of the present case are very different. The debtor does dispute the Indebtedness, the alleged act of bankruptcy, the alleged fraudulent conveyance of the Real Property and the alleged preference. The use of a cross-examination in the CPL motion for any purpose in the bankruptcy Application undermines the Re Debtor principle.

[13] I appreciate there is a conflict between Rule 14 of the Bankruptcy and Insolvency Act which requires leave of the Court to examine a bankrupt and Rule 39 of the Rules of Civil Procedure which entitles a party to cross-examine on any affidavit filed in support of a motion. The quasi-penal nature of bankruptcy and the debtor’s rights must prevail pending determination of the petition, irrespective of collateral civil proceedings. The civil court procedures cannot be utilized to thwart the substantive bankruptcy laws.

[14] The Re Debtor principle protects the debtor from examination respecting the contested petition. It is analogous to the fundamental right a person has not to incriminate him or herself. To permit creditors to conduct examinations in civil proceedings based on the same alleged facts as the bankruptcy petition would entirely undermine this core principle of bankruptcy law.

[15] RBC cannot be permitted to do indirectly what it cannot do directly, and it is hereby precluded from cross-examining the debtor on his affidavit filed on the CPL motion until such time as the Application has been determined on its merits.

[16] I am advised by counsel that there has been no prior case law on this particular issue. The Re Debtor principle is firmly entrenched in Canadian bankruptcy law. I do not accept the submission that refusing to permit RBC to cross-examine the debtor on the CPL affidavit will markedly expand the principle into new territory. The claims and the allegations are the same in RBC’s Action and its bankruptcy Application. RBC is fully entitled to pursue both proceedings at the same time, as established in Re Dominion Gainesville Co. at para. 2. They cannot however use the civil procedure to obtain evidence from the debtor for use in the bankruptcy Application. The proceedings are separate but they are most certainly conflated.

[17] In the circumstances, I am therefore inclined to award costs to the debtor. As agreed, the quantum for costs is fixed at $4,000, plus disbursements and HST, payable forthwith.

Master J. E. Mills Date: March 25, 2019