COURT FILE NO.: BK-35-2748534 DATE: 2024/05/10 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: IN THE MATTER OF THE BANKRUPTCY OF John Charles Pavanel

BEFORE: Justice A. K. Mitchell

COUNSEL: D. Swift, for MNP Ltd., Licensed Insolvency Trustee, applicant J. Buote, for Clare Pavanel, Nicholas Pavanel and John Charles Pavanel Jr., responding parties

HEARD: February 28, 2024 via video conference

Endorsement

Overview

[1] John Charles Pavanel (“John”) made an assignment in bankruptcy on June 29, 2021, and the applicant, MNP Ltd., was appointed Trustee of John’s bankrupt estate (the “Trustee”).

[2] The Trustee brings this application on behalf of the creditors of the estate. The responding parties are John’s estranged spouse, Clare Pavanel (“Clare”) and his two sons Nicholas Pavanel (“Nicholas”) and John Charles Pavanel Jr. (“Charles”).

[3] On this application, the Trustee seeks to set aside alleged transfers at under value made by John to the responding parties in the two years prior to the date of his bankruptcy.

[4] Specifically, the Trustee seeks a declaration that (i) the transfers described below constitute “transfers for undervalue” as that term is defined in the BIA [1]; (ii) such transfers are void; and (iii) directing the responding parties to repay the amount of such transfers to the Trustee for distribution among John’s creditors.

[5] The alleged impugned “transfers” consist of the following payments:

(a) In the year immediately preceding the date of bankruptcy: (i) $118,168.13 paid to Clare on account of Clare’s credit card and expenses relating to her house; (ii) $16,332.08 paid to Charlie on account of personal income tax and moving expenses; and (iii) $38,634.56 to Nicholas on account of personal income tax and mortgage payments. (collectively, the “1-year prior payments”)

(b) In the year commencing two years preceding the date of bankruptcy: (i) $103,619.37 paid to Clare on account of Clare’s credit card and expenses relating to her house; (ii) $46,517.81 paid to Charlie on account of on account of a down payment for a property purchased by Charlie; and (iii) $38,634.56 to Nicholas on account of mortgage and property tax payments and tuition. (collectively, the “2-year prior payments”)

Relevant Facts

[6] Many of the facts relevant for purposes of determining the issues on this application are not disputed. These facts include the following:

• Charlie was 24 years of age and Nicholas was 22 years of age in June 2019.
• Charlie and Nicholas are the biological children of Clare and John.
• The payments were made and received as described above.
• The payments constitute dispositions of property for purposes of the BIA.
• On the dates on which the payments were made by John, on the one hand, to Clare, Nicholas and Charlie, as the case may be, on the other, the parties were not dealing at arms’ length.

The Law

[7] Section 96(1) of the BIA provides:

s. 96. (1) on application by the Trustee, a court may declare that a transfer at undervalue is void as against the Trustee – or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor – if

(b) the party was not dealing at arm’s length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or

(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph one begins and

(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or

(B) the debtor intended to defraud, defeat or delay a creditor.

Positions of the Parties

[8] The Trustee submits that all of the payments constitute dispositions of property to persons not at arm’s length to John for less than full and fair consideration, and at a time when John was insolvent in the case of the 2-year prior payments.

[9] The responding parties submit that the payments do not constitute transfers at undervalue because they were made in exchange for Clare’s forbearance from enforcing her rights under the parties’ oral separation agreement to receive spousal and child support and to receive an equalization of net family property entered into at the time John and Clare separated.

[10] Furthermore, in the case of the 2-year prior payments, the responding parties submit that they were made at a time when John was not insolvent. That is, the value of his assets exceeded his liabilities on the dates the payments were made.

Analysis

[11] The responding parties do not dispute that the date and amounts of the payments and that the payments constitute dispositions of property for purposes of s. 96(1) of the BIA. Furthermore, it is not disputed that at the time the payments were made John and Clare, Charlie and Nicholas were individuals connected by marriage or blood relationship and, thus, not dealing at arms’ length.

[12] In the circumstances of this case, determining whether any one or more of the six (6) payments made by John to the responding parties or on their behalf in the two years prior to the date of bankruptcy are void, requires a determination of the following issues:

(i) with respect to all payments, whether the payments or any of them constitute a “transfer at undervalue”. That is, whether fair and valuable consideration was given in exchange for the payments; and

(ii) with respect to the 2-year prior payments, whether at the time of any one or more of the payments, John was insolvent or was rendered insolvent by the payment(s).

Were the payments or any one or more of them a “transfer at undervalue”?

[13] Pursuant to s. 2 of the BIA, a “transfer at undervalue” means a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor.

[14] John and Clare filed evidence to support the position of the responding parties on this application that all payments were in satisfaction of John’s ongoing spousal and child support obligations and his obligation to equalize his net family property in favour of Clare.

[15] In her affidavit sworn July 17, 2023, Clare deposes that she and John separated in 2012. She acknowledged there is no written separation agreement or spousal support order.

[16] In their respective affidavits both John and Clare deposed to the existence of an oral separation agreement reached on separation. The purported oral agreement included the following terms:

a) that John would continue to provide for the financial needs of Clare and their children including all post-secondary education costs and the children’s housing needs and any other financial needs that might arise post separation; and

b) in exchange for John’s financial support, Clare agreed to defer any efforts to collect spousal support or child support to which she was otherwise entitled under the Family Law Act and to postpone any efforts to enforce her rights to a net family property equalization payment amount under the Family Law Act.

[17] With respect to the evidence relating to the oral agreement, save and except that John’s evidence is stated in first person, paragraphs 5, 6, 7 and 8 of Clare’s affidavit are identical to paragraphs 13, 14, 15 and 16 of John’s affidavit.

[18] Attached to John’s subsequent affidavit sworn December 11, 2023, is a typewritten letter signed by John and Clare dated November 22, 2023, sent to the Trustee wherein they attempt to correct their earlier evidence. In this joint letter it is stated in part:

Notwithstanding that our previous affidavits stated that we separated in 2012, we have taken a closer look and we now agree that the separation actually took place in mid-2009.

When we separated, we had an oral agreement that John would continue to provide the financial needs of the family, just as when we had lived together, including all post-secondary education costs and the children’s housing and financial needs after we separated and for as long as there was a need for financial support.

We affirm that all payments under the oral agreement have been made every year from 2009 through June 29, 2021, inclusive.

[19] Where the parties to an alleged impugned transfer of property were not dealing at arms’ length and allege the existence of an agreement or other legal obligation as justification for the transfer, compelling evidence of the agreement or legal obligation mut be provided. Uncorroborated evidence of the parties will not be sufficient. [2]

[20] In this case, the requirement for corroborating evidence to support the existence of an alleged oral agreement makes good sense because the evidence of John and Clare, being parties not at arms’ length, is (not surprisingly) entirely self-serving.

[21] Based on the evidence (or lack of corroborating evidence) I am unable to conclude that John and Clare entered into an oral agreement upon separation which agreement obligated John to pay spousal and child support “for as long as there was a need for financial support”.

[22] I arrive at this conclusion having considered that in their sworn affidavits, both John and Clare deposed to the same incorrect date of separation and then purported to correct this evidence in an unsworn letter written to the Trustee some five months later. No explanation for the error itself or the coincidence in their mutual discovery of the error was provided beyond stating they discovered the error after taking a “closer look”. At what did they look more closely to discover their error? Neither John nor Clare provided an explanation, let alone a reasonable explanation. I find this inconsistency in their evidence defies logic and, thus, undermines their overall credibility.

[23] Furthermore, it is concerning that there is an absence of:

(i) evidence from either Nicholas or Charlie with respect to their financial needs after reaching 18 years of age corroborated by independent evidence of such needs;

(ii) financial statements and net family property statements completed at or about the date of separation rather than as part of the materials to respond to this application;

(iii) documentation to support annual income for each of John and Clare since the breakdown of their marriage to support the disproportionate sharing of the children’s expenses and the quantum and duration of spousal support;

(iv) documentation to support Clare’s entitlement to an equalization payment. In particular, documentation to support the estimated market value of assets as at date of marriage and date of separation contained in the Form 13.1 Financial Statements of John and Clare sworn November 23, 2023 including documentation to support the valuation of the interest of John in Pavaco Plastics Inc. (“Pavaco” or the “company”) and “Real Estate Co.” on the date of separation totaling $8,500,000; and

(v) bank statements or other documentation verifying the statements of John and Clare that “all payments required to be made under the oral agreement during the period June 2009 through June 2021 were made”.

[24] For these reasons, I find that the 1-year prior payments totaling $173,134.77 are transfers at undervalue pursuant to s. 96(1) of the BIA.

Was John insolvent at the time the 2-year prior payments were made?

[25] Under s. 2 of the BIA, an “insolvent person” means a person who is not bankrupt and who resides, carries on business or has property in Canada and whose liabilities to creditors provable as claims amount to $1000 and,

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of his property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.

[26] The test for insolvency is disjunctive. Satisfying one of the three tests is sufficient to establish insolvency.

[27] The Trustee has the initial onus of establishing a prima facie case of insolvency on the relevant date and once the Trustee has done that, the onus shifts to the responding party to adduce evidence to rebut that prima facie case. [3]

[28] A representative of the Trustee deposed an affidavit sworn June 9, 2023, in support of the relief sought on this application. With respect to the Trustee’s assessment of John’s solvency as of June 2019, it is stated at paragraph 4:

An analysis of [John’s] financial position was undertaken by the Trustee to determine when he became insolvent. An assets–liabilities and cash–flow test were conducted, and it was established that [John] became insolvent in June 2019, approximately two years prior to the filing of the assignment.

[29] John deposed in his responding affidavit sworn July 17, 2023, that he became insolvent on May 13, 2021, being the date, he received notices of reassessment from Revenue Canada for his past due tax obligations. He was unable to pay this obligation once re-assessed thereby rendering him insolvent.

[30] John deposed in his affidavit sworn December 11, 2023, that as of June 1, 2019:

(a) with respect to his liabilities: a. the total debts owed to his sisters, Joanne and Ellen, was $1,778,021. This amount is consistent with the Trustee’s assessment. However, the obligations were not due and payable because his sisters had agreed to postpone the payments falling due during the second year prior to bankruptcy; b. the total debts due to Revenue Canada was $474,953 (the amount re-assessed), not $658,067 as determined by the Trustee; and c. therefore, his total liabilities as of June 2019 was $2,252,975, not $2,436,089.13 as determined by the Trustee,

(b) with respect to his assets: a. the RRSP balance at National Bank and CI totaled $271,642. This amount is consistent with the Trustee’s assessment. However, he also held an RRSP with BMO Nesbitt Burns and Franklin Templeton in the total amount of $38,400. The total value of all of his RRSPs was $310,042; b. the value of his 59.08% interest in the shares of Pavaco totaled $2,954,000. The Trustee did not consider the value of the Pavaco shares; c. the value of his 25% interest in the John Pavanel 1995 Insurance Trust was $208,750. The Trustee valued his interest in the trust as nil on the basis it was a contingent asset; d. the value of his other assets totaled $1,021,829. This value is consistent with the Trustee’s assessment; e. the value of his Sun Life Pension totaled $1,019,351. The Trustee valued the pension at nil on the basis it could not be drawn on until John’s employment was terminated or he retired; and f. income having a value of $195,128 is to be added to the total asset calculation. The Trustee’s position is consistent with this assessment.

[31] The responding parties submit that John was not insolvent at any point prior in time to May 13, 2021. In particular, they deny John was insolvent in the second year preceding the date of bankruptcy.

[32] I must first determine whether the Trustee has established a prima facie case of insolvency at the time the 2-year prior payments were made. As an aside, I note that the Trustee takes the position that insolvency has also been established on a cashflow basis. However, the Trustee did not analyse whether John was meeting his obligations generally as they became due on or about the dates of the payments. Instead, the Trustee incorporated John’s income as an asset into their assessment of insolvency based on a comparison of assets to liabilities. As such, it is unnecessary to consider whether the liabilities to John’s sisters were postponed and/or whether the tax obligation owed to Revenue Canada were due and payable.

[33] A summary of calculations conducted by the Trustee entitled “Assets vs. Liabilities & Cashflow” appended as an exhibit to Mr. Cowan’s affidavit does not establish a prima facie case of insolvency. For the period June 30, 2018, through to and ending June 29, 2019 [4] the Trustee calculates the value of John’s assets as exceeding his liabilities by $507,131.94. That is, John was not insolvent on June 29, 2019. For the period ending June 29, 2020, the Trustee calculates John’s liabilities as exceeding the value of his assets by $51,612.93. I find that the evidence establishes only that John was insolvent as of June 29, 2020.

[34] If this finding is incorrect, I will now go on to consider whether the responding parties have rebutted the Trustee’s prima facie case of insolvency. For purposes of deciding this issue, I will focus my analysis on the value of John’s interest in Pavaco. It is unnecessary to consider the value of the Sun Life Pension, or the amount of the tax obligation owed to Revenue Canada given the significant alleged value of John’s interest in the company.

[35] As noted above, the responding parties rely on the evidence of John to support their position that a substantial value should be attributable to his shareholding in Pavaco with the result that as of June 2019 the value of his assets far exceeded his liabilities. I note that the Trustee did not include the value of John’s shareholding in Pavaco in its assessment of solvency.

[36] Pursuant its statutory duties, the Trustee obtained a copy of the financial statements for Pavaco for the year ended March 30, 2019. The financial statements were appended as an exhibit to the Trustee’s supplemental reply affidavit sworn December 20, 2023.

[37] The financial statements were prepared on an audited basis and were accompanied by an independent auditor’s report dated July 17, 2019. The report contains the following opinion:

We have audited the non-consolidated financial statements of Pavaco Plastics Inc. (the company), which comprise the non-consolidated balance sheet as of March 30, 2019, and the non-consolidated statements of operations and retained earnings and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying non-consolidated financial statements present fairly, in all material respects, the financial position of the company as of March 30, 2019, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.

[38] The financial statements reflect retained earnings as of March 30, 2019, of $3,691,246. Since the financial statements were independently prepared on an audited basis, I am of the view that it is unnecessary to consider the collectability of the accounts receivable as the Trustee invites me to do. Instead, I rely on the opinion of the auditor as to the accuracy of the information contained in the statements.

[39] I find that John’s interest in Pavaco had a value equal to his percent interest in the retained earnings of the company as of June 2019. That value was approximately $2,177,000. Consequently, I am satisfied that the responding parties have rebutted the Trustee’s prima facie case of insolvency, if any.

[40] Therefore, I conclude that the 2-year prior payments totaling $188,771.74 are not transfers at undervalue pursuant to s. 96(1) of the BIA.

Disposition

[41] The application is granted in part. Order to issue as follows:

1. the payments from John to Clare, Charlie and Nicholas in the year immediately preceding the date of bankruptcy totaling $118,168.13 on account of payments made to Clare; $16,332.08 on account of payments made to Charlie; and $38,634.56 on account of payments made to Nicholas, are hereby declared “transfers at undervalue”;
2. the payments from John to Clare, Charlie and Nicholas in the year immediately preceding the date of bankruptcy described in 1. above totaling $173,134.77 are hereby declared void as against the Trustee; and
3. Clare is hereby ordered to forthwith repay to the Trustee the amount of $118,168.13;
4. Charlie is hereby ordered to forthwith repay to the Trustee the amount of $16,332.08; and
5. Nicholas is hereby ordered to forthwith repay to the Trustee the amount of $38,634.56.

[42] The balance of the relief sought on this application is hereby dismissed.

Costs

[43] The Trustee achieved mixed success on this application. In my view, mixed success disentitles the Trustee to an award of costs payable by the responding parties. However, I find that the Trustee, in accordance with its statutory duties, properly sought the relief requested on this application and is, therefore, entitled to its costs of the application payable by the estate.

[44] Should the parties, or any one or more of them, not share my views on the issue of costs, written submissions shall be filed in accordance with the following timeline:

(a) the applicant shall serve and file their submissions, not exceeding 5 pages in length (exclusive of caselaw, time dockets and any bill of costs), within 10 days;

(b) the responding parties shall serve and file their submissions, not exceeding 5 pages in length (exclusive of caselaw, time dockets and any bill of costs), within 10 days thereafter; and

(c) the applicant shall serve and file any reply submissions, not exceeding 2 pages in length, within 5 days thereafter.

[45] If costs submissions are not received in accordance with the foregoing timeline, the parties shall be presumed to have resolved the issue of costs.

“Justice A.K. Mitchell” Justice A.K. Mitchell Released: May 10, 2024

Footnotes

[1] Bankruptcy and Insolvency Act, R.S.C. 1985, s. B.-3, as amended (“BIA”).

[2] 1157157 Ontario ltd. v. Al Barnim Inc., 2000 CarswellOnt 1700 at paras. 17 and 18; Re Carnese Hardware Ltd., 2002 CarswellOnt 5862 at para. 26; Re Garrett, 1979 CarswellOnt 195 at para. 18; and Jovkovic v. Da Silva, 2022 ONSC 2691, aff’d on appeal at 2023 ONCA 137.

[3] Re Forbes, 2011 MBCA 41 at paras. 20 and 21.

[4] See Exhibit “C” to the Affidavit of Wes Cowan sworn June 9, 2023.