Issues for Litigation: Bankruptcy & Insolvency Basics for Lawyers

1. Bankruptcy and Insolvency Basics for
Lawyers
Issues for Litigation
Presented by: Christopher Ramsay
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2. Preferences and Transfers for Undervalue
• Amendments to the Bankruptcy and Insolvency Act (“BIA”)
– Recently amended to repeal settlement and reviewable transaction provisions
– Replaced with provisions regarding preferences and transfers at undervalue
– Provisions work to protect the assets of the bankrupt from being unfairly
dissipated by allowing the trustee to recover those assets from transferees
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3. Section 95 ‐ Preferences
• What constitutes a preference?
– An improper preference under section 95 is any transaction
undertaken by the bankrupt with the intent to prefer one creditor over
others
• The transaction must be with a creditor to constitute a preference
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4. • Onus of proof
– The Trustee has the onus of proof to show that the bankrupt intended
to give a preference to one creditor
– Exception: A bankrupt will be presumed to have had the requisite
intent where the transaction has the effect of giving a creditor a
preference
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5. Section 95 ‐ Time Limitations
• Preferences to Arms’ length creditors
– Preference must be completed:
• Not more than three months prior to the initial bankruptcy event and
• Ending on the date of bankruptcy
• Preferences to non‐Arms’ length creditors
– Preference must be completed:
• Not more than twelve months prior to the initial bankruptcy event and
• Ending on the date of bankruptcy
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6. Related Persons
• For the purposes of sections 95 and 96, related persons are
only presumed to deal not at arms’ length as opposed to
deemed
• If related parties can prove that they were dealing with each
other at arms’ length factually, then the arms’ length timelines
will apply to that transaction
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7. Section 96 – Transfers Under Value
• What constitutes a transfer at undervalue?
– Defined in section 2 of the BIA
• “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”
• Transferee not required to pay exactly fair market value, but must be
sufficiently close
– Transfers to both creditors and non‐creditors are caught
• Intention is to capture transactions that significantly
undervalue assets or provide no consideration
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8. • Evidence
– A trustee alleging transfer under value must provide evidence of the
value of the transferred asset or service and the consideration received
by the bankrupt
– If transferee provides no evidence to the contrary, the court will accept
the trustee’s evidence as correct
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9. Section 95 ‐ Time Limitations
• Transfers at undervalue to Arms’ length persons
– Trustee must prove:
• Transaction occurred not more than one year prior to the initial bankruptcy
event;
• Transaction occurred after the date of bankruptcy;
• Debtor was insolvent or became insolvent because of transaction; and
• Debtor intended to hinder, delay or defraud creditors
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10. • Transfers at undervalue to non‐arms’ length persons
– Trustee must prove:
• Transaction occurred not more than one year prior to the initial
bankruptcy event and
• Before the date of bankruptcy
OR
• Not more than five years prior to the initial bankruptcy event;
• Ending one year prior to initial bankruptcy event;
• Debtor was insolvent or became insolvent because of transaction; and
• Debtor intended to hinder, delay or defraud creditors
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11. Provincial Statutes
• Trustees may attack transactions that do not meet criteria
under sections 95 and 96 under provincial legislation.
– Eg. Fraudulent Conveyance Act (“FCA”) or Fraudulent Preference Act
• FCA
– Transfer for insufficient or no consideration where debtor intends to
delay, hinder or defraud creditors and others are vulnerable to attack
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12. The FCA and Botham
• Botham Holdings Ltd. (Trustee of) v. Braydon Investments
Ltd., 2008 BCSC 1547, aff’d 2009 BCCA 521
– Botham transferred assets to Braydon prior to entering into a risky
partnership
– Partnership failed and Botham and partnership went bankrupt
– Directing mind of both companies admitted intention was to
protect assets in event partnership failed
– Court found intention was honest, but held fraudulent intent not
required to void transaction
• Only requirement is to keep assets out of hands of creditors, current
or future
– Decision enables trustee to attack a greater range of transfers
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13. Section 38 Claims
• Section 38 of the BIA
– Allows creditor to apply to court for approval to take place of trustee in
a proceeding
– Permitted only where trustee refuses or fails to act
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14. • Benefits
– Creditor is able to keep all proceeds up to the total of their claim
plus costs of the proceeding
• Requirements
– Affidavit that debtor is insolvent, trustee has been requested to
act, and trustee has refused or failed to act
– Trustee must be served
– May have to show prima facie case against potential defendant
• Courts are divided on issue
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15. • Requirements continued
– Failure to meet requirements that is non‐prejudicial will not be
fatal
– Creditor must show proceeding, if successful, will result in
monetary gain for estate
• Notice to other creditors
– Not required prior to application
– Must give sufficient notice, once approved, to permit other
creditors to decide whether to join the action
– Joining creditors will share in costs and proceeds pro rata
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16. Appeals from Disallowance of Claim
• Is Creditor entitled to hearing de novo or limited to true
appeal?
– Hearing de novo permits new evidence to be adduced and is
effectively a rehearing of the disallowed claim
– True appeal is an appeal on the record
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17. Re Galaxy Sports Inc, 2004 BCCA 284
• Previous case law permitted hearing de novo
• Court in Galaxy rejected this, stating:
• the law in British Columbia is clear that unless the statute that provides an
appeal also states that it is to take the form of a trial de novo, […] the appeal
will be an ordinary appeal.
• Hearing de novo as of right is an inefficient use of resources
• Trustee has requisite knowledge and experience to make
decision
• Fresh evidence only permitted where disallowance would be
unjust
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18. Standard of Review
• Standard of review depends on nature of decision being
appealed
– Standard of review for errors in law made by trustee is correctness
– Standard of review for factual errors made by trustee is reasonableness
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19. Fresh Evidence
• Fresh evidence permitted in limited circumstances
• Creditor must show
– evidence was not discoverable by reasonable diligence before the
trustee's decision;
– that the evidence is credible;
– that it would be practically conclusive of an issue before the court; and
– that if believed, the evidence could have affected the result of the
trustee's decision
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20. Section 163 Examinations
• Subsection 163(1) gives the trustee broad powers to examine
the following persons:
– Bankrupt;
– Any person who would be reasonably thought to know the affairs of
the bankrupt; or
– Any person who is or has been an agent, clerk, director or employee
with respect to the bankrupt or the bankrupt's dealings.
• Requirements
– Approval via either: ordinary resolution of the creditors or resolution
passed by the majority of inspectors
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21. • Benefits
– Allows trustee to locate and value assets that bankrupt may have
hidden
– Court order not required for examination
– Trustee may ask any questions relevant to the bankrupt or the
bankrupt’s property or business
– Person being examined cannot refuse to answer any relevant question,
even if such an answer would potentially incriminate them
– Not limited to examination of one person
– May examine a person more than once, but cannot harass
– Solicitor may be examined on non‐privileged matters
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22. • Document production
– Trustee can require any person being examined to bring documents
related to the examination
– Trustee can request any document that relates to the bankrupt or the
bankrupt’s property
• Confidential information must be provided, unless subject to
solicitor/client privilege
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23. • Subsection 163(2) gives a creditor broad powers to examine
the following persons:
– Bankrupt;
– Trustee;
– Inspector;
– Creditor; or
– Any other relevant person.
• Requirements
– Court order
– Creditor must prove examination is for the benefit of the bankrupt’s
estate as a whole
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24. • Scope
– Scope of examination limited to administration of bankrupt’s estate
and cannot be used as private remedy for a secured creditor
• Document production
– Creditor can require any person being examined to bring documents
related to the examination
– Creditor can request any document that relates to the administration
of the bankrupt’s estate
• Confidential information must be provided, unless subject to
solicitor/client privilege
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25. • Use of Information from Section 163 Examination
– Subsection 163(3) requires that any Section 163 examination that is
transcribed must be filed with the court
– Subsection 163(3) permits the transcript to be read in during any civil
proceedings to which the examined person is a party
• Cannot be used in criminal proceedings, although trustee may use such
transcripts to obtain leave to bring criminal proceedings under section 205
of the BIA
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26. Waiver of Solicitor Client Privilege
• Who may waive privilege on behalf of a corporate
bankrupt?
– Nothing in the BIA denies or gives a trustee the right to waive
privilege on behalf of the bankrupt company
– Re St. Anne‐Nackawic Pulp Co. (2005), 12 C.B.R. (5th) 65
(N.B.Q.B.)
• Broad powers given to trustee under BIA, but right to waive
privilege not one of them
• Corporate bankrupt survives bankruptcy and retains ability to
waive privilege itself
• Trustee acts on behalf of creditors and is often at odds with
bankrupt’s interest
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27. • Bre‐X Minerals Ltd. (Trustee of) v. Verchere (2001), 206 D.L.R.
(4th) 280 (A.B.Q.B)
– Trustee not permitted to waive privilege even where all directors had
resigned
– Company can waive privilege through election of new directors or
meeting of shareholders to address issue
– Distinguished cases permitting waiver by trustee as they dealt with
fraudulent behaviour, which is an exception to the privilege rule
• Ultra Information Systems Inc. v. Pushor Mitchell LLP (2008),
45 C.B.R. (5th) 108
– Only current directors may waive privilege
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28. Claiming Legal Costs in an Insolvency
Proceeding
• Claiming of legal fees by counsel depends on nature of work,
timing of work, and person for whom work was done
• Subsection 197(4) of the BIA permits recovery of costs from
estate of bankrupt only where costs authorized by trustee or
where costs have been awarded against the trustee
– Authorization by trustee must be in writing or costs not recoverable
from estate
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29. • If estate insufficient to cover permitted legal fees, priority
structure set out in subsection 197(6):
– 1. Commissions on collections;
– 2. Costs incurred by the trustee after bankruptcy, but prior to the first
meeting, where such fees are authorized by either the court or the
creditors;
– 3. Costs on an assignment or incurred by the application creditor up
to the issue of a bankruptcy order;
– 4. Costs awarded against the estate or the trustee;
– 5. Costs for legal services otherwise rendered to the trustee or the
estate.
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30. • Bankrupt’s Counsel
– Legal fees for work done for bankrupt prior to bankruptcy generally
recoverable, even without approval by trustee where in connection
with the assignment into bankruptcy
– Services provided post‐bankruptcy are not recoverable from the
estate, only against bankrupt
• Legal fees here survive discharge of bankrupt
– No charge on bankrupt’s assets permitted for past or future legal fees
– Proposal by debtor under section 50 could include payment of past or
future legal fees
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31. • Creditor’s Counsel
– Subsection 45(1) of BIA generally permits legal fees incurred by
creditor in petitioning a debtor into bankruptcy to be payable out of
the bankrupt’s estate unless the court otherwise orders
• Legal fees incurred in Plan of Arrangement under the
Companies’ Creditors Arrangement Act (“CCAA”)
– Initial order should contain request for super‐priority administrative
charge to cover legal fees
– Court has the jurisdiction to grant such a request under section 11.52
of the CCAA
• Notice to secured creditors affected by request required
• Estimate of fees should include monitor’s fees and the fees of other
parties who could not participate without such a charge
– If plan fails, legal fees more likely to be paid with super‐priority
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32. Ethical Issues – Ex Parte Orders
• Ex Parte orders commonplace where debtor requesting a stay
of proceedings to file a proposal under the BIA or a plan
under the CCAA
• Ex parte orders brought without notice to other parties and
so have higher disclosure requirements
– Counsel required to make full and frank disclosure of all material
facts and circumstances that may be relevant to the court’s decision
• Material facts harmful to client’s case must be disclosed
• Serious consequences can flow from an ex parte order made
on deficient facts
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33. • Ex parte orders often requested on urgent basis
– Regardless of this, counsel must take time to include all relevant
materials available at time of application
– Insufficient time to prepare materials not a valid excuse for
incomplete disclosure
• Ex parte orders are exception to adversarial system
– Greater burden of disclosure, as opposing counsel not there to ensure
court hears all relevant information
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34. • Requesting ex parte orders
– Should only be requested when necessary
• Eg. Stay is urgently required to prevent seizure of assets
– Unnecessary ex parte applications may be vacated or costs may be
awarded against the applicant, if order survives challenge
– Ex parte orders requested without reasons for the lack of notice will
likely be refused by the court
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35. Ethical Issues – Solicitor/Client Privilege
• Protecting Privilege as Former Solicitor of Bankrupt
– Trustee does not have power to waive privilege and cannot be provided
with privileged documents unless bankrupt has waived privilege
• Trustee may have management of corporate bankrupt, but ability to waive
privilege does not transfer to trustee (Bre‐X)
– If former counsel examined under section 163, issues arise
• Must answer all questions that do not require privileged information
• Must provide all documents requested, even if confidential, that are not
privileged
• Requires great care to ensure that solicitor complies with section 163, but
maintains privilege at same time
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36. • Conflict of Interest
– Former solicitor of bankrupt not entitled to act for trustee
• Trustee’s interests and bankrupt’s interests frequently do not align, as
trustee acts in the interest of creditors not the bankrupt
• Solicitors may have privileged communications with bankrupt that it needs
to protect, but may also feel obligated to disclose to trustee, if they were
to act for both
– Former firm of bankrupt may only act for trustee where the
presumption of shared information between the solicitors that worked
for the bankrupt and the solicitors that would act for the trustee is
overcome
• Must provide evidence that information has not been previously shared
and proof that protections have been put into place to prevent sharing of
information
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37. Thank You!
Contact Us
Christopher Ramsay christopher.ramsay@fmc‐law.com | +1 604 622 5151
http://ca.linkedin.com/in/christopherknight

38. The preceding presentation contains examples of the kinds of
issues companies dealing with bankruptcy and insolvency
could face. If you are faced with one of these issues, please
retain professional assistance as each situation is unique.