When is a Bankrupt Not Entitled to a Discharge From Debt?

Financial Services

If a debtor has taken the step of filing for bankruptcy and met the debtor’s statutory obligations, is the debtor automatically entitled to be discharged under the Bankruptcy and Insolvency Act (BIA)?

The answer is ‘no’.  Rather, it is necessary to consider the manner in which the debts were incurred and the nature of those debts.

Bankruptcy laws are intended to grant financial relief and assist in the rehabilitation of an ‘honest but unfortunate debtor’.

This area of law is discussed in the recent British Columbia case of Re Poonian, 2020 BCSC 547.  In that case, the bankrupt parties were a husband and wife who made a joint assignment into bankruptcy in April, 2018.   This was the first bankruptcy filing made by either of them.

Together, their combined debts were significant, exceeding more than $25 million with the most significant creditors being the BC Securities Commission (BCSC), which was owed over $19 million, and Canada Revenue Agency (CRA), which was owed over $4 million in total by the two bankrupts.

The trustee in bankruptcy realized just over $3,000 from the bankrupts’ assets.

The bankrupts applied for a discharge from bankruptcy in 2020. The trustee confirmed that the bankrupts had generally performed their obligations under the BIA.

The BCSC debt arose from BCSC proceedings where it was found that the bankrupts previously organized a public market manipulation scheme. There was no express finding of fraud as against the bankrupts.

The BCSC made disgorgement orders and assessed administrative penalties against the bankrupts which combined to total the BCSC debt noted above.

The CRA debts arose from tax reassessments due to the bankrupts’ failure to report certain income amounts they had earned.

In considering the application for discharge by the bankrupts, the Court reviewed the caselaw and the interpretation of the discharge provisions of the BIA.

On a discharge application, the court’s mandate is to consider two main principles: (i) rehabilitation of the bankrupt; and (ii) the integrity of the bankruptcy system.  The court must balance the interests of the bankrupt, the creditors and the public.

The Court in Poonian referred to past case law where courts had concluded that a bankrupt who has incurred debt to the government because the bankrupt did not properly report income is not considered an ‘honest but unfortunate debtor’. 

The Court considered the circumstances of the Poonians and determined that neither of them met this criteria and their application for discharge was dismissed by the Court.

If you are either a debtor considering bankruptcy or a creditor who is faced with a bankrupt debtor, we recommend that you seek legal advice to assist and provide guidance to you.  We would be pleased to assist you in dealing with this difficult situation. 

Brad Martyniuk
Partner, Bankruptcy and Insolvency
Lindsay Kenney LLP