The bankrupt is authorized to sue the trustee in a personal capacity in a decision creating a precedent

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David Westcott
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Licensed Insolvency Trustees (LITs) in Ontario are a lot like lawyers. They have a de facto monopoly on their profession, they are autonomous and they have a fiduciary duty to their clients. A major difference that IADs enjoy compared to lawyers is the legal protection against liability.

Section 215 of the Bankruptcy and Insolvency Act, RSC 1985 c B-3 (BIA) obliges bankrupts to seek authorization from the court if they want to sue their trustee. Indeed, IADs are protected against civil liability, as long as they act under the BIA.

However, s. 215’s protection is not absolute. Indeed, the right of bankrupts to sue their SAI without the authorization of the court has just been recognized in Robbery against Adamson 2021 ONSC 4278.

Facts

The complainant in Flight was in his fourth bankruptcy and the defendant was his LIT. As a serial bankrupt, the plaintiff was in a difficult position. He was not entitled to an automatic discharge and would have to pass a high standard of rehabilitation to obtain a fourth discharge.

In early 2018, the plaintiff discovered that his former accountant, attorney, and accountant had been embezzling funds from his business for at least 13 years, resulting in multiple debts to Revenue Canada and his four bankruptcies. This was revolutionary news for the Complainant. Knowing that his bankruptcies were not his fault, he had the road to release.

However, this path to its landfill turned out to be a long, winding road with several bumps and obstacles.

According to the plaintiff, the LIT did not investigate the theft, correct the falsified books and records submitted to the LIT throughout the plaintiff’s four bankruptcies, did not bring an action against the author and did not obtained the applicant’s release with sufficient urgency. The plaintiff, being bankrupt, could not take legal action against his former accountant without the consent of the defendant. Having no choice or recourse, the plaintiff filed two appeals in the Superior Court of Justice: one against his accountant and one against his LIT. At the end of 2020, the plaintiff succeeded in canceling his bankruptcy with the help of another LIT, paving the way for the plaintiff to pursue his actions against the accountant and the defendant.

Questions

The only problem in Flight was whether the plaintiff needed leave to sue the defendant. The plaintiff claimed that he had not done so because he was suing the defendant in his personal capacity and for omissions and omissions while the plaintiff was in bankruptcy. The defendant argued that the plaintiff needed leave because the action concerned the administration of the plaintiff’s estate and that leave should not be granted because the claim had no basis in law.

Decision

In the end, Kelly C. Tranquilli J. concluded that leave was not required because s. 215 does not isolate IADs from acts of omission or personal actions.

According to Justice Tranquilli, an act of omission is not “concerning a report or any action taken under the BIA”. His decision was largely based on the Supreme Court of Canada’s decision in Mercury c. Marquette & Fils [1977] 1 RCS 547, cited by the applicant. In Mercury, the Supreme Court ruled that s. 215 does not apply to any action arising out of the administration of the estate of a bankrupt. Effectively, Mercury allowed a bankrupt to sue his LIT for omissions, and the plaintiff in Flight took advantage of this opening to proceed with its complaint.

Justice Tranquilli further concluded that the plaintiff’s claim was for personal damages against the defendant, a position that the plaintiff has advanced to various authorities: Canadian Glacier Beverage Corp. vs. Barnes & Kissack Inc. [1999] BCJ No. 1272; 298157 Alberta Ltd. (grainhand ear) (Re) [2005] AJ No. 1739; Environmental Metal Works Ltd. vs. Murray, Faber & Associates 2013 ABQB 479.

Importance

There is a public interest in isolating LITs from all liability, as LITs bear a great deal of responsibility in the administration of bankruptcies. Their actions and omissions can either bring bankrupt people back to financial health or keep them stuck in a never-ending cycle of financial ruin. It is not always clear which decisions will lead to which results, and an SAI acting rationally should be spared any responsibility.

However, the decision of Flight honors the other side of the bankruptcy picture: the bankrupt’s right to have his bankruptcy administered with care and competence. Bankruptcy is meant to be a restorative status that balances (1) the bankrupt’s need to be released from his debts and (2) the creditor’s interest in recovering his debts. It is important that IADs act quickly, efficiently, honestly and rationally. When a bankrupt believes that his LIT has acted negligently and caused additional financial and emotional strain, it is a simple matter of fairness that he is allowed to act against his LIT. Inaction by an LIT can affect the rights and obligations of the bankrupt and his creditors. Flight tells us that when this harm can be proven, the bankrupt should have a chance in court.

Flight does not represent an “opening of the floodgates” or a “slippery slope” for bankruptcy proceedings against IADs. Rather, it is a narrow and rational exemption from the rule of art. 215 when the bankrupt wishes to act against an allegedly unscrupulous LIT who has arguably failed to act and respect his fiduciary duty. Flight balances the need for LITs to work proactively and prudently while managing a bankrupt’s assets with the bankrupt’s right to have his bankruptcy administered competently.

David Westcott is a law student at Law at a distance Canada. Tara Vasdani is the lead lawyer and founder of Remote Law Canada. His practice focuses on labor law, civil litigation and remote work. She was the first Canadian lawyer to serve a statement via Instagram, and you can reach her directly at tara@remotelawcanada.com. Remote Law Canada represents the plaintiff in these proceedings. Tara Vasdani delivered.

Photo Credit / AndreyPopov ISTOCKPHOTO.COM

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