Canada: Judgment Debts Arising From Fraud Or False Pretences: Recent Developments In The Application Of S.178 Of The Bankruptcy And Solvency Act

Last Updated: March 16 2016
Article by Steven Dvorak and Matthew Nied

In the recent decisions of H.Y. Louie Co. Limited v. Bowick [H.Y. Louie]1 and Cruise Connections Canada v. Szeto [Cruise Connections],2 the British Columbia Court of Appeal considered when judgment debts arising out of facts involving fraud or false pretences can survive bankruptcy pursuant to s. 178 of the Bankruptcy and Insolvency Act [BIA].3 The decisions have important implications for judgment creditors.

H.Y. Louie

The defendant in H.Y. Louie was employed in the plaintiff's IT department. His duties included arranging for the purchase of IT products and services for the plaintiff. The defendant was also the proprietor of a company and used his position with the plaintiff to "purchase" various products and services from that company. The plaintiff eventually became aware of the situation and determined that many or all of the "purchases" could not be verified as authentic. The plaintiff sued, and while its claim included references to conduct that could be characterized as fraudulent, the plaintiff claimed damages for breach of contract and did not allege fraud or false pretences.

The defendant ultimately consented to two judgments for breach of contract, and subsequently made an assignment into bankruptcy under the BIA. His indebtedness related almost entirely to his obligations to the plaintiff.

The plaintiff sought to have the judgments declared debts that would survive bankruptcy, pursuant to s. 178(1)(d) and (e) of the BIA. Section 178 of the BIA sets out several circumstances in which a discharge order does not release a bankrupt from debt, including, under subs. (1)(d), "any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity", and under subs. 1(e), "any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim". These provisions are designed to ensure that a deceitful bankrupt will not be able to use the court system and the BIA as a mechanism for avoiding the consequences of unacceptable conduct. The onus is on a creditor to prove that its claims come within the ambit of these provisions.

In support of its s. 178 application, the plaintiff adduced affidavit evidence that appended the transcript of the defendant's examination for discovery at which evidence suggestive of fraud was elicited.

Justice Blok accepted that the consent judgments were debts within s. 178(1)(e) and declared that the judgments would survive bankruptcy.4 In the judge's view, the plaintiff pled the case as it knew it at the time, and, once the circumstances surrounding the invoices became clear, the defendant consented to judgment—at which point, there was no apparent need to amend the pleadings to include allegations of fraudulent behaviour or other misconduct.

The decision was reversed on appeal. The majority (per Justice Chiasson) confirmed that courts should characterize a judgment for the purposes of s. 178 by considering the pleadings and the circumstances that gave rise to the judgment. However, the majority cautioned that "where pleadings allege a specific cause of action to which a defendant consents to judgment, a court should be loath to characterize the judgment based on allegations not made and on facts not pleaded".5

The majority concluded that the application judge had effectively re-characterized the consent judgments and that this amounted to an abuse of process. In the majority's view, the plaintiff had exhausted its opportunity to pursue a cause of action against the defendant in connection with his wrongful conduct when it limited its pleadings to breach of contract and entered consent judgments that were limited to breach of contract.

In the view of the minority (Justice Newbury), the decision of the Blok J. did not result in an abuse of process. While the plaintiff could have pled fraud or false pretences to guard against the possibility of the defendant going into bankruptcy at some later time, it would not have been reasonable to require that the plaintiff do so, particularly given that it was not clear that the plaintiff had a reasonable basis for such a claim until after the defendant had been examined for discovery. The plaintiff could not be faulted for failing to amend its pleadings in anticipation of a potential bankruptcy when offered consent judgments for the full amounts claimed.

The minority concluded that although the plaintiff pled breach of contract as the legal basis for its claim, the factual basis pled was sufficient to characterize the judgment as falling under s. 178(1)(e), since it included allegations that the defendant issued invoices to the plaintiff, indicating that goods had been delivered and services were performed, even though they were not.

While the approach of the majority is consistent with abuse of process principles, there is some question as to why those principles ought to apply in the circumstances. The doctrine of abuse of process is animated by the notion that there can be no assumption that re-litigation will provide a more accurate result than the original proceeding, that re-litigation that produces the same result twice wastes judicial resources and imposes unnecessary costs on the parties, and that re-litigation that produces a different result undermines the credibility of the judicial process.

In this case, the Court was not re-litigating an action but was instead characterizing and assessing the nature of judgments already obtained, as required by s. 178. Moreover, it is unclear why the characterization process could constitute a waste of judicial resources: it may well be more efficient to address s. 178 issues once a bankruptcy arises rather than to require all plaintiffs to take steps to guard against such a possibility.

Cruise Connections

The defendant in Cruise Connections was employed with the plaintiff as a cruise ship booking agent. The defendant, along with three other booking agents and two office administrators, left the employment of the plaintiff and moved as a partnership to a rival agency. In doing so, they conspired to misappropriate confidential client lists and pre-existing bookings that were the property of the plaintiff. The plaintiff sued, alleging that the defendants had conspired to convert the property of the plaintiff for their own use.

The trial judge found the defendant and the other booking agents jointly and severally liable in damages for breach of contract and the torts of civil conspiracy and conversion.6 However, the judge found that while the defendant had participated in the scheme, he had not participated with the other booking agents in the deceptive conduct (namely, the creation of false database entries for cruise bookings).

The defendant subsequently made an assignment in bankruptcy and applied for an absolute discharge under the BIA. The plaintiff responded by bringing an application for a declaration that the judgment constituted a debt under s. 178(1)(e).

Justice Pearlman determined that although the judgment debt resulted, at least primarily, through the acquisition of property through deceitful means, s. 178(1)(e) could not apply to the debt held by the defendant because the misconduct that gave rise to his liability was the surreptitious taking and use of the plaintiff's confidential information, and there were no pleadings or findings of fraudulent misrepresentation or false pretences.7 Accordingly, the defendant's liability was predicated on breach of contract, conversion, and civil conspiracy—and not fraudulent misrepresentation or false pretences.

The decision was reversed on appeal. The Court (per Justice Garson) began by recognizing that the plaintiff did not plead or try the case on the basis of fraud, that it was not necessary to do so, and that it could not necessarily have foreseen that the defendant would declare bankruptcy. Fortunately for the plaintiff, the Court determined that the Pearlman J. erred in failing to properly consider that the defendant was jointly liable for the conduct of his co-defendants, including the deceitful false database entries. As a result, it was not necessary for the application judge to find that the defendant participated in the actual deceptive conduct himself in order for his liability for participating in the deceptive and wrongful scheme to survive bankruptcy under s. 178(1)(e).


The decisions in H.Y. Louie and Cruise Connections are a reminder that plaintiffs ought to proceed with caution when pursuing claims against defendants that may potentially trigger the application of s. 178(1)(e) or (d) of the BIA.

While it will not be prudent to make doubtful allegations of fraud or false pretences in order to guard against the possibility of bankruptcy (given that doing so may prejudice the defendant and give rise to special costs), a plaintiff should consider amending its claim to add such allegations if it becomes aware of compelling evidence in that regard.

Where such evidence exists and the plaintiff has an opportunity to obtain a consent judgment, it should consider doing so only after amending its claim. In addition, where possible, the plaintiff should ensure that the consent judgment reflects that it has arisen out of circumstances falling within s. 178(1)(e) or (d). In practice, however, defendants will likely be resistant to enter consent judgments which provide that they have arisen out of such circumstances. Accordingly, plaintiffs may increasingly have no alternative other than to proceed with a full trial or summary process in order to obtain judgment.

The authors would like to thank Arend Hoekstra (articling student) for his assistance with this article.


1 [2015] B.C.J. No. 1163, 2015 BCCA 256.

2 [2015] B.C.J. No. 1776, 2015 BCCA 363.

3 R.S.C. 1985, c. B-3.

4 H.Y. Louie Co. Limited v. Bowick, [2014] B.C.J. No. 1250, 2014 BCSC 1097.

5 Supra note 1, para. 87.

6 Cruise Connections Canada v. Cancellieri, [2012] B.C.J. No. 76, 2012 BCSC 53.

7 Re Szeto, [2014] B.C.J. No. 2136, 2014 BCSC 1563.

Previously published in the Commercial Insolvency Reporter February 2016 Volume 28, No. 3

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions