Canada: Requirements For Granting A Bankruptcy Order

In the Nova Scotia case Witch's Glen Gold Inc., Re, 2015 NSSC 93, the sole creditor, Steve Furlotte, brought an application pursuant to s. 43 of the Bankruptcy and Insolvency Act (BIA) seeking a bankruptcy order against the debtor Witch's Glen Gold Inc. ("WGC").

Background

Mr. Furlotte had owned the single issued share in Flex Mining & Exploration Limited ("Flex"). In 2013 Mr. Furlotte reached an agreement for sale of the share and debt owed to him by Flex to WGC. The purchase price of $2 million was to be paid in three instalments, secured by a Share Pledge Agreement ("SPA"). WGC failed to make payment on the first note when it became due. An extension to the payment date was granted and WGC subsequently provided a cheque to Mr. Furlotte. However, when Mr. Furlotte presented the cheque for payment, he was advised that there were insufficient funds in WGC's account.

Early in August 2014, Mr. Furlotte's lawyer prepared an Amending and Acknowledgement Agreement (AAA), which amended certain provisions in the purchase agreement and the SPA. The AAA stipulated that in event of default, the creditor intended to rely on s. 62 of the Personal Property Security Act (PPSA) and a parallel provision in the SPA to take ownership of the share in full satisfaction of the bankrupt's obligations. It was executed by Mr. Furlotte, WGG and Flex. About the same time, a further payment of $50,000 was made reducing the amount owing on the first note to $350,000, bringing the total debt to $1,850,000. No further payments were made.

Decision

Registrar Cregan reviewed the SPA and the AAA. He also referenced the acceptance of collateral provisions of s. 62 of the PPSA. Section 62 of the PPSA provides a secured creditor with the statutory remedy of foreclosure. Once exercised, the creditor has no right to claim a deficiency. Once the notice is sent and no objection is filed, the debt is extinguished and the creditor acquires the collateral. This is an alternative to the remedy of seizing the collateral, selling it and making a deficiency claim.

Registrar Cregan noted that it is very clear that before s. 62 of the PPSA is operative, the creditor must strictly comply with the statutory requirements. There must first be default followed by the secured party proposing to take the collateral in full satisfaction of the debt and giving notice thereof to the debtor and certain subordinate creditors. Registrar Cregan was satisfied that Mr. Furlotte could not be deemed to have made a proposal under s. 62.

In considering the provisions of the SPA that paralleled s. 62 of the PPSA, the Registrar concluded that to activate the election to retain ownership of the collateral, required written notice clearly stating that was what Mr. Furlotte intended to do. Reviewing the evidence, Registrar Cregan found that all Mr. Furlotte did with the share were the things contemplated by the SPA. He did not elect to retain ownership of the pledged share for himself in complete, full and final satisfaction of the indebtedness.  

The Registrar noted further, that s. 43 of the BIA requires for a bankruptcy order that the applicant prove that the unsecured debt of the debtor owed to it amounts to $1,000 and that the debtor within six preceding months has committed an act of bankruptcy as defined in s. 42(1) of the BIA. Registrar Cregan found there to be sufficient evidence to establish that the valuation of the security was such that an unsecured debt in excess of $1000 was owed by the debtor.

Moving on to the acts of bankruptcy as defined in s. 42 of the BIA, the Registrar found that the facts surrounding the presentation of the cheque that could not be processed due to insufficient funds, and comments relating to the failure to make the payment, proved that notice of suspension of payment had been given.

The Registrar considered the second act of bankruptcy – ceasing to meet liabilities generally as they become due. As this was a situation where there was only one creditor, the Registrar looked to the law from Holmes, Re (1975), 20 CBR (NS 111, 60 DLR (3d) 82, where Justice Henry stated a receiving order on the basis of a default to one creditor was appropriate when the creditor is the only creditor of the debtor, and the debtor has failed to meet repeated demands of the creditor. With evidence of a series of demands, negotiation, extensions and amendments respecting payment during the six months before the application all to limited avail, the Registrar concluded that there was an implied admission that not only could the debtor not pay Mr. Furlotte, it was without funds to address other debts, though not specified. Thus, Registrar Cregan concluded that the second act of bankruptcy was proved.

Satisfied that WGC owed Mr. Furlotte in excess of $1,000 and that it had committed two acts of bankruptcy, Registrar Cregan found that the requirements for a bankruptcy order were met and the order was issued.

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