According to the Office of the Superintendent of Bankruptcy, in 2019, 44,852 hardworking individuals filed for insolvency in Ontario. 67% of those consumer insolvencies filed in Ontario were consumer proposals. Ontarians continue to carry record levels of personal debt and for many residents, a consumer proposal or a personal bankruptcy becomes the only way out of financial trouble.

Interestingly, in April 2020, consumer insolvencies in Ontario declined 36.3%, bankruptcies declined 50.5% and consumer proposals declined 29% as compared to April the previous year. This decline may be due to the current COVID-19 restrictions, residents prioritizing paying for necessities, debtors becoming creditor-proof, the partial closure of the courts and the unavailability of income to be garnished. Mortgage, rent and credit card payment deferrals have also removed immediate repayment pressures. However, once supports such as the CERB and deferrals end, most bankruptcy and insolvency practitioners are expecting to see a dramatic rise in defaults and a rise in consumer insolvencies.

Bankruptcy versus Consumer Proposal

It is important to distinguish between a bankruptcy and a consumer proposal. An insolvent person may be assigned or assign themselves into bankruptcy, or may file a proposal to their creditors. A proposal is a formal process under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) that allows a debtor (whether a business or individual), subject to approval by its creditors and the Court, to manage their debt by making a new contract with all of their creditors which provides for more time to pay, a reduction in the amount to be paid or a combination of more time and a reduced amount. In a proposal the debtor stays in control of their assets.

A bankruptcy, on the other hand, contemplates finality and closure as it relates to an enterprise or an individual. In a bankruptcy, the assets of the debtor, subject to certain rules, vest with the trustee who then liquidates the assets for the general benefit of the creditors.

This article will only deal with the impact of a bankruptcy on a civil litigation claim.

Bankruptcies can significantly impact a civil litigation claim, whether the bankrupt is a plaintiff or defendant.

Bankrupt Defendant

Section 69.3 of the BIA provides for a stay of proceedings upon the bankruptcy of a debtor. This means that no creditor has any remedy against the bankrupt or the bankrupt’s property (except for secured creditors who may be able to continue to enforce their security). Creditors also cannot commence or continue any action, execution or other proceedings for the recovery of a claim provable in bankruptcy. In a bankruptcy, the stay of proceedings is normally lifted when the trustee is discharged. But this means that the debt owed by the bankrupt is also discharged.

The result is that the litigation against the bankrupt defendant is stayed and the plaintiff cannot pursue its claim unless he/she obtains an order from the Court lifting the stay of proceedings. Section 69.4 of the BIA provides the Court with the discretion to lift the stay if it is satisfied that the creditor or person is likely to be materially prejudiced by its continued operation or where it is equitable on other grounds to make such a declaration. The lifting of a stay pursuant to section 69.4 is, however, far from automatic.  If the stay is lifted, the plaintiff may continue its civil litigation claim against the bankrupt defendant.

However, the plaintiff should consider the costs and risks of lifting the stay of proceedings. If the stay is lifted and a judgment is obtained, will there by anything upon which the plaintiff can enforce against? Or will the plaintiff be left with a paper judgment?

If a defendant does become bankrupt, the plaintiff should also file a proof of claim in the bankruptcy to protect their claim. It is not uncommon that a skilled litigator can negotiate a settlement with the trustee that allows a claim to be valued fairly based on the merits of the case and avoid a protracted Court process.

Bankrupt Plaintiff

Pursuant to section 71 of the BIA, upon bankruptcy, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to the BIA and to the rights of secured creditors, immediately pass to and vest in the bankrupt’s trustee.

The plaintiff’s claim, therefore, vests in the trustee. The trustee must then decide whether to pursue the litigation or not. The trustee must weigh the cost and likely benefit of pursuing a litigation claim and how to fund the litigation. Where a creditor requests the trustee to take (or continue) any proceeding that in his/her opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to act, then the creditor may apply to the Court for an order authorizing him/her to commence or continue the proceeding in his/her own name and at his/her own expense and risk. The creditor must give notice of his/her application for such an order to the other creditors. If the Court grants such an order, then any benefit(s) derived from the proceeding, to the extent of his/her claim and the costs, belongs exclusively to the creditor(s) that instituted or continued the proceedings. The surplus benefit(s), if any, belongs to the bankrupt estate.

There are many factors to consider if a plaintiff or defendant in a civil litigation claim becomes bankrupt. Speak to a civil litigation lawyer at Augustine Bater Binks LLP today to discuss how your civil litigation claim might be impacted by a bankruptcy.

[This article is for informational purposes only and does not constitute legal advice, which cannot be given without consideration of your individual circumstances.]

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