Discharging a bankrupt in cases of fraud and false representations

In the recent decision of Compagnie d’assurance d’hypothèques Sagen Canada c. Cyr 2023 QCCS 4763, the Superior Court of Québec rendered an important judgment clarifying the circumstances in which a false declaration can prevent a claim from being discharged from bankruptcy.

In principle, the bankruptcy process will conclude with the debtor’s discharge from the totality of his debts, but in its section 178(1), the Bankruptcy and Insolvency Act enumerates a series of exceptions, including the case of “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” (subsection 178(1)(e)).

Despite a widespread belief to the contrary, it is not sufficient for a creditor to simply allege fraude or misreprensentation on the part of the debtor.

The circumstances that give rise to this exception are the following :

• Section 178(1) LFI must generally receive a restrictive interpretation;
• In the specific case of subsection 178(1)(e) BIA, the creditor must establish that: (i) his debtor made a representation; (ii) this representation was false; (iii) the debtor knew that said representation was false; and (iv) the false representation was made with a view of obtaining property or services;
• The creditor must establish a fraudulent intent on the part of the debtor, based on “overwhelming evidence of superior quality”;
• The false representation must have been made by the debtor himself and the fraudulent intent must have existed in his own mind. If the debtor did not hold the culpable intent himself, then subsection 178(1)(e) BIA is not applicable, irrespective of whether the debtor obtained property or services as a result of the conduct of a third party. The law seeks to punish the real fraudulent actor and not the person who, while benefitting from the fraud, was acting in good faith;
• The intention to defraud or misrepresent had to exist in the debtor’s mind at the time the representation was made, as well as having been communicated to the creditor at the same time;
• There must have been « obtaining » of property or of services as a direct consequence of the false representation made, and this exception from discharge is strictly limited to the value of the property or service so obtained;
• Consequently, any other collateral damages, which do not strictly reflect the value of the property or services obtained cannot benefit from the application of subsection 178(1)(e), for example judicial costs, expert costs, administration costs, punitive or exemplary damages, general damages and other similar claims;

This type of debate is usually in issue when a creditor presents before the court a motion under section 69.4 BIA, in order to seek the lift of the stay of proceedings.

When the creditor’s claim is based on a preexisting judgment issued by a civil court that contains no explicit reference to subsection 178(1)(e), the bankruptcy court will generally limit itself to review the judgment’s reasoning, without holding a new trial or hearing additional evidence. However, in the case of Montréal (Ville) c. Restructuration Deloitte inc. 2021 CSC 53, the Supreme Court of Canada established that « …a court must generally make its own findings of fact […]. This is true, for example, even where findings possibly linked to fraud have been made in a previous trial or where a default judgment or a consent to judgment might have contained such findings. It can be inferred by analogy from the case law on s. 178(1)(e) of the BIA that the courts have been particularly consistent and rigorous in assessing the evidence presented to them in this…”. For example, the simple signature of an acquiescence to judgment regarding a monetary claim does not necessarily imply that there has been an admission regarding any allegations of fraudulent misrepresentation.

However, if no previous judgment exists, then a real hearing may be held in the case of a motion based on 69.4 BIA, with testimony and documentary evidence, since the court will be called upon to determine whether or not the creditor’s claim fits in one of the exceptions of section 178(1) BIA.

Finally, it should be remembered that even if the stay of proceedings is granted, it should only take effect upon the trustee’s discharge, rather than the debtor’s.

Reference : Compagnie d’assurance d’hypothèques Sagen Canada c. Cyr 2023 QCCS 4763 https://canlii.ca/t/k1txd

Attorney involved : Me Jean-Philippe Gervais