Ontario Court of Appeal affirms annulment of discharge from bankruptcy

A judge’s decision to annul a discharge from bankruptcy is discretionary once a breach of duty has been found, the Ontario Court of Appeal has ruled. Prejudice to the party discharged need not be a major consideration in the decision.

In Karia Estate v. Karia, 2022 ONCA 256, the appellant filed an assignment in bankruptcy in February 2008. In May 2009, the registrar in bankruptcy granted the appellant a discharge conditional upon paying $24,000 to his estate within 48 months. In October 2017, the appellant’s brother became bankrupt. Bindaas Capital, as the brother’s creditor, unsuccessfully filed a proof of claim.

In March 2018, the appellant fully satisfied the condition for the discharge by paying the last of the amount payable and the interest. In May 2018, the registrar granted the appellant an absolute discharge.

Bindaas appealed the disallowance of its proof of claim. To support the appeal, the appellant swore affidavits stating that he was Bindaas Capital’s sole officer and director since its incorporation in November 2013 and that Bindaas had loaned over $14 million in total to 88 borrowers.

In February 2019, the trustee in bankruptcy told the appellant that Bindaas Capital’s value should be paid into his estate if he had been a shareholder in the period from February 2008 to May 2018, a period during which he had been an undischarged bankrupt.

In September 2019, the trustee filed a motion asking the court to declare the shares as after-acquired property of the appellant’s estate that should vest in the trustee under s. 67(1)(c) of the Bankruptcy and Insolvency Act and to set aside the appellant’s discharge from bankruptcy.

The motion judge annulled the appellant’s discharge from bankruptcy under s. 180(1) of the Act and declared all Bindaas Capital’s issued and outstanding shares as vested in the trustee. The judge found that the appellant owned Bindaas, that he breached his duty under s. 158(a) of the Act, and that the shares were after-acquired property.

The Ontario Court of Appeal dismissed the appeal. It held, first of all, that the trustee was never discharged and was entitled to file the present motion.

Second, the appellate court saw no basis to interfere with the motion judge’s discretionary decision to annul the discharge on the basis that the bankrupt person, after being discharged, failed to perform his duties under the Act. The motion judge had found that the appellant fabricated documents to suggest that he had no ownership interest in Bindaas.

Third, the motion judge did not allow the past endorsements of other judges to influence his decision, the appellate court ruled. The motion judge, in his decision, had appropriately set out the case’s history and the previous orders leading to the present motion.

Fourth, the motion judge’s reasoning lacked palpable and overriding error, the appellate court decided. The court noted that the appellant did not challenge the motion judge’s findings regarding fabricated evidence and did not provide another reason for his actions.

Lastly, the appellate court concluded that there was no evidence of unfair prejudice.