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Bankruptcy and Insolvency

Bankruptcy and receiving orders
Rescission or stay of order

Receiver should have responsibility for evaluating claims of secured creditors

Debtor company became insolvent. Receiver was appointed by court and sold debtor’s assets. Debtor made assignment into bankruptcy without leave of court or consent of receiver. Trustee in bankruptcy purported to disallow claim of secured creditor. Secured creditor brought motion to stay bankruptcy proceeding until after receiver completed its evaluation of secured creditors’ claims. Motion granted in part. Leave granted for bankruptcy proceeding to continue, in tandem with receivership, before same judge. Receiver should have responsibility for evaluating claims of secured creditors. It would be unfortunate if receiver and trustee had to duplicate work or work at cross purposes. Because receivership was put in place first and because bankruptcy was initiated without court approval, receiver was authorized to complete its work. Trustee had right to be heard both as trustee and as holder of debtor’s residual rights, right to be informed of steps taken by receiver and right to take position when report was submitted for court approval. If receiver and trustee reached different conclusions on status and quantum of secured claims, hearing would be required in receivership.
Royal Bank of Canada v. Casselman PHBC Ltd. (2017), 2017 CarswellOnt 10241, 2017 ONSC 4107, Calum MacLeod J. (Ont. S.C.J.).

Alternative Dispute Resolution

Relation of arbitration to court proceedings

Stay of court proceedings

Judge refusing partial stay as unreasonable to separate consumer and non-consumer claims

Plaintiffs claimed defendant phone companies engaged in undisclosed billing practices of “rounding up” calls to next minute. Defendants’ contracts contained mandatory arbitration clause but pursuant to s. 7(2) of Consumer Protection Act, claims in respect of consumer contracts can proceed in court. Motions judge granted plaintiffs’ motions to certify actions as class proceedings and dismissed defendants’ motion for stay of non-consumer claims pursuant to s. 7(5) of Arbitration Act, 1991. In refusing to grant partial stay, judge followed Ontario Court of Appeal decision in G case, which she concluded had not been overtaken by Supreme Court of Canada decision in S case. Judge determined it would be unreasonable to separate consumer and non-consumer claims. Defendants appealed denial of partial stay of non-consumer claims. Appeal dismissed. Judge’s decision to refuse stay was upheld. Judge was correct in applying G case to determine whether partial stay of proceedings should be granted under s. 7(5) of Arbitration Act, 1991 in proposed class proceeding involving both consumer and business customer claims. While both G case and S case involved arbitration clauses in context of proposed class proceeding, S case was decided under relevant laws of BC, which differed in material ways from those of Ontario. Arbitration agreement did not oust jurisdiction of court. G case remained good law in respect of proceedings commenced in Ontario, and had not been overtaken by S case. Judge did not refuse stay of proceedings of arbitrable claims based on conclusion that class action would be preferable procedure.
Wellman v. TELUS Communications Company (2017), 2017 CarswellOnt 8100, 2017 ONCA 433, K.M. Weiler J.A., R.A. Blair J.A., and K. van Rensburg J.A. (Ont. C.A.); affirmed (2014), 2014 CarswellOnt 16562, 2014 ONSC 3318, Conway J. (Ont. S.C.J.).

Tax

Income tax

Administration and enforcement

Director liable for corporation’s unpaid balance of source deductions following bankruptcy

G was majority shareholder and director of corporation. Corporation experienced severe financial difficulties and G retained services of trustee in bankruptcy. G was unable to fulfill proposals and corporation made assignment into bankruptcy on August 1, 2006. On August 26, 2006, new trustee in bankruptcy was appointed and CRA collections issued proof of claim on August 28, 2006 addressed to first trustee in bankruptcy. Revised or amended proof of claim was filed with second trustee in bankruptcy on July 24, 2007. Documentation corroborated G’s version of facts as to change of trustee in bankruptcy on August 26, 2006, filing of proposal on June 29, 2006, and that all real property was transferred to mortgagee pursuant to final order of foreclosure and that court appointed receiver-manager took possession and control of cash in bank, accounts receivable, and machinery and equipment such that there was no equity available to bankrupt estate. G was assessed under s. 227.1 of Income Tax Act (ITA) from liability of corporation for unpaid balance of source deductions together with penalties and interest in amount of $66,865.44. G appealed from notice of assessment. Appeal dismissed. Words “with all due dispatch” set out in s. 152(1) of Act had no bearing on analysis. G did not sign or deliver letter of resignation and merely assumed that he was no longer director of corporation as of bankruptcy date. On basis of evidence, G was still director of corporation when notice of assessment was issued in May 2012. There was insufficient evidence to show that G discharged his statutory duty of care for due diligence defence to apply. Signed proof of claim was admissible as evidence. There was nothing in statutory language contained in s. 227.1(2)(c) of Act requiring delivery of signed proof of claim to G as director and nothing prevented G from following up with CRA representative or her successor to verify that there would be sufficient assets to meet outstanding CRA claim, and nothing preventing G from following up or concluding arrangement with CRA in months after bankruptcy. Sending proof of claim to first trustee was error, however, on basis of wording of s. 166 of Act, assessment could not be vacated. Nothing turned on fact that amounts owing changed between date of initial proof of claim and second proof of claim.
Grant v. The Queen (2017), 2017 CarswellNat 3033, 2017 TCC 121, Guy R. Smith J. (T.C.C. [General Procedure]).

Pensions

Federal and provincial pension plans

Federal pension plans

Minister not entitled to judicial review of Social Security Tribunal - Appeal Division’s reasons

Pension claimant JT injured her wrist in 2007 and worked sporadically until August 2008 when she was no longer able to work. Social Security Tribunal–General Division determined that claimant was eligible for disability pension under Canada Pension Plan because disability was severe and prolonged as of minimum qualifying period. Social Security Tribunal–Appeal Division granted Minister of Employment and Social Development leave to appeal on ground that General Division may have erred in finding that disability was severe, but did not grant leave on other two arguments. Minister brought application for judicial review, seeking to have appeal proceed on all three arguments. Application dismissed. Minister alleged three distinct erroneous findings but they all fell within just one ground of appeal recognized by statute. Minister was seeking judicial review of Appeal Division’s reasons, not its disposition. Appeal Division referred to other issues as “grounds” and found they did not have reasonable chance of success, but to refer to all instances of error as “grounds” was problematic. Language of statute was clear that there were only three possible grounds of appeal and that appeal was either granted or refused. Since Minister was not seeking different disposition, Minister had no basis upon which to bring judicial review application prior to completion of appeal proceedings. Appeal Division was specialized tribunal with expertise to interpret scope of its own appeal jurisdiction and statute. There was no reason to interfere with Appeal Division’s finding on issue of capacity to work and severity of disability. Appeal Division’s determination of factual issues raised by Minister was reasonable.
Canada (Attorney General) v. Tsagbey (2017), 2017 CarswellNat 1310, 2017 FC 356, Richard G. Mosley J. (F.C.).

Business Associations

Legal proceedings involving business associations

Practice and procedure in proceedings involving corporations

Corporate veil lifted to execute default judgment

Court issued default judgment against corporate third party carrying on business as “jbloom”, on ex parte motion brought by plaintiff A Corp.. Corporate third party brought motion seeking various types of relief in relation to execution of Writ of Seizure and Sale that was issued by court. Among other things, corporate third party sought to have execution of Writ set aside and nullified, and to have itself declared as sole owner of goods that were seized. Motion dismissed. Corporate third party’s corporate veil was lifted to permit A Corp. to execute Default Judgment against corporate third party. Bringing of this motion by corporate third party, after having been party to deliberate and improper actions taken by its principals, JN and JPN, to evade enforcement of Default Judgment, was outrageous and reprehensible. JN and JPN were at all relevant times the directing minds of both numbered companies. Together with numbered companies, they deliberately and flagrantly attempted to evade A Corp.’s enforcement of Default Judgment by liquidating assets of 9153 and transferring jbloom business to 9279, in an attempt to avoid 9153’s liability for the damages and costs awards set forth in paragraph 5 of Default Judgment.
ASICS Corp. v. 9153-2267 Québec Inc. (2017), 2017 CarswellNat 622, 2017 FC 257, Paul S. Crampton C.J. (F.C.).

Tax

Income tax

Administration and enforcement

Question was whether application for extension of time brought as soon as circumstances permitted

In 2010, taxpayer sold condominium property that he had acquired three years previously. He declared gain from sale in 2010 income tax return as capital gain. In 2014, Minister reassessed taxpayer’s return, treated gain from sale of condominium property as income and assessed penalty. Taxpayer filed notice of objection. On January 12, 2016, Minister confirmed reassessment and sent notice of confirmation to taxpayer. Bookkeeper who had been assisting taxpayer referred taxpayer to chartered accountant who communicated with Canada Revenue Agency to persuade them that confirmation of reassessment was error. Within short time, CRA advised that file had been closed and that taxpayer would have to file notice of appeal to Tax Court of Canada (TCC). Accountant asked taxpayer to obtain relevant documentation for appeal, which took taxpayer beyond 90 day limitation period for filing notice of appeal. TCC dismissed taxpayer’s application for extension of time for appeal. Taxpayer appealed. Appeal allowed. Relevant issue was taxpayer’s use of time between expiry of 90 day appeal period and filing date of application for extension of time. TCC did not direct its mind to appropriate period when it considered whether taxpayer’s appeal had been brought as soon as circumstances permitted. TCC asked whether circumstances permitted taxpayer to file notice of appeal during 90 day period rather than asking whether, once period expired, he brought application for extension of time as soon as circumstances permitted. Case was one in which Federal Court of Appeal should render decision which TCC ought to have given. Having incurred expense of hearing in TCC and appeal, taxpayer ought to be spared necessity of further hearing on question. Evidence was that taxpayer spent period between expiry of 90 day period and filing of his application for extension of time gathering documentary evidence. Evidence suggested that application for extension of time was brought as soon as necessary documents were in hand and application for extension of time were made as soon as circumstances permitted. It was just and equitable to grant application..
Bygrave v. Canada (2017), 2017 CarswellNat 2687, 2017 FCA 124, J.D. Denis Pelletier J.A., Wyman W. Webb J.A., and D.G. Near J.A. (F.C.A.).

Administrative Law

Practice and procedure
On application for certiorari

Applicant, not party to original proceedings, not granted standing to apply for judicial review

Applicant EB was not party to original proceedings before Public Service Labour Relations and Employment Board. Applicant brought application for judicial review on basis that Board member involved in decision failed to satisfy legal residency requirement and Board member released decision beyond time permitted by law. Application dismissed. Applicant was not granted standing to apply for judicial review. Applicant was not directly affected by proceedings before Board within meaning of s. 18.1(1) of Federal Courts Act. Applicant was not party to Board proceedings, was not member or employee of union involved in Board proceedings, and had no relationship with individual respondent grievors before Board. Applicant offered no evidence suggesting that Board’s decision affected her legal rights, imposed legal obligations upon her, or prejudicially affected her. Applicant did not have public interest standing. Assuming applicant raised serious justiciable issue, this was not situation where issue of significance was evasive of review. Parties involved in proceedings did not apply for judicial review, which suggested that they chose to accept decision, and granting standing to applicant would disrupt that choice. It was not wise use of judicial resources to grant applicant standing in these circumstances.
Bernard v. Close (2017), 2017 CarswellNat 769, 2017 FCA 52, David Stratas J.A., Boivin J.A., and Woods J.A. (F.C.A.); application for judicial review refused (2016), 2016 CarswellNat 915, 2016 CarswellNat 916, 2016 PSLREB 18, 2016 CRTEFP 18, Kate Rogers Member (Can. P.S.L.R.E.B.).

Business Associations

Specific matters of corporate organization

Directors and officers

Directors found personally liable for oppression

As result of private placement, proportion of common shares held by CEO of corporation were significantly reduced. Consequently, value of CEO’s A and B shares, which were convertible into common shares, was also greatly reduced. This prompted CEO to file application for oppression under s. 241 of Canada Business Corporations Act against corporation’s directors, including two members of audit committee. Trial judge found that CEO had reasonable expectation that board would consider his rights as A and B shareholder in any transaction impacting A and B shares. Trial judge held that those two directors who were also members of audit committee had personally benefitted from private placement. Trial judge concluded that those two directors were personally liable for CEO’s loss. Court of Appeal dismissed directors’ appeal, holding that imposition of personal liability was justified, given positions of directors on audit committee. Directors appealed before Supreme Court of Canada. Appeal dismissed. Determining personal liability of director required two-pronged approach. First, oppressive conduct must be properly attributable to director because of his or her implication in oppression. In this case, trial judge found that those two directors who were also members of audit committee had played lead roles in board discussions resulting in non-conversion of CEO’s A and B shares. In making that finding, trial judge held that those directors were implicated in oppressive conduct. It was therefore open to trial judge to determine that oppression was properly attributable to those two directors. Second, imposition of personal liability must be fit in all circumstances. In this case, trial judge found that, in addition to lead role he had played, one of directors had accrued personal benefit as result of oppressive conduct. Additionally, remedy went no further than necessary to rectify CEO’s loss. Finally, remedy was appropriately fashioned to vindicate CEO’s reasonable expectations. Therefore, trial judge’s decision did not reflect any errors warranting appellate intervention.
Wilson v. Alharayeri (2017), 2017 CarswellQue 5230, 2017 CarswellQue 5231, 2017 SCC 39, 2017 CSC 39, McLachlin C.J.C., Abella J., Moldaver J., Karakatsanis J., Wagner J., Gascon J., Côté J., Brown J., and Rowe J. (S.C.C.); affirmed (2015), 2015 CarswellQue 13380, 2015 CarswellQue 7661, 2015 QCCA 1350, Morissette J.C.A. (C.A. Que.).

Bankruptcy and Insolvency

Proving claim

Provable debts

Fund liquidators failed to establish damages

British Virgin Islands fund, F Ltd., was part of group (F Group) which provided funds on behalf of itself and S Ltd. and L Ltd. to B’s security brokerage, B LLC, for investment. In December 2008, B was arrested for operating Ponzi scheme and trustee and liquidator was appointed under US Securities Investor Protection Act (SIPA) to collect and set aside fund of BLMIS customer property for distribution among BLMIS customers. SIPA trustee sought return of 3.5 billion from F Group. F Ltd. filed claims in SIPA proceeding. In 2011, liquidator appointed for F Ltd., K, agreed to pay SIPA trustee $70 million, parties consented to judgments in favour of SIPA trustee against each F Group fund, and F Ltd. was granted $230 million claim in SIPA proceeding. F Group brought action in breach of contract and negligence against auditor of its 2006 and 2007 financial statements for failing to discover and disclose Ponzi scheme, claiming US $2.577 billion difference between actual and estimated liquidation deficits had auditors discovered scheme earlier. Auditor admitted negligence. Auditor brought motion for summary judgment. Motion granted; action dismissed. Liquidators failed to establish damages so there was no genuine issue requiring trial. Evidence of auditor’s witness that F Group were better off by some $857,500,000 was accepted. Liabilities of F Group or their liquidators to SIPA trustee or customers of B LLC were incorrectly included in calculations. Net liability figure $2,329,525,000 used in calculation was invalid. Investments S Ltd. and L Ltd. made in B LLC were double-counted. Phantom earnings were included in calculations based on fictitious entries on B LLC statements. Hypothetical, statute-barred claims of B LLC investors against F Fund were included in calculations. Liquidators gave no details as to claims they rejected or included in damage calculation and no details of separate proceedings in BVI in which F Group were allegedly liable to investors.
Fairfield Sentry Limited et al v. PwC et al (2017), 2017 CarswellOnt 8995, 2017 ONSC 3447, Newbould J. (Ont. S.C.J. [Commercial List]).

Tax

Income Tax

Administration and enforcement

Taxpayer liable for gross negligence penalty

Taxpayer was certified general accountant whose participation in charitable donation program, on invitation of close friend, led to reassessments and significant tax liabilities for three taxation years during period when he lost employment. Friend then promised that such liabilities could be “reversed” by having organization prepare his next tax return. Taxpayer, who was spending significant amount of time outside Canada to assist with family’s foreign farm venture and was anxious about tax liabilities, authorized friend to look after preparation and filing of tax return. Taxpayer’s income tax return was prepared by organization to report net business loss of $274,576.54, eliminating his taxable income for that year as well as for three preceding years. Minister reassessed taxpayer under Income Tax Act, denying loss and imposing gross negligence penalty. Taxpayer appealed only to challenge penalty. Appeal dismissed. Statements in taxpayer’s income tax return claiming business income and expenses were false. Taxpayer’s education and work experience provided him with knowledge and understanding of business and financial matters. Taxpayer did not make inquiry into previously unknown tax preparing organization, partly because of misplaced trust in friend. Warning signs included magnitude of claimed business loss, ready visibility of false entries about business income and separate statement of business activities, and absence of tax preparer’s name and contact information in box beside where he signed. Taxpayer failed to see warning sign of referral by friend who had also recommended donation program. Friend’s “explanation” clearly did not explain how taxpayer could be entitled to refund of taxes but he readily agreed to let friend proceed as proposed to clear tax liabilities, without insisting on full explanation of contents of return. Considering all factors, taxpayer was wilfully blind when he signed return. Placing undue trust in tax preparer, to extent of signing return without reviewing it, demonstrated indifference as to whether Act was complied with or not. Taxpayer made false statements in tax return under circumstances amounting to gross negligence.
Rowe v. The Queen (2017), 2017 CarswellNat 3032, 2017 TCC 122, Don R. Sommerfeldt J. (T.C.C. [General Procedure]).
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An estate trustee who took an ‘egregious' position in litigation has been ordered to personally pay more than $140,000 in costs. Will this ruling serve as an appropriate caution to executors on how they conduct themselves in litigation?
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