Ontario Civil

Bankruptcy and Insolvency

Bankruptcy application brought to put wrench in position of husband in litigation

Estranged spouses had operated several businesses together for 25 years. Parties executed separation agreement. Subsequently, husband claimed he noticed some irregularities in amounts being paid to creditors. Husband and companies commenced civil action against wife and others for payment of damages of $3 million and other relief on basis of alleged fraud. Husband also amended his divorce proceedings to claim separation agreement should be set aside and support payments provided for in agreement be set aside retroactively on grounds that wife had assisted in defrauding companies, which was unknown at time of execution of separation agreement. Wife commenced civil action against husband and companies, central issue being who was responsible for fraud on their businesses. Wife brought application for bankruptcy. Principal debt relied on by wife in support of her bankruptcy application was debt arising from separation agreement and family law proceedings. There was evidence that husband had been indebted to other creditors other than the FRO for spousal arrears. None of these were listed in application for bankruptcy order, nor were they subject of evidence in chief from wife. Application dismissed. There was no legitimate purpose in this bankruptcy application. It was not brought with a view to orderly and fair distribution of property of bankrupt among its creditors on pari passu basis. Applicant did not refer to or rely on any creditors other than herself, and no other creditor was served with application. What wife may be owed was subject of dispute in family court proceedings and two civil proceedings. No thought was given to having orderly and fair distribution of property of bankrupt among husband’s creditors. Wife did not bring bankruptcy application in order to have trustee sue her for fraud. Bankruptcy application had been brought for improper purpose of putting wrench in position of husband in litigation who asserted fraud on part of wife. Refusal of wife to assist with independent report was evidence of bad faith on her part in dealing with issue which was central to dispute and raised question as to whether their defence of fraud claim was bona fide defence. Claim of husband against wife was bona fide dispute so far as he was concerned.

Gaal, Re (Mar. 6, 2013, Ont. S.C.J., Newbould J., File No. 31-207823-T) 227 A.C.W.S. (3d) 20.

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