In this case, the Court of Appeal for Ontario explained the
conditions under which a constructive trust remedy can be granted
in favour of defrauded creditors after the fraudster enters into
After Credifinance Securities Limited ("Credifinance")
made an assignment into bankruptcy, DSLC Capital Corp.
("DSLC") filed a proof of claim in the amount of $400,000
in accordance with section 81 of the Bankruptcy and Insolvency
Act, RSC 1985, c B-3 (the "BIA"). The proof
of claim maintained that $310,500 in the possession of Credifinance
was DSLC's property. The Trustee of Credifinance denied the
claim. DSLC appealed the decision to the Superior Court on the
basis that it was a victim of a fraud and therefore a constructive
trust should be granted in its favour.
The Superior Court judge found that DSLC had been defrauded into
loaning Credifinance the $400,000 and granted a constructive trust
over what remained of the loan on the basis that it did not form
part of the bankrupt estate. The trustee appealed the factual and
jurisdictional basis for the decision to the Court of Appeal.
In its judgment, the Court of Appeal discussed the process for
appeals under the BIA. In obiter, the court
commented that the British Columbia approach of hearing the matter
as a true appeal makes more sense than the Ontario approach of
potentially hearing it as a hearing de novo instead of as
a true appeal, the policy rationale for the B.C. approach being
that trustees in bankruptcy should be regarded as having experience
and expertise in the area of business financing, restructurings and
insolvency. However, since the parties did not raise this issue the
court did not comment on it further.
In upholding the Superior Court judge's decision, the
court found that the remedy of a constructive trust is expressly
recognized in bankruptcy proceedings, although the test for proving
such a constructive trust is difficult to meet. The court stated
that where the bankrupt and the creditors would benefit from the
bankrupt's misconduct, a constructive trust may be granted
to prevent an injustice. The court agreed with the Superior Court
judge that DSLC met the test for a constructive trust and noted
that the only creditors of Credifinance were its lawyers and the
individual who controlled Credifinance. However, the court warned
that the reasons of the Superior Court judge should not be
interpreted as meaning that a constructive trust will always be
imposed in cases where a civil fraud by the bankrupt on a claimant
is proven and the funds are traceable.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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