A creditor commences an action against a debtor and obtains a
judgment after a trial. The debtor then appeals and loses. The
creditor does its due diligence and tracks down land that the
debtor owns. The creditor files a writ of seizure and sale and
commences proceedings whereby the land is to be sold to pay the
judgment debt. By this time, the judgment debt, including interest,
is $200,000 and the costs that the creditor has incurred have
ballooned to $110,000. Not to worry, the equity in the land is
$320,000 and payday is coming.
However, not so fast. Just before the sale takes place, the
debtor assigns himself into bankruptcy. Aside from cursing, what is
the creditor to do? According to a seemingly little-known provision
of the Bankruptcy and Insolvency Act ("BIA"), depending
upon the facts the creditor may recoup much of the costs spent in
chasing the debtor. An example is set out in Re Walker, a 2010
British Columbia Supreme Court decision.
The BIA has 3 rungs of creditors: secured creditors (who usually
care little about the bankruptcy and are paid from assets they have
taken as security), preferred creditors (e.g. the trustee in
bankruptcy, a landlord for some months of rent, etc.), and ordinary
creditors (i.e. everybody else). Section 70(1) of the BIA provides
that all ordinary creditors are treated the same, regardless of
judgments, seizures, garnishments, and executions. In essence,
under this subsection, a creditor who has done nothing to validate
and collect its debt is in the same position as the judgment
creditor that we referenced in the first paragraph.
However, there is one saving grace; section 70(2) provides that
a creditor, "who has first attached by way of garnishment or
filed with the executing officer an attachment, execution or other
process against the property of the bankrupt" is paid
"one bill of costs". In effect, if a creditor has
incurred legal fees and disbursements in the judgment and execution
process and is the first creditor to file a writ of seizure and
sale affecting the bankrupt's property, then, to the extent of
the property's equity, those legal fees are bumped from
ordinary creditor to preferred creditor status. In our example, the
creditor would be an ordinary creditor for purposes of the
bankruptcy for its $200,000 debt, but would be a preferred creditor
for $110,000 in costs.
Other than the dollar amounts involved, the Walker case mirrored
the basic facts that we set out in the first paragraph. In that
case, the debtor had led the creditor on a merry chase all the way
to the Supreme Court of Canada and then went bankrupt just as her
property was being sold to pay her judgment debt.
The dispute between the trustee and the creditor was not whether
the creditor's trial costs (which were only partial indemnity
for its true costs) would be a preferred debt, but, rather, whether
the costs on appeal and the collection costs would also be included
in the "one bill of costs."
The judge noted that if only the trial costs were to be
included, a defendant would be provided with an incentive to launch
an appeal of dubious merit, knowing that she might declare
bankruptcy if unsuccessful and prevent the execution creditor from
enjoying any protection for the costs of the appeal. Worse, that
knowledge would be a potent weapon to compel the plaintiff to
settle the matter for less than the plaintiff was entitled or run
the risk that the defendant would appeal and, if unsuccessful, make
a subsequent assignment into bankruptcy.
After analysis, the judge noted that "one bill of
costs" meant all costs – and it mattered not whether
those costs were assessed before or after the date of the
The creditor in Walker had all of its costs paid in priority to
all of the ordinary creditors, but only because it was the first
execution creditor of the bankrupt. The 2nd place
execution creditor would have received nothing for its costs, other
than as part of the ordinary, pro rata, distribution process. It
pays to be the early bird.
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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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