Two recent Ontario decisions confirm the wide breadth of the powers available to trustees-in-bankruptcy under the Bankruptcy and Insolvency Act to examine witnesses and compel the production of documents. Section 163(1) permits trustees, without court order, to examine under oath any person reasonably thought to have knowledge of the affairs of the bankrupt.1 Recent cases demonstrate that this power is broad and continues to be available after the trustee commences proceedings against the person to be examined. Similarly, Section 164(1) gives trustees the broad power to compel production of any book, document or paper of any kind relating in whole or in part to the bankrupt, his dealings or property, or showing that he is indebted to the bankrupt.2 This power extends to the corporate records of third party private companies that are not a party to the bankruptcy proceedings.
In Osztrovics (Trustee of) v. Osztrovics Farms Ltd., the trustee of a bankrupt individual brought a motion before the Registrar in Bankruptcy to compel a privately held company constituted under the Ontario Business Corporations Act, that is a third party to the bankruptcy proceedings, to produce documents related to its business.3 The trustee also sought to compel two individuals to submit to examinations in relation to their knowledge of the affairs of the bankrupt. The individuals were family members of the bankrupt and also directors of the private company, in which the bankrupt was a minority shareholder. The trustee required the documents and examinations in order to properly value the shares, which were the bankrupt's principal asset.
The trustee sought broad production of the company's corporate records. The Registrar agreed that these records were necessary to properly value the shares. He also rejected the respondent company's argument that the trustee's power to compel documents was limited to its inspection rights as a shareholder of the company. He also dismissed the possibility that there was an operational conflict between Section 164(1) and the directors' obligations under the OBCA to act in the best interests of the company (i.e. not to disclose sensitive internal documents). He concluded "I do not accept that it follows that the powers of a trustee in bankruptcy 'having stepped into the shoes of a bankrupt shareholder' is restricted or prevented by the provision of the provincial statute from exercising his federally created mandate."4 Finally, the Registrar held that the possibility of misuse of commercially sensitive information by the bankruptcy's inspectors ought not prevent the trustee from carrying out its investigatory duties.5
The Registrar further ordered the attendance of one of the individuals for a Section 163(1) examination by the trustee. However, rather than compel the attendance of the other individual for examination, he ordered that she answer questions by written interrogatory. In this regard he cited her advanced age as well as the principle of proportionality under the Rules of Civil Procedure.
The directors appealed the order of the Registrar in its entirety and the trustee cross-appealed in relation to the requirement that one of the directors be examined by written interrogatories. On appeal, Justice Wilton-Siegel upheld the Registrar's decision as to the scope of the trustee's power to compel documents, including sensitive commercial documents necessary for the evaluation of shares belonging to the bankrupt's estate.6 However, Justice Wilting-Siegel held that the Registrar erred in fashioning a "hybrid solution" in ordering the written interrogatories. Once the Registrar had found that the individual was a person contemplated in Section 163(1), his discretion was exhausted and the trustee was entitled to examine her in person.7
The directors sought leave to appeal to the Ontario Court of Appeal. Justice Brown denied leave to appeal, finding that the appellants' grounds for appeal did not raise issues of general importance, were not prima facie meritorious or unduly hindered the progress of the insolvency proceedings. 8 In particular, he observed that the appellants sought to read in a limitation to the trustee's power to compel documents that does not appear in the text of Section 164(1).9 It should be noted, however, that Justice Brown declined to adopt the breadth of the principle articulated by Justice Wilton-Siegel.10
In Re SHS, Justice Patillo ordered the attendance for examination by the trustee of three individuals despite the fact that the trustee had already issued a claim against them.11 The individuals argued that the trustee was not entitled to examine them pursuant to Section 163, citing Franks Ex parte Gittins, Re12 for the proposition that the trustee's power to examine is restricted where proceedings have commenced. In his reasons for decision, Justice Patillo changed the test applicable to examinations under Section 163(1) where the trustee has commenced proceedings against the parties to be examined. Trustees no longer require "exceptional circumstances" justifying the examination of individuals against whom civil proceedings have been commenced. Rather, the correct test is whether the examination is necessary for the due administration of the bankrupt's estate and not "a mere step in the action".13
The trustee in Re SHS sought to examine three former managers of the bankrupt company regarding suspicious transactions that occurred under their management. To avoid any possible limitations issue, the trustee was forced to issue a claim against the managers before examining them pursuant to Section 163(1).
Historically, trustees have generally not been permitted to examine pursuant to Section 163(1) after a proceeding had been commenced against the individuals to be examined. This was to avoid abuse of the trustee's power by using it to promote litigation.14 One case from 1914 (Re Aarons) provided authority for the availability of such examinations in "exceptional circumstances" where some urgency forced the trustee to commence proceedings before examining pursuant to Section 163.15 In Re SHS, Justice Patillo departed from the previous threshold of "exceptional circumstances", holding:16
In my view, a requirement of "exceptional circumstances" to permit a s. 163(1) examination is too high. In considering the interests at stake, in order to permit a s. 163(1) examination to proceed, the court must be assured the examination is necessary for the due administration of the bankrupt's estate and not "a mere step in the action".
Justice Patillo's decision considerably reduces the constraints on a trustee's ability to conduct examinations pursuant to Section 163(1) after a proceeding has commenced against the individuals sought to be examined.
Both Osztrovics and Re SHS confirm that the court will uphold the broad powers available to trustees under Sections 163 and 164 of the Bankruptcy and Insolvency Act to investigate the affair of bankrupts.
 R.S.C. 1985, c. B-3, s. 163(1).
 R.S.C. 1985, c. B-3, s. 164(1).
 2014 ONSC 4405 [Osztrovics].
 Ibid at 88.
 Ibid at 101.
 2015 ONSC 2079.
 Ibid at 44.
 2015 ONCA 463.
 Ibid at 15.
 Ibid at 15 and 22.
 2015 ONSC 2674 [Re SHS].
  1 Q.B. 646 (Eng. Q.B.)
 Ibid at 20.
 Re Frank; Ex parte Gittins,  1 QB 646 (Queens Bench); Re SHS at 18.
 Re Aarons (1914), 111 L.T. 411 (K.B.).
 Re SHS at 22.
Originally published by Ontario Bar Association.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2016