Clement (Re), 2011 ABQB 275

Court of Queen ’ s Bench of Alberta Citation: Clement (Re), 2011 ABQB 275 Date: 20110420 Docket: BK01 077876 Registry: Calgary, Alberta In the Matter of the Bankruptcy of Gerald Martin Clement _______________________________________________________ Memorandum of Decision of J.B. Hanebury, Registrar in Bankruptcy _______________________________________________________ [ 1 ] There are two preliminary questions that are the subject of this application:

(1) Does a registrar have jurisdiction to reopen and reconsider an order selling assets in a bankruptcy?

(2) Can a registrar direct the Superintendent of Bankruptcy, the trustee or a third party to conduct an investigation into the circumstances surrounding the sale of the assets of the bankrupt? Facts [ 2 ] Mr. Clement is an undischarged bankrupt. He is self-represented. He is applying for an investigation by a third party, the Superintendent in Bankruptcy or his trustee of the sale of his shares in a company called Dynamic Mechanical Systems Inc. After the investigation he seeks leave to bring an application to set aside an order granted by Registrar Waller in 2007 selling his shares in Dynamic Mechanical.

He owned 80% of the shares in that company. His affidavit alleges, in essence, that Paul Viccars, a principal of the purchaser, P.V. Flood Control Corp., hid the true value of the company from Mr. Clement’s trustee and then purchased the shares for a value much less than their real worth.

[3] The bankrupt’s application was heard in chambers and the Registrar directed that argument first be made on two questions:whether a registrar has the jurisdiction to set aside the order approving the sale of the shares; and, whether a registrar has jurisdiction todirect the Superintendent of Bankruptcy, the trustee or a third-party to conduct an investigation into the circumstances surrounding thesale of the shares of Dynamic Mechanical. [4] The Registrar directed that no further evidence was to be filed as the issues were legal in nature.

If, as a result of thisapplication, a further hearing was required on the merits of the motion, the parties could file further evidence at that time or conductcross-examinations. [5] The purpose of the investigation requested by the bankrupt is to assist him in his application to re-open and to reconsider theorder selling his shares. Therefore, the first question that requires consideration is the jurisdiction of a registrar to grant such an order. Does a registrar have jurisdiction to reopen and reconsider an order selling assets in a bankruptcy? [6] Mr. Clement raises a number of arguments on this question.

He points out that the court should not countenance or allow tostand an order based on fraud and he relies on sections 37 and 187(5) of the Bankruptcy and Insolvency Act. [7] It goes without saying that the court abhors fraud. However, the scent of fraud is insufficient to confer jurisdiction.

Section 37 of the Act [8]

Section 37 of the Act provides that any person aggrieved by any act or decision of the trustee may apply to the court whomay confirm, reverse or modify the act or decision and make such order in the premises as it thinks just. This

section permits a registrarto review the actions of a trustee and is an alternative to s. 215 of the Act, which permits an action against the trustee in the ordinarycourts. [9] In Re Paper Strap Ltd. (BC SC), [1948] 1 W.W.R. 330 (B.C.S.C.), the president of a bankrupt companyapplied under what is now s. 37 for an order reversing the sale of its assets by the trustee. The sale had been approved by court order andhad not been appealed. He also relied on the same

section to have the court order reopened and reconsidered. [10] The application was made four months after the sale and the applicant alleged that there was fraud. The Court did not rule onthe ability of the applicant to apply to set aside the decision of the trustee, pointing out that the parties appeared to have acknowledgedthat the Court could do so. The Court also did not discuss whether it had any jurisdiction to reconsider its original order under what isnow s. 37 of the Act.

It simply dismissed the application, noting that “to reopen the matter now would result in confusion and injustice.” [11] In my view, when a decision of a trustee to sell assets has been confirmed by court order, an applicant who seeks to have thesale set aside must apply to the court to set aside the order. It is insufficient to seek to set aside the decision of the trustee under s. 37.The latter, without the former, is not dispositive. [12] In

summary, s. 37 does not provide for the reopening or reconsideration of a court order. Subsection 187(5) of the Act [13] Mr. Clement also relies on s.187(5) of the Act which provides that “every court may review, rescind or vary any order madeby it under its bankruptcy jurisdiction”.

[14] Mr. Clement points out that in s. 187(5), the word “court” refers to a registrar, when a registrar is exercising the powers he orshe has pursuant to the Act or the Rules: Re Fackler and Patterson (1948) 14 C.B.R. (N.S.) 152 (Ont. Reg.). [15] The trustee and the purchaser of the shares both argue that a registrar has no jurisdiction to reconsider Master Waller’s order.Since it is an order for sale, it may only be reconsidered by way of an appeal. [16] Section 187(5), on its face, appears to give a registrar jurisdiction to set aside a registrar’s order.

However, the question ofwhen that can occur has been considered by the court in a number of cases. [17] In Elias v. Hutchison [1981] Carswell Alta 183, the Alberta Court of Appeal noted that the language of the

section wasbroad, but that it was designed to permit a judge to deal with continuing matters in the bankruptcy so as not to be bound by earlierdecisions if faced with changing circumstances. The Court gave as examples the changing of trustees and the refusing and subsequentgranting of a discharge to a bankrupt. [18] It noted that when there is a final adjudication, such as the claim of one class of creditors to a priority over another, whether aparticular piece of property forms part of the bankruptcy estate, and, the validity of a claim or its amount, there cannot be repeatedapplications.

By and large, claims capable of a final determination should not be the subject of repeated applications. The power toreview can only be applied in respect of judgments on interlocutory matters and not when a final judgment dealing with the rights of theparties has been given. In the latter instance, an appeal is the proper remedy. See as well: Garritty (Re) 2006 ABQB 238 ,[2006] A.J.

No. 351 (Q.B.). [19] While this decision did not consider the specific instance of the sale of assets, two decisions out of the Ontario Court ofAppeal have considered the ability of a court to review an order for the sale of the bankrupt’s assets. [20] In Re Impact Tool and Mould Inc. [2008] Carswell Ont. 1360 (Ont. C.A.), the Court considered an application by a trustee toset aside a vesting order obtained by an interim receiver appointed under the Act.

The trustee was concerned that it was improper to sellthe assets to a new company incorporated by the former principals of the bankrupt. [21] The original Court refused to set aside the sale on the basis of both delay and the failure of the trustee to establish any error oromission in the order. [22] The Court of Appeal, relying on Elias and Hutchison, held that s. 187(5) cannot be used for the purpose of bringing anappeal out of time, and that was what the trustee was trying to do. The original sale and vesting order should have been appealed.

Anapplication to vary an order for sale years after the transaction took place is not a variation and does not fall under s. 187(5). [23] This decision was followed in Re HOJ National Leasing Corp [2008] Carswell Ont 2749 (Ont CA). In that case the Registrarof Motor Vehicles applied to vary an order approving a sale and vesting title to the assets. The Registrar apparently became aware of theorder within a month and only brought his application six months later. The actual application was heard two years thereafter. The Courtfound that s.187(5) cannot be used as a substitute for an appeal.

See as well: Syntec Biofuel Inc. (Re) [2007] B.C.J. No. 984. [24] In light of this case law, the remedy sought by Mr. Clement is not one that can be granted by this Court. The sale of the assetsof the bankrupt is in the nature of a final judgment dealing with the rights of the parties. The order granted was not interlocutory innature. His remedy is to seek leave to file an appeal out of time. [25] As the second question may ultimately arise despite the negative response to the first question, it will be considered.

Can a registrar direct the Superintendent of Bankruptcy, the trustee or a third party to conduct an investigation into the

circumstances surrounding the sale of assets of the bankrupt? Superintendent of Bankruptcy [ 26 ] A registrar has no jurisdiction to direct the Superintendent of Bankruptcy to conduct an investigation of this matter. Mr. Clement is free to approach the Superintendent’s office directly and request an investigation, should he so choose. The Trustee [ 27 ] For the authority to direct the trustee to undertake an investigation, Mr.

Clement relies on s.187(8) of the Act : The court may direct any issue to be tried or any inquiry to be made by any judge or officer of any of the courts of the Province, and the decision of the judge or officer is subject to appeal by a judge in bankruptcy unless the judge is a judge of the Superior Court when the appeal shall, subject to s.193, be to the Court of Appeal. [ 28 ] A trustee is generally considered to be an “officer of the court”. However, counsel for the trustee advised that they had found no case law relying on this

section to direct a trustee to conduct an investigation. He noted that s.184 of the Act refers to the appointment of “officers” which are described as “registrars, clerks and other officers in bankruptcy as deemed necessary for the transaction or disposal of matters”. He suggested that a trustee is not included in the description of an officer. [ 29 ] I agree. This

section appears to be insufficient to support the power of a registrar to order a trustee to undertake an investigation. [ 30 ] Paragraphs 192 (1) (

b) and (

g) were also suggested as authority for the registrar to direct the trustee to undertake an investigation. However they are directed to the ability of the registrar to summon and examine a bankrupt or other party and are not applicable. [ 31 ] There is some equitable jurisdiction vested with a registrar, however it cannot be exercised contrary to the provisions of the Act : Royal Bank of Canada (c.o.b. Royal Bank Financial Group) v.

Drummie (Trustee of) 2002 NBQB 251 . [ 32 ] Counsel for the trustee acknowledges that the court, in its equitable jurisdiction, may have the authority to direct that the trustee undertake an investigation, although he had found no cases on point. The primary concern of counsel for the trustee was the payment of costs and expenses. [ 33 ] His approach is that expected from trustees. They have an obligation, as do registrars, to protect the integrity of the process.

Subject to some arrangements being made to cover their costs, trustees generally co-operate with a request or suggestion of the registrar that further investigation is warranted and should be undertaken. Independent Third Party [ 34 ] The bankrupt also seeks a direction by the court that an independent third party, at the bankrupt’s request, undertake an investigation. The trustee argues that there is nothing preventing the bankrupt from retaining a third party to conduct a review and investigation at his own cost.

He could apply under s.163 (2) to examine any person for the purpose of investigating the administration of the bankrupt’s estate. I agree. As an undischarged bankrupt, he falls within the definition of “other interested person” found in that subsection: Re Chua [1995] Carswell BC 372 (Master) . Again, the trustee notes in response that some provision should be made for any expenses incurred by the trustee.

Conclusion [ 35 ] There is no jurisdiction in a registrar to reopen, reconsider or set aside an order for the sale of the assets of the bankrupt.

The remedy is by way of an appeal. [ 36 ] Should a bankrupt wish an investigation of the circumstances surrounding the sale of his or her assets, the appropriate avenue is: to ask the Superintendent of Bankruptcy to undertake such an investigation; to ask a registrar to request that the trustee undertake an investigation; or, to undertake an investigation him or herself, or hire a third party to do so, with the direction of the court as to the right to question interested parties. Heard on the 20 th day of January, 2011. Dated at Calgary, Alberta this 20 th day of April, 2011. J.B.

Hanebury Registrar in Bankruptcy Appearances: Doug Nishimura Burnet Duckworth & Palmer LLP for Alger & Associates Inc. Trustee in Bankruptcy Randal S. Van de Mosselaer Macleod Dixon LLP for P.V. Flood Control Corp Gerald Martin Clement self Represented