Both the Bankruptcy and Insolvency Act (“BIA”)[1] and the Companies’ Creditors Arrangement Act[2] stay actions and remedies as against debtors. However, creditors may apply to lift the stay to pursue a proposed class action. The recent decision of the Alberta Court of Queen’s Bench in Da Silva v River Run Vistas Corporation (“Da Silva”)[3] considered the framework for when a court may lift such a statutory stay so that a proposed class action may proceed.

Background

In Da Silva, the plaintiff for a proposed class action brought an application to lift a BIA stay in respect of two bankrupt defendants who were the directors, officers, shareholders, and operating minds of corporations promoting and developing a real estate development project (the “Project”) in Alberta. The plaintiffs invested $14 million, secured by a first mortgage, in the Project based on representations made in 2007 and 2009. In 2009-2010, after an initial default, investors were told that their investments were still secured, based on an appraisal of the lands of between $11 million and $13 million. The plaintiffs alleged that the representations were made fraudulently based on false appraisals. By 2011, there was no progress on the development of the Project and by 2015, the lands were valued at $623,230. The investors lost substantially all of their investment in the Project.[4]

Lifting a Stay under the BIA

The BIA prohibits a creditor from pursuing a remedy against a debtor who is in bankruptcy until the debtor’s trustee is discharged (s 69.3). However, s. 69.4 of the BIA permits affected creditors – such as the investors in Da Silva – to apply to the court for permission to pursue a remedy, if the court is satisfied that:[5]

  1. The creditor or person is likely to be materially prejudiced by the continued stay; and
  2. It is equitable on other grounds to make such a declaration.
  3. In considering an application to lift a stay, a court will consider whether there are “sound reasons” to lift it, which have included actions where:[6]
  • The bankrupt’s discharge would not be a defence – for example where the claims arise from fraud, which claims the BIA does not extinguish;
  • The degree of complexity makes the summary procedure described in the BIA inappropriate; and
  • The debtor is a necessary party for the complete adjudication of the matters at issue involving other parties.Stay Lifted in Da SilvaIn addition, the Court held that:[9]
  • In Da Silva, Justice Strekaf was satisfied that the low threshold for fraud was met and raised sufficient suspicious circumstances to warrant an inference of fraud: there was an unexplained reduction of value for the land from $14 million to less than $700,000, comments were made in a report by a court appointed inspector that the monies taken from investors were used in what appeared to be a direct contravention of the planned use in an offering memorandum, and that the transactions did not appear to serve any business purpose.[8]
  • Where fraud is alleged against an undischarged debtor or bankrupt, some evidence must be provided on the application to lift the stay. The threshold is low.[7]
  • The claims advanced against the bankrupts involved a degree of complexity that made the summary procedure under the BIA inappropriate;
  • The bankrupts were necessary and proper parties for the trial to proceed in an orderly and efficient fashion, having regard to the allegations in the statement of claim; and
  • As the conditional discharges of the bankrupts were not scheduled to be completed until 2019, the plaintiffs would be prejudiced if they were delayed a further 3 years in proceeding a class action which relates to matters that arose in 2007.
  • Accordingly, the plaintiffs had demonstrated that they would be materially prejudiced if the stay continued and it would be equitable to lift the stay and allow the proposed class action to proceed. The stay was lifted.