What Restrictions Are There on a Proposal Trustee’s Investigatory and Remedial Powers?
By David R.M. Jackson on 2019/02/07
“Are There Limits On A Proposal Trustee’s Investigatory And Remedial Powers?” Insolvency Insider, February 22, 2019.
While Proposal Trustees do not typically get involved with investigating or challenging pre-filing transactions to the extent of Bankruptcy Trustees do, they do have the power to do so. In particular:
a) BIA s. 66(1) provides that “all provisions of this Act, except Division II of the Proposal, insofar as they are applicable, apply, with such modifications the circumstances require to Proposals made under this Division”;
b) BIA s. 101.1(1) specifically provides that the remedial provisions available to Bankruptcy Trustees for setting aside preferences, transfers under value and so forth under BIA ss. 95-101 apply under Division I Proposals unless the Proposal expressly provides otherwise;
c) Available jurisprudence consistency affirms that a Proposal Trustee has the same authority to utilize the examination powers that a Bankruptcy Trustee has under BIA ss. 163-4:
Re Amonson 1985 CanLii 1201 at para. 7 (MBQB)
Man with an Axe, Re (No.2) 1961 Carswell Man. 4 at para. 7 (MBQB)
d) To the extent that the Proposal Trustee is to utilize the investigatory, remedial or other provisions of the BIA there is jurisprudence to suggest that such intentions should be spelled out in the actual Proposal: see for example Brunco Leasing v. Zutphen Bros. Construction (1994) Carswell NS 31 at 37.
Just how and when these powers may be used in a BIA Proposal became an issue recently in Manitoba in PricewaterhouseCoopers Inc. v. Ramdath 2018 MBCA 71.
Finding itself in financial difficulties during the summer of 2017 R. Litz & Sons Company Limited (“Litz Crane”) lodged a Notice of Intention to Make a Proposal under the BIA. Within just a few weeks of filing the NOI the Chief Financial Officer (“Ramdath”) tendered his resignation. Shortly thereafter Litz Crane discovered an apparent fraud by Ramdath initially identified in excess of $3 million and sought several.
Additional Orders from the Court of Queen’s Bench on an ex parte basis including:
a) An Interim Receivership Order under BIA s. 47.1 appointing PWC as Interim Receiver with specific investigatory and tracing powers;
b) An Order for Mareva Injunction restraining Ramdath from disposing of his assets.
Ultimately, the Interim Receiver produced several reports of its investigations which were and continue to be of use to the stakeholders.
As Litz Crane and PWC also proceeded with its restructuring efforts with a view to completing a Proposal, the Proposal Trustee identified that once the BIA Proposal was approved by the Court the Interim Receivership would expire in accordance with BIA s. 47.1(1.1). In determining what should be done in contemplation of this expiry, Litz Crane and the Proposal Trustee considered whether the Court should be asked to continue PWC’s investigatory role as “Receiver” or if there were other alternatives. It was ultimately decided that given PWC’s ongoing obligations to administer the Proposal, as well as the existing powers available to the Proposal Trustee to also carry out investigations and take remedial action, it would be more efficient and cost effective to allow the Interim Receivership to expire but have the Proposal Approval Order provide that there was appropriate provisions in place to transition the responsibilities of the Interim Receiver to the Proposal Trustee.
The Proposal tendered by Litz Crane to its creditors in late 2017 set out the terms for the creditors consideration including provisions that the Proposal Trustee had the discretion to utilize the investigatory or remedial powers existing under the BIA to continue the investigation of Ramdath initiated by the Interim Receiver. The Proposal was approved by the requisite majority votes of creditors, in particular 90 percent of the number of creditors voting representing 98.2 percent of the proven claims following which the Proposal Trustee filed the motion materials necessary to seek Court approval. It should be noted that at no time was Ramdath a creditor, a shareholder or had any financial interest in the company. The only party appearing in opposition to the Proposal Approval Order was Ramdath who objected the Proposal on several grounds including
a) That the Proposal Trustee’s remedial and investigatory powers expired once a BIA Proposal had been approved. While there was no jurisprudence to support this assertion, the argument was made that the investigatory powers were to be used in the context of satisfying the Proposal Trustee and stakeholders that the Proposal to put to the creditors should be approved and not for the collateral purpose of assisting the debtor’s fraud action against Ramdath;
b) Allowing the Proposal Trustee to proceed with its remedial and investigatory powers against Ramdath under BIA would create unfairness given the continuation of the Mareva injunction and the prosecution of that civil action. In effect, a double jeopardy situation where Ramdath would be exposed to not only the ordinary civil discovery process but the extraordinary statutory powers afforded Bankruptcy Trustees.
Following submissions before the Chambers Judge the Proposal Approval Order was granted following which, and without seeking leave to appeal, Ramdath filed a Notice of Appeal to the Manitoba Court of Appeal. Upon the Proposal Trustee’s motion the Court confirmed that Ramdath did not have a right of appeal and directed that leave motion be sought to the Court of Appeal Chambers Judge under BIA s. 193(a).
Cameron, J.A. dismissed Ramdath’s motion for leave and, inter alia:
a) Pointed out that there is nothing in the BIA that states the powers or duties of the Proposal Trustee automatically expire upon Court approval of an Order. In particular she noted BIA s. 66(1) provides that all provisions of the BIA apply to Proposals and BIA s. 101.1(1) which deals with the Proposal Trustee’s ability to exercise the Bankruptcy Trustee’s remedies have no set expiry upon them;
b) The mere possibility that procedural unfairness may occur is not sufficient to prevent the Proposal Trustee from exercising its powers and remedies. The fundamental principal is that the “law assumes that concurrent proceedings on the same facts can be conducted fairly” and it is premature at this stage of the proceedings to restrict the Proposal Trustee’s powers unless or until actual prejudice and unfairness occur.
Coincidentally, the Manitoba Court also weighed in on the advantages of provinces adapting the same test for litigants seeking leave to appeal in insolvency matters. Manitoba, like various other provinces, has its own general test for deciding civil applications for leave to the Court of Appeal based on traditional criteria such as the question raised must be one of law or jurisdiction or that it is of sufficient importance to warrant consideration by the Court and the arguable merit. Cameron, J.A. concluded that it was appropriate in Manitoba bankruptcy situations to apply the test as enunciated Business Development Bank of Canada v. Pinetree Resort Inc. 2003 ONCA 282 (Pinetree) in order to maintain consistency of test criteria to be applied to federal legislation across the country. In Pinetree Blair, J.A. analyzed the different tests being applied by the appellant Courts and concluded that in applications for leave to appeal under BIA s. 193(e) for leave to appeal should be granted only where the proposed appeal:
a) Raises an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole, and is one that the appeal Court should consider and address;
b) Is prima face meritorious; and
c) And would not unduly hinder the progress of the bankruptcy/insolvency proceedings.
Pinetree test had not only found general acceptance by the Ontario Court of Appeal but British Columbia as well. It also has the benefit of utilizing similar criteria to that applied in CCAA.
 PricewaterhouseCoopers Inc. v. Ramdath 2018 MBCA 41.
 Romspen Investment Corporation v. Courtice Auto Wreckers 2017 ONCA 301 at 25 and Farm Credit Canada v. Gidda 2015 BCCA 236 at paras. 11-12
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