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Lifting stay of proceedings against a bankrupt

One of the main protections for a debtor in entering into bankruptcy is the stay of proceedings: no creditors are allowed to take any collection or enforcement action against the debtor. However, a creditor can apply to court under section 69.4 of the Bankruptcy and Insolvency Act (BIA) to lift that stay of proceedings with respect to a particular claim. When a creditor alleges fraud and asks the court to lift the stay of proceedings, one might expect the court would require proof before granting the request. However, that was not the case in a recent Ontario decision.

No onus

In Pannia, Re, a creditor bank had applied to lift the stay of proceedings against the bankrupt to pursue a fraud claim against the bankrupt. In response, the bankrupt brought a motion seeking production of the receiver's reports supporting the bank's allegation of fraud.

The Ontario Superior Court of Justice ruled that section 69.4 of the BIA "does not impose an onus upon the bank to establish, on an evidentiary basis, that its claim is meritorious." While the bank must provide a basis for its motion to lift the stay, it need not demonstrate that its claim will succeed. The bank's motion to lift the stay is not an opportunity for the bankrupt to test the strength of the bank's proposed action, the court said, because this would put the bankrupt in a better position than any other litigant or defendant.

Full discovery

Allowing the stay to be lifted would lead to a separate legal action in civil court, in which the bank would press its claim for payment and face the challenges of opposing counsel. "It must be emphasized and recognized that the bankrupt will be entitled to full discovery rights in the civil action," the court said.

Rather, if the bankrupt believes the claim is frivolous, vexatious, or otherwise has no prospect of success, it is on the bankrupt to put forward that evidence.

Bankruptcy law and proceedings in bankruptcy court are a unique environment where all parties should be represented by counsel with specialized knowledge and expertise.

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