The bankruptcy of the Pemberton Music Festival's organizers and the cancellation of the festival made headlines in 2017 with thousands of ticket holders left out of pocket. Where the tickets had been purchased using credit cards, the credit card companies issued refunds and then charged the refund back to the Festival's ticket sellers.
It's a standard tactic of creditor proofing. Instead of investing in a business, principals make loans to the company. Then, if the business fails, they're secured creditors, standing first in line when the receiver sells company assets to pay creditor claims.
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.
When a bank alleges fraud and petitions court to lift a stay of proceedings against a bankrupt company, one might expect the court would demand proof before granting the bank's request. Depending on the facts of the case, those expectations could well be dashed.
Ponzi schemes are fraudulent investment schemes whereby individuals are enticed by a conman or fraudster to make investments in an operation promising an unreasonably high rate of return. Once the first few investments are made, subsequent investors are enticed to invest partly through reported gains and partly through the high payouts of earlier investors. Ultimately, the conman either spends or disappears with the remaining money, or the scheme collapses on itself as funds are exhausted by payouts to earlier investors.