When a debtor becomes bankrupt, there may be suspicion as to whether the bankrupt has made full disclosure of all assets or dealings with the bankrupt's assets prior to the bankruptcy. The bankrupt's conduct prior to discharge may also be in issue. The trustee in bankruptcy has the obligation to make inquiries, but if the bankrupt is uncooperative, or if information is required from someone other than the bankrupt, more aggressive steps may be required.
Section 163 of the Bankruptcy and Insolvency Act (the "BIA") provides for the examination of the bankrupt and others by the trustee or by a creditor. There are, however, different procedures to be followed depending on whether the examination is by the trustee or by a creditor.
Examination by the trustee
Section 163(1) of the BIA allows the trustee, on ordinary resolution of the creditors or the written request or resolution of the inspectors, to examine under oath:
... the bankrupt, any person reasonably thought to have knowledge of the affairs of the bankrupt or any person who is or has been an agent or a mandatary, or a clerk, a servant, an officer, a director or an employee of the bankrupt, respecting the bankrupt or the bankrupt's dealings or property.
If the creditors or the inspectors are suspicious of the bankrupt's disclosure, or further information is required, they can direct the trustee to conduct the examination of the bankrupt or other person. No court order is required.
To assist in the examination, section 163(1) of the BIA provides that the trustee:
... may order any person liable to be so examined to produce any books, documents, correspondence or papers in that person's possession or power relating in all or in part to the bankrupt or the bankrupt's dealings or property.
Other persons who can be subject to such examination may include, for example, the bankrupt's parents, spouse or children, her accountant or lawyer (subject to restrictions on such examination based on solicitor and client privilege), any transferees of property from the bankrupt, or creditors who may have received a potential preference. If the bankrupt or other person fails to attend the examination or produce relevant documents, the trustee may apply to court to compel attendance.
Examination by a creditor
If the trustee does not seek the approval of the creditors or inspectors to conduct an examination, or where a creditor believes there may be a basis for an examination but wants to control the examination, such creditor may apply to the court under section 163(2) for an order:
... for the examination ... of the trustee, the bankrupt, an inspector or a creditor, or any other person named in the order, for the purpose of investigating the administration of the estate of any bankrupt.
The court may further order:
... any person liable to be so examined to produce any books, documents, correspondence or papers in the person's possession or power relating in all or in part to the bankrupt, the trustee or any creditor.
The court may only make the order "on sufficient cause being shown".
The threshold for demonstrating sufficient cause for an examination is a fairly low one. Re Boozary Estate is frequently cited by the court where it was stated:
... the test is whether or not the moving party has demonstrated something amiss with the estate or its administration, and that the party sought to be examined might reasonably be expected to shed some light on that which is amiss. The moving party is not bound to accept the trustee's opinion regarding the state of the estate's administration, but may make its own reasonable and supplementary inquiries, so long as they are not frivolous or oppressive. As has been stated in many of the cases, the moving party may not engage in a fishing expedition.
While the scope of the examination by a creditor may appear more limited than that of a trustee, that is not the case. Once the initial hurdle of sufficient cause is met, section 167 of BIA provides that:
Any person being examined is bound to answer all questions relating to the business or property of the bankrupt, to the causes of his bankruptcy and the disposition of his property.
By way of example, in Re Antifaev the court stated, with respect to the examination of a personal bankrupt by a creditor:
Questions can be put to the bankrupt concerning his actions and conduct both prior to and after making his assignment into bankruptcy. In particular, he can be asked questions with respect to his dealings with any property, including questions concerning property that was not disclosed to the trustee. He can be asked whether there have been dispositions and whether same are in the nature of a preference or settlement not disclosed by the bankrupt. The bankrupt can certainly be asked questions with respect to his income earned throughout the period of the bankruptcy, as to whether same has been fully disclosed to the trustee, and as to whether he has or has not paid any surplus to the estate under the guidelines set by the Superintendent.
Examination by both the trustee and a creditor
The recent New Brunswick decision in Re Merchant, 2018 CarswellNB 241 considered an application by a creditor to examine three related bankrupts. One issue that was addressed was whether a creditor could be granted an order allowing the examination of a bankrupt under section 163(2) the BIA when the trustee had given notice to the bankrupt that it was intending to conduct an examination under section 163(1) of the BIA.
The three bankrupts argued that an examination by the creditor following an examination by the trustee would be oppressive. The court, however, found that there is nothing in the BIA that would prohibit both examinations from taking place. As the creditor had satisfied the test to be granted the order under section 163(2) of the BIA, the court ordered the examinations by the trustee and the creditor to take place together with the creditor's examination to follow the trustee. The only limit was that the examination by the creditor was "limited to relevant questions not posed by the Trustee, and questions of follow up and clarification."
Examination of the bankrupt and others can be a significant tool for both the trustee and creditors where there are concerns regarding the pre-bankruptcy dealings or conduct of the bankrupt as well as matters during the bankruptcy. Creditors in particular may wish to take advantage of this option where the trustee may not be conducting an examination of the bankrupt or other person regarding the bankrupt's property or business affairs.