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Creditor's inattention to proposal terms leads to release of joint debtor

When a debtor makes a proposal under the Bankruptcy and Insolvency Act ("BIA"), the terms of that proposal must be put to creditors for a vote. If accepted, the proposal will then be submitted to the court for approval and then performed by the debtor; if rejected, the debtor will be deemed bankrupt.

A recent decision out of Nova Scotia highlights the importance of creditors closely reviewing the terms of a proposal they are being asked to vote on. In Melanson (Re), 2018 NSSC 279, a creditor bank with a substantial claim was faced with a proposal put forward by its customer.

The debtor's wife was jointly liable for the bank debt, and the proposal put forward by the customer included a term releasing the wife from any obligation to the bank upon successful performance. The bank, through a hired agent, voted in favour of the proposal. However, shortly afterwards, and through a different agent, the bank commenced a lawsuit against the wife on account of the debt. The bank did not appear on the application for court approval of the proposal, at which time the court determined that the release, while possibly not effective under the terms of the BIA, did create a contractual relationship between the wife and the bank.

After the fact, the bank applied to court to either vary the proposal to remove the release, or to annul the proposal. The court dismissed the bank's application, relying heavily on the fact that the bank, through its agent, had received the proposal and voted in favour of it; even if this was a mistake on its part, the trustee and the debtor were entitled to rely on the apparent authority of the bank's agent and the vote cast by them. Accordingly, the proposal, including release of the wife, continued to stand.

Creditors should ensure they fully understand the consequences of a proposal being made to them by a debtor, and when faced with a proposal they can maximize their returns and minimize their risks by seeking the advice and input of experienced insolvency counsel.

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