This document is a summary of some of the litigation issues facing counsel in bankruptcy and insolvency matters.

1.
ISSUES FOR LITIGATION
BY CHRISTOPHER RAMSAY AND
JESSICA FABBRO
PRESENTED TO:
BANKRUPTCY & INSOLVENCY BASICS
FOR LAWYERS CLE BC
FEBRUARY 22, 2011

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Table of Contents
1. Fraudulent Preferences and Transfers at Undervalue ....................................................... 1
1.1 Fraudulent Preferences (Section 95 of the BIA) ........................................................ 1
1.2 Transfers at Undervalue (Section 96 of the BIA) ....................................................... 1
1.3 Voidable Transfers under Provincial Statutes ........................................................... 2
2. Section 38 Claims ............................................................................................................... 2
3. Appeals from Disallowances of Claims by Trustees: True Appeals or Hearings de novo? . 3
4. Section 163 Examinations .................................................................................................. 5
5. Waiving Solicitor/Client Privilege on behalf of a Bankrupt Company................................ 6
6. Claiming Legal Costs in an Insolvency Proceeding ............................................................. 7
7. Ethical Issues in Bankruptcy and Insolvency ...................................................................... 9
7.1 Ex Parte Orders .......................................................................................................... 9
7.2 Solicitor/Client Privilege .......................................................................................... 10

3.
ISSUES FOR LITIGATION
This paper is a summary of some of the litigation issues facing counsel in bankruptcy and
insolvency matters and will briefly highlight the following areas:
1. Fraudulent Preferences and Transfers at Undervalue
2. Section 138 Claims
3. Appeals from Disallowances of Claims by Trustees: True Appeals or Hearings de novo?
4. Section 163 Examinations
5. Waiving Solicitor/Client Privilege on behalf of a Bankrupt Company
6. Claiming Legal Costs in an Insolvency Proceeding
7. Ethical Issues in Bankruptcy and Insolvency – Ex Parte orders
1. Fraudulent Preferences and Transfers at Undervalue
The Bankruptcy and Insolvency Act, RSC 1985, c. B‐3 (the “BIA”) was recently amended to repeal
the settlement and reviewable transaction sections of the Act, and replaced these sections with
provisions regarding transfers under value and preferences. The aim of these new provisions is
to prevent bankrupts from unfairly preferring certain creditors over others and to prevent
bankrupts from transferring assets for significantly less than they are worth.
1.1 Fraudulent Preferences (Section 95 of the BIA)
Under section 95, a trustee is able to attack any transfer where the bankrupt makes a transfer
with the intent to prefer one creditor over others. The trustee bears the burden of proving that
the bankrupt intended to give a preference to that creditor, although a transaction will be
presumed to have the requisite intent if it has the effect of giving a creditor a preference. It is
then the responsibility of the bankrupt and the transferee to rebut this presumption. A trustee
may attack any transactions creating a preference that occur in the time beginning three
months prior to the initial bankruptcy event and ending on the date of bankruptcy, provided the
transferee is at arms’ length with the transferor. This time is extended to one year prior to the
initial bankruptcy event if the transferee is not at arms’ length with the transferor. It is
important to note that, for the purposes of section 95 and 96, related persons are only
presumed to deal not at arms’ length and such a presumption can be overcome with evidence
that they were, in fact, dealing at arms’ length.
1.2 Transfers at Undervalue (Section 96 of the BIA)
Section 96 provides the trustee with a mechanism for attacking transactions between the
debtor and persons who provide the debtor with either no consideration or inadequate
consideration for the asset, goods, or services provided. If the debtor is in the business of
providing services, the provision of such services for no fee or for a fee undervalue can be
attacked under section 96. The purpose of section 96 is to prohibit the debtor from disposing of
its assets for inadequate consideration. The transferee need not be a creditor of the debtor to
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have the transaction attacked, but only needed to provide inadequate consideration in the
transaction. If the parties to a transaction were dealing at arms’ length, a transaction can be
found void if it was completed in the year prior to the initial bankruptcy event, the debtor was
either insolvent at the time or became insolvent because of the transaction, and the debtor
intended to delay, hinder, or defraud a creditor. All the aforementioned conditions must be met
to vacate such a transaction. If the parties are not dealing at arms’ length, all transactions for
undervalue can be found void if they were completed in the year prior to the initial bankruptcy
event, or if the transaction occurred between five years and one year before the initial
bankruptcy event, the debtor was either insolvent at the time or became insolvent because of
the transaction, and the debtor intended to delay, hinder, or defraud a creditor.
1.3 Voidable Transfers under Provincial Statutes
However, the fact that a trustee does not meet the requirements under either section 95 or
section 96 does not mean that the transaction is incapable of being attacked. A trustee may
also seek to void a transaction under provincial legislation, such as the Fraudulent Conveyance
Act, RSBC 1996, c. 163 (the “FCA”) or the Fraudulent Preference Act, RSBC 1996, c. 164. While
any conflict between either the BIA or the Companies’ Creditors Arrangement Act, RSC 1985,
c. C‐36 (the “CCAA”) and provincial legislation will result in the federal legislation being
applicable, it is important to note that provincial legislation is available to trustees to use in
certain circumstances. The FCA is a particularly useful statute for trustees, as it allows the
trustee to attack transactions made prior to the debtor having any creditors, so long as the
trustee can prove that the debtor intended to delay, hinder or defraud creditors or others. This
is exactly the action the trustee took in the recent case of Botham Holdings Ltd. (Trustee of) v.
Braydon Investments Ltd., 2008 BCSC 1547, aff’d 2009 BCCA 521 (“Botham”).
In Botham, the owner of Botham Holdings Ltd. engaged in several transactions which had the
effect of transferring all the assets of Botham to Braydon Investments Ltd., which was owned by
the same shareholders, in the same proportions as Botham, prior to entering into a risky
partnership. When the partnership failed and Botham and the partnership went bankrupt,
Botham’s trustee in bankruptcy sought to apply the FCA to the transaction. The Court held that,
despite no dishonest intent, the transaction could not stand as the transferor still intended to
delay or hinder its creditors. While the trustee had also sought to set the transaction aside
under the BIA’s former provision on settlements, the Court chose to determine the matter
under the FCA. Botham highlights the usefulness of the FCA to trustees or creditors seeking to
attack transactions that fall outside of the scope of sections 95 and 96 of the BIA.
2. Section 38 Claims
Section 38 provides a mechanism by which a creditor can take the place of the trustee in any
proceeding where the trustee refuses or fails to act. Essentially, the creditor stands in the place
of the trustee and, if successful in the proceeding, is entitled to keep all proceeds, except those
that exceed the total of the creditor’s claim and the creditor’s costs of the proceeding. Any
surplus proceeds received by the creditor are the property of the bankrupt’s estate. A creditor
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is not, however, entitled to interest on these claims.1 In order to make an application under
section 38 a creditor must show that they have asked the trustee to take action in a proceeding
and that the trustee refused or neglected to do so. An affidavit setting out these facts, and the
fact that the debtor is insolvent, will be sufficient under a section 38 application.2
There are a number of conflicting authorities on whether a creditor is required to make out a
prima facie case before the Court will grant leave.3 As such, it is preferable to err on the side of
caution and provide the court with evidence, if it is available, that would enable counsel to make
out a prima facie case against the potential defendant. The creditor, however, must show that
such a proceeding will result in a monetary gain for the estate, if successful for the court to
approve a section 38 application.4
While the courts have adopted a more flexible approach in recent years, it is important for
counsel to protect their clients by ensuring that they meet all the requirements under section 38
when making their application. A failure to meet such requirements will not necessarily be fatal,
as the court can excuse such a failure under subsection 187(9) of the BIA, but such an
application will be dismissed where that failure has caused prejudice to any party. While
section 38 does not require the notification of other creditors prior to making a section 38
application, counsel must ensure that, once the application is granted, sufficient notice is given
to other creditors. The Creditor beginning the action must give the other creditors a reasonable
amount of time to make a decision on whether to join the action.5 The creditor is, however,
required to serve the trustee prior to making an application under section 38.6
Section 38 is a particularly useful tool where the trustee has insufficient funds to conduct such
litigation, but the creditor feels such litigation is likely to be successful and has the ability to fund
the proceedings. Counsel seeking to use such a section should ensure that they have the
requisite affidavit information and that, if successful, the case will provide a profit or monetary
benefit to the estate. Counsel should also try to make out a prima facie case against the
potential defendant, as there have been some decisions that have made this a requirement to
approval of such an application.
3. Appeals from Disallowances of Claims by Trustees: True Appeals or
Hearings de novo?
One of the duties of a trustee is to examine each claim presented by a potential creditor of the
bankrupt and to determine whether such a claim is valid. A trustee is entitled, under
subsection 135(2) of the BIA, to disallow any claim, priority or security that it finds unproven or
invalid. In the event that a creditor’s claim is disallowed by a trustee, that creditor is entitled to
1
Royal Bank v. King (1991), 13 C.B.R. (3d) 292 (Ont. Gen. Div.).
2
Re Dominion Trustco Corp. (1997), 45 C.B.R. (3d) 25 (Ont. Gen. Div.) at para. 17.
3
L.W. Houlden, Geoffrey Morawetz, and Janis Sarra, The 2011 Annotated Bankruptcy and Insolvency Act, (Toronto: Carswell, 2010) at 98 (Houlden).
4
Re Beothic Fish Processors Ltd., 2009 NLTD 19, at para. 4 [Beothic]
5
Toyota Canada Inc. v. Imperial Richmond Holdings Ltd. (1993), 10 Alta. L.R. (3d) 127 (A.B.Q.B.).
6
Beothic, supra at para. 4.
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appeal that decision to the superior court in the province. A creditor has 30 days after the
receipt of the trustee’s reasons for disallowance to file an appeal, although an extension may be
requested during that 30‐day period.
Neither the BIA nor the Bankruptcy and Insolvency General Rules, C.R.C. 1978, c. 368, as
amended specifies whether such an appeal is a true appeal or a hearing de novo. A hearing de
novo would permit a creditor to introduce new evidence on appeal, whereas a true appeal
would restrict the creditor to an appeal based on the record. In the recent case of Re Galaxy
Sports Inc., 2004 BCCA 284 (“Galaxy”), the Court reviewed previous case law on this point, much
of which had held that an appeal under subsection 135(4) was a hearing de novo. In rejecting
these cases, the Court stated that “the law in British Columbia is clear that unless the statute
that provides an appeal also states that it is to take the form of a trial de novo, […] the appeal
will be an ordinary appeal.”7 The Court went on to state that to allow a hearing de novo as of
right would be an inefficient use of resources, especially as a trustee has specialized knowledge
and expertise in the field on which they are making a determination.8 However, the Court also
stated that where it is alleged that the trustee has made a reviewable error, the court may
permit the creditor to adduce fresh evidence where it would be in the interests of justice to do
so.9
On the issue of the appropriate standards of review for the decisions of a trustee in disallowing
a claim, the standard depends on the nature of the decision. Where the appeal is based on a
trustee erring in law, the standard of review is correctness. Where the error alleged is factual,
the standard is reasonableness.10
In Re Sran, 2010 BCSC 937 (“Sran”), the Court followed the decision in Galaxy, before going one
step further and determining when fresh evidence would be admissible. The Court, quoting
Scott v. Scott, 2006 BCCA 504 (“Scott”), held that fresh evidence would be admissible where:
the evidence was not discoverable by reasonable diligence before the end of the trial;
that the evidence is credible; that it would be practically conclusive of an issue before the
court; and that if believed, the evidence could have affected the result of the trial.11
As the recent case law in British Columbia has not permitted a hearing de novo as of right to a
creditor appealing a disallowance, counsel must ensure that they bring all the evidence to the
attention of the trustee when putting forth a proof of claim. If counsel has new evidence that
they wish to adduce at the appeal, they must either be able to meet the requirements in Scott
or show that not admitting the new evidence would be unjust in the circumstances.
7
Galaxy, supra at para. 40. See also Johnson v. Erdman (trustee of) (2005), 276 Sask.R. 10 (S.K.Q.B.) [Johnson] and Re Tong, 2008 BCSC 814.
8
Galaxy, supra at para. 41.
9
Ibid. at para. 42.
10
Johnson, supra at para. 7.
11
Scott, supra at para. 16 in Sran, supra at para. 29.
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4. Section 163 Examinations
Section 163 gives the trustee the broad power to examine the bankrupt, any person who would
be reasonably thought to know the affairs of the bankrupt, or any person who is or has been an
agent, clerk, officer, director or employee with respect to the bankrupt or the bankrupt’s
dealings. Essentially, this section gives the trustee the power to examine any person who is
capable of providing information on the bankrupt. While a trustee cannot act on their own in
conducting an examination under section 163, they only require either an ordinary resolution of
the creditors or a resolution passed by the majority of the inspectors. Most importantly, a
trustee does not require an order of the Court to conduct such an examination. A trustee is also
not limited to conducting the examination of a single person, but is entitled to examine as many
persons as it considers necessary and for which it can obtain the requisite creditor or inspector
approvals. A trustee may examine a person more than once under section 163.12
In addition to conducting an examination under section 163, a trustee can require the person
being examined to produce any books, documents, correspondence, or other relevant papers
relating to the bankrupt or the bankrupt’s property. This includes documents that would be
otherwise confidential, unless they are subject to solicitor/client privilege.13 Counsel can be
examined by a trustee under this rule on issues and communications that are not subject to
solicitor/client privilege.14
Creditors are also entitled to conduct such examinations under subsection 163(2), but require
an order of the court to do so. A creditor is entitled to examine the trustee, the bankrupt, an
inspector, another creditor, or any other relevant person that can provide information on the
administration of the bankrupt’s estate. If the creditor also seeks to have the examined person
produce documents relevant to the administration of the bankrupt’s estate, the creditor must
include this in their application for examination. However, the court will only grant the order
where the creditor can show that their “efforts are directed at assisting the estate generally
[and not at assisting the creditor’s] private remedies as a secured creditor of [the debtor], which
is not a permissible use of [subsection] 163(2).”15
The powers of examination given under section 163 are very broad. A trustee is entitled to ask
the person being examined any questions regarding the bankrupt, the bankrupt’s property, and
the causes of bankruptcy. While a creditor is more limited in the scope of its examination, it is
still entitled to ask any questions regarding the administration of the bankrupt’s estate. The
courts have determined that a person being examined is not entitled to refuse to answer a
relevant question on the grounds that it may incriminate them.16
Subsection 163(3) provides for the use of information obtained in an examination under either
subsection 163(1) or 163(2), stating that a transcribed examination must be filed in the court.
12
Chiang (Trustee of) v. Chiang (2008), 44 C.B.R. (5th) 145 (Ont. S.C.J.) at para. 4.
13
Re Cygnus Industries Ltd. (1990), 80 C.B.R. (N.S.) 220 (Ont. Gen. Div.).
14
Re Canadian Triton International Ltd. (1998), 3 C.B.R. (4th) 231. (Ont. Sup. Ct.) at para. 9.
15 th
Re Dave, 2010 ABQB 358, 69 C.B.R. (5 ) 65 at para. 13.
16
Re Rieger Printing Ink Co. (2009) 94 O.R. (3d) 440 (Ont. S.C.J.) at paras. 13‐14.
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This information can then be read in to any civil proceedings to which the examined person is a
party. However, to the extent that such evidence is self‐incriminating, the information may not
be used in criminal proceedings per section 13 of the Canadian Charter of Rights and Freedoms17
and subsection 5(2) of the Evidence Act, R.S.C. 1985, c. C‐5, although a trustee may use such
evidence to obtain leave to institute criminal proceedings under section 205 of the BIA.18
Section 163 is an exceptionally useful tool for counsel to trustees and creditors, as it greatly
assists in locating and collecting as much of the bankrupt’s assets as possible and leads to a
more fulsome recovery for creditors. In addition, it provides evidence that can be read in at any
other civil proceedings to which the examined person is a party. This would be particularly
useful, for example, in a situation where a director of a bankrupt company was examined and
the examining creditor was engaged in a proceeding against the director in his or her personal
capacity.
5. Waiving Solicitor/Client Privilege on behalf of a Bankrupt Company
The waiver of Solicitor/Client privilege by a bankrupt company is a difficult matter and one
distinct from the waiver of such privilege by an individual bankrupt. As there is nothing in the
BIA that either gives or denies a trustee the right to waive solicitor/client privilege on behalf of a
company, the courts have had to turn to the common law for guidance on the issue.
The case law is very clear that the right to waive privilege in relation to pre‐bankruptcy legal
advice given to a bankrupt company is not a right conferred on the trustee.19 In St. Anne, the
Court highlighted the fact that the legislature chose to give a trustee very wide powers under
the BIA, but made no mention anywhere of the right to waive privilege on behalf of the
bankrupt.20 Additionally, the Court pointed out that a corporate bankrupt still exists
post‐bankruptcy and so would be able to waive privilege if it wanted to do so.21 Most
importantly, the Court recognized that a trustee acts for the creditors and not the bankrupt, and
is often in conflict with the bankrupt.22 As such, the Court refused to permit the trustee to
waive privilege.
In Bre‐X, the Court determined that the trustee was not permitted to waive privilege on behalf
of the company, regardless of the fact that all the directors of the company had resigned.23 The
Court stated that the resignation of all the directors and officers of the company did not make
waiver of privilege impossible, as a meeting of the remaining shareholders could be called to
deal with the issue, such as by electing new directors.
17
The Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11.
18
Houlden, supra at 743‐744.
19
See Re St. Anne‐Nackawic Pulp Co. (2005), 12 C.B.R. (5th) 65 (N.B.Q.B.) [St. Anne] and Bre‐X Minerals Ltd. (Trustee of) v. Verchere (2001), 206 D.L.R. (4th) 280 (A
20
St. Anne, supra at para. 8.
21
Ibid. at para. 10.
22
Ibid.
23
Bre‐X, supra at para. 65.
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Confirming the decision in Bre‐X, the Court in Ultra Information Systems Inc. v. Pushor Mitchell
LLP (2008), 45 C.B.R. (5th) 108 (“Ultra”) held that only current directors have the ability to waive
privilege on behalf of the company. Former directors of a bankrupt company are not permitted
to waive privilege on behalf of the company, regardless of whether they were directors at the
time the privileged communication was created.24
While some cases prior to Bre‐X appeared to indicate that a trustee would be able to waive
privilege in certain circumstances, the most recent cases on the issue have not given the trustee
such a right. The Court in Bre‐X mentions that those cases that did permit the waiving of
privilege dealt with fraudulent or criminal behaviour, which is an exception to the privilege
rule.25
In the event that privileged information is required by the trustee, attempts should be made to
ask the directors of the company to waive privilege on behalf of the company. If there are no
directors of the company, the trustee should attempt to deal with the matter through a
shareholders’ meeting to either elect directors or deal directly with the issue. A solicitor faced
with a request for privileged materials by a trustee should ensure that privilege has been waived
by the current directors of the company before disclosing such information.
6. Claiming Legal Costs in an Insolvency Proceeding
Recovery of legal costs in insolvency proceedings can be a difficult procedure, as the ability of
counsel to claim costs depends on the work performed, the timing of the work, and for whom
the work was done.
Subsection 197(4) of the BIA permits the recovery of costs from the estate of the bankrupt only
where such costs have been authorized by the trustee in writing or where such costs have been
awarded against the trustee. If there is no written authorization for legal fees, such fees will not
be payable out of the bankrupt’s estate. In the event that the estate has insufficient costs to
cover the permitted legal fees, the BIA sets out, in subsection 197(6), a priority structure as
follows:
(a) Commissions on collections;
(b) Costs incurred by the trustee after bankruptcy, but prior to the first meeting, where
such fees are authorized by either the court or the creditors;
(c) Costs on an assignment or incurred by the application creditor up to the issue of a
bankruptcy order;
(d) Costs awarded against the estate or the trustee;
(e) Costs for legal services otherwise rendered to the trustee or the estate.
24
Ultra, supra at para. 19.
25
Bre‐X, supra at para. 40.
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Counsel acting for the bankrupt prior to the assignment into bankruptcy for work done in
connection with the assignment into bankruptcy will be entitled to have their legal costs payable
out of the estate, even though such costs are not approved by the trustee.26 Additionally, the
legal costs for a creditor who petitions a debtor into bankruptcy will generally be payable out of
the estate of the bankrupt, unless the court otherwise orders.27
Counsel is not entitled to submit claims for fees for legal services provided to the debtor
post‐bankruptcy. Such fees may be claimed against the debtor and will survive a discharge of
the bankrupt, but may not be claimed against the estate.28 The Court also does not have the
jurisdiction to give counsel a charge over the assets of the bankrupt for past or future legal fees
incurred by the bankrupt.29 However, if a debtor plans to make a proposal under section 50 of
the BIA, the terms of such a proposal could include the payment of legal fees incurred or future
legal fees.30
If counsel is preparing to request a stay to put forward a plan of arrangement under the CCAA,
counsel should request a super‐priority administrative charge in the initial order to cover the
legal fees it expects to incur on behalf of the debtor in relation to the plan. Under section 11.52
of the CCAA, the court is permitted to make an order granting a charge over all the debtor’s
property for certain administrative fees incurred by the debtor company during CCAA
proceedings. As the court is entitled to fix the amount of such a charge at a level they consider
appropriate, Counsel should ensure that they provide a thorough estimate of administrative
fees in their request. Subsection 11.52(1) of the CCAA permits the court to award an
administrative charge for the following fees:
(a) The monitor’s fees, including the any legal, financial or expert fees incurred by the
monitor in the performance of their duties.
(b) Any financial, legal or expert fees incurred by the debtor company for the purpose of
the CCAA proceedings.
(c) Any financial, legal or expert fees incurred by any other interested party, provided
they satisfy the court that such a charge is necessary for effective participation in the
proceedings.
In light of the fact that several fees are covered by the administrative charge, counsel making
the request for the charge should ensure that they incorporate estimates from all other parties
eligible to claim against the charge into their request. Some of the factors that the Court may
take into consideration in determining the appropriateness of both the administrative charge
itself and the amount are:
(a) the size and complexity of the businesses being restructured;
26
Houlden, supra at 885.
27
Subsection 45(1) of the BIA.
28
Downey v. Charland (1943), 26 C.B.R. 268 (Que.S.C.) in Houlden, supra at 886.
29
Re Melnitzer (1991), 9 C.B.R. (3d) 30 (Ont. Bktcy.).
30
Anderson v. Canadian Imperial Bank of Commerce, 1999 CarswellOnt 1896 (Ont. Gen. Div.).
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(b) the proposed role of the beneficiaries of the charge;
(c) whether there is an unwarranted duplication of roles;
(d) whether the quantum of the proposed charge appears to be fair and reasonable;
(e) the position of the secured creditors likely to be affected by the charge; and
(f) the position of the Monitor.31
As this list is by no means exhaustive, counsel should, in addition to addressing these factors,
address any other factors that may be relevant to the court’s decision to grant or deny the
order. Finally, it is important to note that such a request cannot be made ex parte.
Subsection 11.52(1) specifically requires that notice be given to all secured creditors likely to be
affected by the charge before the Court may grant such an order.
Ensuring that counsel has requested such super‐priority in the initial order is essential, as
counsel will be an unsecured creditor in respect of its fees if it does not make this request and
the plan fails. If this happens, counsel will be far less likely to recover than they would if they
had requested and received a super‐priority charge on the assets.
7. Ethical Issues in Bankruptcy and Insolvency
7.1 Ex Parte Orders
There are a number of ethical issues facing lawyers today in bankruptcy and insolvency
litigation. One of the main issues is the level of disclosure in ex parte applications, such as those
for a stay of proceedings in order to file a proposal under the BIA or a plan under the CCAA. The
courts have held that counsel must make full and frank disclosure of all material facts and
circumstances that may be relevant to the court’s decision, as the court does not have the
benefit of opposing counsel to ensure that all facts are brought to their attention.32 Counsel
must note that this includes facts that may be harmful to the applicant’s case. While the client
may request that counsel present only the facts that assist in the application, counsel has a duty
to the court to put forward all relevant information, particularly in the cases of ex parte
applications where the bankrupt’s counsel is the only counsel present. If counsel fails to make
full and frank disclosure, the ex parte order will likely be set aside.33 As there can be serious
consequences to an ex parte order made on deficient facts, counsel must make sure that they
have all the relevant facts and present those facts to the court in any ex parte application. The
court will not accept an excuse from counsel that there was insufficient time to prepare such
materials.34 While ex parte applications are generally brought on an urgent basis, counsel
should ensure that they take the time to include all relevant materials available to them at the
time of application.
In addition to ensuring that full and frank disclosure is made, counsel should also ensure that
applications made ex parte are necessary. Orders obtained through ex parte applications,
where insufficient reasons were found for bringing such applications ex parte, may vacated
31
Re Canwest Publishing Inc., 2010 ONSC 222, 63 C.B.R. (5th) 115 at para. 54.
32
United States of America v. Friedland, [1996] O.J. No. 4399 (Ont. Gen. Div.) at para. 27.
33
Forestwood Co‐operative Homes Inc. v. Pritz (2002), 156 O.A.C. 359 (Ont. S.C.J.) at para. 25.
34
Patel v. Shikar Properties Inc. (2009), 176 A.C.W.S. (3d) 1134 (Ont. S.C.J.) at para. 49.
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regardless of whether counsel made full and frank disclosure in such application.35 In making
any ex parte application, counsel must provide reasons for not providing notice to the other
parties, such as urgency due to a potential seizure of assets, or the court may refuse to grant
such an order without notice to other parties.
7.2 Solicitor/Client Privilege
It has been well established that “solicitor‐client privilege is an essential element of the judicial
system that will be rigorously protected by the law and which will not yield to any but the most
essential exceptions.”36 However, the bankruptcy and insolvency process can make keeping
such protections more difficult. This difficultly is particularly prominent where a trustee of a
corporate bankrupt wishes to access and use privileged materials in the bankruptcy proceedings
for the benefit of the creditors. In these circumstances, the bankrupt’s prior counsel must
ensure that the bankrupt has waived privilege over the materials before providing such
information to the trustee. In the case of a corporate bankrupt, counsel must obtain a waiver
from the company’s current directors or through a shareholder’s resolution, if the company has
no directors.
Previous counsel for the bankrupt may also find themselves subject to an examination under
section 163 of the BIA. In this case, counsel must ensure that they take care to protect
privileged communications, while answering all questions that do not require privileged
information honestly. If required to produce documents, counsel must produce all documents,
even if confidential, unless they are privileged. In these circumstances, counsel must take
special care to cooperate with the examination process while at the same time protecting
privileged information until the bankrupt has waived privilege.
As the trustee acts for the creditors and not the bankrupt, former solicitors for the bankrupt are
not entitled to act for the trustee once the bankrupt makes an assignment into bankruptcy.37 As
the holders of privileged materials, acting for the trustee puts the solicitor in a position of
conflict that cannot be resolved. Counsel has access to privileged information that it should be
protecting, but at the same time knows it has information useful to the trustee, which it may
feel obligated to provide.38 While counsel may believe that the trustee stands in the place of
the bankrupt entirely and their interests are aligned, this is not the case as the trustee acts in
the interest of the creditors. Even in the case of a corporate bankrupt, the bankrupt continues
to survive post‐bankruptcy and continues to have interests that may or may not be in line with
the trustees. If a solicitor’s firm has previously acted for the bankrupt, but the solicitor has not,
the solicitor may only act for the trustee where the strong presumption of shared information
amongst firm members is overcome.39
35
Re Marine Drive Properties Ltd., 2009 BCSC 145 at para. 47.
36
Refco Alberta Inc. v. Nipsco Energy Services Inc. (2002), 42 C.B.R. (4th) 292 at para. 28. See also R. v. McClure [2001] 1 S.C.R. 445 and Bre‐X, supra.
37
West Edmonton Mall Property Inc. v. Duncan and Craig, [2001] 11 W.W.R. 615 (A.B.C.A.).
38
Ibid. at para. 6.
39
Ibid. at para. 9.
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