Canada's insolvency legislation provides a debtor seeking insolvency protection with an automatic stay of all legal proceedings. However, a recent decision of the Alberta Court of Queen's Bench confirms that a bankrupt may be unable to hide behind a statutory stay of proceedings where a proposed class action alleges fraud.
In Da Silva v. River Run Vistas Corporation, ("Da Silva"), the Court lifted a stay under the Bankruptcy and Insolvency Act ("BIA") to allow a proposed class action to proceed against two individuals who had been the officers, directors and operating mind of companies that were accused of orchestrating a fraudulent real estate development scheme. The representative plaintiffs sought approximately $14 million in investment losses as a result of the bankrupts' fraudulent misrepresentations.
Although the BIA prohibits a creditor from pursuing a remedy against a bankrupt until the debtor's trustee is discharged, an affected creditor can apply under section 69.4 of the BIA for permission to pursue the remedy in any event. A court may lift a stay of proceedings if it is satisfied that (a) the creditor or person is likely to be materially prejudiced by the continued operation of the stay; and (b) it is equitable on other grounds to make such a declaration.
Courts have found sound reason to lift a stay under the BIA if the applicant establishes some evidence that the claims alleged arose from the bankrupt's fraud. While the proposed class is not required to prove a prima facie case of fraud, it must make more than a mere allegation of fraud.
In Da Silva, the Court found that the proposed class had met the low threshold of establishing fraud, as the circumstances of the real estate scheme, such as the dramatic and unexplained decrease in the property's value, was sufficiently suspicious and warranted an inference of fraud.
The Court also held that the stay of proceedings should be lifted in this case because:
- the bankrupts were necessary and proper parties to the action;
- the summary procedure under the BIA would be inappropriate given the complexity of the claims alleged against the bankrupts; and
- the proposed class would be prejudiced by a three year delay in proceeding with the class action if the stay was not lifted, as the bankrupts would not be discharged until 2019.
For these reasons, the Court held that it was equitable to lift the stay in the circumstances and allowed the proposed class to proceed against the fraudsters.
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