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As a general rule, a creditor applying for a bankruptcy order will not be permitted to establish its case by compelling the respondent debtor to give evidence. May the creditor cross-examine the debtor on an affidavit that the defendant filed in a motion in a civil action and then use the transcript in the bankruptcy application? This question was answered in In re Gagnon, a 2019 decision of a Master of the Ontario Superior Court of Justice.

Proceedings

A creditor commenced an action for judgment on a debt and for a declaration for a fraudulent conveyance. On the same day, it also commenced an application for bankruptcy alleging the same fraudulent conveyance and the debtor’s alleged inability to pay his debts as they came due. The debtor defended both the application and the action. The creditor then brought a motion in the action for a certificate of pending litigation (CPL). When the debtor filed an affidavit in order to resist the motion, the creditor wanted to cross-examine on the affidavit. The creditor fully expected to use the transcript in the application, but, it explained, only for purposes of impeaching credibility, not to provide evidence to support its application for bankruptcy.

Analysis

The general rule has been interpreted broadly to prohibit examination and cross-examination in circumstances in which the effect would be to indirectly obtain a debtor’s evidence in disputed bankruptcy applications. The creditor may not even examine the debtor during the hearing of the application. However, if the debtor voluntarily files an affidavit in opposition to the application, then all bets are off and the debtor is fair game.

The Master noted that the debtor did not “voluntarily” file an affidavit in the CPL motion; it had no choice but to do so because the motion required direct rather than hearsay evidence on the issues in dispute. Accordingly, the Master held that the rule, not the exception, still applied.

The Rules of Civil Procedure allow a party on a motion to cross-examine, as of right, a responding party on an affidavit filed in response. Does this right trump the general rule stated above?

The Master noted that the bankruptcy rule had to prevail over the right to cross-examination under the Rules, recognising the quasi-penal nature of bankruptcy. The Master refused to allow the cross-examination on the affidavit until after the bankruptcy application was concluded. To do so would have allowed the creditor to do indirectly what it was not allowed to do directly.

Timing

The creditor could have achieved its goal by commencing its action; bringing the motion for, and obtaining, a CPL – with cross-examination of the debtor if required; and then bringing its application for bankruptcy. Timing is everything.

Image courtesy of  SimonMichaelHill.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.