Legal Blog

Bankrupt

The chief executive officer of a large sub finds himself in trouble. There has been a downturn in the economy, the sub had some bad jobs, and the sub has gone under leaving a spate of incensed subsubs. The sub never operated separate trust accounts and was in breach of the trust fund rules under the Construction Lien Act (the “Act”). The CEO is liable under the Act for the monies owed to the subsubs and the debts are so large that the CEO will never be able to repay them. With heavy heart, the CEO assigns into bankruptcy. After all, bankruptcy wipes out all debts; or does it? 

Issue 

In Re Zumbo, a 2000 decision of the Superior Court of Justice, a general had gone belly up owing its subs and its bank a large chunk of money. One sub had obtained a default judgment against the general for approximately $190,000 for breach of trust and at the same time had, under the Act, obtained a default judgment against the general’s sole shareholder and officer. The officer then assigned into bankruptcy. Under the Bankruptcy and Insolvency Act (the “BIA”), a bankrupt can apply, within a relatively short time, to be discharged from all debts. If any creditors oppose the discharge, there is a hearing to determine whether the bankrupt should be allowed to do so, with or without attached conditions. That is exactly what happened in this case.

A section of the BIA states that an order of discharge does not release the bankrupt from any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity. The subsub opposed the officer’s discharge relying on this section. 

Slippery

The officer was not a sympathetic bankrupt. He had refused to co-operate with his creditors; did not answer some of his undertakings in a previous examination; did not provide the documents the creditors had requested; did not provide an accounting ordered by the court; and frustrated any attempt the creditors could have made to trace the monies that the general received on the project but did not pay to the subs.

The court noted that the “fraud, embezzlement” words of the BIA meant that there had to be an element of dishonesty, wrongdoing, or misconduct; simple inadvertence, negligence or incompetence was not enough.

With that in mind, the judge noted the facts set out above and that the officer was an experienced contractor who was aware of the provisions of the Act and chose to ignore them. Accordingly, the judge decided that the breach of trust of the officer was sufficient to fall within the exception to the BIA discharge provisions and that the debt to the sub survived the bankruptcy and any discharge of the officer from bankruptcy.

We are not sure if the judge would have ruled in the same manner had the officer been more sympathetic and demonstrated that he was an unfortunate but honest debtor attempting to re-integrate into society.

Moral

Do not breach the trust fund rules of the Act. Your creditors can affix you with personal liability without being subject to a limitation period (see newsletter of July 2000) to commence their actions and once there is a judgment, bankruptcy does not relieve you from it.