In past newsletters, we have discussed ingenious defences. Actually many of these defences are more aptly named “grasping for straws” defences. These defences are not just limited to collection actions; they also pop up in bankruptcy proceedings, for example in Royal Bank of Canada v. 1130703 Ontario Ltd., a 2003 decision of the Ontario Superior Court of Justice.
The debtors’ business had collapsed. They commenced an action against the bank, claiming that the bank was in breach of an alleged fiduciary duty to them and was negligent in allowing the debtors to borrow from the bank.
Within two months, the bank filed to petition the debtors into bankruptcy. There is no doubt that, but for their civil action, the debtors were bankrupt and owed the bank a significant amount of money.
The debtors relied on section 43(11) of the Bankruptcy and Insolvency Act, which gave the court discretion to stay the petition. The question for the court to determine, in the exercise of that discretion, was whether there really was a bona fide dispute between the bank and the debtors in the civil action.
The judge noted that the debtors had a lawyer in their first application for funding; the debtors commenced the civil action almost contemporaneously with the bank’s attempt to collect the monies owed; before the debtors commenced their action, they alleged acts of fraud on the part of the bank and then did not substantiate the allegations; and the debtors were unable to explain the disappearance of financial and accounting records.
The judge held that the litigation that the debtors commenced was no more than an attempt to fabricate a dispute to place obstacles in the way of the bank’s collection efforts. In particular, the judge stated that “the claims that duties of care, or fiduciary duties, owed to the debtors … arose… – and were breached – are tenuous in law to a degree that speaks more to the ingenuity of counsel than it is consistent with the existence of a bona fide dispute.” The judge refused to stay the petition.