Legal Blog

Rewind

People make decisions based on assumptions as to fact and law. Later, they may realise that their assumptions were wrong and may want to reverse the decisions they made. Such was the case in  Bibico Electric Inc. v. Battlefield Electrical Services Inc., a 2012 decision of the Ontario Court of Appeal.

Trust

It was an ordinary breach of trust action. A material supplier sued a corporate electrical sub and its two directors for breach of trust. The corporate defendant did not defend the action; it obviously had no assets. The directors defended, but, we presume, their defence became costly. They stonewalled on producing the necessary documents, probably the financial records of the sub. They then made a decision: “Let’s do nothing and see what happens; if worst comes to worst, we will just go bankrupt.”

The worst happened. Their defence was struck for failure to produce the documents and the supplier obtained judgment against them for breach of trust. “So what,” they said, as they blithely assigned into bankruptcy.

But, surprise, their home-free assumption was not correct. The supplier brought a motion to remove the stay that a bankruptcy automatically generates and for a declaration that the judgment against the directors survived their bankruptcies. Section 178(d) of the Bankruptcy and Insolvency Act provides that there is no release from bankruptcy for liability arising out of fraud, embezzlement, defalcation, or misappropriation while acting in a fiduciary capacity. A common law breach of trust can fit within that section.

The directors realised that they had problems and requested the court to set aside the default judgment against them and allow them to contest the merits of the breach of trust allegations.

Too Late

The motions judge reviewed the statement of claim in the trust action and noted that it was sufficiently detailed to demonstrate that the sub had incorporated the supplier’s products into construction projects, received payment for the products, and not paid the funds down the line to the supplier. The statement of claim alleged that the directors had caused, assented to, or acquiesced in the conduct, thus allowing the sub to breach its trust dishonestly.

The judge held that the allegations were sufficient to justify personal liability and to fit within section 178(d). He held that Construction Lien Act claims were supposed to be dealt with expeditiously and it would be unjust to allow the directors to re-open their case. He, therefore, dismissed the motion without further reasons.

Appeal

The directors appealed. The court, in a short endorsement, held that the allegations in the statement of claim were sufficient to attract the wrong-doing necessary to fall within section 178(d) and upheld the order.

In this case, the directors made an incorrect assumption, were not able to reverse the effects of the decision made on the faulty assumption, and found themselves still liable for the judgment – even after their bankruptcies. Not a happy situation for them.