We had a client recently go bankrupt. Unfortunately, it happens.
When a party goes bankrupt, there is an automatic Stay of Proceedings. When a party goes bankrupt during litigation, that litigation is at an end. There are some exceptions, but that is beyond the scope of this blog.
Pursuant to Section 69.3 of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3):
“…on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.”
The bankrupt’s Trustee serves all interested parties with the Notice of Stay and a “Creditor Package” which usually consists of a Notice of First Meeting of Creditors, Statement of Affairs and a Proof of Claim.
The party who commenced the litigation against the party who is now bankrupt can submit its Proof of Claim with the Trustee, however, they cannot proceed with the litigation.
In the case of our bankrupt client, we wrote to the Plaintiff’s paralegal and the Court, advising them both of the Stay of Proceedings. The Court still scheduled a Settlement Conference, and the Plaintiff’s paralegal insisted on proceeding, despite being informed we were not attending due to the bankruptcy.
We received the Endorsement from the Settlement Conference and were surprised to read that the Deputy Judge acknowledged that we had provided information regarding the bankruptcy and the Stay but found there was “insufficient information concerning a stay of the proceeding” and ordered the matter to Trial.
During a time when the Small Claims Court is slowed down due to staffing and other issues, we now have Deputy Judges who do not understand the impact of insolvency on court proceedings. This needs to be addressed quickly, before the Small Claims limit increases to $ 50,000.00 and more files flood the system.