Both of Canada’s primary insolvency statutes, the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”) provide for an automatic stay of all legal proceedings when an insolvent debtor files for or seeks insolvency protection. The purpose of the stay is to provide breathing space to a debtor attempting to restructure its business so as to avoid “death by a thousand cuts” and also to ensure similarly situated creditors are treated equally. While it is an integral part of Canada’s insolvency regime, the stay of proceedings is not inviolable and there have been a number of noteworthy cases where Canadian courts have considered whether to lift the statutory stay and permit proposed class actions to proceed where the plaintiff has alleged fraud.

In a 2016 decision, Da Silva v. River Run Vistas Corp. 2016 ABQB 433 (“Da Silva“), the Alberta Court of Queen’s Bench lifted a stay to permit a proposed class action to proceed against two bankrupt individuals who had been the officers, directors and shareholders of companies developing real estate projects in the province of Alberta. The representative plaintiffs alleged that the proposed class had lost approximately $14 million as a result of a fraudulent real estate development scheme orchestrated by the bankrupts through their companies. Section 69.4 of the BIA permits an affected creditor to apply to the court for a declaration that the stay no longer operates in respect of that creditor or person, and the court may make such a declaration, subject to any qualification that the court considers proper if it is satisfied:

  1. that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or
  2. that it is equitable on other grounds to make such a declaration.

In Da Silva, the representative plaintiffs’ central argument was that bankruptcy does not release a bankrupt from debts arising out of fraud and therefore the proposed class action should be allowed to proceed. In assessing the parties’ submissions, the motion judge considered the requisite evidentiary threshold the court will consider sufficient to lift a stay under the BIA and concluded that, while the threshold is low and the plaintiffs need not prove a prima facie case, they must make more than mere allegations. In this case, the motion judge lifted the stay in light of the dramatic and unexplained reduction value in land owned by the companies and certain financial transfers between the defendants which were described as “suspicious”.

However, an allegation of fraud will not automatically result in the stay of proceedings being lifted especially where it might negatively impact ongoing restructuring. In Sino-Forest Corporation (Re), 2012 ONSC 6275, an Ontario motion judge refused to lift the stay of proceedings under the CCAA for a class action seeking $9.18 billion in damages based on allegations that Sino-Forest Corporation, some of its officers and directors, auditors and underwriters made material misrepresentations regarding the assets and operations of the corporation. The motion judge considered the applicable factors for lifting a stay set out in Timminco Ltd., (Re) 2012 ONSC 2515 which focus on:

  1. the relative prejudice to the parties of lifting or continuing the stay;
  2. the balance of convenience; and
  3. where relevant, the merits (i.e. if the proposed proceedings has little chance of success, there may not be sound reasons for lifting the stay).

The motion judge was persuaded that the defendants of the proposed class action should remain focused on the restructuring and that there would be little prejudice to the proposed class action members if the stay was maintained while the restructuring process was underway. Ultimately, once the restructuring process concluded, the stay of proceedings was lifted and the Ontario class action was certified in January 2015.

Key Takeaways

  • Canadian courts will lift statutory insolvency stays of proceedings in order to permit class actions to proceed.
  • Proposed class action plaintiffs need not prove a prima facie case, however they must make more than mere allegations of fraud.
  • While the test to lift a stay under the BIA or CCAA differs, a significant consideration in either context that the courts will consider is the prejudice a party would suffer if the stay is lifted.
  • Motions to lift the automatic stay may not be granted if it is detrimental to an ongoing restructuring.

The author would like to thank Glenn Gibson, student-at-law, for her assistance with this article.