Best, Re, [1999] 2 CTC 257

Hamilton J.:

Joel H. Lazer is the trustee in bankruptcy (“the Trustee”) of the estate of lan David Best (“the Estate”). The Trustee seeks the court’s permission to sell the Estate’s share of the equity (“Mr. Best’s Equity”) in the family home to Gail Best, Mr. Best’s wife, pursuant to an offer which the Trustee accepted over two years ago. The Trustee has not concluded the sale transaction because Revenue Canada, the major creditor of the Estate, objects to the sale on the basis that the value of Mr. Best’s Equity is greater than the sale price. Mrs. Best maintains she has a binding agreement with the Trustee and demands that the Trustee honour the agreement. The Trustee recommends the agreement.

The Trustee applies under s. 30(1)(a) and s. 34(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“the Act”). Section 30(1 )(a) authorizes a trustee to sell property of a bankrupt’s estate. Section 34(1) allows a trustee to apply to court for directions in relation to any matter affecting the administration of the estate of a bankrupt. The relevant portions of these sections read as follows:

30(1) The trustee may, with the permission of the inspectors, do all or any of the following things:

(a) sell or otherwise dispose of for such price or other consideration as the inspectors may approve all or any part of the property of the bankrupt, including ... by tender, public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;

34(1) A trustee may apply to the court for directions in relation to any matter

affecting the administration of the estate of a bankrupt and the court shall give it in writing such directions, if any, as to it appear proper in the circumstances.

It is important to note that there are no inspectors for the Estate. This bankruptcy is a summary administration bankruptcy and no inspectors were appointed. Section 155(e) of the Act, which applies to summary administrations, is therefore relevant to this situation:

155. The following provisions apply to the summary administration of estates under this Act:

(e) there shall be no inspectors unless the creditors decide to appoint them, and if no inspectors are appointed, the trustee, in the absence of directions from the creditors, may do all things that may ordinarily be done by the trustee with the permission of the inspectors; (emphasis supplied by underlining)

Revenue Canada maintains that it has provided directions to the Trustee under s. 155(e) and, therefore, the Trustee had no authority to enter into the agreement with Mrs. Best.

For the purposes of these reasons, other relevant sections of the Act are s. 30(1 )(f) and (i):

30(1) The trustee may, with the permission of the inspectors, do all or any of the following things:

(f) accept as the consideration for the sale of any property of the bankrupt a sum of money payable at a future time, subject to such stipulations as to security and otherwise as the inspectors think fit;

(i) compromise any claim made by or against the estate;

A Preliminary Matter - Mrs. Best’s Standing

At the outset of the hearing of submissions, Revenue Canada objected to Mrs. Best having any standing in this application. I ruled that Revenue Canada’s objections were without merit and that she had standing to speak to the application of the Trustee. It is Mrs. Best’s offer to purchase that is in question and she will be directly affected by my ruling. She is an interested party to these proceedings and, accordingly, it is only appropriate that she have the opportunity to present her position through her counsel

A Brief History

The evidence was presented in two affidavits:

1) the affidavit of the Trustee sworn November 10, 1998;

2) the affidavit of Robert Kozyra, a collections officer at Revenue Canada, sworn December 4, 1998.

There were no cross-examinations on these affidavits.

At the time Mr. Best filed his assignment in bankruptcy on September 4, 1996, the Best family home on Kirkbridge Drive, in Winnipeg, was registered solely in Mrs. Best’s name. The house was purchased in joint names in 1992 and in April 1994 Mr. Best transferred his interest to Mrs. Best, for no consideration, subject to two existing mortgages. Shortly after the bankruptcy in September 1996, the Trustee wrote to Mrs. Best alleging that the 1994 transfer to her of Mr. Best’s Equity was void as against the Trustee because it constituted a settlement under s. 91 of the Act and/or a reviewable transaction under s. 100 of the Act. In this letter the Trustee calculated Mr. Best’s Equity to be $28,100. Although Mrs. Best questioned the Trustee’s position, she entered into negotiations with the Trustee and on October 9, 1996, the Trustee accepted Mrs. Best’s offer to purchase Mr. Best’s Equity for $15,000. It was intended that this transaction would settle all issues surrounding the transfer of Mr. Best’s Equity to Mrs. Best pursuant to s. 91 of the Act and would include a consent order setting aside the transfer and conveyance of Mr. Best’s Equity to Mrs. Best.

A brief summary of events prior to the bankruptcy is useful:

• in December 1992 the Bests purchased 160 Kirkbridge Drive as joint tenants for $189,000. The purchase involved a joint first mortgage to the Toronto-Dominion Bank in the amount of $112,792;

° in January 1993 the Bests jointly and severally mortgaged their home by way of a second mortgage to the Toronto-Dominion Bank for $55,000;

° in Mr. Best’s statement of affairs filed at the time of his bankruptcy, Mr. Best disclosed the April 1994 transfer to Mrs. Best and provided his opinion that the home had a fair market value at the date of transfer of $185,000 with outstanding indebtedness under the first and second mortgages of $86,000 and $25,000, respectively.

The affidavits disclose a protracted series of events following the bankruptcy. These may be summarized as follows:

• as noted previously, the Trustee wrote to Mrs. Best on September 10, 1996 alleging the transfer of Mr. Best’s Equity to her was void as against the Trustee;

° by letter dated September 11, 1996, Revenue Canada wrote to the Trustee indicating, among other things, that it intended to oppose any discharge application of Mr. Best. Revenue Canada requested that Mr. Best be examined by the Official Receiver and in particular he be “... questioned with particular care...” on the business loan that resulted in the second mortgage on the home. Revenue Canada maintained, and still maintains, that the second mortgage granted jointly by Mr. and Mrs. Best on their home should not in any way be attributed to Mr. Best (thereby reducing Mr. Best’s Equity) because it is a mortgage related to a business owned by Mrs. Best. Revenue Canada concluded in its letter:

It is the opinion of the writer that the granting of a collateral mortgage has created a preference in favour of the taxpayers spouse and has resulted in a severe drain of equity which should be available for the benefit of the estate.

• the first meeting of creditors was held on September 16, 1996. No quorum for the meeting was present and no inspectors were appointed. I note that Section 106(1) of the Act only requires one creditor to be present for a quorum. Therefore, I conclude that there was no creditor present at the first meeting of creditors;

• on October 9, 1996 the Trustee accepted Mrs. Best’s offer;

° on October 10, 1996 Mr. Best was examined by the Official Receiver;

• until the Trustee made his application for directions, the Trustee attempted on numerous occasions to obtain the agreement of all parties. He attached to his affidavit 18 letters to various involved parties, including his letter dated October 8, 1997 to Revenue Canada that stated as follows:

No inspectors were appointed in this bankruptcy; however, because Revenue Canada is the major creditor and, therefore, the major beneficiary of the realization in this bankruptcy, we sought your direction with respect to that settlement, (emphasis supplied by underlining)

In this letter the Trustee indicated that there were three options available: the Trustee accepts Mrs. Best’s offer and Revenue Canada can oppose Mr. Best’s discharge; the Trustee attempts to renegotiate the settlement with Mrs. Best; Revenue Canada proceeds under s. 38 of the Act (court authorization for a proceeding by a creditor where a Trustee refuses to act). The Trustee sought Revenue Canada’s rec- ommendation by November 15, 1997, failing which the Trustee would proceed under the first-mentioned option. The date for Revenue Canada’s reply was extended to January 5, 1998 and then again to January 26, 1998;

• by letter of January 23, 1998 Revenue Canada’s lawyer advised the Trustee that Revenue Canada was not prepared to accept the offer of $15,000 and required a settlement payment of $35,000 on certain assumptions as to other monetary matters being confirmed;

• Revenue Canada’s lawyer wrote to the Trustee by letter dated February 10, 1998 and instructed the Trustee to accept an offer of no less than $35,000.

There is a further complicating matter. After the Trustee’s application to this court, Revenue Canada filed a notice of assessment against Mrs. Best under s. 160 of the Income Tax Act, R.S.C. 1985 (5 Supp.) c. 1. Apparently no particulars of the assessment had been provided at the time of the hearing of this application. Section 160 of the Income Tax Act is a provision that creates tax liability for a transferee spouse in certain circumstances for the tax liability of the transferor spouse. The assessment relates to the transfer of Mr. Best’s Equity to Mrs. Best in 1994.

Arguments

Mrs. Best argues that her accepted offer to purchase is a binding agreement with the Trustee to settle all issues surrounding the transfer of Mr. Best’s Equity and that Revenue Canada has no right to object to or to assess Mrs. Best with respect to the same transaction. On the issue of the assessment, it was conceded readily by Mr. Leslie that any matter related to the s. 160 assessment under the Income Tax Act is not within the jurisdiction of this court.

Mr. Leslie submits that the Trustee has clear authority under s. 30(1 )(a), (f) and (i) and s. 155(e) of the Act to enter into the settlement because:

I) there were no inspectors; and

2) there was an “absence of directions from the creditors”.

Revenue Canada maintains that it did provide directions to the Trustee and points to a series of letters from Revenue Canada to the Trustee dated January 2, 1998, January 23, 1998, February 10, 1998 and May 11, 1998. Clearly these letters object to the sale being concluded. But the question is whether these letters, sent some 15 months or more after the settlement agreement, are directions from a creditor as contemplated by s. 155(e) of the Act?

Ms Harwood-Jones also referred to Revenue Canada’s letter dated September 11, 1996 to the Trustee, which raised Revenue Canada’s concerns about the second mortgage and the alleged preference in favour of Mrs. Best. Ms Harwood-Jones argued that these objections related to the valuation of Mr. Best’s Equity. She urged me to view this letter as directions to the Trustee for the purposes of s. 155(e). On the other hand she also asked, “How could Revenue Canada provide directions if it did not know of the offer?” Simply stated, she argued that the Trustee does not have the authority to sell Mr. Best’s Equity without the approval of the creditors or, at least, Revenue Canada.

Revenue Canada challenged the Trustee’s application on two other grounds. I will deal briefly with both of them:

1) Revenue Canada argues that the Trustee’s application is ill- founded, that he should be seeking directions pursuant to s. 91 of the Act and, therefore, the Trustee is attempting to circumvent the Act. I disagree. Section 34 of the Act is intended to furnish a means for deciding questions in a summary way and the courts have given it broad application over the years. See Houlden & Morawetz, in their annotation under s. 34 of the Act. The Trustee has the right to make this application. The circumstances certainly warrant a conclusion.

2) Revenue Canada points out that in his notice of application, the Trustee used the words: “...notwithstanding s. 155(e) of the said Act, I ask the court’s permission to accept the said offer and conclude the transaction” and argues these words acknowledge the Trustee received instructions. I place no meaning to the words, “notwithstanding s. 155(e) of the said Act”. The Trustee filed the court documents on his own without the assistance of counsel. From reading all of them, I cannot conclude that the Trustee acknowledges he received directions as contemplated by s. 155(e).

In making his application the Trustee continues to recommend the settlement as one in the best interests of the Estate and, therefore, the creditors. In his affidavit he states that his acceptance of Mrs. Best’s offer was based on his consideration of the amount that would be realized if he had to litigate to void the 1994 transfer to Mrs. Best, apply for a partition and sale order (to sell the property), and to dispose of the property in the open market (which would incur legal fees and real estate commissions).

Section 160 of the Income Tax Act

Mrs. Best argues that Revenue Canada has inappropriately sought to cloud the issue by a collateral attack under s. 160 of the Income Tax Act. Mr. Leslie points to the decisions of the Tax Court of Canada in Cox v. R. (1995), 96 D.T.C. 1690 (T.C.C.) (for the authority that Revenue Canada is only able to pursue an assessment under s. 160 if a trustee in bankruptcy does not invoke s. 91 of the Act to set aside a transfer) and Gamache c. R., [1996] 3 C.T.C. 2597 (T.C.C.) (for the authority that because the Act takes precedence over the Income Tax Act when there is a challenge to a transfer of property by a bankrupt, s. 160 of the Income Tax Act does not apply in the event of a bankruptcy). The validity of the assessment is an issue within the jurisdiction of the Tax Court of Canada and it would be inappropriate for me to comment directly or indirectly on the issue other than to say it is indeed unfortunate, and somewhat concerning, that Revenue Canada saw fit to file its s. 160 assessment only after the Trustee made his application for directions.

Mrs. Best asks that I approve the settlement and permit the Trustee to complete the settlement by voiding the 1994 transfer of Mr. Best’s Equity to her by consent and selling Mr. Best’s Equity to Mrs. Best for $15,000. Alternatively, she asks that I direct the Trustee to complete the settlement. But because of the pending s. 160 Income Tax Act assessment issue, she asks that the funds be held in trust until the assessment is withdrawn or ruled on by the appropriate court. She asks this to avoid the possibility of paying the Trustee and then Revenue Canada. It was acknowledged by Mr. Leslie that the $15,000 will be used to pay the Trustee’s fees and then be distributed among the creditors. As the major creditor, Revenue Canada would receive the greatest share and Mr. Best’s indebtedness to Revenue Canada will be reduced accordingly.

The Trustee is in agreement with the position of Mrs. Best, except he does not want the settlement funds to be held in trust pending the resolution of the s. 160 income tax assessment issue.

Ruling

The combined effect of s. 30(1 )(a), (f) and (i) and s. 155(e) is that in a summary administration bankruptcy, where no inspectors are appointed, a trustee, “in the absence of directions from the creditors”, has the authority to sell and/or otherwise dispose of property and “compromise any claim made by or against the estate”. What does the phrase “in the absence of directions from the creditors” mean? Can Revenue Canada’s 1998 letters of objection referred to earlier be construed as providing directions? Is the September 11, 1996 letter from Revenue Canada a direction from a creditor? Was there an obligation on the Trustee to seek directions from the creditors? Counsel advised that they were unable to find any cases specifically dealing with this wording. I was unable to find any as well.

To answer these questions it is important to consider firstly what is meant by the word “directions”? The text by Ruth Sullivan, Driedger on the Construction of Statutes (Butterworths, 3 ed., 1994), provides guidance on this: the ordinary meaning of the word is to be considered in the context of the purpose and scheme of the legislation [see Driedger on the Construction of Statutes, Ch. 1, The Ordinary Meaning Rule, and Ch. 2, Purposive Analysis].

To determine a word’s ordinary meaning, a reference to dictionaries is often helpful. So it is in this case. Both The Random House Dictionary of the English Language (The Unabridged Edition) (Random House, New York, 1966) and The New Webster Encyclopedic Dictionary of the English Language (Consolidated Book Publishers, Chicago) define “direction” by using the same or similar definitions. Those that I found to be relevant to the questions raised here are:

order, command, guidance, management, supervision, the act of directing, the act of governing.

Therefore, for a creditor to provide directions, the creditor must do an act: make a command, make an order, provide guidance, management or supervision. There is no specific wording in s. 155(e) that requires the Trustee to seek the approval of the creditors and this phrase should not be interpreted in this way. To my mind there is a clear distinction between a creditor who provides direction and a creditor who provides approval. The former would require a creditor to take the initiative and provide direction. The latter would require a trustee to take the initiative to obtain approval from the creditor. The Act contemplates that assets of a bankrupt’s estate be disposed of as quickly and efficiently as possible [see case annotations, p. 57, The 1999 Annotated Bankruptcy and Insolvency Act, Annotated, by Houlden and Morawetz (Carswell, 1998)]. This is especially so for summary administration bankruptcies. Directions after the fact would be tantamount to ap- proval. And approval by creditors is not what is contemplated by s. 155(e) when there are no inspectors.

The appropriate question in the circumstances becomes: At the time the Trustee accepted Mrs. Best’s offer, had Revenue Canada done anything to direct (to command or order or provide guidance, management or supervision) the Trustee with respect to the sale of Mr. Best’s Equity? The 1998 letters of objection are clearly not directions at the relevant time. The September 11, 1996 letter from Revenue Canada simply stated that it would oppose any discharge application of Mr. Best, requested Mr. Best to be examined by the Official Receiver, and noted Revenue Canada’s concerns with respect to the second mortgage. In my view, this letter did not provide any direction to the Trustee with respect to the sale of Mr. Best’s Equity. This conclusion is reinforced by the fact that Revenue Canada did not attend the first meeting of creditors on September 16, 1996 where it would have had an opportunity to provide directions to the Trustee directly as a creditor or through an inspector appointed by the creditors.

I, therefore, find that at the time the Trustee accepted Mrs. Best’s offer there was an absence of direction from Revenue Canada and the Trustee had authority to enter into the agreement with Mrs. Best and to conclude the transaction with her. Unfortunately, the Trustee did not proceed to conclude the transaction and attempted to resolve Revenue Canada’s objections through negotiations. With hindsight, I expect the Trustee might very well approach a similar situation differently. Neither the permission of Revenue Canada nor the permission of the court was required.

I am satisfied that it is important this matter be resolved without further delay. In light of the history of this matter, I am satisfied these are appropriate circumstances for me to approve the settlement transaction [see Salok Hotel Co., Re (1967), 11 C.B.R. (N.S.) 95 (Man. Q.B.), re application for direction to approve action already taken by a trustee]. I find the transaction is a reasonable one in all of the circumstances. In coming to this conclusion, I accept that it was appropriate for the Trustee to take into account the second mortgage when determining the value of Mr. Best’s Equity. Whether or not the mortgage proceeds were used in Mrs. Best’s business, Mr. Best is jointly and severally responsible to the Toronto-Dominion Bank for the mortgage debt.

I agree with Mr. Leslie’s submissions in his written brief:

The Trustee was possessed of all relevant facts, considerations and ability to make a reasoned decision, including:

(a) complete disclosure of the transfer by the bankrupt, the consideration therefore, the mortgages against the Property, the view of the bankrupt as to value and the occupancy of the Property:

(b) the expected costs to prove a settlement exists under s. 91;

(c) the expected costs to revert title from Gail Best to the Trustee and Gail Best;

(d) the expected costs including real estate commissions and legal fees, to dispose of the tenancy in common interest of the Trustee (if recovered), subject to the unquantifiable interest of Gail Best and her right at law to continue to occupy the property, including her rights under The Homesteads Act, S.M. 1992 c.46, Cap. H80 s. 4 and in particular:

(i) No owner shall, during his or her lifetime, make a disposition of his or her homestead unless

(a) the owner’s spouse consents in writing to the disposition;

(b) the disposition is in favour of the owner’s spouse;

(c) the owner’s spouse has released all rights in the homestead in favour of the owner under s. 11:

(d) the owner’s spouse has an estate or interest in the homestead in addition to rights under this Act and for the purpose of making a disposition of a spouse’s estate or interest, is a party to the disposition made by the owner and executes the disposition for that purpose; or

(e) the court has made an order dispensing with the consent of the owner’s spouse under s. 10.

(e) the judgment exemption of $1,500.00 under The Judgments Act in favour of Ian Best:

(f) the vagaries of litigation;

(g) the uncertainty as to the true recoverable value of a tenancy in common interest in the Property, where the only saleable interest is the tenancy in common and not the whole of the property.

(The reference to “the Property” in Mr. Leslie’s submissions means 160 Kirkbridge Drive.)

However, I do not agree that the transaction should be held in abeyance until the s. 160 assessment issue is resolved. Who knows when that might be? Mrs. Best and the Trustee entered into a settlement agreement in October 1996. It is this agreement that I am approving. It is in the best interests of the Estate and the creditors that the settlement be concluded and the proceeds distributed.

Conclusion

The Trustee’s application for directions is allowed and I approve the settlement transaction entered into between Mrs. Best and the Trustee, pursuant to which all issues surrounding the transfer of Mr. Best’s Equity to Mrs. Best pursuant to s. 91 of the Act were settled. Counsel are asked to draft the appropriate judgment to include a consent order setting aside the 1994 transfer and conveyance of Mr. Best’s Equity to Mrs. Best and my order approving the sale by the Trustee to Mrs. Best of Mr. Best’s Equity for $15,000. For the purposes of certainty, the transaction is to be concluded within 30 days of my signing the judgment.

If necessary, counsel may speak to me on the issue of costs.

Application allowed.