Citation: 2008TCC246
Date: 20080429
Docket: 2008-390(GST)I
BETWEEN:
GARAGE A. D. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR ORDER
Lamarre J.
[1]
The Respondent moves to
dismiss the appeal on the ground that the Appellant does not have the capacity
to sue or be sued.
[2]
The Appellant declared
bankruptcy on November 29, 2007. On February 1, 2008, it appealed an assessment that had been
made on March 14, 2006 and confirmed on November 21, 2007. The assessment concerns GST and QST on
drug trafficking.
[3]
The Respondent submits
that the Appellant is no longer capable of suing or being sued because it is
bankrupt. The evidence shows that the Minister of National Revenue and the
Quebec Minister of Revenue are the main creditors in the bankruptcy, with a
total claim of about $8 million. There is also another creditor, the Royal
Bank, which has a claim for $98,000. At the meeting of creditors, counsel for
the Appellant brought up the possibility that the assessments for a total of
about $8 million were unfounded. The trustee in bankruptcy postponed the
meeting of creditors several times based on the arguments made by counsel for
the Appellant. The trustee himself had never intended to challenge the
assessments. The last meeting of creditors was attended only by André Allard,
the trustee in bankruptcy, and Junior St‑Urbain, a
representative of the Quebec Minister of Revenue.
[4]
The trustee asked
Mr. St‑Urbain to act as an inspector in the bankruptcy. He explained
that it is always preferable to have an inspector because this avoids many
court proceedings.
[5]
The trustee never asked
the inspector for authorization to appeal the assessments. If he had, the
inspector, Mr. St‑Urbain, would have had to disqualify himself,
since he would have been in a conflict of interest given that he was
representing the interests of the Quebec Minister of Revenue, who had made the
assessments.
[6]
Counsel for the
Appellant acknowledges that, since the Appellant is bankrupt, it does not have
the capacity to sue or be sued. However, he asks that the motion to dismiss the
appeal be adjourned so that he can request the trustee in bankruptcy to
authorize Francine Althot, who owns 50 percent of the Appellant's
shares, to represent the Appellant in the Tax Court of Canada and the Court of
Quebec in objecting to the assessments. If the trustee denies permission to do
so, he will make a motion before the bankruptcy court. According to counsel, he
is representing the interests not only of the Appellant but also of
Ms. Althot. The other shareholder is Ms. Althot's spouse, who is in
prison for drug trafficking. Counsel for the Appellant relies on
articles 165 and 166 of the Quebec Code of Civil Procedure and
wants to seek an order remedying the ground upon which the motion to dismiss is
based and authorizing Ms. Althot to represent the Appellant in this Court.
[7]
Counsel for the
Respondent objects to this delay, saying that Ms. Althot is not personally
a creditor in the bankruptcy and has no right to assert. He refers to
sections 2, 2.1, 30(1)(d) and (e), 37, 71, 116, 117, 118 and
120 of the Bankruptcy and Insolvency Act ("Bankruptcy Act")
and argues that only the trustee has the right to sue for the bankrupt. He also
cites the following decisions: 4028490 Canada Inc. v. Canada, [2005]
T.C.J. No. 95 (QL), a decision by Justice Paul Bédard of this
Court signed on February 23, 2005; and Transport Car‑Fre ltée v.
Fiset, [2000] J.Q. No. 4586 (QL), a decision of the Court of Quebec,
district of Iberville, signed on November 1, 2000, No. 755‑22‑001896‑9.
[8]
The legislative provisions
cited above read as follows:
Articles 165 and 166 of the Quebec Code of Civil Procedure
165. The defendant may ask for the dismissal
of the action if:
(1) There is lis pendens or res
judicata;
(2) One of the parties is incapable or
has not the necessary capacity;
(3) The plaintiff has clearly no interest
in the suit;
(4) The suit is unfounded in law, even if
the facts alleged are true.
166. When it is possible to remedy the ground upon which
the exception is based, the plaintiff may ask that he be granted a time to do
so and that judgment be rendered upon the exception only upon the expiry of
such time.
If the ground remains, the suit is
dismissed; if it has been remedied, the exception is maintained for costs only.
Bankruptcy Act
2. In this Act,
"creditor"
means a person having a claim, unsecured, preferred by virtue of priority under
section 136 or secured, provable as a claim under this Act;
2.1 For the purposes of this
Act, the bankruptcy or putting into bankruptcy of a person occurs at the time
or date of
(a) the granting
of a bankruptcy order against the person;
(b) the filing of
an assignment by or in respect of the person; or
(c) the event that
causes an assignment by the person to be deemed.
30(1) The trustee may, with
the permission of the inspectors, do all or any of the following things:
. . .
(d) bring, institute or
defend any action or other legal proceeding relating to the property of the
bankrupt;
(e) employ a barrister or
solicitor or, in the Province of Quebec, an advocate, or employ any other representative, to
take any proceedings or do any business that may be sanctioned by the
inspectors;
37. Where the bankrupt or
any of the creditors or any other person is aggrieved by any act or decision of
the trustee, he may apply to the court and the court may confirm, reverse or
modify the act or decision complained of and make such order in the premises as
it thinks just.
71. On a bankruptcy order being made or an assignment
being filed with an official receiver, a bankrupt ceases to have any capacity
to dispose of or otherwise deal with their property, which shall, subject to
this Act and to the rights of secured creditors, immediately pass to and vest
in the trustee named in the bankruptcy order or assignment, and in any case of
change of trustee the property shall pass from trustee to trustee without any
assignment or transfer.
116.
Appointment
(1) At the first or a
subsequent meeting of creditors, the creditors shall appoint one or more, but
not exceeding five, inspectors of the estate of the bankrupt.
Persons not
eligible
(2) No person is eligible to
be appointed or to act as an inspector who is a party to any contested action
or proceedings by or against the estate of the bankrupt.
Powers
(3) The powers of the
inspectors may be exercised by a majority of them.
Filling vacancy
(4) The creditors or
inspectors at any meeting may fill any vacancy on the board of inspectors.
Revocation and
replacement
(5) The creditors may at any
meeting and the court may on the application of the trustee or any creditor
revoke the appointment of any inspector and appoint another in his stead.
117.
Meetings
(1) The trustee may call a
meeting of inspectors when he deems it advisable and he shall do so when
requested in writing by a majority of the inspectors.
Participation by
telephone, etc.
(1.1) An inspector may, if
all the other inspectors consent, participate in a meeting of inspectors by
means of such telephone or other communication facilities as permit all persons
participating in the meeting to communicate with each other, and an inspector
participating in such a meeting by such means is deemed for the purpose of this
Act to be present at that meeting.
Trustee votes in
case of tie
(2) In the event of an equal
division of opinion at a meeting of inspectors, the opinion of any absent
inspector shall be sought in order to resolve the difference, and in the case
of a difference that cannot be so resolved, it shall be resolved by the
trustee, unless it concerns his personal conduct or interest in which case it
shall be resolved by the creditors or the court.
118. Where there are no
inspectors of the estate of the bankrupt or where the inspectors fail to
exercise the powers conferred on them, the trustee shall call a meeting of the
creditors for the purpose of appointing inspectors or substituting other
inspectors, taking such action or giving such directions as may be necessary.
120.
Inspector may not acquire property
(1) No inspector is, directly
or indirectly, capable of purchasing or acquiring for himself or for another
any of the property of the estate for which he is an inspector, except with the
prior approval of the court.
Formal defects
(2) No defect or irregularity
in the appointment of an inspector vitiates any act done by him in good faith.
Duty of
inspectors
(3) The inspectors shall from
time to time verify the bank balance of the estate, examine the trustee's
accounts and inquire into the adequacy of the security filed by the trustee
and, subject to subsection (4), shall approve the trustee's final
statement of receipts and disbursements, dividend sheet and disposition of
unrealized property.
Approval of
trustee's final statement by inspectors
(4) Before approving the
final statement of receipts and disbursements of the trustee, the inspectors
shall satisfy themselves that all the property has been accounted for and that
the administration of the estate has been completed as far as can reasonably be
done and shall determine whether or not the disbursements and expenses incurred
are proper and have been duly authorized, and the fees and remuneration just
and reasonable in the circumstances.
Inspectors'
expenses and fees
(5) Each inspector
(a) may be repaid
actual and necessary travel expenses incurred in relation to the performance of
the inspector's duties; and
(b) may be paid
such fees per meeting as are prescribed.
Special services
(6) An inspector duly
authorized by the creditors or by the other inspectors to perform special
services for the estate may be allowed a special fee for those services,
subject to approval of the court, which may vary that fee as it deems proper
having regard to the nature of the services rendered in relation to the
obligations of the inspector to the estate to act in good faith for the general
interests of the administration of the estate.
[9]
Moreover,
paragraph 128(1)(a) of the Income Tax Act ("ITA")
provides as follows:
128(1) Where corporation bankrupt − Where a corporation has become a bankrupt, the
following rules are applicable:
(a) the trustee in bankruptcy shall be deemed to be the agent of the
bankrupt for all purposes of this Act;
[10]
According to
paragraph 128(1)(a) of the ITA, the trustee in bankruptcy shall
be deemed to be the agent of the bankrupt.
[11]
Under section 71
of the Bankruptcy Act, a bankrupt no longer has any capacity to dispose
of or otherwise deal with the bankrupt's property, which vests in the trustee.
[12]
According to
paragraphs 30(1)(d) and (e) of the Bankruptcy Act,
the trustee may, with the permission of the inspector, bring, institute or defend
any action or other legal proceeding relating to the property of the bankrupt
and employ a barrister or solicitor or, in the Province of Quebec, an advocate,
or employ any other representative, to take any proceedings.
[13]
Thus, the basic
principle where a taxpayer declares bankruptcy is that the trustee decides
whether or not to object to the assessment. Here, the trustee clearly indicated
that he did not intend to challenge the assessment.
[14]
However,
section 37 of the Bankruptcy Act states that, where the bankrupt or
any of the creditors or any other person is aggrieved by any decision of the
trustee, that person may apply to the court and the court may confirm, reverse
or modify the act or decision complained of and make such order in the premises
as it thinks just.
[15]
Here, the main
creditors are the Minister of National Revenue and the Quebec Minister of
Revenue, who have a total claim of about $8 million. The other creditor,
the Royal Bank, did not attend the meeting of creditors. Ms. Althot
believes that the assessments made by the Quebec Minister of Revenue are
unfounded. If this is the case and the trustee does not intend to challenge the
assessments, she may be able to argue before the bankruptcy court that she
feels aggrieved.
[16]
In Transamerica Commercial
Finance Corp., Canada v. Computercorp Systems Inc. (Alta. C.A.), [1993]
A.J. No. 447 (QL), [1993] 7 W.W.R. 495, the issue was whether a
shareholder of a bankrupt corporation could sue in lieu of the trustee if the
trustee refused to do so. The Alberta Court of Appeal stated the following at
pages 496‑497:
The difficulty is that the
proposed plaintiff is an undischarged bankrupt. Despite the fact that the
proposed claim is for several million dollars, the trustee in bankruptcy, after
consultation with the inspectors, refused to prosecute it. The simple and sole
reason was that, although the bankrupt owes millions, it has almost no assets,
and in any event not enough to secure to the trustee its potential litigation
costs.
The Lloyds are directors and
shareholders of the bankrupt. They are of the view that Transamerica, who
precipitated the bankruptcy and put in the receiver when it called a huge debt
owed to it, was in breach of its obligations to the bankrupt. If successful in
the suit, the Lloyds say the bankrupt will win from Transamerica enough to pay
all its debts as well as his lost investment in the company, if not more. They
are sufficiently confident of the outcome that he will undertake personally to
underwrite the cost of the suit at no risk to other claimants. He asked in
return only that his claim as a shareholder be given priority over the claims
of creditors. The learned chambers judge accepted this offer, and granted leave
to "bring an action in the name of Computercorp Systems Inc.". The
judge also ordered that "all costs of this lawsuit will be borne
entirely" by the Lloyds, and not the proposed plaintiff, and that any
fruits of the litigation, after payment of costs, "shall go ... to satisfy
the claims of..." the Lloyds.
Transamerica appeals. It
argues firstly that a judge in bankruptcy has no power to make an order
permitting a third party the carriage of a suit in the name of the bankrupt. As
the principal creditor in the bankruptcy, it also protests what it says is an
illegal re‑ordering of the priorities established by the Bankruptcy
Act, R.S.C. 1985, c. B‑3.
We shall first deal with the
power to make the order. It is unusual. This is not a case where, at discharge,
the trustee re‑assigns a cause of action. Nor is it a case where the
shareholder attempts, during bankruptcy, a derivative action. Nor is this a
case where a bankrupt, during the bankruptcy, attempts itself to sue. Cases
dealing with those situations have no application. Nor is it quite the same as
a case where, under s.38, the bankruptcy judge grants leave to a creditor to
sue when the trustee will not. The Lloyds are not creditors.
The learned chambers judge
found the power to make the order in s.37 of the Act. It provides:
Where the bankrupt or any of
the creditors or any other person is aggrieved by any act or decision of the
trustee, he may apply to the court and the court may confirm, reverse or modify
the act or decision complained of and make such order in the premises as it
thinks just.
We have not been persuaded to put any unnecessary limit on the
powers of a Court under s.37. That wide residual power permits a bankruptcy
judge to do justice in special cases. We reject the argument that he lacked the
statutory authority to make the order under review.
[17]
Thus, in my opinion, it
would be possible for Ms. Althot to apply to the bankruptcy court for an
order modifying the trustee's decision not to object to the assessments. Of
course, it would be up to the bankruptcy court to decide whether or not to
allow such an application.
[18]
I cannot determine what
the trustee's duties are, but I consider it important to give Ms. Althot
an opportunity to assert her rights before the bankruptcy court. That court
will decide whether her application is well‑founded. If she wins before
the bankruptcy court, the Notice of Appeal in this Court will no longer
necessarily have to be struck out as the Respondent argues.
[19]
I note that a trustee's
refusal to take action is reviewable under section 37 of the Bankruptcy
Act (see Lloyd W. Houlden, Geoffrey B. Morawetz and
Janis P. Sarra, The 2008 Annotated Bankruptcy and Insolvency Act (Toronto:
Thomson Carswell, 2008), at p. 98, citing Holley v. Gifford Smith Ltd.
(1986), 54 O.R. (2d) 225, [1986] O.J. No. 165 (QL) (Ont. C.A.), and
other decisions on this subject).
[20]
Moreover, although the Bankruptcy
Act is structured in such a way as to allow the trustee to administer the
property of the bankrupt without unreasonable interference, the trustee's
decisions may be challenged in certain cases where the necessary proof exists.
In Nesterenko (syndic) v. Banque royale du Canada, [1998] J.Q. No. 53 (QL), the following was stated:
42 Moreover, the
scheme of the Bankruptcy Act is so framed as to allow the trustee to administer
an estate under the supervision of the inspectors without undue interference.
Where inspectors are acting within the amount of their authority the Court
should not interfere lightly save for sound and cogent reasons. This principle
has been aptly stated by the courts in Re Groves‑Raffin Construction
Ltd. (No. 2), (1978) 28 C.B.R. (n.5.) 105 (B.C.S.C.) where
Macfarlane J. states at Page 112:
In considering the conduct of
a trustee it is well to keep in mind that the scheme of the Act is to allow the
trustee to administer the estate under the supervision of the inspectors
without interference unless there has been an excess of power, fraud, a lack of
bona fides, or unless the actions of the trustee and the inspectors are
unreasonable from the standpoint of the good of the estate.
[21]
For these reasons, the
motion to dismiss the appeal should be adjourned so Ms. Althot can take
the necessary steps with the trustee and the bankruptcy court to assert her
rights. Counsel for the Appellant referred to a time period of 30 days for
this purpose. To be on the safe side, I am adjourning the motion for
60 days. This motion to dismiss the appeal will be set down for hearing
again by me when that time period is over so that the issue of whether the
Notice of Appeal must be struck out can be determined once and for all.
Signed at Montréal, Quebec,
this 29th day of April 2008.
"Lucie Lamarre"
Translation
certified true
on this 27th day
of June 2008.
Brian McCordick,
Translator
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