In the Matter of the Proposal of Wosk’s Ltd., Under the Bankruptcy Act., [1986] 2 CTC 78

Cumming, J. [Orally]:—The appellant, the Attorney General of Canada, on behalf of Her Majesty The Queen in right of Canada, appeals pursuant to Bankruptcy Rule 108 and section 106 of the Bankruptcy Act from the disallowance on May 7, 1985 by the Trustee of a claim made on behalf of her Majesty in the sum of $28,270.10, being the penalty assessed by Revenue Canada Taxation under subsection 227(9) of the Income Tax Act by reason of the failure of Wosk’s Ltd. to remit employee contributions of Canada Pension Plan and U.I.C. contributions which had been deducted at source. The amount of contributions themselves in the sum of $24,924.64 was allowed, but the penalty was disallowed on the grounds that the penalty assessed was not an obligation of the estate on February 6, 1985, the date on which the proposal under the Bankruptcy Act was filed.

It appears from the affidavit of Mr. Vondette, and it is common ground, that the penalty imposed on Wosk’s for its failure to remit was assessed on February 16, 1985, ten days after the proposal was filed. Mr. Burnyeat, on behalf of the Trustee and Wosk’s Ltd. takes the position that as the penalty had not been imposed until and indeed, could not be imposed before, February 16 it is not a claim which the Trustee should or could allow.

The governing provision of the Bankruptcy Act is subsection 95(4) which provides that where a proposal is made before bankruptcy the claims proveable shall be determined as of the date of the filing of the proposal. He says that as the penalty had not and could not have been then imposed the claim for it is not one which is proveable. I agree.

In the case of Re Poli et al (Model Steel Works) (1948), 92 C.C.C. 253; 29 C.B.R. 115, Mr. Justice Boyer of the Superior Court of Quebec said, at 254 (C.B.R. 116):

In fact the fine was imposed after the assignment, and moreover, cannot be a proveable debt . . . it is not a question of a debt but of a penalty for violation of a Statute.

The rationale for such a rule is well put by Mr. Justice Boyer where at the same page he says:

To permit the petitioner to take advantage of the Bankruptcy Act and to have the fine paid right from the assets of the bankruptcy would be permitting payment of the fine by and to the detriment of the creditors.

In another case in the same year, that of In re Fred D. Cohen, reported in (1949), 29 C.B.R. 111 the facts, as appears from the judgment of Mr. Justice Urquhart at 112 were:

The debtor, before he became bankrupt, failed to account for a large sum of money due by him to the Dominion Government for sales taxes which he had collected on sales of goods manufactured by him. The department proceeded against him by information in the Magistrate's court under sec. 111 of The Special War Revenue Act, R.S.C. 1927, ch. 179 as amended by 1947 (Dom.), ch. 60, sec. 20.

Before the case came on for trial before the Magistrate, and therefore, before judgment, the debtor went into bankruptcy.

In that case Mr. Justice Urquhart observed that the Crown had a proveable debt in bankruptcy and in fact had filed for that debt. It had not filed for the extra penalty. There the Crown wisely stayed its hand. Here I think it is overreaching. This is not a case where the liabilities for the penalty arose from anything which preceded the date of the proposal. There remained after that date nine days within which to remit the moneys due. It is only by reason of Wosk’s failure to remit after February 6 and before February 16 that it became subject to a penalty for its violation of the statute. The Trustee was therefore correct in disallowing the claim for penalty. It was not an obligation which he inherited because it simply did not exist.

This appeal is therefore dismissed.

Mr. Burnyeat: My lord, I would ask for costs.

The Court: I thought you would. Of course.

Mr. Burnyeat: One of the cases referred to had that specific provision for costs as against the Crown as a result of a failed application and it was that particular one that I relied on which Your Lordship has quoted.

The Court: Mr. Gilchrist, can you think of any reason why I ought not to make the usual order.

Mr. Gilchrist: None, my lord.

The Court: So be it.

Mr. Burnyeat: Thank you, my lord.

Order accordingly.