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Insolvency (BIA) - Proposal. North House Foods Ltd. (Re)
In North House Foods Ltd. (Re) (Ont CA, 2025) the Ontario Court of Appeal dismissed an insolvency appeal, here relating to the proposed assessed value of security of a secured creditor's claim [BIA 50.1(4)].
Here the court canvasses aspects of 'proposals' under the BIA:[4] Part III, Division I of the BIA governs the general scheme for proposals.[1] The proposal provisions of the BIA are designed in part to help insolvent business entities restructure so that when the proposal is accepted by creditors and approved by the court, the business will be operationally viable: Re Mernick (1994), 1994 CanLII 7459 (ON SC), 24 C.B.R. (3d) 8 (Ont. Gen. Div.), at para. 5. A proposal is made to the debtor’s creditors generally: s. 50(1.2). Between the filing of the notice of intention to make a proposal and the filing of a proposal, the proposal trustee advises the debtor and participates in the preparation of the proposal, including negotiations: s. 50.5. However, the development and substance of the proposal is the responsibility of the debtor. If a proposal includes a proposed assessed value of the security in respect of a secured creditor’s claim, a secured creditor may file with the proposal trustee a proof of secured claim and may vote on questions relating to the proposal in an amount equal to the lesser of the claim and the proposed assessed value of the security: s. 50.1(2); Workgroup Designs Inc. (Re), 2008 ONCA 214, 90 O.R. (3d) 26, at para. 14. If a secured creditor is dissatisfied with the proposed assessed value of its security, it may apply to court under s. 50.1(4) to have the value revised.[2]
[5] Under s. 58(d) of the BIA, the proposal trustee is to file a report with the court on the proposal. Among other things, in its report to the court, the proposal trustee will provide an opinion on the reasonableness of the proposal including the valuation of security by the debtor. . North House Foods Ltd. (Re) [proposed assessed value of security: BIA 50.1(4)]
In North House Foods Ltd. (Re) (Ont CA, 2025) the Ontario Court of Appeal dismissed an insolvency appeal, here relating to the proposed assessed value of security of a secured creditor's claim [BIA 50.1(4)]:[1] The appellant, Seabrook Bros. Mechanical Ltd., appeals from the order dismissing its application under s. 50.1(4) of the Bankruptcy and Insolvency Act R.S.C. 1985, c. B-3 (the “BIA”) to revise the proposed value of its security. That section states:Where a secured creditor is dissatisfied with the proposed assessed value of his security, the secured creditor may apply to the court, within fifteen days after the proposal is sent to the creditors, to have the proposed assessed value revised, and the court may revise the proposed assessed value, in which case the revised value henceforth applies for the purposes of this Part. ....
[12] Relying on s. 50.1(4) of the BIA, the appellant moved before the motion judge for an order that the proposed assessed value of its security be amended and an order that the appellant be treated as a secured creditor for the full amount of its claim.
Reasons of Motion Judge
[13] The motion judge dismissed the application. He observed that the application was not an exercise in valuing the debt. Rather, the question to be addressed was whether the security, namely a lien against the leasehold interest, had any value.
[14] He noted that the onus was on the appellant to demonstrate that the value of its security should be revised. He commenced his analysis by considering the sale of the lease by the Proposal Trustee to a third party. He stated that assuming that the landlord was prepared to waive the non-assignment provisions of the lease or that a court might override those provisions, it was conceivable that a third party would be interested in taking over the balance of the lease. If that were the case, the value could be determined if and when there was a willing buyer. He reasoned, however, that it was far from certain that there would be any value in the lease even in that scenario. Among other factors, the lease would have to be kept in good standing or brought into good standing; there were other claims against the leasehold interest; another party held security over the equipment; and anyone wanting to repurpose the facility would likely have to remove leasehold improvements or effect repairs. The appellant had no lien judgment and no immediate right to seize and sell the leasehold interest of North House. Moreover, any order for sale pursuant to such a judgment is discretionary. Furthermore, the Proposal Trustee was not going to sell the leasehold interest during the Proposal as the objective of the Proposal was to keep North House operating. As such, the proposed valuation was a theoretical exercise.
[15] The motion judge considered the report and cross-examination of the appellant’s expert, John Comba, but noted that Mr. Comba had admitted to having no experience in lease valuations in bankruptcy and that his valuation reflected the value to the tenant, namely North House, rather than the value of the security on a forced sale of the leasehold interest. The motion judge stated that the Proposal Trustee put forward expert evidence supporting a nil assessment for the value of the security, citing a number of impediments to realizing value from a sale of the leasehold interest. These had been described in a letter from Paul Hindo, a commercial real estate executive and investor whom the Proposal Trustee had asked to comment on whether the lease could be assigned, and whom the motion judge described as an expert.
[16] The motion judge addressed the fairness concerns raised by the appellant who argued that North House was receiving an unjust and inequitable windfall by obtaining improved premises to the detriment of the trades that did the work. The motion judge stated that if fairness were the primary concern, he would have to consider whether it would be fair to give the appellant priority over the general body of unsecured creditors, many of whom were owed far more than the appellant. He also observed that the Proposal Trustee had noted no misconduct by North House in its Report to the court. Lastly, he stated that lien claimants are not without other remedies, including potential trust claims or a remedy against the landlord.
[17] The motion judge concluded that a forced sale of the leasehold interest was extremely unlikely to yield any net value for the appellant. The values suggested by the appellant’s experts were not the value that could be realized on a court supervised sale of the leasehold interest at the end of a lien action. He accordingly declined to revise the proposed assessed value of the security.
....
[50] Under s. 50.1(4) of the BIA, it is the appellant who must bring the application to challenge the assessed value. It is not enough for the appellant to simply prove the debt and the existence of security. In essence, the appellant has to establish, on a balance of probabilities, that it could realize more money by enforcing its security in comparison with the proposed assessed value set out in the Proposal. At this stage of the proceedings, the Proposal Trustee has already concluded that the Proposal including the debtor’s valuation was reasonable. Both the language and the scheme of the statute suggest that the onus is on the appellant, as the dissatisfied creditor, to show that its security should receive a higher value. This is unlike s. 128(1) of the BIA referenced in St. Anne-Nackawic Pulp Co. (Trustee of) v. New Brunswick (Minister of Business), 2005 NBQB 99, 11 C.B.R. (5th) 296, at para. 35, relied upon by the appellant where the trustee in bankruptcy sought full particulars in support of its request for proof of security. Here, the appellant had provided information on North House’s indebtedness, a valuation has already been made and is now being challenged by the appellant. This is therefore different from s. 128(1). Bankruptcy of Woodland Windows Ltd., 2003 BCSC 497, 43 C.B.R. (4th) 300, also relied on by the appellant, similarly did not involve s. 50.1(4).
[51] As illustrated in this court’s decision in Workgroup Designs Inc., at paras. 14-16, a challenge to the assessed value given to security in a proposal must be brought under s. 50.1(4). The onus is then on the appellant to show that the proposed assessed value should be revised. I would not give effect to the appellant’s first submission relating to onus. . In the Matter of the Bankruptcy of Selvamurugan Gunaratnam
In In the Matter of the Bankruptcy of Selvamurugan Gunaratnam (Div Court, 2024) the Divisional Court, citing authority, denies the approval of a bankruptcy proposal. The approval was opposed only by the Office of the Superintendent in Bankruptcy ('OSB'):[1] The Trustee in respect of the Amended Proposal of Selvamurugan Gunaratnam (the “Debtor” or the “Bankrupt”) seeks approval of the Amended Proposal dated July 28, 2022. The Debtor supports the relief sought. The Royal Bank of Canada (“RBC”) one of the creditors of the Debtor, also supports the Amended Proposal.
[2] The Office of the Superintendent in Bankruptcy (“OSB”) opposes the relief sought, on the basis of what it submits is the continued lack of disclosure and transparency on the part of the Bankrupt, among other things.
[3] The relevant provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, (the “BIA”) relevant to the approval of proposals are ss. 59(2) and (3):(2) Where the court is of the opinion that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors, the court shall refuse to approve the proposal, and the court may refuse to approve the proposal whenever it is established that the debtor has committed any one of the offences mentioned in sections 198 to 200.
(3) Where any of the facts mentioned in section 173 are proved against the debtor, the court shall refuse to approve the proposal unless it provides reasonable security for the payment of not less than fifty cents on the dollar on all the unsecured claims provable against the debtor’s estate or such percentage thereof as the court may direct. [4] As observed by Morawetz, J. (now Chief Justice) in Kitchener Frame Limited (Re), 2012 ONSC 234 (“Kitchener Frame”) at paras. 19 – 22:[19] In order to satisfy s. 59(2) test, the courts have held that the following three-pronged test must be satisfied:
(a) the proposal is reasonable;
(b) the proposal is calculated to benefit the general body of creditors; and
(c) the proposal is made in good faith.
See Mayer (Re) (1994), 1994 CanLII 7461 (ON SC), 25 CBR (3d) 113; Steeves (Re), 2001 SKQB 265 (CanLII), 25 CBR (4th) 317; and Magnus One Energy Corp. (Re), 2009 ABQB 200 (CanLII), 53 CBR (5th) 243.
[20] The first two factors are set out in s. 59(2) of the BIA while the last factor has been implied by the court as an exercise of its equitable jurisdiction. The courts have generally taken into account the interests of the debtor, the interests of the creditors and the interests of the public at large in the integrity of the bankruptcy system. See: Farrell (Re), 2003 CanLII 39370 (ON SC), 2003, 40 CBR (4th) 53.
[21] The courts have also accorded substantial deference to the majority vote of creditors at a meeting of creditors: see Lofchik, Re, [1998] O.J. No. 322 (Ont. Bkrptcy). Similarly, the courts have also accorded deference to the recommendation of the proposal trustee. See Magnus One, supra.
[22] With respect to the first branch of the test for sanctioning a proposal, the debtor must satisfy the court that the proposal is reasonable. The court is authorized to only approve proposals which are reasonable and calculated to benefit the general body of creditors. The court should also consider the payment terms of the proposal and whether the distributions provided for are adequate to meet the requirements of commercial morality and maintaining the integrity of the bankruptcy system. For a discussion on this point, see Lofchik, supra, and Farrell, supra. [5] The decision in Re Mernick, (1994) 1994 CanLII 7459 (ON SC), 24 C.B.R. (3d) 8 (Ont. S.C.) reflects the same principles.
[6] As set out in the 2023 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz and Sarra, Thomson Reuters Canada, Toronto, 2023 at §4:71 and §4.80:In deciding whether the proposal should be approved, the court must take the following interests into account: a) the interests of the debtor in making a settlement with creditors; b) the interests of creditors in procuring a settlement that is reasonable and that does not prejudice their rights; and c) the interests of the public in the fashioning of a settlement that preserves the integrity of the bankruptcy process and complies with the requirements of commercial morality: Re Gardner (1921), 1921 CanLII 948 (ON SC), 1 C.B.R. 424 (Ont. S.C.); Re Sumner Co. (1984) Ltd. (1987), 1987 CanLII 7591 (NB KB), 64 C.B.R. (N.S.) 218 (N.B.Q.B.); Re Stone (1976), 22 C.B.R. (N.S.) 152 (Ont. S.C.); Re National Fruit Exchange Inc. (1948), 29 C.B.R. 125 (Que. S.C.); Re Man With Axe Ltd. (No. 2) (1961), 2 C.B.R. (N.S.) 12 (Man. Q.B.).
In order for the court to approve a proposal, it must be satisfied that the terms are reasonable: s. 59(2). To be reasonable, the proposal must have a reasonable possibility of being successfully completed in accordance with its terms: McNamara v. McNamara (1984), 53 C.B.R. (N.S.) 240 (Ont. S.C.); Re Gareau (1922), 2 C.B.R. 265 (Que. S.C.). ....
[18] The OSB opposes approval of the Amended Proposal on the basis that it is not reasonable, not to the benefit of the general body of creditors, and not made in good faith. The OSB emphasizes that recovery for unsecured creditors is approximately 12%, and not close even to fifty cents on the dollar.
[19] It submits that the lack of good faith and the fact that approval of the Amended Proposal would compromise the integrity of the bankruptcy system is illustrated in part by the fact that there is no evidence as to whether or not the Debtor was a dupe or a knowing participant in the fraud committed on the banks who were induced to advance the loans.
[20] This uncertainty has been exacerbated rather than addressed by the Debtor who has failed to make full disclosure of all books and records including bank accounts, and has failed to provide answers to highly relevant questions, all of which would shed light on the issue of whether or not the Debtor was a dupe or a willing participant in the fraud, as well as on other issues such as the use of the funds.
[21] The OSB submits that the interests of the public at large in the integrity of the bankruptcy system are not served by the Amended Proposal since the Debtor is contributing only $2500 in funds, the gifts of money from family of the Debtor do not address individual responsibility/culpability issues, and a number of the facts referred to in s. 173 of the BIA are established here, with the result that that section, and particularly subsections 173(1) (a), (b), (d), (e) and (o), apply here.
[22] The OSB submits that the Debtor either could not, or would not, provide satisfactory answers regarding the basis for his bankruptcy, which was described simply as “business losses”. No particulars were provided as to the names of the individuals who were involved or why the businesses were never operated.
....
[28] As a result of all of the above, the OSB came to the conclusion that the Debtor’s reliance on family and friends to aid in his proposal payments does not fulfil the requirement of reasonable security as required by s. 59(3) of the BIA and that notwithstanding his undertakings to do so, he failed to satisfactorily disclose where the funds will come from to pay into his proposal.
[29] The OSB observed that his was the only signature on the proposal and that there was no signature of the other individuals who, he submits, have agreed to contribute to his proposal. A guarantee of performance provided as security may not be acceptable to the court if there is no evidence to show that the individual providing the guarantee has assets to support it: Re National Fruit Exchange Inc., (1948) 29 C.B.R. 125 (Que. S.C.).
[30] Finally, the OSB concluded that s. 170(6) applies and the Debtor has not given notice to the Trustee specifying the statements in the Report that he proposes to dispute, and indeed has not explained or answered the concerns expressed by the OSB at all.
[31] I accept the position of the OSB. As a result of all of the above, I am not satisfied that the Debtor is acting in good faith or that approval of the Amended Proposal is in the interests of the public at large in protecting the integrity of the bankruptcy system.
[32] Given the refusal of the Debtor to answer the questions on his Examination, I am unable to conclude otherwise. Moreover, the questions asked but refused were centrally relevant and in fact fundamental and basic: What caused the vaguely described business losses? What caused those losses particularly when the business of Concept Wrap was never in fact operated? What happened to the proceeds of the loans advanced by RBC and BMO?
[33] In the absence of satisfactory answers to those questions, I cannot be satisfied, particularly given the chronology of the filings and proposals as set out above, that the integrity of the bankruptcy system is maintained. Nor can I be satisfied given the Debtor’s refusal to answer these questions (whether satisfactorily or not), that he is acting in good faith.
[34] The record before me contains the Report of the Official Receiver, and that is unchallenged, since the record does not contain a transcript of the Examination, and nor, as noted above, is there any statement from the Debtor himself taking issue with or explaining the concerns raised by the Official Receiver.
[35] Finally, the position of the Debtor is not assisted by the fact that he is contributing only $2500, and even that modest amount is contributed over time, with the overwhelming bulk of the funds necessary for the Amended Proposal coming from his sisters who have not signed the Amended Proposal.
[36] In short, the Debtor seeks to get out from under his bankruptcy, but to do so by contributing only $2500 of his own funds as against debts of over $514,000 owing to unsecured creditors and maintaining his refusal to answer basic but highly relevant questions. As noted above, even if the proposed contribution from his sisters are accepted as being firm and irrevocable, recovery for unsecured creditors is still in the order of only approximately 12%.
[37] I accept the submission of the Trustee, supported by the Debtor himself and by RBC, that if the Amended Proposal is not approved, the funds from the Debtor’s sisters will not be available for distribution to creditors. I further accept the position of RBC that it would like to recover something, rather than nothing (or a de minimus amount).
[38] However, that is not the test, and such a motivation on the part of a creditor, while not improper and reasonable in its own self-interest, does not assist me with respect to the good faith of the Debtor or the integrity of the bankruptcy system. The elements set out in Kitchener Frame do not support the relief sought here, and I am satisfied that the facts described in ss. 173(1)(a),(d),(e) and (o) are made out here.
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