Judgment Debts Arising From Fraud Or False Pretences: Recent Developments In The Application Of S.178 Of The Bankruptcy And Solvency Act

In the recent decisions of H.Y. Louie Co. Limited v. Bowick [H.Y. Louie]1 and Cruise Connections Canada v. Szeto [Cruise Connections],2 the British Columbia Court of Appeal considered when judgment debts arising out of facts involving fraud or false pretences can survive bankruptcy pursuant to s. 178 of the Bankruptcy and Insolvency Act [BIA].3 The decisions have important implications for judgment creditors.

H.Y. Louie

The defendant in H.Y. Louie was employed in the plaintiff's IT department. His duties included arranging for the purchase of IT products and services for the plaintiff. The defendant was also the proprietor of a company and used his position with the plaintiff to "purchase" various products and services from that company. The plaintiff eventually became aware of the situation and determined that many or all of the "purchases" could not be verified as authentic. The plaintiff sued, and while its claim included references to conduct that could be characterized as fraudulent, the plaintiff claimed damages for breach of contract and did not allege fraud or false pretences.

The defendant ultimately consented to two judgments for breach of contract, and subsequently made an assignment into bankruptcy under the BIA. His indebtedness related almost entirely to his obligations to the plaintiff.

The plaintiff sought to have the judgments declared debts that would survive bankruptcy, pursuant to s. 178(1)(d) and (e) of the BIA. Section 178 of the BIA sets out several circumstances in which a discharge order does not release a bankrupt from debt, including, under subs. (1)(d), "any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity", and under subs. 1(e), "any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim". These provisions are designed to ensure that a deceitful bankrupt will not be able to use the court system and the BIA as a mechanism for avoiding the consequences of unacceptable conduct. The onus is on a creditor to prove that its claims come within the ambit of these provisions.

In support of its s. 178 application, the plaintiff adduced affidavit evidence that appended the transcript of the defendant's examination for discovery at which evidence suggestive of fraud was elicited.

Justice Blok accepted that the consent judgments...