To Survive Bankruptcy Fraud Debt Must be Proven

In order for a debt to survive bankruptcy because it is fraudulent, it must be proven. A recent Newfoundland court case illustrates this point.

As is often the case when bankruptcies involve large debts owed to individuals or private companies, anger and hard feelings can result. This can often lead to accusations that the debt came about due to fraud on the part of the bankrupt. If proven, these debts would survive the discharge of the bankrupt.

Default Judgment against director

In this case, a creditor brought a court action and received a default judgment against a company and its sole director and shareholder for over $100,000. It had accused the shareholder of fraudulent misrepresentation. The shareholder filed for bankruptcy and was automatically discharged. The creditor later brought an application to the court for leave to pursue the shareholder for the debt based on it being fraudulent and thus surviving bankruptcy based on section 178(1)(e) of the Bankruptcy and Insolvency Act.

The court found that the default judgement that was obtained was basically silent on the issue of fraud. While this was not fatal, it would require the court to now hear the details of how the debt arose in order to consider the fraud issue. Nonetheless, the court did give it some consideration and did not see a clear case of fraud. If found that “neither the judgement on its face nor careful consideration of entirety of record provided proof of debt based on fraudulent misrepresentation”.

Key Issues regarding fraud debts

A few key points here are as follows:

  • The court must find actual fraud (where there has been an intent to defraud) in order for a debt to survive bankruptcy.
  • The fraud can either be proven in an earlier judgement prior to the bankruptcy or must be proven after the bankruptcy discharge at such time that a court action is commenced.
  • The fraud does not have to be proven to the bankruptcy court at the time of discharge.

If you are considering bankruptcy or a proposal to your creditors and are concerned about accusations of fraud ti is important to seek advice and understand your options. Call us today to discuss your situation.