When a bank alleges fraud and petitions court to lift a stay of proceedings against a bankrupt company, one might expect the court would demand proof before granting the bank’s request. Depending on the facts of the case, those expectations could well be dashed.
In Pannia, the Ontario Superior Court of Justice denied a motion by the bankrupts, Gregorio and Antonio Pannia, seeking production of receiver’s reports supporting the allegation of fraud related to the bankruptcy of the Omega companies.
Court ruled that section 69.4 of the Bankruptcy and Insolvency Act (BIA) “does not impose an onus upon the bank to establish, on an evidentiary basis, that its claim is meritorious.” While the bank must provide a basis for its motion to lift the stay, it need not demonstrate that the claim will succeed.
The bank’s motion to lift the stay is not an opportunity for the bankrupt to test the strength of the bank’s proposed action, the court said, because this would put the bankrupt in a better position than any other litigant or defendant. Allowing the stay to be lifted would lead to a separate legal action in civil court, in which the bank would press its claim for payment and face the challenges of opposing counsel. “It must be emphasized and recognized that the bankrupt will be entitled to full discovery rights in the civil action,” the court said.
The ruling also noted that proof of the bank’s case might well rely upon admissions of defendants, oral evidence, allegations of concealment and/or allegations of destruction of documents, all of which would be matters for the civil action, not the BIA court.
Bankruptcy law and bankruptcy court form a unique environment where all parties should be represented by counsel with specialized knowledge and expertise.