The duty of good faith in the context of insolvency proceedings

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On June 21, 2019, amendments to the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”) and the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (the “CCAA”) created an express statutory duty to act in good faith for any “interested person” in proceedings under the statutes. The amendments also grant courts a broad power to make any order considered appropriate in the circumstances of a failure to act in good faith.

In the recent decision in CWB Maxium Financial Inc v 2026998 Alberta Ltd, 2021 ABQB 137, the Alberta Court of Queen’s Bench provided guidance on the statutory duty of good faith provided by section 4.2 of the BIA in the context of an application for a receivership order.

Notably, the Court held that although section 4.2 cannot be used to impugn conduct that has no connection to a BIA proceeding, the conduct of the creditor from the date of its demand letter was relevant for the purposes of the provision.

The Court also summarized conduct that might be considered a failure to act in good faith. While the duty of good faith will depend on the context and is to be assessed in light of the policy objectives of the BIA, the Court described the following examples of conduct that may constitute a failure to act in good faith:

  • bringing or conducting an insolvency proceeding for an oblique motive or improper purpose;
  • half-truths, omissions, or silence of a party; and
  • lying to or misleading another party as to the status of a loan or the state of the lender-borrower relationship.

CWB Maxium is an important caution to creditors, who must be sure to act in good faith in their interactions with debtors even before insolvency proceedings begin. A failure to do so can have significant consequences in the insolvency proceedings that follow.

The case also illustrates what could, in the right circumstances, serve as an effective defence for a debtor in insolvency proceedings, including in an application for a receivership order.

It is critical that debtors, creditors, and other interested parties seek timely advice from counsel to avoid the serious potential consequences that can now flow from conduct before an insolvency proceeding begins.

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