The primary purpose of discharge is to give a bankrupt an opportunity to surrender his debts and to make a fresh start. The discharge is not automatic process, it can be opposed by the creditors, trustee in bankruptcy, the Supervisor in Bankruptcy.
Under s.168.1(1)(f) of the BIA, a bankrupt, who has never been bankrupt before and where the Superintendent in bankruptcy, the trustee or a creditor does not oppose the discharge, then on the expiration of the six month, the trustee in bankruptcy will automatically issue the bankrupt a certificate, declaring that the bankrupt is discharged and is released from all debts except those referred to in subsection 178(1) of the BIA. Under s.168(2) of the BIA the bankrupt can apply to the court before expiration of nine months period for an earlier discharge.
The automatic discharge can be opposed by either Superintendent in bankruptcy, the trustee or the creditors by a notice of opposition given at any time before nine months period expires (s.168(1)). If the discharge is opposed, a court hearing is held (“opposition to discharge”, chapter V (D)).
A first- time bankrupt is precluded from automatic discharge of his debts, if the bankrupt neglects to comply with mandatory counseling requirement in s.157 of the BIA.
Under s.169(1) of the BIA, the bankruptcy automatically operates as an application for discharge, unless a bankrupt serves on the trustee a waiver of application. The trustee must apply for discharge not earlier than three months and not later than a year. The trustee must, no earlier than three months and no later than a year, file an application for discharge to the court. A bankrupt may apply for discharge on his own where he serves the trustee with waiver of application under s.169(1) of the Act.
Under s.170 of the BIA, the trustee must prepare a report, where he must comment on:
(a) the affairs of the bankrupt
(b) the causes of the bankruptcy
(c) the manner in which the bankrupt has performed the duties under the act or obeyed the orders of the court
(d) the conduct of the bankrupt both before and after the bankruptcy
(e) conviction in offences under the Act
(f) any other fact, matter or circumstance that would justify the court in refusing discharge.
Under s.170.1 of the BIA, the report must include a trustee’s recommendation on whether the bankrupt should be discharged or conditionally discharged, having regard to the bankrupt’s conduct and ability to make payments. S.170(2) lists the factors that the trustee must consider in making such a recommendation:
a) whether the bankrupt has complied with s.68 of the BIA requirement; (treatment of pre-discharge income)
b) the total amount paid to the estate by the bankrupt;
c) whether a viable consumer proposal to creditors has been made.
Where trustee recommends a conditional discharge, the recommendation is considered to be opposition to discharge. Under s.170.1(4) where the bankrupt does not agree with the trustee’s recommendation the bankrupt may send the trustee a request in writing to have the matter determined by mediation before the matter proceeds to the bankruptcy court.
The trustee upon obtaining or been served with a notice of hearing must not less than fifteen days before the discharge hearing, send a notice to the superintendent, the bankrupt and to every creditor, who has proved the claim.
An interested , party, either creditor, the trustee or the superintendent in bankruptcy, which intends to oppose the discharge, must give a notice of discharge to the bankrupt, the trustee and the superintendent in bankruptcy before nine month after the bankruptcy in cases of automatic discharge and before the time appointed for the hearing of the application in other cases.
A party that intends to oppose the discharge must also state the grounds of the opposition of the discharge in the notice of opposition. The grounds of opposition are usually “facts for which discharge may be refused, suspended or granted conditionally” in s.173(1) of the BIA (“facts for which a discharge may be refused”, chapter V (D)). The opposing party must prove the existence of at least one of the facts in the section and where the opposing party is successful; the bankrupt is entitled to defend himself by disproving the facts.
The opposing party must prove the existence of the factors in s.173(1) of the BIA. The bankrupt’s successful defence is likely based on the argument that the opposing party has not proved the existence of the factors or that the facts have not occurred.
Powers of the Court to grant, to refuse, to suspend the discharge or to grant a conditional discharge.
Under s.172 of the BIA, on the hearing of an application of a bankrupt for a discharge, the court may either grant or refuse an absolute order of discharge or suspend the operation of the order for a specified time, or grant an order of discharge subject to any terms and conditions with respect to any earnings or income that may become due to the bankrupt after the discharge or with respect to his after acquired property.
Under s.172 (3) of the BIA, where a party opposing discharge proves the facts mentioned in s.173(1) of the BIA,, the court will:
(a) refuse the discharge of a bankrupt;
(b) suspend the discharge for such period as the court thinks proper; or
(c) require the bankrupt, a condition of his discharge, to perform such acts, pay such money, consent to such judgments or comply with such other terms as the court may direct.
Under s.176 (1) of the BIA, where a conditional order is granted, the bankrupt must:
(a) give the trustee such information as he may require with respect to his earning s and after-acquired property and income, and
(b) no less than once a year, file in the court and with the trustee a statement verified under oath showing the particulars of any property or income he may acquired subsequent to the order for his discharge.
The trustee may require the bankrupt to attend for examination with respect to the facts contained in the statement or with respect to his earnings, income, after-acquired property or dealings.
Where the bankrupt fails to comply with conditions, the court may annul the discharge order or may at any time annul the bankruptcy, where the court is satisfied that the bankruptcy process ought not to be initiated (“annulment”, chapter V(D)(3)).
Section 173(1) of the BIA lists the facts, referred in s.172, which the bankruptcy court must consider at the bankruptcy hearing:
(a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact has arisen from circumstances for which the bankrupt cannot justly be held responsible;
(b) the bankrupt has omitted to keep such records as are usual for the business carried by a bankrupt and as sufficiently disclose the business transactions and financial position of the bankrupt within the period beginning on the day that is three years before the date of the initial bankruptcy event.
(c) the bankrupt has continued to trade after becoming aware of being insolvent;
(d) the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities’;
(e) the bankrupt has brought on the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs;
(f) the bankrupt has put any of the bankrupt’s creditors to unnecessary expense by a frivolous or vexatious defence to any action properly brought against the bankrupt;
(g) the bankrupt has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, incurred unjustifiable expense by bringing a frivolous or vexatious action;
(h) the bankrupt has, within three months before the bankruptcy, when unable to pay debts as they became due, given an undue preference to any of the bankrupts’ creditors (“fraudulent preference”, chapter IV(B)(4));
(i) the bankrupt has within three months before the bankruptcy incurred liabilities in order to make the bankrupt’s assets equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities;
(j) the bankrupt has on any previous occasion been bankrupt or made a proposal to creditors;
(k) the bankrupt has been found guilty of any fraud or fraudulent breach of trust;
(l) the bankrupt has committed any offence under the BIA or any other statute in connection with the bankrupt’s property, the bankruptcy or the bankruptcy proceedings;
(m) the bankrupt has failed to comply with living standards requirements under s.68 or failed to transfer specified surplus income to the trustee in bankruptcy;
(n) the bankrupt failed to make a viable consumer proposal, choosing bankruptcy as a means to resolve the indebtedness;
(o) the bankrupt has failed to perform the duties imposed on the bankrupt under the BIA or to comply with the order of the court.
In Re Raftis, the court has articulated a number of principles that should be considered in determination of a question whether a discharge should be granted subject to conditions or be refused:
- public interest;
- enabling an honest, but an unfortunate debtor to make a fresh start;
- debtor’s ability to perform the ordinary duties of citizenship;
- bankruptcy court is not a “clearing-house” for debts
- discharge provisions are one of the fundamental stones of the bankruptcy process;
- court is not charitable institution;
- absolute discharge is not bankrupt’s right, if it were, such an approach would deteriorate commercial morality.
Power of the Court to Modify or Annul the conditions in the discharge Order or to penalize the conditionally discharged bankrupt for the failure to comply.
Under s.172(4) the court may modify conditions after a year if the bankrupt satisfies the court that there is no reasonable probability of bankrupt’s being in a position to comply with the terms of the order.
Under s.176(2) , where the bankrupt fails to give information or to file a statement of affairs in s.176(1), to attend for examination when required to do so or to answer all questions fully and accurately, the court may on the application of the trustee or of any creditor revoke the order of discharge.
Further, s.180 of the BIA gives the bankruptcy court broad powers to annul the discharge where the bankrupt after his discharge fails to perform the duties imposed on him by the BIA, obtained by fraud. Section 181 gives the court broad power to annul the bankruptcy where bankruptcy order, in the opinion of the court, ought not to have been made or an assignment ought not to have been filed.
Under s.178(2) An order of discharge releases the bankrupt from all claims provable in bankruptcy, except the debts found in the list under s.178(1). An order of discharge does not release the bankrupt from
(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;
(a.1) any award of damages by a court in civil proceedings in respect of
(i) bodily harm intentionally inflicted, or sexual assault, or
(ii) wrongful death resulting from wrongdoing;
(b) any debt or liability for alimony or alimentary pension;
(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law , partner or child living apart from the bankrupt;
(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;
(e) any debt or liability for obtaining property by false pretences or fraudulent misrepresentation;
(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;
(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred
(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or
(ii) within ten years after the date on which the bankrupt ceased to be a full- or a part-time student; or
(h) Any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g).
The debtor can independently agree to pay off a specific debt with a creditor despite the discharge. It is called a re-affirmation of a debt. The re-affirmation of the debt does not need to be confirmed by an express written agreement. If the debtor continues to make payments under a debt, this may automatically “reaffirm” the debt and any cessation of payment by the debtor may result in a valid re-affirmed claim, despite the bankruptcy.
In Manulife Bank of Canada v. Planting, the bankrupt Planting had a mortgage with MBC, a portion of which was unsecured. After the bankruptcy, Planting continued to make payments under the mortgage. The court held that where a secured party has not proved a claim in the bankruptcy and the bankrupt retains possession of the collateral and continues making payments on the debt, the debt is re-affirmed and as a result, not extinguished by the discharge.
s.168-182 of the BIA.