Penalized for seeking refuge under the Bankruptcy and Insolvency Act: discharged Bankrupts denied costs despite success

In Suleiman v. Venkataraman et al, 2024 ONSC 4441; 2024 ONSC 5422 Justice Hilliard denied the Respondents their costs, despite their success in defending the Application seeking a declaration the Judgment against them sounded in fraud and survived their discharge pursuant to sections 178(1)(d) and (e) of the Bankruptcy and Insolvency Act (“BIA”). The Respondents, successfully represented by Sean N. Zeitz and Jakob Bogacki of SZK, argued that the Application was baseless as the Judgment was granted pursuant to a straightforward breach of contract in the absence of any allegations or reference to fraud. The Respondents consented to a settlement, defaulted on that settlement and then declared bankruptcy. Only after they declared bankruptcy and obtained their discharge did the Applicant allege fraud (7 years post-discharge).  The court agreed with the Respondents that the Applicant attempted to rewrite history to cast his claim as falling within the fraud exemption provisions of the BIA, which would survive bankruptcy and dismissed the Application.  

In determining costs, the court sided with the Applicant, emphasizing the perceived “unfairness” of further burdening him with a costs order after losing the ability to collect the debt. The court expressed empathy for the Applicant, finding he was unable to recover the loan due to the “fresh start” policy of the BIA and that it would be unfair to saddle him with a costs order. 

A similar case, RBC v. Greb Tele Data et al, 2024 ONSC 3747, was argued two months before Suleiman by Matthew R. Harris, who recently joined SZK. In that case, Justice Hilliard also dismissed an application seeking to declare a debt non-dischargeable due to fraud but declined to award costs to the debtor for similar reasons.

While judicial discretion over costs is broad, it must be exercised on proper legal principles. The BIA is a complete code prescribed by Parliament. Denying a bankrupt their costs, thereby effectively penalizing them for seeking bankruptcy protection and not repaying a debt that the BIA was designed to discharge, is unconventional. Parliament has not granted creditors the right to allege fraud without consequence and avoid costs if unsuccessful. This approach risks encouraging creditors to pursue baseless fraud claims, eroding well-established legal principles such as the presumption that a successful party is entitled to costs and that unsuccessful fraud allegations warrant substantial or full indemnity costs.

Costs drive the system, serving as a deterrent against baseless claims. In the absence of a real and substantial risk of having to pay costs for alleging fraud and bringing an unsuccessful application, creditors are effectively incentivized to try and reconstitute their claims to survive a bankrupt’s discharge while forcing the debtor to incur significant costs to defend themselves. Without meaningful opposition from the bankrupt, there is a risk that a debt may survive bankruptcy, effectively rendering the bankruptcy moot in many cases. Compounding the issue, appeals of cost decisions require leave, which can be expensive and disproportionately burdensome relative to the potential benefit. Even if leave is granted, any costs recovery is typically limited to partial indemnity.

The current approach undermines the principles of fairness and the “fresh start" policy central to the BIA, creating a system where discharged bankrupts are effectively penalized for seeking refuge under the statute specifically enacted to allow them to discharge debt.  It was the discharge of the debt (ie: not having to repay same) which the court relied on to deprive the Respondents of their costs. 

Written by: Elina Fish