Lifting the stay in bankruptcy

When a creditor seeks to lift the automatic stay arising from an assignment in bankruptcy that creditor must show, among other things, that the claim has some merit. It must be a claim with a chance of success: see the Court of Appeal's decision in Re Ma 2001 CanLII 24076 (ON C.A.).

That raises the question, just now decided in Kandasamy (Re), 2009 CanLII 7763 (ON S.C.), whether the defence's strength is to be considered in determining whether the claim has a chance of success. The answer appears to be 'no'.

The Court is to review the merits of the claim only and not to consider whether the defence is strong. (To this writer's view that position seems wrong. In this case the defence was, on its face, weak. What if an absolutely solid defence was presented? Surely that should be considered?).

The Court held:


Merits of the Claim

In Re Ma the Court of Appeal indicates that a court considering whether to lift the stay should examine the "merits of the proposed action."  In this case, the Bankrupt wants to examine the proposed merits of his defence to the fraud allegation.   To my mind these are not the same thing. For the Bankrupt to be successful in his defence a trier of fact will have to find the evidence of the Bankrupt credible.  If that happens, it may be that the Bankrupt has a full defence.  On the other hand, even if the Bankrupt is found to be credible, and his story is accepted by the court, a judge still might find that the Bankrupt was wilfully blind and thus nevertheless liable for the fraud. These are not questions which I can and or should determine at this stage. As a result I am not able to say that the proposed BNS claim is without merit.
James Morton
1100 - 5255 Yonge Street
Toronto, Ontario
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