Executive Summary: Key Legal and Evidentiary Issues

• Appeal by Galton Corporation from a bankruptcy order granted under the Bankruptcy and Insolvency Act (BIA), challenging the application judge’s discretionary refusal to dismiss or stay the application.

• Argument by Galton that the bankruptcy order would serve no meaningful purpose, was allegedly driven by an improper or ulterior motive, and would impede potential recovery from the related Farmers Edge litigation.

• Finding by the application judge, upheld on appeal, that a trustee’s investigatory powers into Galton’s conduct and use of loaned funds constituted a meaningful and legitimate purpose for granting the bankruptcy order.

• Application of a highly deferential standard of review to the application judge’s discretionary decisions under sections 43(7) and 43(11) of the BIA, with no error of law, no palpable and overriding error, and no injustice established.

• Clarification that costs in bankruptcy proceedings are governed by section 197(1) of the BIA, and not by The Court of King’s Bench Act or the King’s Bench Rules, while confirming the broad discretion to award costs and declining to order personal costs against Susan Bonk as a non-party.

• Ultimate dismissal of Galton’s appeal and of Sensible’s request for personal costs against Ms. Bonk, with tariff costs awarded to Sensible Capital Corp, and no specific monetary amount for those costs stated in the decision.

Background and parties

Sensible Capital Corp (Sensible) was the applicant creditor. It had obtained a judgment against Galton Corporation (Galton) in the amount of $500,000 plus interest and costs, and it was undisputed that Galton had committed an act of bankruptcy within six months of the application for the bankruptcy order. It was admitted that Galton had no assets to satisfy its outstanding debts, and that its only asset was shares held in Precision Weather Solutions Inc. (Precision). Susan Bonk (Ms. Bonk), the President and Chief Executive Officer of Galton, was a shareholder of both Galton and Precision. The bankruptcy application was advanced by Sensible. A bankruptcy order was granted by the application judge under the BIA, and Galton appealed that order to the Court of Appeal of Manitoba. Sensible, in its factum and at the hearing, also raised an additional issue regarding costs, arguing that elevated costs should be awarded against Ms. Bonk personally as a non-party.

Factual context and the related Farmers Edge litigation

The factual context included Galton’s lack of assets apart from its interest in Precision and the potential value connected to litigation by Precision against Farmers Edge Inc. and other entities (the Farmers Edge litigation). Galton argued that dismissing the application, or alternatively staying the bankruptcy order, would preserve the status quo and maximize the likelihood that the Farmers Edge litigation could generate value for the benefit of all of Galton’s creditors. The application judge acknowledged that Galton had no assets other than its interest in Precision. However, he accepted that an order in bankruptcy would permit a trustee to investigate the conduct of Galton and that this investigatory remedy was both meaningful and legitimate because Galton had failed to respond to repeated requests from Sensible to explain what it did with the funds that were loaned to it. He also addressed the fact that there was no evidence that, if the bankruptcy order were granted, Precision would be deprived of funding or otherwise impeded in prosecuting or defending various actions, including the Farmers Edge litigation. The Court of Appeal accepted that it was open to the application judge, on the facts before him, to find that the bankruptcy order would not impede the Farmers Edge litigation.

Issues on appeal regarding dismissal or stay under the BIA

Galton relied on section 43(7) of the BIA, which provides that a court “shall dismiss” a bankruptcy application where it is satisfied that “for other sufficient cause no order ought to be made.” Galton advanced three primary submissions under this provision: that granting a bankruptcy order would serve no meaningful purpose; that the application was driven by an ulterior motive or for an improper purpose; and that granting the bankruptcy order would impede recovery in the Farmers Edge litigation. Galton relied on authorities such as JICO Holdings Inc v Lynco Construction Ltd and Buth-Na-Bodhiaga Inc v Lambert, which interpret section 43(7) as conferring a broad and flexible discretionary power to reject an otherwise valid application even where the debt and act of bankruptcy have been established. The application judge reviewed the list of examples of “other sufficient cause” set out in Lambert and found that none applied in this case. He dealt with the specific objections advanced by Galton and found there was no evidence that Sensible’s application was driven by an ulterior motive or improper purpose. The Manitoba Court of Appeal held that none of the reasons relied on in JICO to dismiss a bankruptcy application applied on the facts of this case, and it concluded that the application judge made no errors of law or palpable and overriding errors of fact or mixed fact and law, and that his decision was not so clearly wrong as to amount to an injustice. In the alternative, Galton submitted that the application judge erred in not exercising his discretion under section 43(11) of the BIA to stay the bankruptcy order pending determination or resolution of the Farmers Edge litigation. The Court of Appeal found that it was open to the application judge to exercise his discretion to stay the application on certain conditions, but that he made no palpable and overriding error in refusing to do so. The Court stated that Galton was, in effect, asking the Court to re-weigh the evidence and substitute its discretion for that of the application judge, which was not the role of the appellate court.

Standard of review for discretionary decisions

The Court of Appeal emphasized that the application judge’s refusal to dismiss the bankruptcy application or to grant a stay were discretionary decisions afforded a high degree of deference on appeal. It stated that a discretionary order will not be interfered with unless there has been an error in law, a material misapprehension of the evidence or a decision so clearly wrong as to amount to an injustice, referring to authorities such as White Oak Commercial Finance, LLC v Nygård Enterprises Ltd and Project Management and Development Limited (Re). The Court also reiterated that, with a discretionary decision, there rarely is a “right” or “wrong” result, and that it is not enough that appellate judges might have decided differently; they must respect, not replicate, the unique role of trial or application judges, citing Perth Services Ltd v Quinton et al. In the result, the Court concluded that the application judge made no reviewable error in granting the bankruptcy order and refusing to stay it, and the appeal was dismissed.

Costs, the BIA framework, and non-party costs

On costs, Sensible argued that the application judge erred in failing to award elevated costs and in not awarding costs personally against Ms. Bonk. The Court of Appeal described costs as a highly discretionary decision, noting that the standard of review for cost awards has been characterized as “quintessentially discretionary,” with such awards not lightly interfered with unless the judge made an error in principle and the award is plainly wrong. In his oral reasons on costs, the application judge had referred to section 96(1) of The Court of King’s Bench Act and rule 57.01 of the King’s Bench Rules as the source of the Court’s authority to determine liability and quantum of costs. The Court of Appeal clarified that, because this was a bankruptcy proceeding, costs are governed by the BIA. Section 197(1) of the BIA provides the Court with the discretion to award costs, and the Ontario Court of Appeal in Dallas/North Group Inc (Re) had emphasized that there are no words limiting that section and that it gives the court the widest discretion. The Court of Appeal held that, although the application judge referenced the wrong authority, he concluded that the court’s discretion to award costs was very broad, and that this conclusion was consistent with section 197(1) of the BIA. Therefore, the error in citation was not material. Regarding the request for personal costs against Ms. Bonk, the Court summarized the “person of straw” test drawn from authorities such as Conversions by Vantasy Ltd et al v General Motors of Canada Limited and others. It noted that the test requires showing that the directing mind or non-party had status to bring the action themselves, that the corporation was not the true litigant, and that the corporation was a person of straw put forward to protect the true litigant from liability for costs. The Court also discussed Dallas/North, where the Court had upheld costs orders against non-parties in bankruptcy proceedings due to conduct involving bullying, harassment, intimidation and a barrage of proceedings constituting an abuse of process, even though the person-of-straw test was not satisfied. In this case, the application judge had been referred to the relevant authorities and exercised his discretion not to award costs against Ms. Bonk personally. He acknowledged that, while Galton’s arguments did not persuade him to dismiss the bankruptcy application, they were “reasonably arguable positions,” and he was unable to conclude that there was “no reasonable basis for Ms. Bonk’s continued resistance to the bankruptcy application.” He further stated that Galton’s conduct did not fall to the level that justified solicitor-client costs, and that for the same reason he was not prepared to make an order of costs against Ms. Bonk personally. On appeal, Sensible argued that the application judge had equated the test for solicitor-client costs with the test for costs against a director in a bankruptcy proceeding. The Court of Appeal was not satisfied that he erred in his application of the test. It found that he was familiar with the authorities and that his conclusion reflected his application of the legal principles to the facts of the case. The Court also rejected Sensible’s submission that Ms. Bonk’s conduct in other litigation was a relevant factor for awarding costs in this application or on this appeal, holding that such conduct is relevant to cost orders made in those other proceedings, and that it was not an error for the application judge to refuse to rely on it here.

Absence of policy terms and final outcome, including amounts

The decision does not discuss any insurance policy terms or contractual policy clauses, nor does it refer to any specific provisions of an insurance or similar policy. The focus is on the Bankruptcy and Insolvency Act, the discretionary powers under sections 43(7), 43(11) and 197(1), and the costs framework as it applies in bankruptcy proceedings. In conclusion, the Manitoba Court of Appeal dismissed Galton’s appeal from the bankruptcy order and dismissed Sensible’s request for an order of costs against Ms. Bonk personally. The Court ordered tariff costs to Sensible. The decision records that Sensible had obtained a judgment against Galton in the amount of $500,000 plus interest and costs, but it does not state the precise amounts of interest, prior costs, or the tariff costs awarded on the appeal. Accordingly, while Sensible Capital Corp is confirmed as the successful party and it is established that there was a $500,000 judgment plus interest and costs in its favour and tariff costs on appeal, the exact total monetary amount of all awards and costs in favour of Sensible cannot be determined from this decision.