Executive Summary: Key Legal and Evidentiary Issues

• The court considered whether the Petitioner satisfied the four-part test under section 38(1) of the Bankruptcy and Insolvency Act to continue the action in place of the Trustee.
   
• Disqualification of the Petitioner's lawyer was raised based on an alleged conflict of interest tied to the Trustee's discontinuance.
   
• Timeliness of the Defendant's notice of case management was challenged for failing to meet the three-day notice requirement.
   
• Effect of the Trustee's discontinuance on the ongoing proceeding required interpretation under article 213 of the Code of Civil Procedure.
   
• Standing of the Defendant and the Mis-en-cause to challenge communications between the Trustee and his own lawyer was also at issue.
   
• Postponement of the costs determination arose given the limited hearing time available.
   

Facts of the case

Arthur Blumer & Associates Inc., acting as Trustee in Bankruptcy, filed an originating application under section 38 of the Bankruptcy and Insolvency Act against Defendant Carolina Cobo Vasquez, involving Mis-en-cause/Debtor Andrey Malihin. Petitioner Oksana Sergeev, a creditor of the bankrupt estate, applied to be authorized to continue the proceeding in the Trustee's place after the Trustee, for reasons of cost efficiency dating back to August or September 2025, decided not to pursue it further. On the morning of 26 June 2026, the day of the hearing, the Trustee electronically filed a discontinuance; the form itself bears the date of 23 June 2026, though it was actually signed that morning since the Trustee had been out of the office on the 23rd. The lawyer for the Mis-en-cause/Debtor had prepared the discontinuance form and sent it to the Trustee for signature. Separately, the Defendant filed a notice of case management (Avis de gestion) seeking to disqualify the Petitioner's lawyer, Mtre. Robert Pancer, alleging a conflict of interest because he had previously acted for the Trustee. That notice was served on 23 June 2026 at 4:04 p.m. but made presentable for 26 June, short of the three-day notice period required. The underlying case had already been set down for trial on the merits for 1–3 May 2028 by Justice Poisson on 10 June 2026.

Policy and legislative provisions at issue

Section 38(1) of the Bankruptcy and Insolvency Act allows a creditor to seek court authorization to pursue, in their own name and at their own expense and risk, a proceeding that the trustee has refused or neglected to bring, provided notice is given to other creditors. The Alberta Court of King's Bench decision in 1393392 Alberta Ltd v 2128348 Alberta Ltd set out four criteria for such authorization: creditor status, a prior request to the trustee, the trustee's refusal or neglect, and threshold merit in the proposed proceeding. Article 213 of the Code of Civil Procedure governs discontinuances, providing that a full discontinuance terminates the proceeding upon notification and filing, restores matters to their former state, and places legal costs on the plaintiff absent agreement or court order. The Supreme Court of Canada's decision in MediaQMI inc v Kamel established that a discontinuance nullifies the parties' procedural legal relationship but that a defendant or intervener prejudiced by it may contest it, while a third party may apply to have it set aside if prejudiced. Subsequent Quebec appellate and trial-level authorities, including Procureur général du Canada c Pénosway, Regan v Attorney General of Canada, and Gestion 555 Carrière inc c Ville de Gatineau, confirmed that a discontinuance cannot infringe on rights or advantages already acquired by other parties.

Reasoning and analysis

Applying the four-part test, the Court found all criteria satisfied: the Petitioner was an uncontested creditor of the estate, the Trustee had filed and then declined to continue the application, and threshold merit existed given the scheduled trial dates. The Court rejected the Mis-en-cause/Debtor's argument that section 38 required the Petitioner to commence an entirely new action, finding this position contrary to proportionality and the interests of justice, since it would force all parties to duplicate costs already incurred. Turning to the disqualification issue, the Court noted procedurally that a notice of case management was not the correct vehicle for seeking a lawyer's disqualification, which requires a formal application. On the merits, the Court found no conflict of interest, since the Trustee, contacted directly during the hearing, confirmed he had no objection to the Petitioner continuing the case and would even have withdrawn the discontinuance if needed. The Court also questioned what standing the Defendant and Mis-en-cause/Debtor had to raise an issue confined to communications between the Trustee and his own lawyer. On the discontinuance itself, the Court held that because the Petitioner's application preceded the Trustee's filing, treating the discontinuance as terminating the entire proceeding would prejudice rights she had already acquired, consistent with the SCC's guidance in MediaQMI and the Quebec authorities cited. The Court therefore declared that the discontinuance removed the Trustee as Plaintiff without ending the proceeding itself. The Petitioner's request for provisional execution notwithstanding appeal was denied for lack of justification, and given inadequate hearing time, the determination of costs on the main application was postponed to a later date.

Ruling and overall outcome

The Court granted the Petitioner's application, with the exception of the request for provisional execution, and authorized Oksana Sergeev to act in her own name in lieu of Arthur Blumer & Associates Inc. as Plaintiff, at her own expense and risk. It declared that the Trustee's discontinuance removed him from the proceeding without terminating it, ordered the style of cause amended accordingly, and directed the Trustee to transfer all related rights and interests to the Petitioner. The Court further ordered notice to other creditors of the Mis-en-cause/Debtor, with a fifteen-day window for any of them to join the proceeding on a pro rata cost-sharing basis. The Defendant's Avis de gestion was dismissed, with costs awarded in the Petitioner's favour, though the amount of those costs, along with the costs and extra-judicial costs sought on the main application, was not quantified in the judgment and was postponed to be determined at a later date.