7/7/2005
The Forensics of Insolvency

By EVELYN L. BOWLES, Assistant Estate Administrator & Insolvency Clerk

While it is true that the majority of bankrupts are honest and unfortunate debtors, and their files are relatively routine, occasionally, we will be “treated” to a file that is filled with deception and intrigue. These files, where assets have “mysteriously” disappeared, sometimes result in high courtroom drama.

In one such case involving two brothers, our Trustees argued successfully for a payment of $300,000 by each, as a condition of their discharge. This was one of the highest Conditional Orders ever awarded in Canada.

These orders were a result of months of painstaking investigation by the Trustee into a complex corporate structure, which the bankrupts claimed had been set up for valid estate planning and tax purposes, but which became a convenient method of thwarting their creditors.

The Trustee, who is both licensed by the federal government and an Officer of the Court, is required to walk a tight-rope between diametrically opposed parties — the debtor and his creditors — while still ensuring that the principles and rules of the overriding laws are upheld.

In the past, the process of bankruptcy was generally an involuntary situation, driven by the creditors who appointed a specific Trustee of their own choice, and thus, the creditors held a high degree of confidence that their interests were being well protected.

However, as the process of bankruptcy has evolved, it has become more of a voluntary process, sought out by the debtor and managed by a Trustee of their own choosing. The creditors may sometimes feel that the Trustee is more aligned with the debtor than with creditors.

This perception is not the reality, however, as the Trustee has a mandated set of duties and is obliged to realize the maximum amount possible for the creditors.

The bankrupt is required to disclose all assets, which then vest with the Trustee for disposal. While the Trustee must be willing to maintain empathy for the “average” debtor who finds him or herself in a financial quagmire brought about by an unfortunate set of circumstances, the Trustee must always remain vigilant for the debtor who actively attempts to use the system to his or her own advantage.

The purpose of the insolvency legislation is to: 1) Rehabilitate an unfortunate/innocent debtor; 2) Provide for a fair distribution of assets; 3) Pursue claims collectively; 4) Set aside preferential payments or fraudulent conveyance of assets; 5) Investigate the affairs of the bankrupt; 6) Punish fraudulent debtors.

The unfortunate reality is, that since the late 1960's, provincial legislation allows creditors to easily obtain the status of a secured creditor and recover without regard to the bankruptcy process. Further, many laws permit that certain debts to the government be “deemed trusts,” which gives them priority above all other creditors, leaving little if anything available to pay for even the Trustee's fees, let alone providing funding for the further investigation of assets or “suspicious” transactions.

Those few unscrupulous debtors who live the high life on borrowed money or who attempt to hide assets from seizure by the Trustee are, in many cases, able to take advantage and rely on this reality.

In the event that a further investigation of assets is warranted, additional funding by the creditors is usually required. The Trustee now has an extensive and relatively inexpensive list of tools at their disposal for investigation purposes. The results can be very effective as the internet now permits a Trustee to investigate the debtor on an international scale, from the convenience of their laptop.

With the use of Teraview® software, public real estate records are instantly accessible and a Trustee can, by searching with only a name, locate undisclosed real estate and scrutinize transactions. Public databases, such as the PPSA, where liens against non-real estate assets are registered or the corporate registry, which discloses officers and directors of a company, are also readily available. Further, there is always the option of retaining the services of a licensed private investigator.

Another example of what can be accomplished occurred recently. The Trustee had no funds, but with the financial support of a few of the creditors, our investigations led to the confirmation of assets previously undisclosed by a bankrupt, who had since been discharged.

Finally after years of litigation by the Trustee, which included obtaining a Court Order permitting access to records held by a third party, the Trustee was successful. The resulting settlement negotiated with the third party recovered in excess of $1.5M to the estate.

While the forensic investigation aspect is often forgotten when discussing insolvency, it is the work behind the scenes that helps the Trustee maintain the integrity of the entire system. Those few people who actively try to defraud their creditors harm all of us — we lose a little more faith in the world. But, when the exhilaration of the chase turns to a sense of satisfaction that hidden assets have been found and seized for the benefit of the creditors, faith is restored and the world made just that little bit better.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.