When can a claim against a debtor proceed despite the debtor's bankruptcy?Great North Data Ltd.(Re), 2020 NLSC 105 (CanLII)
1. In 2015, the Debtor and Bitmain entered into negotiations by which the Debtor offered to host Bitmain’s Bitcoin mining hardware at facilities that the Debtor owned. In 2017, Bitmain brought an action against the Debtor for damages for conversion, detinue, breach of trust and fraudulent misrepresentation. The Debtor was subsequently placed into receivership in February 2020. The Receivership Order provided that all proceedings currently under way against Bitmain were stayed and suspended pending further order of the Court. Bitmain sought a declaration that s. 69.3(1) of the BIA did not apply to its claim against the Debtor.
2. Lifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. A creditor applying under s. 69.4 must meet at least one of the two criteria stated in the section, not both. The creditor does not have to show it has a prima facie case in its action against the bankrupt. The court need only consider the merits of the proposed action to see whether there are ‘sound reasons’ for lifting the stay.
3. To succeed in its motion, Bitmain had to show that it was likely to be “materially prejudiced” by the automatic stay of proceedings effected by s. 69.3 of the BIA or that it was inequitable to maintain the stay. Bitmain argued that if the Debtor was discharged from bankruptcy, it would not be released from the claim that Bitmain had against it. It also stated that its claim against the Debtor was too complex to be settled by the procedure for proving claims under s. 135(1.1) of the BIA.
4. The Court confirmed that Bitmain bore the onus of proving that the Debtor had committed fraud, breach of trust, conversion, detinue, fraudulent misrepresentation, deceit and extortion. However, based on the evidence before it, the Court was satisfied that Bitmain had an arguable case on those issues against the Debtor. If it succeeded in any or all of these claims, the Debtor would not be discharged from any debt or liability arising from them.
5. The Court also held that addressing each of Bitmain’s claims would involve a detailed examination of the relationship between Bitmain and the Debtor, and a full hearing was the only process in which the claims could be properly addressed. The Debtor was a necessary party to Bitmain’s claims and its participation in the proceedings was integral to the issues being fully canvassed.
6. Finally, the Court considered how much procedural progress Bitmain had made to prepare for trial. The action was commenced nearly three years ago. Thousands of documents had already been disclosed, over 10 days of discoveries had been conducted and both parties had made numerous court applications. Bitmain had already begun preparing for trial when the Debtor filed for bankruptcy. Given the effort and expense required to get to this advanced stage of the proceedings, Bitmain would be materially prejudiced if the stay of proceedings was allowed to remain in place.7. The Court was satisfied that it would be inequitable and unfair to continue the stay of proceedings. The Court held that s. 69.3 of the BIA no longer operated, and was deemed never to have operated, in respect of Bitmain’s claim against the Debtor. Bitmain was authorized to proceed with the trial of its claims against the Debtor.