[Vol. 17
The Debtor’s Discharge From Bankruptcy
Edouard Martel*
I. The History
Quiconque s’est le moindrement arr~t6 h examiner l’6volution
de la idgislation touchant la faillite, an cours des si~cles, est frapp6
par l’ouverture graduelle d’esprit du ldgislateur en regard des pos-
sibilitds pour un d6biteur de parvenir h sa lib6ration ou, selon
un terme consacr6 par 1’usage, d’envisager sa r6habilitation.
One must bear in mind that the word “bankrupt” originally
brought with it a significance which scarcely carried a note of
sympathy for the human being to whom it referred. From the
standpoint of etymology it has been advanced by some that the
word “bankrupt” originated from the Italian words “banca rotta”,
meaning a broken bank or bench. It would have originated from
the custom in Italy of breaking the bench or counter of a money-
changer upon his failure. According to others, however, the word
was derived from “banque route” meaning a trace of track thereby
signifying by the combination of the two words banque and route,
“one who hath removed his banque, leaving but a trace behind”.’
In 510 B.C. the Roman magistrates, the decemvirs, drew up the
law of the Twelve Tables. This severe and archaic legislation consti-
tuted the insolvent debtor and his family the slaves of his creditor
and ordered his death if he had more than one creditor, his body
being divided between them. Later on, with the Roman “cessio
bonorum”, the debtor, by surrendering his goods to his creditors
was exempted from imprisonment and corporal punishment.
Reflecting upon the attitude of society towards debtors, creditors,
work and debt, and the changes which have intervened in the
course of history, Mr. John D. Honsberger, Q.C., stressed, a few
years ago, that this rigour of the early Roman bankruptcy legis-
lation was influenced by the high value placed by society on
property and the extreme low value put on the person. Fortunately,
a softer attitude made its way, although it took centuries to come
to such a realization.
* Judge of the Superior Court of the Province of Quebec.
‘Cyclopedia of Law and Procedure, vol. 5, pp. 237-38, (N.Y., 1902).
No. 41
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
719
Mr. Honsberger wrote that:
The Lex Julia, enacted in the time of Julius Caesar, provided that the
person of the debtor would no longer be at the disposal of his creditors.
They were merely authorized to seize the debtor’s goods and sell them
by auction to satisfy their claims. Sometime later, an insolvent debtor
who had not committed any fraud and who had surrendered all of his
property to his creditors, was entitled to an exemption of all personal
penalties. This was known as the “cessio bonorum” which is the real
basis for most of the law of bankruptcy in civil law. It was also the
beginning of a new and more humane attitude towards the honest and
unfortunate debtor.2
While, today, the discharge is a matter of right for a debtor,
which entails his reinstatement in the community, we are not so
far away from those times when, even by the common law of
England, each creditor was allowed to take separate proceeding
to recover his debt and the eventual compulsory discharge was
ignored. The first English Bankruptcy Act was enacted in 1542.
It still bears influence upon our attitudes. It was assumed then
that bankruptcy was a quasi-criminal act. A debtor was an offender.
Only those who were tradesmen could avail themselves of the
privilege of the Act. It was a “Creditors’ Act”. In 1705, under
Queen Anne, the first “debtor’s Act” came into being. A debtor,
who was a merchant, was given a discharge of all his debts at
the time of his bankruptcy, provided he first surrendered all of
his property and conformed to all of the other provisions of the
statute. In Canada 3 during colonial
times, we maintained the
distinction, which arose in England, between the word “bankrupt”
and the word “insolvent”. One must take note of the fact that
the word “bankrupt” was originally applied in England to fraudulent
persons, meaning “those persons as do make bankrupt” or more
specifically, those “who craftily obtaining into their hands great
substance of other men’s goods, do suddenly flee to parts unknown,
or keep their houses, not minding to pay or restore to any of
their creditors, their debts and duties”.4
Without going much further into the history of bankruptcy and
insolvency and the legislation relating thereto one is bound to realize
that the debtors, whether traders or not, were looked at by society,
as duly expressed in the law a few centuries back, as “… con-
suming at their own wills and pleasure the substance obtained
2The Aims and Objectives of Bankruptcy Legislation, an address delivered
3 Duncan and Honsberger, Bankruptcy in Canada, 3rd edition, pp. 2 et seq.,
to a Toronto social club.
(Toronto, 1961).
4 Ibid., p. 1.
McGILL LAW JOURNAL
[Vol. 17
by credit from other men for their own pleasure and delicate
living, against all reasons, equity and good conscience.” r Referring
to the last-described genus of debtors and looking at the situation,
at the beginning of the twentieth century, Mr. D. E. Thompson, K.C.,
talking before the Canadian Manufacturers’ Association on “Bank-
ruptcy Legislation in Canada” 6 said:
Irate creditors are sometimes
inclined to think that notwithstanding
the improvements of civilization, the genus here described is not yet
quite extinct.7
Bankrupts were in effect treated as criminals and one had to
wait until 1705, during the reign of Queen Anne, to feel that some
relief was given to the debtor,8 when the stigma was somewhat lifted.
It became possible for a bankrupt to be released from his debts,
upon surrendering his property and conforming to the directions
of the law.
In the province of Quebec, under the Ordinance of 1673, while
the law then in existence allowed a debtor, as an insolvent, to have
his property divided among his creditors by surrendering it to
them, the right to a discharge from further liabilities was not
recognized. The Ordinance of 1839 was, indeed, a big improvement
upon the Ordinance of 1673. As indicated by De la Durantaye,9 in
referring to the Ordinance of 1839:
The substance of the English laws of 1571, 1706 and 1825, was combined
in that Ordinance applicable to Lower Canada.
The voluntary assignment, instituted by the Law of 1825 in England,
was incorporated in the Ordinance of 1839. Mr. D. E. Thompson,
expressing himself on this 1839 “Ordinance concerning bankrupts
and the administration and distribution of their estates and effects”,
modelled on the English Bankruptcy laws then in force, considered
that:
Quebec (then Lower Canada) takes first place on this subject among
the Provinces, [referring to the discharge granted to the debtor] not
only by reason of the greater liberality of its common law, but because
it was the first to cover the whole ground by statutory provision.10
He went on to say:
The Law thus promulgated ensured not only rateable distribution, but
the debtor’s right, in the absence of fraud, to a discharge after full
5 (1542), 34 and 35 Henry VIII, c. 4. See, Thompson, Bankruptcy Legislation
in Canada, infra n. 6 at p. 173.
6 (1901-02) 1 Canadian Law Review, p. 173.
7Ibid.
8 (1705), 4-5 Anne c. 4. There were provisions concerning the discharge of the
debtor from prison and also from liability for past debts.
9 Traitd de la Faillite, p. 23, (Montreal, 1934).
10 Supra, n. 6 at p. 174.
No. 41
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
721
surrender of his estate, as well as immunity from arrest for debt, and
release therefrom if under arrest.”
It is interesting to note further on in that address that the
year following Confederation (1868),
the House of Commons ap-
pointed a Select Committee to inquire into and report upon the
insolvency laws in force in the several provinces.
As to the Province of Quebec the report acknowledges the principle
of the common law, but reflects on the efficiency of administration in
the following language: –
“The right of the creditors of an insolvent
to a just distribution of his assets among them all, has always been
recognized by the law of Lower Canada, although the means under
the common law of enforcing that right were cumbrous and expensive.
The effects of the debtor could only be realized under execution, and
by this process only the minimum price of the goods sold was obtained.”’12
Subsequent to Confederation the first Act of the Parliament of
Canada on Bankruptcy and Insolvency was enacted in 1869. It
was in fact an Act respecting insolvency applicable only to traders.13
It provided for the discharge of a debtor, and for his release
from imprisonment, as long as he could make proof of an
assignment of all his property and the absence of fraud. A new
Act,’14 also called “The Insolvent Act”, was passed in 1875 applicable
to all the provinces. The principle of the discharge was still kept.
This Act was repealed in 1880. It took nearly 40 years before a
bankruptcy law applicable to the whole of Canada became a reality,
by the passing of the Bankruptcy Act of 1919. 5 The original Act
of 1919 which came into force on July 1st, 1920, was consolidated
with its subsequent amendments and revised.’ The revised statute
of 1927 and its amendments were in turn eventually repealed. The
present Bankruptcy Act which appears in the revised statutes of
1952. c.14 was enacted in 1949 and came into force on July
ist, 1950.11
Before terminating the historical discussion it might be well
to review, in the words of Mr. D. E. Thompson, the situation
which faced Canada in the course of those 40 years when no
uniform and legislation universally applicable governed the ad-
11 Ibid.
12Ibid., at p. 175.
13 32-33 Vic. c. 16. It was known as the Insolvent Act.
14 38 Vic. c. 16.
15 9-10 Geo. V c. 36.
16 R.S.C. 1927 c. 11.
17 13 Geo. VI c. 7. The Bankruptcy Act has since been revised once more and
now appears in R.S.C. 1970, c. B-3. The references made herein to the Bank-
ruptcy Act are to the pre-1970 revision.
McGILL LAW JOURNAL
[Vol. 17
ministration of insolvency and bankruptcy from coast to coast.
In his opinion, since 1880, the Government of Canada though
invested with the power had abdicated its authority,
… leaving the rights of the parties concerned to be wrought out under
the diverse and necessarily defective laws of each province. The result
is confusion; injurious to our credit abroad, oppressive to unfortunates
at home, and out of harmony with our awakening national life.’8
Questioning himself on the sort of law which was needed
nationwide, an accomplishment which took place in 1919 and
in 1949 as stated above, he did say this:
But what sort of a law should we have? Should it provide for discharge
of debtors, as well as for administration of assets? Has the rigor of
our law in this respect since 1880 been in the aggregate a national gain,
or a national loss? Some among us still believe that no debtor should
be discharged from any debt without his creditors’ consent. Their
arguments are singularly like those by which imprisonment for debt
used to be defended.
The preamble to one of our own statutes on that subject passed
fifty years ago, is in the following language: “Whereas imprisonment
for debt, where fraud is not imputable to the debtor, is not only
demoralizing in its tendency, but is as detrimental to the true interests
of creditors, as it is inconsistent with that forbearance, and humane
regard for the misfortunes of others, which should always characterize
the legislation of every Christian country; and whereas it is desirable,
to soften the rigor of the laws affecting the relations between debtor
and creditor, as far as due regard for the interests of commerce will
permit,” etc.19
Suppose the opening words of that preamble were altered so as to
make it apply to the refusal of discharge to a debtor whom the law
summarily strips of all his property, is the sentiment more lenient
than the humane feelings of this generation should endorse?
II. The Situation Today
With this retrospective view in mind and remembering the legis-
lation eventually passed by the Canadian Government I shall now
deal with our present day situation, remembering that, in the
course of past centuries up to the present, bankruptcy legislation
has gone through a transformation from being a law of the creditor
to presently being a law concerned with the public interest. This
transformation was not direct and involved first of all, a shift
in emphasis from the creditor to the debtor.
18 Supra, n. 6 at p. 177.
19 Ibid.
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
723
The principles of an equal distribution of the property of a
bankrupt among his creditors without preference cannot be dis-
associated from the other objective or goal of bankruptcy legis-
lation which is that of obtaining for a debtor a discharge of his
debts. In fact, the aujudication of bankruptcy operates as an
automatic application for a discharge of the debtor.
Some changes under the 1949 Bankruptcy Act
Bill “N” an Act respecting Bankruptcy was filed in the Senate,
for first reading on February 14, 1949. It was accompanied by
some explanatory notes. Since in the course of these remarks
I intend to make reference to those explanatory notes, to the
debates and evidence submitted before the two Houses and their
Committees, such references should be looked at strictly as shedding
some light on the circumstances which surrounded the passing
of the Bankruptcy Act of 1949. The Supreme Court of this Country
has affirmed the rule of law that the debates in Parliament are
not admissible in aid of interpretation of a statute. The original
rule being that:
The sense and the meaning of an act of Parliament must be collected
from what it says when passed into a law and not from the history of
the changes it underwent in the House where it took its rise.20
In confirmation of this rule, Mr. Justice Cartwright has said:
… the statement of a Minister in introducing a Bill would be inadmissible
in aid of the interpretation of the statute as finally passed into a law.2′
The principle laid down by the Supreme Court of Canada regarding
the debates and parliamentary history applies equally well to the
explanatory notes. Notes do not form part of the law. On that
account, it would be illegal to render a judgment on the basis of
explanatory notes.
Reference shall be made to them in order to try to understand
the circumstances which brought about those changes to the law
of 1919, the evolution of our legislation in relation to the discharge
of a bankrupt, the facilities granted to a debtor to obtain his
discharge on the condition that he first observe the provisions of
the law and conduct himself in such a way that the rehabilitation
which he is requesting should be given to him absolutely, under
conditions, or suspended.
2oMiller v. Taylor, (1769), 4 Burr. 2303 at p. 2332, per Wiles J.
2
1 Attorney-General of Canada v. The Readers’ Digest Association (Canada)
Limited et at [1961] S.C.R. 775 at p. 792.
McGILL LAW JOURNAL
[Vol. 17
Section 127(1) of the Bankruptcy Act stipulates that “the making
of a receiving order against, or an assignment by, any person
except a corporation operates as an application for discharge unless
the bankrupt waived such application. The explanatory note reads
as follows:
Subsection 1 is new. It establishes a new principle in regard to the
discharge of a bankrupt. The operation of the former Act indicated
that only a few bankrupts apply for a discharge, largely for two reasons,
first, that many bankrupts are not aware of their legal status and
believe that their debts are determined by the bankruptcy, and, secondly,
because of the financial inability of many others to meet the expense
of an application. From the beginning of the bankruptcy legislation
there has been a gradual evolution in the attitude of the public towards
bankrupts until at the present time creditors are held more or less
equally responsible with bankrupts for their debts. If The Bankruptcy
Act is to serve its intended purpose to give bankrupts an opportunity
to rehabilitate themselves as useful citizens, more responsibility must
be accepted to create that opportunity for the bankrupt by providing
an automatic procedure for his discharge. This procedure has been
incorporated in the Bankruptcy Act of the United States –
Sect. 14
of the Amendment to the Bankruptcy Act of the United States as approved
on June 22, 1938.
The view is thus expressed that one of the purposes of the
Bankruptcy Act, apart from all the other subjects contained in
the legislation, consists in the opportunity for a bankrupt to re-
habilitate himself. It results therefrom that we must bear the
responsibility to supply the bankrupt with the means to obtain
his discharge by a proper procedure which, under this section,
becomes an automatic one. Such a mechanism in support of this
object of the Act lies in the progressive attitude of the public
vis-a-vis the bankrupt in that creditors are also regarded as sharing
the responsibility for the debts of a bankrupt. Moreover, the ap-
plication of our bankruptcy legislation, prior to the introduction
of the new legislation of 1949, had taught us that there existed
a misconception as to the role of certain bankrupts in relation to
the discharge application. A very large number of bankrupts were
under the impression that the advent of the bankruptcy put an
end to their debts. Others did not apply for their discharge because
they were without means to finance the procedure.
Along with Section 127(6), it was indicated in the Bill that
when a trustee is not available to perform his duties on an ap-
plication for the bankrupt’s discharge, it is within the power of
the Court to authorize any other person to perform such duties,
with the appropriate directions, if necessary, to enable the ap-
plication of the bankrupt to be brought before the Court. It was
said in the explanatory notes referred to above, that:
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
725
:.. availability of a trustee should not affect the legal right of a bankrupt
to have his application brought before
the Court and heard. The
Courts have attempted to deal with this problem merely on the basis
of removing an injustice which might be inflicted on a bankrupt, but
there has always been some doubts as to whether or not the Courts
have such authority.
This Section of the Act was an additional step to warrant that the
automatic procedure for the discharge of a bankrupt be carried out.
A new article, Section 128A, was inserted within the provisions
governing the discharge of a bankrupt. The trustee is bound to
file with the Superintendent in Bankruptcy, within two months
after his appointment or for such longer period as allowed by
the Superintendent, in respect of each estate, a report which is
qualified as follows by the explanatory note:
The report setting out the name of the bankrupt and the names of the
persons controlling the day-to-day operations of the bankrupt, the trustee’s
opinion whether the deficiency between the assets and liabilities of
the bankrupt has or has not been satisfactorily accounted for, and
the probable causes of the bankruptcy.
The note further states:
A separate report prepared by the trustee will also be required to be
filed with the official receiver to permit the dissemination of information
relating to previous bankruptcies so that prospective creditors may
better judge the credit rating of their customers.
In the opinion of Messrs. Houlden & Morawetz:
There has been considerable discontent in the business community with
the situation where a person, who has the effective control of a bankrupt
corporation but does not appear as an officer or director, immediately
starts up another corporation which may in due course become bankrupt.
There has been no way, prior to this amendment, of the trustee making
a public record of who actually controlled the day-to-day operations
of the bankrupt, and whether the deficiency between assets and liabilities
are or has not been satisfactorily accounted for. The report required
by Section 128A will now furnish this information. The information
in the report will be available to creditors and they will be in a better
position to grant credit in the future.
In addition, the report is designed to provide the Superintendent with
informatioin which will assist him in determining whether or not there
should be an investigation into the affairs of the bankrupt.22
Such being the case this new section should assist creditors
in their future conduct towards a person so concerned and give
the Superintendent the proper openings to go deeper into the
affairs of the bankrupt.
2 2 Bankruptcy Law of Canada – Cumulative Supplement, p. 103, (Toronto,
1969).
McGILL LAW JOURNAL
[Vol. 17
Under Section 128 the trustee is required to prepare a report
as to the affairs of the bankrupt, the causes of the bankruptcy, the
performance of his duties by the bankrupt, his conduct, his con-
victions of offences under the Act and all other facts, matters or
circumstances which would justify the Court to refuse an un-
conditional order of dischare. The opportunity was afforded to the
Superintendent, under subsection 3, to make such further or other
report to the Court to ensure that all of the relevant facts are
before the Court at the hearing. In order that the initial report
of the trustee be so supplemented, the trustee must forward a
copy of his report to the Superintendent not less than ten days
before the day of the hearing for the application for a discharge
(128(2)).
Under Section 129(2), the Legislator has lessened the provisions
of the former Bankruptcy Act and deleted words which in the
former Act were effecttively an absolute prohibition to a discharge
being obtained by a bankrupt. It is now within the discretion of
the Court to refuse suspend or make conditional a discharge, should
it not be granted absolutely. The factors to be considered by the
Court in coming to such a decision are now outlined under subsection
1 of Section 130. The period of suspension ordered pursuant to
s. 129(2) is a matter to be determined within the Court’s discretion.
Section 133 deals with the duties of the bankrupt in cases of
conditional discharge. The bankrupt is obliged to give the trustee
such information as required with respect to his earnings and
after-acquired property and income. To add further to the obligations
imposed upon a bankrupt under a conditional discharge he must
file with the Court and with the trustee at least once a year a
statement under oath with particulars of any property or income
he may have acquired subsequent to the order for his discharge.
This new section further allows the trustee or any creditor to
force the bankrupt to attend for examination under oath with
reference to the facts contained in his statement as to his earnings,
income, after-acquired property or dealings. Upon failure by the
bankrupt to fulfill those duties, the Court, on the application of
the trustee or any creditor, may revoke the order of discharge.
To avoid inducing a bankrupt, who is subject to a conditional
order of discharge on payment of a further dividend or sum of
money, to pay creditors directly or bargain with them and, thus,
make payments on an unequal basis, Section 133(3) rules that
all payments on account shall be made to the trustee for distribution
to the creditors.
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
727
According to the terms of this new article, if a debtor benefits
from a conditional discharge, he is called upon to act in good
faith, cooperate with the trustee and the creditors and see to it
that all the creditors are treated equally.
An order of discharge operates as a release to the bankrupt
from all claims provable in bankruptcy except the debts mentioned
in Section 135 and Section 136. Without citing at length those
cases where debts of the bankrupt are not released by his discharge,
suffice it to say that the most commonly known are those debts or
liabilities for alimony, the debts arising out of fraud and the debts or
liabilities for goods supplied as necessaries of life. A further debt
which is not released by an order of discharge is that of the partner or
co-trustee with the bankrupt at the date of the bankruptcy. Is
neither released the debt of a person who was surety or in the
nature of a surety for the debt for the bankrupt or was jointly
bound or had made a joint contract with the bankrupt.
Under the terms of Section 137(2) the Court may annul the
discharge if it was obtained by fraud. When the revocation or
annulment of an order of discharge intervenes, it does not pre-
judice the validity of a sale, disposition of property, payment made
or thing duly done before the revocation or the annulment.
Those are in essence the principles regarding the discharge of
a bankrupt as initiated by the amendments to the Bankruptcy Act
in 1949 and 1966.
If we now come to the proceedings which took place before
the Committees of the Senate and the House of Commons, from
March 1949 until December 1949 (the law was sanctioned on
December 10, 1949), certain views deserve to be recalled.
Various opinions of learned and responsible persons and organ-
izations were enunciated in relation to the mechanism for the auto-
matic discharge of the bankrupt, as covered by Section 127. Some
favoured the preservation of the system whereby it was up to the
bankrupt himself to ask for his discharge and for the trustee to ask
for a hearing for presentation of the demand. Others insisted that it
was sufficient that the trustee should let it be known to the bank-
rupt that he could avail himself of his right to a discharge by
indicating to him the way to do it. For some, if an automatic
measure was offered a bankrupt to obtain his discharge, the cost
of such application should be borne by him and not by the creditors.
That a receiving order or an assignment should be considered as
an automatic demand for a discharge appeared to others as being
contrary to public order in view of the history and the purposes
McGILL LAW JOURNAL
[Vol. 17
of the bankruptcy law. Without denying the tendency to favour the
debtor, it appeared, on the examination of certain representations
before the Committees, that, for certain people, it would be better
to impose upon a debtor the obligation to obtain his discharge
after fulfilling the conditions required by the Act and to leave
him to satisfy the burden of demonstrating to the Court that he
had followed the law, in lieu of imposing such responsibility on the
estate. The Bar of the Province of Quebec suggested that Section
129 be amended to state that a discharge should not be suspended
for more than five years.
The Superintendent of Bankruptcy, Mr. R. Forsyth, followed
up with a detailed consideration of the suggestions. In connection
with section 127 he admitted that whether or not a discharge is
necessary in all cases depends on different factors which vary
with the individual debtor. As to who should bear the cost of the
application, he was satisfied that many debtors did not apply
for their discharge because of the costs. In many instances, deserving
debtors are prevented from making an application to the Court owing
to prohibitive and entirely unwarranted bills submitted by some
trustees. The fee claimed is sometime out of all proportion to the
services which the trustee is required to render. The procedure
of Section 127 is not unduly complicated and should not impose
a grave burden on the estate. Apart from any remuneration voted
or allowed to the trustee, the only other real expense involved
is the cost of mailing the notices to the creditors and the costs
on the application. In his mind, the application for a discharge
should not be delayed too long. The bankrupt should be given
the opportunity to clear his debts at the earliest possible moment
consistent with justice and get off to a fresh start. Therefore,
unless the bankrupt has waived his right, it is advisable that the
trustee ask for a hearing of the discharge not earlier and not later
than twelve months following the bankruptcy. While undoubtedly
the administration of many estates cannot be completed within
twelve months, nevertheless enough is known about the bankrupt’s
insolvency, his transactions and his conduct, to enable the trustee
to prepare his report and to warrant that it will at least indicate
those matters about which doubts exist in the event that the in-
formation obtained up to that point has revealed questionable
aspects which require further explanations or investigations. The
Court can delve into these at the hearing. Moreover, Section 137(1)
provided that a discharge may be annulled if the bankrupt fails
to perform the duties imposed on him by the Act.
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
729
III. A Look at the Jurisprudence
The general philosophy behind the notion of discharge is that
the court, when considering the application, must look beyond the
bankrupt’s and creditors’ interests. Regard must he had, as well,
to the interests of the public.3 The importance of the role played
by the notion of discharge of the bankrupt was recognized in the
case of In re Green 24 where it was held that the success or failure
of a bankruptcy system varied directly with the good or poor ad-
ministration of the discharge provisions of the Bankruptcy Act.
The Bankruptcy Court is no more a clearing house for the
liquidation of debts 25 than it is a collection agent. It must strike
a balance between having the effect of being too lax with irrespon-
sible debtors, and being too harsh with those honest and sincere
debtors unfortunate in their personal and/or business dealings. 26
To aid the Court in its hearing of the bankrupt’s application
for discharge Rule 101 of the Bankruptcy Rules affords the Court
the power to bring the bankrupt before the Court for examination.
If in trying to satisfy the interests above described the Court
feels it is inadvisable to grant the discharge, it is clearly within
its power to suspend it or grant it conditionally. It
is rare that
the discharge would be refused absolutely.
The purpose and object of the bankruptcy Act is to equitably distribute
the assets of the debtor and to permit of his rehabilitation as a citizen,
unfettered by past debts. The discharge, however, is not a matter of
right and the provisions of ss. 142 [now Section 129] and 143 [now
Section 130] of the Act plainly indicate that in certain cases the debtor
should suffer a period of probation. The penalty involved in the absolute
refusal of discharge ought to be imposed only in cases where the conduct
of the debtor has been particularly reprehensible or in what have been
described as extreme cases.2 7 (Emphasis added).
The above exerpt from a judgment of the Supreme Court of
Canada was delivered by Mr. Justice Estey. On the basis of the
alternatives open to the Court, to either grant, refuse, suspend,
or make conditional a discharge (Section 129(1) of the Bankruptcy
Act), it would appear that the highest Court of the land, by stating
23 1n re Sceptre Hardware Company 3 C.B.R. 734.
245 C.B.R. 580.
25 In re Palach 35 C.B.R. 58.
26 See, In re Beerman and Sands 5 C.B.R. 781 and In re Newsome 8 C.B.R.
279.27 Industrial Acceptance Corp. Ltd. and T. Eaton Co. Ltd. of Montreal v.
Lamarre [1952] 2 S.C.R. 109 at p. 120, 32 C.B.R. 191.
McGILL LAW JOURNAL
[Vol. 17
that “the discharge is not a matter of right”, has stressed the point
that notwithstanding the fact that the debtor has the right to apply
for his discharge, the discharge applied for is not obtained auto-
matically and should not be viewed as if facing no obstacles to its
being granted. It was the Court’s opinion, as seen above, that the
debtor should be obliged to suffer a period of probation depending
on the circumstances. The discharge is therefore, depending on the
circumstances, usually suspended or conditional. In this context,
the harsh consequences resulting from the absolute refusal of a
discharge or the refusal of a “discharge in perpetuum” 28 are related
to the reprehensible conduct of the debtor deriving from any of the
thirteen facts outlined in Section 130 of the Act. In brief, by the
fact that a bankruptcy takes place, it is open for a debtor to exercise
his right to eventually obtain his discharge. However, the realization
of this eventuality is subject to a variety of circumstances.
One very important procedural element in the making of an
application for the discharge of the debtor is the preparation, by
the trustee, of a report as to the bankrupt’s affairs. This report,
according to s. 128(5) of the Bankruptcy Act, is prima facie evidence
of the statements it contains, for the purposes of the application
for discharge.29
A greater insight into the effects of such a report can be gained
from an examination of the decision in the case of In re Kemper30
There, the debtor’s application for discharge was opposed on the
grounds that the debtor had been fraudulent. The trustee’s report
suggested there were sufficient grounds on which the Court could
refuse a discharge,”‘ but also suggested that the conduct of the
debtor was not open to censure. On this point the Court, per Smily
J., held:
The Court is not bound by the trustee’s report, but if no facts under
s. 130 are reported by the trustee in his report the onus is on the
creditors’ to establish that such facts exist2… 2
The preceding exerpt was the enunciation of a general rule, for
in that particular case the trustee’s report did make reference
certain facts contained in s. 130(1) of the Bankruptcy Act.
28 Supra, n. 3 at p. 758.
29 Although such report is prima facie evidence, it remains for the Court
to come to its own conclusions on the bankrupt’s state of affairs: In re Hoerner
5 C.B.R. 613.
802 C.B.R. (n.s.) 130.
31 i.e. The assets of the debtor were not equal to 500 on the dollar for
the unsecured liabilities.
32 Supra, n. 30 at p. 132.
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THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
731
That the Court views the report of the trustee as being more
than just routine was seen in the case of Re Chylinski . 3 The effect
of that decision was that rather than fill in the blanks of pre-printed
form, the trustee should really sit down and conscientiously prepare
a report on the bankrupt’s affairs, as said report,
… forms the basis of the order which is made by the Court in connection
with the discharge of the debtor.34
The question arises as to what can and should be done by the
debtor in the eventuality that the trustee’s report contains un-
favourable facts. In the case of In re Roy 3′ it was held to be up
to the debtor to rebut the presumption of negligence created by
the fact of his assets not totalling more than 500 on the dollar
for his unsecured liabilities. Bernier J., speaking for the Court,
held that generally:
I1 incombera donc au failli de rejeter ce qui, dans ce rapport peut
lui 6tre ddfavorable. II devra aussi rencontrer toute preuve faite par
les opposants 6tablissant un des faits 6num6r6s h l’article 130 …. 35a
Another procedural requirement, to be met by one or more
of the bankrupt’s creditors, is that they (or he) must give notice
to the trustee and the bankrupt of any opposition to the latter’s
discharge on grounds other than those mentioned in the trustee’s
report. Such notice must state the grounds of the discharge and
must be served at or before the time which has been fixed to hear
the application for discharge3 6
To illustrate the relative character of the right to a discharge
afforded a debtor in bankruptcy, it would be most helpful to
consider the jurisprudence on the matter.
A general rule with regard to a bankrupt’s application for
discharge is that it,
… must be determined upon its own facts and by the due exercise of
judicial discretion in relation thereto.faa
This principle evolved from the case of Rice v. Copeland 36b where
there was an objection, by one creditor to the discharge on the
grounds of the debt owing him having been incurred by fraud.
Another creditor opposed the discharge as he had a large claim
3 12 C.B.R. (n.s.) 258.
34 Ibid.
35 5 C.B.R. (n.s.) 64.
35a Ibid., at p. 66.
36 See s. 128(7) of the Bankruptcy Act.
36a 7 C.B.R. (n.s.) 288 at p. 292.
36b 7 C.B.R. (n.s.) 288.
McGILL LAW JOURNAL
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arising out of a car accident with the debtor. The Court held that
in considering an application for discharge it would not examine
the question of whether the bankrupt was guilty of fraud. Such
an inquiry would have to be made at a separate hearing. In the
words of Dickson J., speaking for the Court:
The Bankruptcy Act must not be considered to be a clearinghouse solely
for the liquidation of debts: … Nor must it be considered a summary and
expeditious means of avoiding payment of damages arising out of auto-
mobile collisions.30e
It can be seen, therefore, that the judicial discretion to be exercised
in relation to the facts surrounding the bankruptcy, is quite wide.
Notwithstanding the absence of facts under s. 130 of the Bank-
ruptcy Act it is still within the Court’s discretion, upon considering
the debtor’s behavior both before and after his bankruptcy, to make
conditional or suspend an order of discharge.3
7 As mentioned earlier
it is always within the Court’s discretion to refuse the discharge,
but according to the case of In re Lalonde 3s such a refusal would
only come in extreme cases due to its penal effect.
In the above-mentioned case of Industrial Acceptance Corpo-
ration et al. v. Lamarre, the discharge of the debtor was considered
justifiable subject to the imposition of terms, namely the consent
given by the debtor to a judgment against him by the trustee
for part of the balance of the debts proved in the sum of $5,000.00,
after immediate payment of a claim for necessaries of life in the
sum of $92.60 to the T. Eaton Co. Ltd. Having failed to pay to
the trustee the seizable or non-exempt portion of his salary at the
request of the trustee, who was within his rights to claim it, the
debtor had committed an offence and could not therefore obtain
his absolute discharge, while he was in a position to make such
payment. The trial judge was validly exercising his judicial dis-
cretion to refuse to suspend or direct the discharge subject to a
condition. The obligation of a debtor to pay a portion of his salary
derives from Section 39 of the Act related to the property of the
bankrupt divisible amongst his creditors.
In another case the Court of Queen’s Bench of the Province
of Quebec 39 suspended the discharge of a debtor until the fulfill-
ment of the payment by him of 50% of the unsecured claims. The
Ibid., at p. 292.
37 In re Pehlke 20 C.B.R. 415.
3832 C.B.R. 191. See also the exerpt from Mr. Justice Estey’s judgment in
the Industtrial Acceptance case, supra.
39 1n the case of Banque de Montrdal v. Arnold [1969] B.R. 524.
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THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
733
judgment was so rendered on the basis of the Industrial Acceptance
case, i.e. the debtor should have previously deposited with the trustee
the seizable portion of his salary during the bankruptcy.
In Dame Grenier v. Bolduc,40 the Court of Appeal of the Province
of Quebec again underlined the relative right for a discharge claimed
by a debtor, by refusing to grant an absolute discharge on the fol-
lowing facts which appeared evident:
a) the assets were not equal to 50% on unsecured liabilities,
and the debtor appeared responsible for this state of affairs (s.
130(1)(a));
b) the bankrupt had continued trade while knowing to be
insolvent (s. 130(1)(c));
c) the bankrupt had been bankrupt on a previous occasion
(s. 130(1)(j)).
The Quebec Court of Appeal again confirmed the precarious
character of the debtor’s right to a discharge in Portugais et al. v.
Perras et al4′ The discharge of a debtor was made conditional on the
payment of a certain sum of money to the two contesting creditors.
The debtor, before he made his assignment, had been condemned
to pay to the contesting creditors, Portugais and his lawyer, the
sum of $715.75 and the costs, following damages resulting from
an accident which occurred while he was driving a truck. The only
creditors listed when he made his assignment were the plaintiff
on the judgment and his lawyer for the costs. It appears that the
trustee had failed to take proper measures in order to ensure that
the bankrupt pay the seizable portion of his salary. The absolute
discharge of the debtor was refused and the discharge was made
conditional on the payment of the sum of $1,478.32. Referring
to the decision of the Supreme Court of Canada in Industrial
Acceptance case, supra, the Court of Appeal of this Province strongly
stressed the point that an assignment by a debtor constituted, in
this instance, a mockery of justice, and it recalled in the exact
terms of the Supreme Court of Canada that:
If debtors can go into bankruptcy as a convenient means of evading
payment of just obligations and obtain discharges without difficulty,
bankruptcy becomes an abuse.42
One situation in which the court does not view bankruptcy as
a means of evading the payment of debts and will grant a con-
40 [1958] B.R. 89.
41 [1959] B.R. 54.
42 Ibd., at p. 58 per Rinfret, J.
McGILL LAW JOURNAL
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ditional discharge is when the debtor is genuinely overpowered
by his liabilities. For example, in the case of Re White,43 where
amongst the debtor’s liabilities was a judgment for damages
resulting from a car accident, the court held that:
… if a debtor is so burdened by his debts that he cannot properly support
his family or otherwise perform the ordinary duties of citizenship he is
entitled to go into bankruptcy because of such debts whatever the debts
are whether arising from a judgment with respect to a motor vehicle
accident or however they may arise.44
The discharge was granted conditionally on the very easy terms
of $500 being paid off at the rate of $5 per week or such larger
amounts as the debtor would be able to pay.
This is illustrative of the bankruptcy Court’s concern with the
elements of public policy in addition to the interests of the credi-
tors and the debtor.4
An indication of to what extent the debtor was obliged to
support his family can be found in the case of In re Lambert.4
In that case a conditional discharge was granted and it was held
that the conditions of the discharge,
… should not be oppressive or interfere with the debtor maintaining his
family and himself in accordance with their requirements and necessities
having regard to their station in life,…46a
The court went on to make allowances for the fact that the
debtor had an executive position in the field of sales and had
to keep up certain appearances and maintain certain expenses with
respect to his office.
Two recent decisions of 1971 have reinforced the views expressed
above as to the factors influencing the court’s discretion.
In the case of In re Hart 47 when it come to the granting of
a discharge the court held:
In order for the Court to make an order for payments out of the earnings
of the debtor, the Court must be satisfied that the debtor’s income is more
than sufficient to maintain the debtor and his family in a decent standard
of living:.. .48 (Emphasis added).
437 C.B.R. (n.s.) 111.
44 Ibid.
4SIn the earlier case of In re Green 5 C.B.R. 580, the court had recognized
the undesirability of so weighing down a person with his debts as to render
him incapable of performing the ordinary duties of citizenship.
463 CJ3.R. (n.s.) 216.
46a Ibid., at p. 217.
47 14 C.B.R. (n.s.) 92.
48 Ibid., at p. 93.
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
735
In the case of In re Pilawsky 49 an absolute order of discharge
was granted seeing that to make the discharge conditional on the
payment of certain sums would be to saddle the debtor,
… with such an amount that he cannot reasonably support his family
in accordance with the station in life that they occupy…50
Resulting from the foregoing discussion it can be seen that the
courts have tried to balance a variety of interests with the objective
of leaving the debtor and his family as self-supporting members of
society at the same time as granting the creditors some partial
satisfaction of the debts incurred by the bankrupt.
Another situation in which the discharge granted will be con-
ditional is where a debtor receives a salary in excess of what is
required to properly maintain his family,51 part of which could
have been seized by the trustee but was not. In several such cases 52
a discharge was granted upon the debtor’s consenting to a judg-
ment.
The conditions which can be imposed on the bankrupt’s dis-
charge are entirely within the court’s discretion and an example
of the lattitude of that discretion can be seen in the case of In
re Hutson.53 It was made a condition of the discharge, in that case,
that a legacy which the debtor had received in England be assigned
to the trustee so that he could collect it and distribute it to the
creditors.
Certain conditions can never be a part of the discharge. It has
been held that to make it a condition of the discharge that the
creditor alleging fraud be paid would be to give such creditor
a preference.5 4 The creditor who claims that the debtor was fraudu-
lent has his claim against the debtor under s. 135(1)(e) of the
Bankruptcy Act.
One of the key factors to be considered in the bankrupt’s appli-
cation for discharge is his financial status. In the case of In re
Sorrenti et alra5 no time limit was placed on the conditional dis-
charge which was not to become a final discharge until the bank-
4914 C.B.R. (n.s.) 32.
50 Ibid., at p. 34.
51 Mason v. The Canadian Bank of Commerce 13 C.B.R. 243.
52See s. 129(2)(c) of the Bankruptcy Act; In re Cox 24 C.B.R. 33; In re
Tait 20 C.B.R. 392; In re Baillargeon 15 C.B.R. 77 and In re Gauthier 17
C.B.R. 99.
53 31 C.B.R. 219.
54 In re Kemper 2 C.B.R. (n.s.) 130.
55 2 C.B.R. (n.s.) 226.
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rupts, professional men each earning $10,000 per year, paid $5,000
each to the trustee.
In the case of In re Thiessen 56 the court suspended the dis-
charge for three years because there was a failure to pay 50 on
the dollar without a valid excuse and the debtor still traded after
he knew he was insolvent. Another factor influencing the court’s
decision was that the debtor did not account satisfactorily for his
loss of assets.
The case of In re Langlois 57 is a perfect example of the role
played by the facts in each case. In that case the bankrupt’s assets
were not sufficient to equal 500 on the dollar, but the court was
quite willing to grant a discharge subject only to a short suspen-
sion period. The reason for that was the bankrupt had committed
no offence and had only gone into bankruptcy because he had
personally guaranteed two companies that went bankrupt. The
court’s lenient attitude towards the debtor notwithstanding his fi-
nancial position was due to the particular circumstances of the
situation.
Naturally the more money the debtor has or has the potential
of obtaining, the harsher will be the terms of his discharge. For
example in Re Bowerman ” a physician who had a large income
was granted a discharge provided he paid to the trustee, for the
creditors’ benefit, a sum of $500 per month for a period of four
years. In the court’s opinion such a sum, based on his financial
status, would not prove crippling to him.
From the jurisprudence have evolued guidelines which can be
considered by the court when entertaining a debtor’s application
for discharge. For instance in attempting to determine the length
of the period of suspension of a discharge the following factors
play a role: a) the fact that the bankruptcy was caused by inex-
perience,59 b) the fact that the debtor had been taken advantage
of by one of his partners,60 and c) the fact that the debtor had
been in bankruptcy for a long period of time.”
In considering
whether or not to suspend the discharge altogether the court will
consider the fact that credit was extended too freely to a trader
by his creditors.62
56 4 C.B.R. 354.
57 11 C.B.R. 493.
58 9 C.B.R. (n.s.) 261.
59 In re Berman 5 C.B.R. 366.
60 Ibid.
6′ In re Stafford 37 C.B.R. 206.
62In re Beerman and Sands, supra n. 26.
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THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
737
Assuming that the debtor fulfills the conditions of his discharge
and makes all the required payments to the trustee, the problem
arises to the distribution of such sums.
In the case of In re Bona 63 Smily, J., speaking for the Supreme
Court of Ontario, held that the distribution would have to be
made in accordance with s. 95 of the Bankruptcy Act. The trustee
would have a priority for his fees notwithstanding the fact that
a third party guaranteed payment of the trustee’s fees and dis-
bursements.
Rule 4 of the Bankruptcy Rules, when applied to the Quebec
situation, permits the use of a a.483 of the Code of Civil Proce-
dure to annul an order of discharge which has been irregularly
obtained
3a
An examination of the jurisprudence is, as seen above, quite
helpful in trying to understand the factors involved in the granting
of a discharge be it absolute conditional or suspended. It is im-
portant though, to not go too far and try to establish hard a fast
rules applicable to all cases for it has been said that the consider-
ing of already decided cases in coming to a decision on an appli-
cation for discharge is a dangerous practice. 64
Facts and circumstances surrounding the hearing of an appli-
cation for a bankrupt’s discharge imply the consideration of guide-
lines which revolve upon the duties imposed upon a bankrupt by
Section 117 of the Act, to wit, the discovery and delivery of his
property, delivery of his books and records, his attendance for
examination before the official receiver, the submission by him
to the trustee of a statement of his affairs, his assistance in the
making of an inventory of his assets, his presence at the first
meeting of creditors and other meetings of his creditors or in-
spectors, when required. His duties, under Section 117, are nu-
merous and should not be ignored when an analysis is made of
his conduct, cooperation and good will. The complete chapter
covering the discharge of bankrupts, under Sections 127 to 139,
governs the application, the procedure, the powers of the Court,
the objections of the creditors, the consideration of the facts, the
effects of the orders, etc. Those particular provisions of the Act
are applicable to the demand for the discharge.
633 C.B.R. (n.s.) 270.
63a This principle comes from the case of Longchamps v. Caron 1 C.B.R. (n.s.)
251, which was decided in relation to a.1177 of the old Code of Civil Procedure
which is aA83 of the present Code.
64 In re Palach 35 C.B.R. 58.
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IV. Conclusion
There are, indeed, facts and circumstances which debtors,
creditors and the public in general cannot set aside, and which
have to be appreciated by the Court. Some of them were duly
considered by our esteemed colleague of the Supreme Court of
Ontario, the late Honourable Mr. Justice F. T. Mc Dermott, at a
Conference of Judges on Bankruptcy Problems, held in Montreal,
on January 18, 1968. The following points are taken into account,
explored and clarified. Needless to say that they are not limitative.
– The age of the bankrupt, his wife and dependents and the
number of dependents;
– The effect of a lengthy suspension upon his qualification for
a position;
– The state of his health both before and after bankruptcy;
– The salary or revenue of the bankrupt at the time of bankruptcy
and his earnings at the time of the hearing of the discharge
application with a look to the future;
– The occupation of the bankrupt or the business carried on by
him;
The rent paid by the bankrupt;
– The period of time the bankrupt carried on business;
–
– Whether the insolvency has resulted from obligations of a per-
sonal nature of the debtor or from guarantying commitments
of others e.g. as a major or minor shareholder, director or
officer of a corporation, an endorser, etc.;
– The incidence of a prior bankruptcy;
– The value of the proposed assets and the recovery actually
made therefrom;
– The amount of liabilities shown by the debtor and that of
the proven claims;
– Preferred claims proven and their implication. If the bankrupt
has not set aside nor, by way of consequence, remitted to vari-
ous levels of government the amounts deductible from wages
for income tax or sales taxes, workmen’s compensation or other
like deductions, this could reflect upon his conduct while in
business;
Facts referring to sections 117 and 130;
–
– The opinion of the trustee and the inspectors;
– The resolution of the inspectors accompanying the trustee’s
report;
No. 4]
THE DEBTOR’S DISCHARGE FROM BANKRUPTCY
739
– The prospect of dividends for the preferred and ordinary credi-
tors;
– A verification that creditors who filed their proof of claim have
been notified of the application for discharge;
– The fact of the bankrupt’s assets not equalling 500 on the dollar
–
of the amount of his unsecured liabilities;
The payment of the trustee’s fees;
The date of the bankruptcy;
The amounts periodically paid to the trustee;
–
–
– An appreciation of the debts which will not be extinguished by
the discharge order (Section 135).
Taking all those facts and circumstances, and others revealed
by each individual case, consideration being at the same time given
to the provisions of the Bankruptcy Act, sections 117 and 130 in
particular, the case rests. The judge, in the exercise of his discre-
tion, must, of necessity, render his decision upon the facts of that
case. To paraphrase the Supreme Court of Canada in the Industrial
Acceptance Corporation case, his decision should stand as long as
he has not omitted the consideration of or misconstrued some
fact, or violated some principle of law. Such a decision cannot
be the result of a simplification of a set of rules.
