Written by Connor Jonsson
How should ongoing bankruptcy proceedings be handled once debts have been resolved through a subsequent CCAA process? In a recent decision from British Columbia, EncoreFX Inc. (Re), 2023 BCSC 39, the province’s Supreme Court addressed this surprisingly murky question.
EncoreFX Inc. provided foreign exchange and risk management services. The company made an assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act (BIA) on March 30, 2020 after facing significant liquidity issues as a result of extreme market volatility driven by the pandemic. The administration of the BIA proceedings “proved to be extremely complicated” and the Trustee concluded that entering proceedings under the Companies’ Creditors Arrangement Act (CCAA) would be more beneficial. EncoreFX was subsequently granted creditor protection under the CCAA on March 30, 2021. A plan of arrangement under the CCAA was approved shortly thereafter and the monitor collected funds and distributed them according to the plan. The CCAA proceedings ended on November 2, 2022.
The question before the Court was how to address EncoreFX’s still extant bankruptcy proceedings. Even though EncoreFX’s assets and debts had been addressed within the CCAA proceeding, the company was still a “bankrupt” pursuant to the original assignment filed under the BIA. The BIA and CCAA lack explicit provisions regarding the course of action to be taken with respect to BIA Proceedings in the event of CCAA relief being granted so the Court undertook to assess the statutory framework and relevant case law. In the end, BC’s Supreme Court determined that an annulment of the bankruptcy proceeding was appropriate because the filing of the assignment into bankruptcy “ought not to have been made” due to exigent circumstances and lack of critical information.
The Bankruptcy and Insolvency Act (BIA) contains two relevant provisions for annulment: Section 181(1) and Section 183(1) and (2), which only allow an annulment if the court first determines that, in EncoreFX’s case, the 0assignment ought not to have been filed. An annulment of a bankruptcy is a discretionary remedy that is used sparingly and only in special circumstances. Canvassing the case law, the trial judge noted that the circumstances in which annulments have been considered by the courts as justifying annulment include:
- Improper use of the BIA or improper motive;
- Failure to refer the court to all material facts;
- Abuse of process; and
- Lack of notice
Although it is a remedy that is rarely granted, the court’s jurisdiction to annul a bankruptcy is not limited to these circumstances but could extend to any number of factual scenarios as long as the circumstances that existed at the time of the bankruptcy assignment were such that the assignment ought not to have been made. The difficulty before the court is in determining what one ought to have known at the relevant time. Or to put it another way, it must be determined not only what was known but what was knowable and available to be known when the bankruptcy assignment was filed.
Ultimately BC’s Supreme Court concluded that EncoreFx ought not to have entered into such proceedings for a number of reasons including:
- Secured creditors’ security interest in EncoreFX was deficient;
- Various property claims would be disallowed; and
- EncoreFX’s bank would permit electronic funds transfers to occur notwithstanding the stay of proceedings.
According to the Court, these facts were potentially knowable to EncoreFX but were not available to them at the time due to the significant time pressures which existed at the onset of the pandemic. The trial judge found that, “had these and other matters and the full complexity of the issues been fully understood at the time when the assignment was filed, I have no doubt that other options—including a CCAA proceeding—would have been more fully analyzed and considered.” If EncoreFX had sufficient time to examine the various issues, the Court concluded that it would have opted for the CCAA restructuring as a more advantageous option for stakeholders. In that sense, the Court found that the filing of the bankruptcy assignment “ought not to have been made” and was suitable for annulment. The Court also noted that the annulment of the assignment would not impact the interests of EncoreFX’s creditors, nor harm the integrity of the bankruptcy process. Additionally, they found that the creditors involved had no remaining interest in the bankruptcy proceedings, and there was significant support for the plan of arrangement in the CCAA proceedings.
The decision in EncoreFX offers valuable insight on the suitability of utilizing section 181 of the BIA to annul bankruptcy proceedings. Specifically, the provision is useful in situations where the aim is to effectively address and manage the intricacies and expenses associated with formal insolvency proceedings by transitioning from a bankruptcy proceeding to a CCAA proceeding. In EncoreFX’s case, an annulment was deemed appropriate because the circumstances that led to the bankruptcy filing were complex and potentially critical information was not available at the time of filing due to unique time pressures brought about by a global pandemic.
 Ibid at para 67.
 Ibid at para 67.
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.