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Feb 13, 2020

Alberta Court of Appeal Orders Trustee to Post Security for Costs

By Sam Babe

On January 29, 2020, the Alberta Court of Appeal (the “Alberta CA”) released its decision in PricewaterhouseCoopers Inc. v Perpetual Energy Inc.1 (“Perpetual Energy”), granting applications requiring a trustee in bankruptcy (the “Trustee”) to post security for costs on appeals brought by the Trustee. Before the Alberta Court of Queen’s Bench (the “ABQB”), the Trustee had sought to set aside a transaction for public policy reasons and as a transfer at undervalue under section 96 of the Bankruptcy and Insolvency Act2 (the “BIA”) and had also alleged, among other things, oppression and breach of fiduciary duty by a director of the bankrupt and by two corporations and a trust previously related to the bankrupt (collectively, the “Defendants”). When the ABQB struck all the Trustee’s claims other than its transfer at undervalue claim in a January 13, 2020 decision,3 the Trustee appealed and the Defendants brought applications before a single judge of the ABCA for security for costs.

The Defendants made their applications pursuant to rule 14.67(1) of the Alberta Rules of Court (the “Alberta Rules”),4 which make rule 4.22 of the Alberta Rules governing security for costs in ABQB proceedings also applicable in Alberta CA proceedings. Rule 4.22 reads:

“4.22   The Court may order a party to provide security for payment of a costs award if the Court considers it just and reasonable to do so, taking into account all of the following:

(a)    whether it is likely the applicant for the order will be able to enforce an order or judgment against assets in Alberta;

(b)    the ability of the respondent to the application to pay the costs award;

(c)    the merits of the action in which the application is filed;

(d)    whether an order to give security for payment of a costs award would unduly prejudice the respondent’s ability to continue the action;

(e)    any other matter the Court considers appropriate.”

The Defendants also applied under section 254 of the Alberta Business Corporation Act5 (the “ABCA”), which reads:

“254   In any action or other legal proceeding in which the plaintiff is a body corporate, if it appears to the court on the application of a defendant that the body corporate will be unable to pay the costs of a successful defendant, the court may order the body corporate to furnish security for costs on any terms it thinks fit.”

Justice Veldhuis noted that the Alberta case law was split on whether the Alberta CA could grant security for costs under either the Alberta Rules or the ABCA or only under the ABCA. She declined to rule on that dispute because she found, on the facts before her, that the Defendants could discharge their burden under either test, as it was just and reasonable to grant security for costs and the bankrupt estate would be unable to pay the Trustee’s costs.6

In determining whether the estate would be, or would likely be, unable to pay costs, Justice Veldhuis stressed that the analysis cannot look at available assets in isolation from liabilities, especially in a bankruptcy context where all assets have been or are being liquidated and proceeds thereof are subject to a hierarchy of claims in accordance with the BIA priority scheme.7 Although the Defendants only provided non-current financial statements as evidence, Justice Veldhuis found that the Trustee had not seriously attempted to challenge that evidence and, moreover, had frustrated the Defendants’ attempts to get better information during cross examinations.8 She concluded that the estate would not be able to pay costs ordered against it and thus the test under the ABCA for security for costs had been met.

In respect of the additional criteria to be considered under Rule 4.22, Justice Veldhuis could not determine whether there were assets in Alberta to satisfy a judgment because the Trustee had provided no evidence of the value of the estate’s assets or of the existence or quantum of any other claims against such assets.9 She also found that the Trustee had not proffered any evidence that security for costs would unduly prejudice the estate’s ability to continue the appeal.10 Justice Veldhuis could not, however, find that the Trustee’s appeal lacked merit.11 In light of these considerations and the consideration of the estate’s ability to pay a cost award, Justice Veldhuis concluded that the test for security for costs under Rule 4.22 had also been met.

The Trustee had argued that subsection 243(3) of the ABCA was a complete bar to the security for cost application because it states that a complainant is not required to give security for costs in any proceedings brought under Part 19 of the ABCA, which includes proceedings based in claims of oppression under section 242 of the Act.12 Justice Veldhuis accepted this argument, but held that subsection 243(3) of the ABCA would only apply in respect of that portion of the Trustee’s claims based in oppression. Justice Veldhuis found that twenty percent of the Trustee’s claims against the Defendants constituted claims of oppression, and accordingly held that the amounts of security for costs requested would be reduced by that percentage on application of subsection 243(3) of the ABCA.13

Justice Veldhuis was explicit that, in applying the tests for security for costs, her analysis of ability to pay costs was focused on the bankrupt estate’s ability, not the ability of the Trustee personally. Her reason for this was that the Trustee did not confirm that it would be personally liable for costs and that the Trustee would not voluntarily post security for costs.14 Justice Veldhuis therefore did not address the question of whether the Trustee could eventually be found personally liable.

While there is a presumption, under section 197(3) of the BIA, that a trustee in bankruptcy will not be personally liable for costs in any proceeding before a BIA court,15 that presumption has been held not to apply in non-BIA proceedings advanced by a trustee.16 On that view, the Trustee in Perpetual Energy might only benefit from the presumption under section 197(3) of the BIA to the extent of the Trustee’s BIA section 96 transfer-at-undervalue claim. This is relevant because, to the extent the Trustee, as a large accounting firm with ample resources and ability to pay costs, is personally liable for costs, the test for security for costs under the ABCA could not be met and the test under the Alberta Rules would likewise be far more difficult to meet. This point was made by Justice Osborne of the Ontario Court of Appeal in Canadian Imperial Bank of Commerce v. 437544 Ontario Inc. (“CIBC v. 437544”):

“It seems to me that the crux of the respondent’s claimed entitlement to an order for security for costs is the assumption that the trustee will not be personally liable for costs if it is not successful on the appeal. The validity of that assumption is questionable. The courts have consistently held that a trustee in bankruptcy will be personally liable for costs where a trustee brings an action and the estate has insufficient assets to pay the costs in the event the trustee is unsuccessful: Thorne Riddell Inc. v. Sinclair (1983), 49 C.B.R. (N.S.) 196 (Ont. S.C.); Touche Ross Ltd. v. Weldwood of Canada Sales Ltd. (1983), 49 C.B.R. (N.S.) 284; Sigurdson v. Fidelity Insurance Co. (1980), 35 C.B.R. (N.S.) 75 (B.C.C.A.). The reasoning behind these cases is that a trustee has the option of (a) obtaining an indemnity agreement from the creditors before instituting litigation, or (b) refusing to take the action and allowing one or more creditors to proceed by way of a s. 38 application pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. See annotation to Touche Ross, supra, C.H. Morawetz.

 . . .

The case law, however, strongly suggests that given the trustee’s actions in this litigation, the trustee will be held personally liable for any costs awarded against it that are not covered by the assets in the bankrupt’s estate. It seems to me to be necessary to examine not only the probability of the successful enforcement of an order for costs against the bankrupt’s estate, but also whether such an order would be enforceable against the trustee. In the final analysis, I see no basis for concluding that costs ordered against the trustee would not be forthcoming should the trustee be unsuccessful on appeal. There is, therefore, no “good reason” to order security for costs pursuant to r. 61.06(1)(c).”17

Justice Osborne seems to suggest that a trustee in bankruptcy will be personally liable for costs any time such costs cannot be covered by the estate.18 Other courts have followed CIBC v. 437544 on the point.19 On that basis, a court must always consider the personal resources of the trustee when applying an ability to pay test on an application for security for costs. In light of CIBC v. 437544, an Ontario court therefore could not side-step the question of a trustee’s personal resources as did Justice Veldhuis in Perpetual Energy. As a result, Perpetual Energy could have limited precedential application in Ontario.


6 Perpetual Energy, supra note 1, at paragraphs 17 to 19. It should be noted that the Canada Business Corporations Act, RSC 1985, c C-44 (the “CBCA”) and the Ontario Business Corporations Act, RSO 1990, c B. 16 (the “OBCA”) do not have any provisions concordant to section 254 of the ABCA, and so an Ontario court would, in most situations, apply only the test set out in the Rules of Civil Procedure, RRO 1990, Reg 194, at rule 56.01.

7 Ibid, at paragraph 31.

8 Ibid, at paragraph 32.

9 Ibid, at paragraph 33.

10 Ibid, at paragraphs 37 to 38.                                 

11 Ibid, at paragraphs 34 to 36.

12 Subsection 243(3) of the ABCA is concordant in this respect with, among other corporate statutes, subsection 242(3) of the CBCA and subsection 249(3) of the OBCA.

13 Perpetual Energy, supra note 1, at paragraphs 12, 13 and 48.

14 Ibid, at paragraph 21.

15 BIA, supra note 2 at subsection 197(3).

16 Sigurdson v. Fidelity Insurance Co., [1980] B.C.J. No. 488 (BCCA), at paragraphs 33 and 34.

18 In this respect CIBC v. 437544 departs from earlier cases which held that a trustee acting for benefit of the estate, and thus in a representative capacity, should not bear costs personally; see: Mancini (Trustee of) v. Falconi, [1989] O.J. No. 1410 (ONHCJ), leave to appeal refused, Mancini (Trustee of) v. Falconi, [1990] C.L.D. 364 (ONHCJ[Div. Ct.]), where a trustee, acting in a representative capacity, was held not to be a corporation or a nominal plaintiff under rule 56.01(d) of the Rules of Civil Procedure, RRO 1990, Reg 194.

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