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In the division of property jurisdictions (including Newfoundland and Labrador) a non-bankrupt spouse’s property claim is not “provable in bankruptcy” and is neither stayed nor discharged on bankruptcy

Ontario

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Canada

Bankruptcy & Family Law (Newfoundland) Intersection of Bankruptcy and Family Law In Bowes v Bowes, 2022 NLCA 5, the Newfoundland Court of Appeal discussed issues of spousal and child support, division of matrimonial property, and apportionment of debt following the breakdown of a marriage and the husband’s application for bankruptcy. The Court considered the interaction of the bankruptcy and family law regimesThere is tension between Bankruptcy and Family Law. Insolvency law and family law in Canada are both aimed at important public policy goals. The challenge, when bankruptcy and family law issues intersect is how to realize the purpose of each piece of legislation while still achieving a fair result (paras. 40-42).The Bankruptcy and Insolvency Act (BIA) provides a mechanism for the orderly liquidation of a bankrupt’s estate and the distribution of the value of the assets in that estate to the bankrupt’s creditors. On a bankruptcy, the applicant/bankrupt’s unsecured non-exempt assets vest in his Trustee in Bankruptcy for liquidation and distribution to creditors. Debts do not vest in the Trustee. The Trustee has the dual responsibility of representing the bankrupt as well as general creditors in the administration of the estate and should ensure full disclosure of assets and debts (the latter referred to as claims “provable in bankruptcy”) (paras. 43-46)The Trustee is bound by the terms of any contract between the spouses (separation agreement or Opting In-Out agreement) but can challenge as a preference (or transfer under value) any agreement negotiated within twelve months of the bankruptcy. As to income, the Trustee determines any deductions to which the bankrupt is entitled. The bankrupt’s net income is required to be paid to their bankrupt estate and is available for distribution to the creditors (BIA, s. 68). Child and spousal support payments are considered non-discretionary expenses (Surplus Income Directive, No. 11R2-2021 (March 10, 2021)). Support claims are not stayed or released on bankruptcy (BIA, s. 121(4)) and property that does not vest in the Trustee in Bankruptcy is available for support obligations (paras 47-50).While each province and territory has legislation addressing the division of family property, it is not uniform. As explained in Schreyer v. Schreyer, 2011 SCC 35, [2011] 2 S.C.R. 605, some jurisdictions adopted an equalization model and others, a division of property model. The equalization regimes (Ontario, Quebec, Manitoba, Northwest Territories, Nunavut, and Prince Edward Island) can seriously prejudice the marital property claims of a non-bankrupt spouse on the bankruptcy of the other spouse. In addition, within the division of property scheme jurisdictions (including Newfoundland and Labrador), there are a number of differences in the statutory language which affect when a property interest arises. “These differences in the vesting of a proprietary interest can be highly significant, depending on when the bankruptcy is declared, an event that is largely in the control of the bankrupt spouse” (paras. 52-54).One key distinction between the two regimes is that in the division of property jurisdictions (including Newfoundland and Labrador) the non-bankrupt spouse’s property claim is not “provable in bankruptcy” and is neither stayed nor discharged on bankruptcy (para. 55). The Newfoundland Regime Newfoundland, like SK, AB, NS, NB, YK, and BC adopted a division of property regime, but with a unique provision for the matrimonial home in s.8(1)-(2) of the Family Law Act giving each spouse a proprietary interest in any matrimonial home. Pursuant to the Newfoundland regime, a former spouse is not a creditor of their bankrupt ex-spouse’s estate, and their application for division of assets is not necessarily a claim provable in bankruptcy and is not stayed by an application for bankruptcy. Matrimonial Debts While matrimonial debt is defined in the family property legislation of some jurisdictions, apportionment of debts is not the subject of specific provision in the Family Law Act. This has not however prevented courts in Newfoundland from apportioning debt incurred both during marriage and where appropriate, after separation. Whether or not an income tax debt, or indeed any debt, must be satisfied from matrimonial assets can only be determined by the facts of the particular case and the prevailing equities. The person seeking exemption from sole liability for debts must establish it (paras. 97-99). Adjusting spousal support to compensate for debt borne by the non-bankrupt spouse is not without precedent; the Spousal Support Advisory Guidelines (July 2008), (“SSAG”), permit accommodation for unusual facts in a specific claim. (para. 117-118) Commencement Date of Child Support The date of initiation of proceedings (or date of notice) is usually the effective date for the commencement or variation of child support (para. 131).

April 14, 2022
Bowes v Bowes, 2022 NLCA 5