Discharge of the Bankrupt

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 273-304

273

chaPter 10

DISCHARGE

OF THE BANKRUPT

For many individuals, the prospect of a bankruptcy discharge is the

light at the end of the t unnel. Through disch arge, a debtor is given a

fresh start and is freed from the burden s of pre-exist ing indebtedness.

However, the right to obtain a discharge is not absolute. A d ischarge

may be made conditional, suspended, or denied completely in appro-

priate case s. Furthermore, not all debts are relea sed on disch arge, and

the debtor may f‌ind th at discharge has rejuvenated debts that other-

wise would have been released. Discharge on bankr uptcy remains a

controversial subject, as is attested by the frequent shifts in bankruptcy

policy that attempt to f‌ind the appropriate balance between the object-

ive of economic rehabilitation of the debtor and that of mai ntaining

public conf‌idence in the credit system.

a. the POLicy Behind discharge

The bankruptcy discharge is one of the prima ry mecha nisms t hrough

which bankruptcy law attempts to provide for the economic rehabilita-

tion of the debtor. However, it is not the only means by which bank-

ruptcy law seeks to meet this objective. The exclusion of exempt

property from distribution to creditors, the surplus income provisions,

and mandatory credit counsell ing als o are directed towards th is goal.

The goal of debtor rehabilitation applies only to natural persons and

BANKR UPTCY A ND INSOLVENC Y LAW274

not to artif‌icial entities, and for this reason a corporation cannot obtain

a discharge unles s it has satisf‌ied the claims of its creditors in full.1

The “honest but unfortunate debtor” occupies a station in ban k-

ruptcy law akin to th at of the “reasonable person” in negligence law.

The phrase is used agai n and again throughout the Canadian case law,

as well as t hat of the United States.2 In the case of the indiv idual, the

purpose of the bankruptcy discharge is to permit the honest but un-

fortunate debtor to reintegrate into the bu siness life of t he country as

a useful cit izen free f rom the crushing burden of his or her debts.3

This marks a change from ea rlier attitudes towards bankruptcy that

viewed all debtors as di shonest and t hat did not care to draw di stinc-

tions among reasons for f‌inanci al distres s.4

Debtor reh abilitation was not the origi nal objective of the bank-

ruptcy discharge when it was f‌irst enacted in 1705. Its purpose was

to provide an incentive to cooperate, and it operated in tandem w ith

the death penalty as a disincentive for non-cooperative beh aviour. The

use of the discharge as a reward for cooperative conduct stil l exists

in modern bankruptcy law. A bankrupt who fails to cooperate with

the t rustee or to comply with the duties of a bankrupt may result in

the suspension5 or refusal6 of a discharge. Although the prospect of a

bankruptcy discharge continues to be used for the purpose of inducing

cooperation, it is no longer viewed as its primary purpose.

The Supreme Court of Canada in several of its decisions has ex-

pressly recognized that the economic rehabilitation of the debtor is one

of the central objectives of bankruptcy law.7 This objective proceeds

from the idea that a debtor who has acquired an unserviceable debt

load is in a hopeless situation. Lacking any real prospect t hat the debts

can ever be repaid, a debtor wi ll become discouraged and w ill cease to

participate in the economic life of society. The concern is not only with

the well-being of the individual. There is recognition t hat unservice-

able debt imposes hardship on the debtor’s family and also on society

1 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 169(4) [BIA].

2 See, for example, Loc al Loan Co. v. Hunt, 292 U.S. 234 (1934).

3 See Holy Rosary Parish (Thorold) Credit Union Ltd. v. Premier Trust Co. (1965), 7

C.B.R. (N.S.) 169 (S.C.C.).

4 Chapter 2, Sect ion A(1).

5 Re Jefferson (2 00 4), 1 C.B .R. (5th) 209 (B.C.S.C.).

6 Re Rahall (1997), 49 C.B.R. (3d) 268 (Alta. Q.B.); Mancini (Trustees of) v. Mancini

(1987), 63 C.B.R. (N.S.) 254 (Ont. H.C.J.) [Mancini].

7 See Industr ial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109; Vachon v Cana da

(Employment & Immigration Com mission), [1985] 2 S.C.R. 417.

Discharge of t he Bankrupt 275

at large. A debtor who is given a fresh start through the relea se of past

debts can once more become a productive member of society.

The honest but unfortunate debtor was originally idealized as an

individual who suffered f‌inancial setbacks due to event s beyond his

control. In earlier times, one contemplated the merchant whose ship

was lost in a storm or through enemy action during wartime. Honest y

alone was not enough. The loss had to result from misfortune, and the

misfortune had to result from external events. There has been a marked

shift in the meaning of the phrase in modern times. Certainly there

are many instances where the f‌inancial loss results from external fac-

tors over which the debtor h as no control, such as sickness or loss of

employment. However, the notion of the honest but unfortun ate debtor

now encompasses individuals whose f‌inancial distress i s att ributable

to poor f‌inancial management as well. Thi s shift in meaning occurred

during a time of unparalleled growth in the consumer credit market

during the twentieth century, and coincided w ith a steep increase in

the number of consumer bankr uptcies.

The eas y avai lability of consumer credit has made it much easier

for debtors to get themselves into a f‌inancial crisis. Some scholars have

argued that the principal motivation for a bankr uptcy discharge should

be recognized as the protection of a debtor from ill-considered borrow-

ing decisions.8 On this view, a bankruptcy discharge operates as a kind

of insurance against losses caused by debtors who fail to properly assess

the risks as sociated with t he over-consumption of consumer credit.9

Although debtors who have made poor f‌inancial decisions can

nevertheless obtain t he benef‌it s of a bankr uptcy discharge, the same

does not hold true for a debtor who is guilty of dishonest conduct.10

Furthermore, it is not only intentional dishonesty that can result in the

refusal of a di scharge. The BI A establishes certain standards of com-

mercial morality that must be maintained. If the bankruptcy is brought

on by rash and hazardous speculations, by unjustif‌iable e xtravagance

in living, by gambling, or by c ulpable neglect, a bankr uptcy court is

directed to refuse, suspend, or make conditional any order of dis-

charge.11 A failure to keep proper books and records also prevents the

court from granting the debtor an absolute discharge.12

8 T. Jackson, The Logic and Limits of Ba nkruptcy Law (Cambridge, MA: Ha rvard

University Pre ss, 1986) at 232–41.

9 See D. Baird, “Dis charge, Waiver and the Behavior al Undercurrents of Debtor

Creditor Law” (200 6) 73 U. Chicago L . Rev. 17.

10 Bank of Montreal v. Giannotti (200 0), 51 O.R. (3d) 544 (C.A.).

11 BIA, above note 1, ss. 173(1)(e) and 172(2).

12 Ibid., s. 173(1)(b).