In most cases, bankruptcy proceedings come to an end when the trust-ee’s duties have been completed and the debtor, if a natural person,
has obtained a bankruptcy discharge. However, under certain circumstances, bankruptcy proceedings can be interrupted before they reach this normal state of completion. Annulment of bankruptcy is available for both voluntary and involuntary bankruptcy. A court may annul a bankruptcy if it is of the opinion that a bankruptcy order ought not to have been made or an application ought not to have been filed.177
If the bankruptcy was involuntary, the bankruptcy order can also be contested through an appeal or by a motion for rescission. As well, a bankrupt can initiate a consumer or commercial proposal, and approval of it operates to annul the bankruptcy and revest the property in the debtor.178
There are three different processes that might be invoked after a bankruptcy order has been granted by a court, namely (1) an appeal of the bankruptcy order; (2) annulment of the bankruptcy; and (3) rescission of a bankruptcy order. An appeal of the bankruptcy order is the appropriate response where the controversy concerns a question of law.179
For example, the controversy may be over whether the accepted facts constitute an act of bankruptcy. An order annulling a bankruptcy is the appropriate response where there is new evidence of a substantial nature that shows that the order should not have been made.180An order for rescission of a bankruptcy order is the appropriate response where the bankruptcy order was properly made in the first instance, but there are fundamentally new circumstances that arose after the bankruptcy order was granted or facts that were not known at the time the order was made.181For example, the bankrupt may have acquired additional property following the bankruptcy such that the bankrupt is able to pay all the creditors in full.182Annulment of the bankruptcy is not the
appropriate response in this instance, since the applicant must show that the bankruptcy order ought not to have been made on the facts available to the court at the time of the order.
Unlike an involuntary bankruptcy, a voluntary bankruptcy is commenced without a court order. An application to annul a voluntary bankruptcy therefore provides interested parties with the opportunity to contest the bankruptcy. There are two grounds that are most commonly used in seeking an annulment of a voluntary bankruptcy. The first is where the debtor was not within the definition of an insolvent person at the date of the filing of the assignment. For example, a debtor may have failed to disclose assets or may have entered into sham transactions,183with the result that the debtor may not be insolvent under the balance sheet test. However, in order to be successful, the creditor must also show that the debtor was not insolvent under either of the cash flow tests. This may prove to be an obstacle for the creditor, since a business debtor who ceases to pay current obligations in the ordinary course of business satisfies this definition even if the debtor had the ability to pay such obligations.184An assignment may also be annulled on the ground that...