Often times an investigation into the financial affairs of an individual or business that is suspected to have been involved in a financial fraud is impeded by the inability of the aggrieved party to obtain the necessary documents, records and other information needed to prove its claim of fraud. Further, even when the aggrieved party has obtained a judgment against the defendant it may prove difficult to ultimately collect on the judgement.
The provisions of the Bankruptcy and Insolvency Act (the “BIA”) provide a Trustee in Bankruptcy with significant powers to investigate individuals or businesses (herein after referred to as a “Debtor”) which are bankrupt. It goes without saying that generally a Debtor being investigated for a financial fraud will not willingly assign itself into bankruptcy. In that case, an application to Court can be made to assign a Debtor who is insolvent into bankruptcy on an involuntary basis. Once in bankruptcy, the Debtor is subject to the investigatory provisions of the BIA.
Immediately upon the bankruptcy of the Debtor all property in the possession of the Debtor, subject to certain exclusions, automatically vests with the Trustee. The BIA further specifies that this includes all property “wherever situated” and, as a result, comprises property located outside of Canada.
Two of the most powerful investigative tools available to a Trustee in Bankruptcy when administering the estate of a bankrupt Debtor are: (1) the ability to require the Debtor to deliver all books, records and documents relating to its property and affairs; and, (2) the ability to require any person with reasonable knowledge of the affairs of the Debtor be required to be examined under oath without the Trustee having to first obtain a court Order. These two tools provide a mechanism to obtain information about an insolvent individual or business that may not otherwise be available.
If the Trustee makes a formal request of the Debtor in respect of items (1) or (2) above, the Debtor, including the officers of the bankrupt corporation, must comply with the Trustee’s request. Failure to do so may result in significant repercussions including fines and or even imprisonment.
In summary, where an individual or business is suspected of having been involved in fraudulent activity the creditors may have recourse available to them under the BIA if it can be proven that the individual or business is insolvent. The investigative powers of the Trustee are significant and may be utilized to obtain information of a fraud and ultimately recover proceeds from fraudulent activities.
Author: Tom McElroy, CPA, CA, CBV, CIRP, LIT
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