An order of discharge under the Bankruptcy and Insolvency Act (“BIA”) releases a bankrupt individual from the majority of their debts and responsibilities. This signifies that the bankrupt is no longer legally obligated to repay their debts, and creditors can no longer pursue legal action against the bankrupt to recover the debts.
According to section 178(1) of the BIA, there are certain debts and obligations that are not released by a discharge order. These consist of:
- Debts and obligations for alimony, maintenance or support of a spouse, former spouse, common-law partner, former common-law partner, child or children of the bankrupt, or of a spouse or common-law partner, and for education or training of a child or children of the bankrupt or of a spouse or common-law partner
- Fines, penalties and restitution orders
- Debts and obligations arising from fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity, or from obtaining property or services by false pretences or fraudulent misrepresentation
- Debts and obligations for damages resulting from driving while intoxicated or from criminal negligence
- Debts and obligations that are secured by a mortgage, hypothec, pledge, charge or lien on the bankrupt’s property, except to the extent that the property is exempt from seizure by the bankrupt’s creditors under the BIA
In M.O.S. MortgageOne Solutions Ltd. v. Heidary,  O.J. No. 3451, the Ontario Court of Appeal upheld a motion judge’s declaration that a debt owing to the respondent was not discharged by the debtor’s bankruptcy discharge due to his fraud. The debtor had engaged in fraudulent activity by giving a fictitious Canada Revenue Agency contact in order to pass on misleading information, ostensibly to fraudulently encourage the respondent to make the requested advances for the debtor’s own benefit. The court determined that it was unnecessary for the respondent’s pleadings to disclose additional details of the debtor’s conduct, as the only reasonable inference from his acts was that the debtor engaged in fraudulent conduct.
To obtain a declaration under section 178(1) of the Bankruptcy and Insolvency Act that a judgment survives a bankrupt’s discharge, the claimant need not directly reference section 178 in the pleadings upon which the judgment is based. In addition, there is no necessity that fraud be specifically pleaded or particularized. As stated by the court, it is the judge’s responsibility to evaluate the nature and substance of the debt by reviewing the pleadings, any reasons that may have been given, and the proceedings that were before the court that issued the judgment. In evaluating whether a consent judgment falls within the ambit of subsection 178(1), the court is “less concerned with the pleaded cause of action than with whether the pleadings as a whole suggest fraudulent or otherwise ‘unacceptable’ behaviour.” In other words, the issue is whether the evidence, facts, and findings in the underlying proceeding are sufficient to make the requisite finding of fraud or false pretences in the application under BIA section 178(1)(e).
It is crucial to note that an order of discharge does not automatically relieve the aforementioned debts and responsibilities. In some instances, the creditor may need to take additional legal action to have the debt deemed non-dischargeable by the discharge order.
Section 178(1) of the BIA ensures that certain debts and obligations are not discharged in bankruptcy because they are of a more serious nature or have a higher priority for repayment. This aids in maintaining the integrity of the Canadian bankruptcy process and helps protect the rights of creditors.