Bankruptcy Does Not Release a Seller Who Intentionally Misleads a Buyer

This post, published on Éditions Yvon Blais’ blog on latent defects on September 12, 2017 (FR), discusses the judgment in Leduc v. Vachon (Full Text), rendered in September 2016, in which the Superior Court ruled on the application of section 178(1)(e) of the Bankruptcy and Insolvency Act with regards to two sellers who went bankrupt and against whom the buyers obtained a judgment in March 2006 in the context of a recourse for latent defects. In this case, the court refused to release the sellers of their obligations under the judgment from 2006 despite the fact that they were discharged from their bankruptcy, given that they deliberately concealed that a flood occurred in the building a few days before the sale.

Essentially, this decision reminds us that a seller who has misled a buyer through misrepresentations or through his failure to disclose/declare an important fact relating to the sold property and has gone bankrupt after the sale may not be released of his liability/obligations to the buyer, despite the fact that an order of discharge has been rendered, due to section 178(1)(e) of the Bankruptcy and Insolvency Act, which states that a bankrupt may not be released of a debt that is part of his bankruptcy if said debt is the result of “obtaining property or services by false pretences or fraudulent misrepresentation.”

The bankrupt’s creditor who wishes to avail himself of this exception in the Bankruptcy and Insolvency Act in order to object to his debtor’s release from his obligations to him will have to demonstrate strong evidence of the bankrupt’s fraudulent intention within the meaning of section 178(1)(e).

A seller’s deliberate misrepresentations or failure to disclose important and determinant information to a buyer in relation to the sold property will be considered fraudulent intent within the meaning of this provision.

Once the creditor establishes proof of the debtor’s fraudulent intent, the latter will then have the demonstrate the absence of such fraudulent intent, which the sellers were unable to do in Leduc v. Vachon (supra).

Therefore, a seller in bad faith who intentionally misleads a buyer before the sale may not hope to be exempted/released of his legal obligations to the buyer upon his bankruptcy.