May 2, 2016
Whether subsection 40(1) of the Bankruptcy and Insolvency Act (BIA) requires a trustee to remove any registration of interest in property prior to its return to a debtor.
Upon bankruptcy, a debtor’s property vests in the trustee pursuant to s. 71 of the BIA. In cases where there is a desire to protect the actual or potential equity during the administration of the bankruptcy (e.g., where property values may increase over the course of the bankruptcy), the trustee may register the assignment on title, or may register a caution/caveat on title with the appropriate land registry office if an interest in the property is suspected (subs. 74(1) and 74(3) of the BIA) to provide notice of an interest in real property and to guard against dealings with respect to the property without the trustee’s approval.
Subsection 40(1) of the BIA states that:
Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(d) or otherwise disclosed to the trustee before the bankrupt’s discharge and that is found incapable of realization must be returned to the bankrupt before the trustee’s application for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.
Use of the word “returned” in subs. 40(1) of the BIA raises the question of whether the intention is to return the property to the bankrupt in the same state it was in prior to the bankruptcy (i.e., with clear title if that was the case). If not, the bankrupt would be responsible for clearing the title if he/she chooses to do so.
When a trustee seeks discharge, the trustee must comply with subs. 40(1) of the BIA and return all unrealizable property to the bankrupt. The trustee’s registrations on title pursuant to s. 74 of the BIA are notice of an interest or suspected interest in the property. When disposing of the property, the trustee is abandoning his/her interest and, therefore, must not maintain registrations. If the registrations are maintained, the trustee is not returning the property as required by subs. 40(1) of the BIA, and is instead maintaining his/her assertion of an interest in the property. Registrations must be removed by “notice of quit claim or renunciation by the trustee” pursuant to subs. 20(1) of the BIA, which, pursuant to subs. 20(2), has the effect of “a discharge or release” of the assignment or caution/caveat registered previously pursuant to s. 74 of the BIA.
In Zemlak v. Deloitte, Haskins & Sells Ltd. (1987) 58 Sask R. 203 (C.A.), the court dealt with the interrelationships of the Land Titles Act provision regulating caveats and subs. 40(1) of the BIA. The intent of this subsection is to provide a “fresh start” to discharged bankrupts. Consequently, a caveat cannot be continued where both a bankrupt and a trustee have been discharged. By the time of discharge, the trustee should have pursued realization of the equity in the property (perhaps by obtaining a conditional order of discharge) or removed the caveat.
In keeping with the fresh-start principle, it is mandatory that trustees returning unrealizable property to a bankrupt before they apply for discharge pursuant to subs. 40(1) of the BIA ensure removal of any cautions/caveats they may have registered against the title to the property.