Lifting the Stay: When Bankruptcy Is Used to Avoid Fraud Claims

Fraudsters facing civil liability often turn to bankruptcy to halt proceedings through the automatic stay under the Bankruptcy and Insolvency Act (BIA). While this can delay litigation, it does not end it. Under section 69.4 of the BIA, creditors may seek to lift the stay where there are sound reasons to proceed, particularly where the claim involves fraud and may survive discharge under section 178(1)(e).

In a recent Ontario decision, Associate Justice Rappos granted a lift stay motion brought by the Business Development Bank of Canada, represented by Elina Fish. The creditor sought to pursue a civil claim alleging that the debtor obtained financing through fraudulent misrepresentations. The Court confirmed that a creditor is not required to prove its case at this stage, only that the claim, if successful, could result in a judgment that survives bankruptcy. The Court also rejected the argument that the matter should be dealt with solely within the bankruptcy process, emphasizing that civil fraud claims serve a distinct purpose and may proceed in parallel.

This decision reinforces a key principle – bankruptcy is not a shield against fraud. A well pleaded claim, together with a lift stay motion, allows creditors to continue pursuing recovery despite a bankruptcy filing.