In a case that arose from a project to develop a limestone quarry, the Manitoba Court of Appeal upheld a finding that a judgment debt fell within the ambit of s. 178(1)(e) of the Bankruptcy and Insolvency Act, 1985 (BIA).
In Stewart v Auch, 2026 MBCA 21, the applicant was selling farmland to a consortium of investors, including a First Nation, who sought to run the quarry on it.
On Dec. 20, 2013, the applicant’s solicitor advanced $600,000 to 6551450 Manitoba Ltd (655), of which the respondent’s holding company was the majority shareholder.
The trial judge determined that the transaction was a loan – subject to repayment at a 10 percent annual interest rate by Mar. 31, 2015 – that aimed to cover the expenses going forward for securing the Rural Municipality of Rosser’s approval for the quarry development.
However, on Dec. 23, 2013, the respondent directed the disbursement of all the loan money to pay her personal debts and expenses, rather than to obtain approval for the quarry.
The trial judge held that the circumstances justified piercing 655’s corporate veil to hold the respondent personally liable for the loan and interest, as she had used 655 to engage in improper conduct akin to fraud.
The trial judge explained that the applicant would not have lent 655 the money if the respondent and her husband had honestly stated their intentions.
The applicant tried fruitlessly to collect the judgment debt. Meanwhile, the respondent unsuccessfully appealed that judgment and sought leave to appeal to the Supreme Court of Canada. In August 2024, she made an assignment into bankruptcy.
In an application seeking various forms of relief, the applicant sought to collect the judgment debt and asked the court to declare that the judgment debt would survive the respondent’s bankruptcy under s. 178(1)(e) of the BIA.
As an exception to the general rule that a discharge from bankruptcy would release a bankrupt person from pre-bankruptcy debts, s. 178(1)(e) would not release them from debt or liability (other than that arising from an equity claim) resulting from obtaining property or services by false pretenses or fraudulent misrepresentation.
In February 2025, the application judge saw clear and cogent evidence that the judgment debt fell under s. 178(1)(e) on two bases:
- the trial judge’s findings relating to piercing 655’s corporate veil to hold the respondent personally liable for the loan
- alternatively, the respondent’s and her husband’s common venture to obtain the loan from the applicant, then immediately use it for unauthorized purposes
Judge’s findings upheld
The Court of Appeal of Manitoba dismissed the respondent’s appeal with costs. The appeal court found no palpable and overriding error on the application judge’s part.
The appeal court noted that the trial judge in the civil action involving the loan based his decision to pierce 655’s corporate veil and hold the respondent personally liable for the applicant’s loan on a finding that the respondent and her holding company improperly entered into the loan using 655 as a shield.
The appeal court ruled that the application judge reasonably concluded that the factual findings – including that the respondent’s deceitful conduct resulted in the judgment debt – were sufficient to determine that the judgment debt fell within s. 178(1)(e) of the BIA.
Thus, the appeal court deemed it unnecessary to comment on the application judge’s alternative basis for why s. 178(1)(e) applied to the judgment debt.