I do (not) declare: Ontario Court of Appeal refuses to grant declaratory relief to extinguish insolvency claims

Insolvency legislation is full of trade-offs—chief among them is expediency versus fairness. On the one hand, insolvencies are often urgent matters with the fate of the debtor’s business or the value of its assets resting on a speedy and efficient resolution of its creditors’ claims. On the other hand, those creditors expect to be treated fairly and receive a real opportunity to advance and resolve their claims, which often entails a slow, deliberate process.

This tension was at the centre of Bryton Capital Corp. GP Ltd. v CIM Bayview Creek Inc. et al., 2023 ONCA 363, where the Ontario Court of Appeal refused to grant a declaration sought by one creditor in a bankruptcy context that would have extinguished the claims of other creditors before those claims were adjudicated on their merits.

What you need to know

• Declaratory relief should not pre-empt the hearing of other creditor claims. The Ontario Court of Appeal refused to grant a declaration requested by a creditor of a bankrupt company that would have pre-emptively extinguished challenges by other creditors to an option to purchase the bankrupt’s property.
• Court provides guidance on when a declaration is appropriate. The Court held that it would be inappropriate and premature to grant declaratory relief where an alternative, more suitable process or remedy exists for resolving the underlying dispute. The applicant creditor’s option agreement did not give it the right to the bankrupt’s property on a “free and clear” basis; rather, the other creditors’ claims needed to be adjudicated on their merits before there were any rights for the Court to declare.
• When alternative remedy exists, that option should be pursued first. If such an alternative venue exists, parties should act diligently and exhaust their rights in that venue before turning to declaratory relief to achieve their objectives.

The details

Background

Bayview Creek was a real estate developer whose main project was the construction of a group of residential homes in Richmond Hill, Ontario. Before its insolvency proceedings, Bayview granted Bryton Capital Corp. GP Ltd. (Bryton) an option to purchase the development property at a set price.

In late 2020, Bayview filed a notice of intention (NOI) to make a proposal to its creditors under the Bankruptcy and Insolvency Act (BIA). In those NOI proceedings, Bayview attempted to disclaim its option agreement with Bryton, and the NOI trustee alleged that the option constituted a transfer at undervalue (TUV) and/or a preference under sections 95 and 96 of the BIA. The insolvency judge ultimately rejected both arguments, permitting Bryton to exercise its option.

Bayview subsequently made assignments in bankrupt by early 2021 and, shortly thereafter, certain of Bayview’s creditors commenced proceedings to take carriage of and pursue the trustee’s TUV and preference claims, along with similar claims under provincial legislation.

Around the same time, Bryton brought an application for, among other things, a declaration that its option was valid and enforceable, and as a result, that no relief could be granted to set aside the option.

At first instance, the application judge dismissed Bryton’s application, holding that a declaration cannot extinguish unresolved creditor claims before they have been adjudicated. Bryton appealed the decision to the Ontario Court of Appeal.

Key issue

The key issue was whether the Court could grant declaratory relief to extinguish insolvency claims before those claims have been adjudicated.

The Court’s decision

The Court refused to grant Bryton’s requested declaration.

The Court reiterated that the primary objective of declaratory relief in a commercial setting is certainty. By granting a formal pronouncement that explicitly sets out the rights of commercial parties, declaratory relief aims to resolve contentious issues and allow parties to move forward in their affairs with clarity. But while a judicial unclouding of rights is often desirable, the Court illustrated that declaratory relief has its limits.

Here, Bryton’s request for declaratory relief suffered from a fundamental deficiency: the claims it sought to extinguish had not yet been adjudicated on their merits. Instead, Bayview’s creditors were diligently advancing their claims in a different forum. The relief Bryton was seeking extended beyond a declaration of its rights—Bryton was instead seeking an order expanding its entitlement to the option, free and clear, and pre-emptively dismissing proceedings that were already underway.

When is declaratory relief appropriate?

The Court’s approach to exercising discretion

The Court explained that declaratory relief is ultimately discretionary and can be refused based on a variety of considerations. The Court’s decision illustrated that judges should ask the following questions when deciding whether to exercise that discretion:

• Is there an alternative forum? The existence of an alternative, more suitable process or remedy to resolve the issues can render declaratory relief inappropriate. When considering whether a specific procedure is amenable to declaratory relief, the Court provided that the burden of proof, urgency of the issues and limitations periods can all be relevant factors. Here, a more suitable path forward was available to resolve the insolvency claims: the applications that Bayview’s creditors themselves had already commenced.
• Has the applicant acted diligently? The objective of providing certainty on an expedited basis cannot be used to justify declaratory relief where the party seeking the declaration has not made diligent efforts to advance the issues in another forum. Bryton raised concerns that costs continued to mount in relation to the exercise of its option, meaning there was an element of urgency accompanying its declaration. However, Bryton had failed to take steps to expedite the adjudication of the creditors’ claims in their underlying applications, including by seeking a scheduling order or directions from the application judge, setting a timetable for delivery of materials and determination of the issues or otherwise keeping those proceedings on track.
• Is there an appropriate jurisdictional basis? Declarations require an appropriate jurisdictional hook. Bryton relied on section 97 of the Ontario Courts of Justice Act as such a hook, which the Court found is not a free-standing provision that allows a judge to do whatever seems fair. Rather, it allows courts to confirm legal rights that already exist. Bryton’s option agreement did not give it the right to extinguish third party claims.

Implications

Bryton illustrates that fairness can trump expediency in insolvency proceedings. The Court held that declaratory relief cannot be used to cleanse one creditor’s claim to a bankrupt’s property by extinguishing claims that are being diligently pursued by other creditors; those creditors are entitled to their day in court. As a result, where a more appropriate venue exists to resolve issues between parties to an insolvency, those parties should diligently pursue their rights in that other venue before seeking declaratory relief.