Ontario case will impact prosecutions under bankruptcy law: Harnett

A judge of the Ontario Court of Justice has handed down what is believed to be an important precedent that will impact how some cases are prosecuted under Canada’s bankruptcy law, says Toronto criminal lawyer Aaron Harnett. Financial Post

“This appears to be the first decision in Ontario to explain the mens rea for the offence of defrauding creditors using bankruptcy protection,” he tells AdvocateDaily.com. 

“Though there have been prosecutions under s. 198 of the Bankruptcy and Insolvency Act, it appears this decision is one of the first reported judgments that gives guidance over a section that was previously confusing and uncertain. This is surprising, given its importance in the overall bankruptcy scheme and that it’s a federal statute.”

In R. v. Shek, Harnett represented Wilson Chi-Man Shek, who was charged with six counts under s. 198 of the Act after he obtained $186,000 on credit and then filed for bankruptcy. He had received credit from five different credit card companies, with whom he had 13 different credit cards, as well as lines of credit, says the judgment.

Between November 2012 and the end of January 2013, he depleted all of his available credit after he wrote cheques, obtained cash advances and made cash withdrawals on his accounts. Some of the cash advances were obtained at casinos during a gambling run. 

Shek filed for bankruptcy on Feb. 12, 2013.

Harnett says the case turned on the mental element, the intent to defraud, required to commit an offence under s. 198 of the Act. 

“The question was whether you needed to have an intent to defraud your creditors at the time you disposed of the credit or at the time you applied for bankruptcy protection,” he says. 

Harnett says that question doesn’t seem to have been resolved in the jurisprudence preceding this case.

Harnett says the case shows that someone “on a credit card-fuelled gambling run who later declares bankruptcy to escape the credit card debt does not commit an offence under the Bankruptcy and Insolvency Act if he believes he may win while gambling and pay back the credit card debt.”

Judge Brent Knazan dismissed all charges saying that the accused’s intent to defraud couldn’t be proven beyond a reasonable doubt.

“So one reasonable inference is that Mr. Shek began to gamble, which is legal, with credit that he obtained, which is legal and had no intention to defraud his creditors, but rather hoped as all gamblers do that his luck would turn and he would be able to pay enough to maintain his credit. This may have been unrealistic given interest charges and the perils of poker and slot machines, but it is Mr. Shek’s true subjective state of mind that is relevant to the words ’unless there is no intent to defraud,’” wrote the judge.

The judge also wrote: “But I genuinely do not know what occurred here regarding Mr. Shek’s intent when he spent the money that he obtained on credit. It follows that all charges are dismissed.”

Harnett explains that scenarios involving somebody who runs up their credit to the maximum and then walks away from the debt and claims bankruptcy have been typically pursued as a fraud upon the credit card company under s. 380 of the Criminal Code. 

These are sometimes called bust-out schemes where an individual obtains credit with no intention of repayment.

“But those prosecutions under the Criminal Code are cumbersome and the standard of proof for the Crown attorney is often difficult to meet,” Harnett says. “So what has been happening over the last two years or so is that the federal government is relying on this little-known section of the Bankruptcy and Insolvency Act to address the same fraudulent conduct and they’ve done so because it may have been perceived as more efficient and easier to prosecute than under the Criminal Code. There has been an large influx of these kinds ‘bust-out’ cases.”

Harnett says R. v. Shek also demonstrates that proving the mens rea in such a case under the Bankruptcy and Insolvency Act is no longer easier than proving a similar prosecution under the Criminal Code.

“This may stymy the federal government’s desire to prosecute those who are alleged to have defrauded their creditors using the Bankruptcy and Insolvency Act,” he says. 

Harnett notes conditional sentences are available under the bankruptcy law for this offence but are no longer available for a similar offence under the Criminal Code.

“So that gave the federal prosecutors more tools to resolve their cases because no-jail sentences are available under the bankruptcy law whereas my client is statutorily barred from getting a conditional sentence if it was a Criminal Code prosecution,” he says. “As a result, many cases were resolved under the Bankruptcy and Insolvency Act that would have gone to trial under Criminal Code prosecutions.”

Harnett took his matter to trial and won. 

“R. v. Shek will likely make it more difficult for the Crown to prosecute others under the bankruptcy law for this going forward,” he says.