Blood from a Stone: Costs Awards against Bankrupts under the Bankruptcy and Insolvency Act

There is a certain irony in awarding costs against a bankrupt. After all, the defining feature of bankruptcy is that the debtor is, by definition, insolvent. Ordering costs against someone in financial turmoil may seem a bit like awarding a penalty shot against the team that has already lost the game.

But as any creditor who has been involved in bankruptcy proceedings knows, insolvent debtors are not always hapless victims of circumstance. Some simply misjudge their financial position; others are strategic, obstructive, or downright mischievous. And when a bankrupt drags out proceedings with frivolous applications, conceals assets, or generally makes life difficult for trustees, creditors, and courts, a fair question arises: should they be made to pay the price for their behaviour?

The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) gives courts broad discretion on costs, but not without wrinkles. The jurisprudence is inconsistent and the policy considerations delicate. This blog explores the statutory framework, germane cases, and policy considerations for (and against) awarding costs against bankrupts.

Executive Summary: a discharge might wipe away debts, but bad behaviour can still leave a bankrupt footing the bill.

The Statutory Framework

Section 197 of the BIA governs costs in bankruptcy proceedings. In broad strokes, it resembles the ordinary rules of civil litigation: costs are in the court’s discretion and usually follow the event. Like Rule 11-1 of The King’s Bench Rules in Saskatchewan, section 197 permits solicitor-client costs, lump sum awards, or traditional party-party costs.

But the BIA adds some twists:

• Trustee protection (s. 197(3)): trustees are generally shielded from personal liability for costs unless the court orders otherwise.
• Estate limits (s. 197(4) and (6)): costs cannot be freely carved out of the bankruptcy estate’s assets; only authorized or prescribed costs are payable out of the estate according to a fixed ranking of priorities.
• Opposed discharges (s. 197(6.1)): where a discharge is opposed and the court grants a conditional discharge (e.g. requiring periodic payments by the bankrupt), the opposing creditor may be awarded costs from the estate—but only up to the value of what the estate gained by those payments.
• Frivolous opposition (s. 197(7)): conversely, a creditor who opposes a discharge without merit can be ordered to pay costs to the estate.

The takeaway is that while the BIA preserves broad judicial discretion, discharge proceedings come with special costs rules that do not always sit neatly alongside that discretion, potentially to the detriment of creditors.

The Case Law Landscape

Case law highlights the tension at the heart of this issue: costs orders burden an already insolvent individual, yet may be necessary to deter abuse.

For example, in Re Thow, 2010 BCSC 1534, the bankrupt’s conduct was extreme: engaging in fraudulent activities, refusing to cooperate with the trustee, and using excessive legal wrangling. The court ordered costs against the bankrupt personally, characterizing this award as a post-bankruptcy claim not released by the discharge. The court’s reasoning was grounded in fairness: why should creditors shoulder the cost of the bankrupt’s misconduct?

On the other hand, in Re Logeot, 2024 MBKB 180, the court held that BIA s. 197(6.1) limits costs awards in favour of opposing creditors to amounts that can be recoverable from the bankruptcy estate—costs cannot be made into a personal award against a bankrupt that survives discharge. The court was reluctant to create personal liability where the BIA seemed to restrict it. In fact, the court directly questioned the reasoning in Re Thow since the court there had not grappled with s. 197(6.1), even though this provision had been added in a 2005 amendment to the BIA but was not addressed by the court.

However, despite this valid objection, other decisions released after the addition of s. 197(6.1) also found it within their discretion to award costs against a bankrupt personally. In Re Kaiser, 2011 ONSC 5959, the bankrupt had attempted a tactical maneuver by seeking to remove the trustee’s legal counsel. The court was unimpressed and awarded full indemnity costs against him personally.

And in Re Addario, 2014 ONSC 4511 (discharge hearing), and 2014 CanLII 54585 (costs hearing), the bankrupt was in his third bankruptcy following a consistent pattern of embarking upon questionable business ventures and then, once bankrupt, failing to submit necessary financial information to the trustee. The objecting creditor was awarded partial indemnity costs against the bankrupt, personally.

Policy and Practicality

The BIA is a practical statute meant to achieve business-like solutions in insolvencies. Courts have been clear that its purposes are to allow honest but unfortunate debtors to financially rehabilitate themselves, while equitably distributing their assets among creditors (e.g. Aquino v Bondfield Construction Co., 2024 SCC 31 at para 36). The case law involving cost awards against bankrupts reveals the tension between these two purposes.

Crushing costs awards undercut the first purpose, leaving debtors unable to reintegrate into normal economic life. But unchecked misconduct undermines the second, forcing creditors to bear the added costs of chasing information, fighting baseless applications, or navigating procedural games. Without the prospect of a costs award that is not absolved by the bankruptcy itself, bankrupts might see the process as a free shot at obstruction: delay everything, fight everyone, and walk away after a discharge no worse off than if you had just cooperated.

The current patchwork of approaches across Canada leaves parties uncertain. Creditors and trustees cannot easily predict whether costs will be recoverable and, as a result, whether a fight with a bankrupt will be worth the price of admission. A consistent appellate statement of principle would be welcome, but until then, the following take-aways are worthy of consideration:

• Creditors: when opposing a discharge, beware. Cost recovery may be limited to the estate’s assets.
• Trustees: stronger footing exists for personal costs awards against a bankrupt where misconduct forces extra work on the part of the trustee.
• Bankrupts: do not assume that bankruptcy shields against all liability. Courts have, on occasion, treated costs arising from post-bankruptcy misconduct as a claim that survives discharge. Cooperation pays dividends.
• Everyone: discretion under s. 197 is broad but not boundless. Balancing fairness with rehabilitation—while aiming for national consistency—remains the goal of proceedings under the BIA.

Conclusion

Bankruptcy is meant to give debtors a fresh start, not a free pass. While the BIA wipes away many debts, it does not absolve all sins—or immunize bankrupts from the consequences of their own actions. The jurisprudence remains unsettled on this issue, but one lesson is clear: abuse the system, and costs may follow—even if your wallet is already empty.

A fresh start, yes. A free lunch at other people’s expense? Not so much.

McDougall Gauley LLP’s Insolvency and Restructuring team has extensive experience acting for creditors, court officers, and other stakeholders in insolvency matters. To learn more, contact a member of our team.