Background
Avida 2015 Inc. became insolvent owing the Bank of Montreal (BMO) more than $6 million under a general security agreement. BMO privately appointed MSI Spergel Inc. as receiver, a court-approved appointment followed on February 23, 2024, and a bankruptcy order was made on March 6, 2024, with Spergel serving as trustee. David Reale, Avida’s director and officer, had personally guaranteed $4 million of Avida’s debt to BMO.
In November 2024, Reale asked the trustee to commence an action against BMO for breach of contract, breach of fiduciary duty, and related claims. The trustee declined, leaving Reale to seek to pursue those claims in his own name. BMO responded by proposing to acquire the very cause of action against itself through a credit bid at a court-supervised auction, relying on the face value of its secured debt as the bid currency.
Reale opposed the credit bid on the basis that BMO’s general security agreement did not attach to this claim — a claim asserted against BMO itself — and that an asset outside BMO’s security could not be acquired by credit bid; BMO would have to bid cash and would hold no priority over any proceeds. The trustee sought the court’s advice and directions. The motion judge (Justice Steele, Superior Court of Justice, September 22, 2025) held that the cause of action was a bankrupt’s asset available for sale, that it could be sold to the very defendant named in the action, and that BMO was entitled to credit-bid up to the face value of its secured debt. Reale appealed.
The Court’s Holding
The Court of Appeal first addressed jurisdiction. Reale argued he had an appeal as of right under s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. The panel disagreed, finding that no such right arose on the facts, and that leave to appeal under s. 193(e) was therefore required.
Applying the test from Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, the court granted leave. It found the proposed appeal prima facie meritorious: while credit bidding itself is well established in Canadian insolvency practice, whether a secured creditor may deploy a credit bid to acquire an asset that does not attach to its security is an unsettled question. The court characterized this as a matter of importance to bankruptcy proceedings generally, not merely to the parties before it. BMO acknowledged that no harm would result from the appeal being heard.
Leave was granted and the matter referred for appeal management to ensure an expeditious hearing. The panel expressly noted it is not seized of the merits of the appeal, and costs were reserved to the panel that will hear it.
Key Takeaways
- There is no appeal as of right under s. 193 of the Bankruptcy and Insolvency Act in these circumstances; leave under s. 193(e) is required.
- The unresolved legal question — whether a secured creditor can credit-bid to acquire a bankrupt estate’s cause of action that falls outside the creditor’s own security — is sufficiently unsettled and broadly important to warrant leave.
- A secured creditor’s ability to credit-bid is not necessarily unlimited to all estate assets; the relationship between the bid and the scope of the underlying security may be determinative.
- The appeal will be heard by a fresh panel; this decision resolves only the leave question, leaving the substantive merits open.
Why It Matters
Credit bidding is a standard tool in Canadian insolvency proceedings, allowing secured creditors to acquire assets by offsetting the purchase price against the debt owed rather than tendering cash. This case raises a novel boundary question: can that mechanism be used to extinguish a cause of action that the creditor itself faces, even when that claim arguably falls outside the security package? If the answer is yes, senior secured creditors could effectively neutralize litigation risk against themselves without spending cash, potentially at the expense of unsecured creditors and guarantors.
The Court of Appeal’s willingness to grant leave signals that this is live, unresolved law in Ontario. Insolvency practitioners, secured lenders, and litigation counsel advising on bankrupt estates with potential claims against their senior lenders should monitor the substantive appeal closely, as the outcome will shape how such asset auctions are structured and contested going forward.