Does an indemnity survive the seller’s personal bankruptcy after closing?

A buyer holding an indemnity from an individual seller is relying on that person’s ability to pay. If the seller goes bankrupt after closing, the indemnity is still a debt, but the Bankruptcy and Insolvency Act (BIA) decides how it is pursued and whether it is later released. The BIA is federal, so it applies across Canada. This page is about an individual seller. A seller that is a company raises different questions.

What happens to the claim

Under BIA s.121(1), debts and liabilities, present or future, that the bankrupt is subject to on the day of bankruptcy, or may become subject to before discharge because of an obligation incurred before that day, are deemed to be claims provable in the proceedings. For a contingent or unliquidated claim, s.135(1.1) has the trustee decide whether it is provable and, if so, value it. An indemnity for a loss that has not yet happened may fall in that group. On the bankruptcy, s.69.3(1) says no creditor has a remedy against the debtor or the debtor’s property, or may commence or continue an action to recover a provable claim, subject to the exceptions stated there.

What a discharge releases

Under s.178(2), and subject to s.178(1), an order of discharge releases the bankrupt from all claims provable in bankruptcy. Section 178(1)(e) lists, among the debts not released, a debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than one arising from an equity claim. Whether a particular indemnity claim fits that exception is a question for a court, not for this page. The Office of the Superintendent of Bankruptcy, which says it supervises the administration of estates in bankruptcy, describes discharge as a release from the obligation to repay, with some exceptions.

What to ask before and after closing

• Ask whether anyone besides the seller stands behind the indemnity, such as a guarantor. Under BIA s.179, an order of discharge does not release a person who was a surety, or in the nature of a surety, for the bankrupt.
• Ask whether a holdback or escrow can secure part of it. Under BIA s.69.3(2), the bankruptcy does not prevent a secured creditor from realizing its security, subject to the exceptions stated there, so have a lawyer confirm how any security is documented.
• If the seller files, ask a lawyer or the trustee how and when to file a proof of claim.

The escrow and holdbacks guide explains how money held back at closing works, and the representations, warranties and indemnities guide covers the clauses themselves.