Why Courts take bad faith seriously: Insights from the VK Group decision

The British Columbia Supreme Court determined that bad faith conduct by the debtors was sufficient to terminate proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) and that appointing a receiver under the Bankruptcy and Insolvency Act was appropriate.

On December 9, 2025, the Court rendered its decision in V K Delivery & Moving Services Ltd. (Re), 2025 BCSC 2454, and on December 19, 2025, the Court of Appeal refused to grant the debtors leave to appeal. This was a highly contentious case where Royal Bank of Canada (“RBC”), a senior secured creditor, sought the appointment of a receiver of a debtor group of companies, while faced with a competing CCAA proceeding.

The Court’s decision was a relief after almost nine months of RBC being stayed from taking steps against the debtors while having no faith in the debtors in a CCAA proceeding.

Background

V K Delivery & Moving Services Ltd., Product Line Holdings and Logistics Ltd., VK Linehaul Ltd., and VK 24/7 Logistics Solutions Ltd. (collectively, the “VK Group”) were trucking and logistics companies whose primary assets included trucks, trailers and warehousing equipment.

Beginning in late 2024, RBC began investigating the VK Group’s financial affairs as it had become aware that the VK Group’s management had transferred $2.763 million in working capital to a related entity for the purchase of real property. It was also discovered that the VK Group had outstanding employment source deductions owing to Canada Revenue Agency (“CRA”), had $850,000 in arrears owing to Insurance Corporation of British Columbia for unpaid insurance premiums, and that a management family member was alleged to have authorized overpayments of $1.5 to 2 million over a period of two years to contractors.

RBC determined that the VK Group’s management could not be trusted and sought to have MNP Ltd. (“MNP”) appointed as receiver to prevent any further cash from being removed from the VK Group and to prevent RBC’s security from eroding any further.

The VK Group brought a competing application under the CCAA. Notwithstanding RBC’s concerns, on May 16, 2025, an initial order under the CCAA was granted and Crowe MacKay & Company Ltd. was appointed as monitor over the VK Group.

Over the course of seven months and five court applications that followed the initial order, it was determined through VK Group’s evidence that:

• Only 66% of RBC’s security collateral was recoverable,
• $2.337 million of the $3.965 million owed to CRA was owing in respect of deemed trust employee source deduction arrears,
• The VK Group’s accounting records were so poor that they weren’t able to determine GST refunds or tax losses, and
• They had only secured two questionable offers for financing that were both insufficient to see RBC paid out in full.

As part of the VK Group’s “germ of a plan,” they intended to pay down the CRA arrears over the course of the CCAA proceeding such that a refinancing would be sufficient to see RBC paid out in full, and then a plan of arrangement would be put to the remainder of the creditors. The VK Group received a letter of intent for financing on June 3, 2025, from BVD Capital Corporation (“BVD”). Due diligence for the financing was commenced around June 25, 2025, and a conditional commitment letter was obtained on September 8, 2025. The entire viability of any plan of arrangement rested on whether the BVD financing could be advanced.

By December 4, 2025, the VK Group had not completed a portion of the conditions in the commitment letter (real estate appraisals, etc.), were at least a month away from updating their financial statements and accounting processes, and had not paid down the CRA arrears by a sufficient amount that the financing, if advanced on that date, would have been sufficient to see RBC paid out in full.

It was clear that the VK Group were seeking extensions to the stay of proceeding to buy more time to try and pay down the CRA arrears and receive the BVD financing.

Additionally, over the course of the CCAA proceeding, the VK Group and the Monitor provided decreasing amounts of information and updates to RBC and, when information was provided, some of the information provided by one party would conflict with information provided by the other.

Competing proceedings

Justice Basran was seized of the CCAA proceeding and receivership application since his granting of the initial order. At each application, Justice Basran considered both the test for an extension of the stay of proceedings under ss. 11.02(2) and (3) of the CCAA and the test for the appointment of a receiver.

The following criteria were used in assessing whether the VK Group satisfied the test for a stay extension under the CCAA:

1. Had the VK Group acted in good faith and with due diligence?
2. Did the circumstances exist that make a stay of proceedings appropriate?
   1. Did the stay extension advance the policy objectives underlying the CCAA? Meaning, would the stay extension facilitate a plan of arrangement between the VK Group and its creditors?
   2. Had the VK Group made progress toward a restructuring during the previous stay period?
   3. Would the creditors be prejudiced by the stay extension?
   4. What was the comparative prejudice to the VK Group, the creditors and other stakeholders in not granting the stay extension?

The Court also considered the “just and convenient” test, citing the factors set out in Maple Trade Finance Inc. v. CY Oriental Holdings Ltd., 2009 BCSC 1527 – noting that a contractual right of a secured creditor to have a receiver appointed was a “strong factor” in which “considerable weight” could be placed on that right.

In his reasons on December 9, 2025, Justice Basran found that, not only had the VK Group failed the test for a stay extension by not acting in good faith, they had acted in bad faith for two reasons:

1. The VK Group had represented to the Court that they would be making payments to CRA in respect of the CRA arrears. It was discovered that the VK Group was instead making payments to an investment account held by with their counsel’s law firm (the “Investment Account”) while the VK Group negotiated with the CRA regarding how the payment of funds would be allocated. When the VK Group was asked to provide an undertaking in respect of those funds (the “Undertaking”) such that the funds would only be used to pay down the CRA arrears or be made available to a receiver, they failed or refused to do so.
2. The VK Group held funds in a USD account with a U.S.-based subsidiary of RBC (“RBC U.S.”). The VK Group had repeatedly demanded that RBC set-off the funds in the RBC U.S. account against the indebtedness. The Court had been advised that the intention was for the VK Group to use the funds in the RBC U.S. account to pay down the indebtedness owing to RBC and this intention was also stated in the monitor’s reports. One day after the VK Group had made a formal demand of RBC for set-off, the VK Group wired all of the funds from the RBC U.S. account to another non-RBC bank account and applied the funds to operating expenses and professional fees.

Justice Basran ultimately determined that the prejudice to RBC did not warrant the stay extension as the VK Group was cash flow negative for the entire duration of the CCAA proceeding, the financing continued to be insufficient, the VK Group was unable to make payments toward the CRA arrears and other operating expenses in accordance with the cash flow projections, RBC’s collateral continued to depreciate, and insufficient progress had been made toward developing a plan of arrangement. Justice Basran found that it was just and convenient to appoint MNP as receiver.

Leave to Appeal

In its application for leave to appeal Justice Basran’s decision, the VK Group raised broad grounds of appeal including that Justice Basran erred by finding the VK Group had acted in bad faith, failed to consider relevant evidence regarding a plan of arrangement, and erred in determining that RBC had an effective veto in a plan of arrangement.

Justice Edelmann, of the Court of Appeal (in Chambers), dismissed the VK Group’s application for leave to appeal on all grounds, determining that, inter alia:

1. Justice Basran’s findings of bad faith were grounded in the factual matrix of the case before him and there would be limited implications beyond this case.
2. Justice Basran did not fail to consider the material facts or law in finding that, by diverting funds held in their RBC U.S. account, the VK Group acted in bad faith. Prompt disclosure to the Monitor of the diversion was not enough to foreclose a finding of bad faith. Justice Basran knew the context in which the representations relating to the RBC U.S. account had been made and it was open to him to find bad faith where the funds were used for another purpose.
3. With respect to the Undertaking, the necessity for the VK Group to come to an agreement with the CRA regarding the application of payments was not an impediment to holding the funds in trust for CRA or to provide the Undertaking to RBC. Justice Basran considered it incumbent that the VK Group should have made assurances in respect of the funds in the Investment Account, which were otherwise available to the VK Group to use, and there was no reason to interfere with this decision.
4. Notwithstanding that RBC had not raised the issue of bad faith in their written materials, the issue was raised during oral arguments and the VK Group could have sought an opportunity. It was not procedurally unfair for Justice Basran to find that the VK Group had acted in bad faith.
5. Justice Basran did not commit palpable or overriding errors regarding his assessment of the evidence or the weight he gave to the evidence relating to the viability of a plan of arrangement.
6. Justice Basran did not err in finding that, at the relevant time, RBC effectively had a veto as RBC would oppose any plan of arrangement where RBC would not be paid out in full.

Vancouver lawyers William E. J. Skelly and Jess R. Reid were pleased to act as counsel to Royal Bank of Canada in this case.

MLT Aikins insolvency & restructuring group is comprised of 27 lawyers practising in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy.

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