BIA Claims
| Author | Stephanie Ben-Ishai; Thomas G. W. Telfer |
| Pages | 250-294 |
CHAPTER 7
BIA Claims
I. INTRODUC TION
To be entitled to participate in the debtor’s bankruptcy, a creditor must have a “provable”
claim (Bankruptcy and Insolvency Act, RSC, , c B-, s(), “creditor” [BIA]). The amount
of the creditor’s claim is relevant to determining the size of the dividend it will receive from
the bankrupt’s estate. For example, assume there are enough assets in the estate to pay
unsecured creditors cents on the dollar. If the creditor’s claim is for , it will receive
. If, however, its claim is for , it will receive . The amount of a creditor’s claim
also matters because it determines the number of votes it can cast in a creditor’s meeting
(BIA, s). Similarly, in the context of commercial proposals undertaken under the BIA, the
amount of a creditor’s claim determines its voting power in a class meeting to approve a
proposal (BIA, s ()). Section() of the BIA further provides that a proposal is accepted
if all classes of unsecured creditors vote in favour by a majority in number and two thirds in
value: see further, Chapter . The Companies’ Creditors Arrangement Act, RSC , c C-
(CCAA), section , enacts a similar rule for CCAA plans: see Chapter .
This chapter addresses two issues:
) What is a provable claim?
) What are the rules for valuing claims?
A. Provable Claims
BIA, section (), provides:
All debts and liabilities, present or future, to which the bankrupt is subject on the day on
which the bankrupt becomes bankrupt or to which the bankrupt may become subject
before the bankrupt’s discharge by reason of any obligation incurred before the day on
which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceed-
ings under this Act.
This denition covers present debts (debts owed to the creditor on the date of the debtor’s
bankruptcy); future debts (debts that are owing, but not payable on the date of the bank-
ruptcy); contingent debts (debts subject to a condition that has not been fullled); and unliq-
uidated claims (claims for an amount that is undetermined at the date of the bankruptcy).
However, the denition is limited to pre-bankruptcy claims and, as a general rule, debts and
liabilities incurred after the date of bankruptcy are not provable claims (Re Sanderson (),
OR (d) (OntCA)). One exception is post-ling claims for environmental clean-up
costs (BIA, s.()). Another exception arises in the context of executory contracts: if a
Chap ter 7: BIA Claims
contract is disclaimed in a bankruptcy, the other party to the contract has a provable claim
for damages, even though it arises post-ling (see Chapter , SectionII). It is important to
note that before a contract is disclaimed, the counterparty does not have a provable claim,
since the trustee may choose to arm the contract.
Section () provides that every creditor must prove their claim, and a creditor who
does not prove their claim is not entitled to share in any distribution. Section () provides
that, as a general rule, an order of discharge releases the debtor from all claims provable in
the bankruptcy. This includes provable claims from creditors where no proof of claim was
led pursuant to section (). The threat of receiving nothing from the bankrupt’s estate
gives a creditor with a provable claim a strong incentive to le a proof of claim. If, however,
the claim is not a provable claim, the creditor cannot le a proof of claim under section
(), and its claim will not be released when the debtor is discharged. The consequences
of failing to lodge a proof of claim in restructuring proceedings are roughly comparable: see
chapters and .
B. Valuation of Claims
A contingent claim or an unliquidated claim will be an unprovable claim if it is too dicult
to value. This follows from sections() and (.) read in combination. Section ()
states that the classication of a contingent or unliquidated claim is provable, and the value
of that claim will be made in compliance with section . Section (.) provides that the
trustee shall determine whether any contingent or unliquidated claim is a provable claim,
and if it is a provable claim, it will be valued by the trustee. If a creditor disputes the trustee’s
decision about the claim, it has thirty days to appeal to the court (BIA, s ()).
The scheme is driven by two competing policy considerations: () debtor rehabilitation;
and () the need for nality of bankruptcy proceedings. In the case of an individual debtor,
one of the objects of the bankruptcy laws is to wipe the slate clean so the debtor can make a
fresh start. This means that “provable claim” should be dened as widely as possible so the
debtor is not left with outstanding liabilities after the discharge. The discharge provisions
only apply to individuals. Where the debtor is a company, the fresh start policy is to be found
in the restructuring laws (BIA, PartIII, Div, and the CCAA). A BIA proposal, if accepted by
creditors, releases the debtor from provable claims except for payments the debtor agrees
to make under the proposal. The same is true for restructuring plans organized under the
CCAA. Again, in the restructuring context, it makes sense in terms of the fresh start policy to
dene “provable claim” as widely as possible.
The opposing element is the need for nality of bankruptcy proceedings. Unliquidated
and contingent claims are by denition uncertain. The only sure way to resolve the uncer-
tainty in the case of an unliquidated claim is to wait and see what the court hearing the claim
decides. Similarly, the only sure way to resolve the uncertainty in the case of a contingent
claim is to wait and see whether the contingency materializes. The diculty with the wait
and see option is that it may take years to determine if the claim will arise, and it would
be undesirable to hold up bankruptcy or restructuring proceedings indenitely. The main
solutions are to estimate the present value of the claim and admit it to proof on that basis
or, alternatively, if the estimation is too dicult, determine that the claim is not a provable
claim. The rst option is consistent with the rehabilitation goal of the bankruptcy laws, but it
means doing rough and ready justice so far as the value of the creditor’s claim is concerned.
The second option is consistent with the need for nality in bankruptcy proceedings, but it
is inconsistent with the fresh start policy.
BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS
The Supreme Court of Canada was recently called upon to address these competing
policy considerations in the context of family law proceedings in a Manitoba case. In Schreyer
v Schreyer, SCC (Schreyer), the Supreme Court of Canada held that if an equalization
claim is liquidated before the date of bankruptcy, the claim is undisputedly provable. On the
other hand, if the claim was still unliquidated as of the date of bankruptcy, the court must
decide whether it is capable of valuation under section of the BIA, taking into account
any provincial equalization schemes (Schreyer, at para ; see also Bukvik v Bukvik (),
OR (d) (Sup Ct J), excerpted in Part II, below). Specically, at what point does the prov-
ince’s equalization scheme give rise to a right of payment, and how certain is the amount
of the payment? In Schreyer, a right to payment existed from the time of separation of the
spouses, which pre-dated the bankruptcy (Schreyer, at para ). This left only the issue of
quantication, where the court could rely on the clear formula in Manitoba’s family law
legislation, leaving little scope for judicial discretion. Accordingly, the claim arose prior to
bankruptcy and was provable.
In many estates, these issues create no problems, particularly because there is often not
enough left in the estate to make it worthwhile for unsecured creditors to press their claims.
As noted, problems arise where the claim is unliquidated or contingent in character. The
cases extracted in Part II illustrate some of these problems in the context of BIA proceedings,
as well as the innovative approach taken by American courts in resolving deadlocks.
II. ILLUSTR ATIVE CASES
Ontario New Home Warranty Program v Jiordan Homes Ltd (1999), 43 OR (3d) 756 (Ont Ct J (Gen
Div))
FERGUSON J:
The Fac ts
The defendant is a former shareholder in Jiordan which was in the business of building
houses.
The sequence of events is this:
July , — the defendant signed a guarantee in which he agreed to indemnify
the plainti if it had to make good any obligations of Jiordan
July , — Jiordan agreed to indemnify the plainti if it had to make good any
obligations of Jiordan under an agreement of purchase and sale
August , — Jiordan agreed to sell a house to Ramos with a closing date of
March ,
November , — the defendant led an assignment in bankruptcy
March , — the sale of the house did not close
October , — the defendant was discharged from bankruptcy
October , — Ramos made a claim against the plainti for the return of the
deposit it had paid Jiordan under the sale agreement
January , — the plainti paid Ramos compensation of , pursuant to
s. of the Ontario New Home Warranties Plan Act, RSO , c.O..
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