A. Provable Claims

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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After the property of the bankrupt estate has been assembled and liquidated, the proceeds are distributed to the participating creditors. The bankruptcy claims process involves two fundamental questions: Who is eligible to participate in the proceeds of the bankruptcy estate? How will these funds be distributed among the participating claimants? The first question is addressed in the provisions of the BIA that deal with the proof of claims. The second question is dealt with in provisions that address the scheme of distribution in bankruptcy.

The right to prove a claim against a bankrupt estate is "based upon the theory that the debtor’s business has come to an end and that all obligations whether already incurred or merely contingent are to be disposed of and cleared off in the bankruptcy proceedings."1This means that creditors will be entitled to share in the bankrupt estate even though the debtor may not have been in default of a contractual obligation at the date of the bankruptcy and even though a debt was not due until some future date.

The right to prove a claim in bankruptcy is subject to the principles that govern executory contracts.2A claimant cannot prove a claim if the trustee affirms the contract, since the claimant will receive the agreed-upon performance. If the trustee disclaims the contract, the claimant is entitled to prove a claim for breach of contract in the bankruptcy.

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A creditor must file a proof of claim with the trustee in order to participate in the distribution of the assets of a bankrupt estate.3The filing of a proof of claim also permits the creditor to vote at meetings of creditors.4A failure to file a proof of claim before the first meeting of creditors does not preclude the creditor from participating in the distribution of assets. However, it is unwise for a creditor to wait too long before filing a proof of claim, since that creditor will not be entitled to disturb the dividends that have already been paid out to other creditors.5The concept of a provable claim is significant in a number of other respects. First, a provable claim is subject to the automatic bankruptcy stay of proceedings. This prevents the creditor from commencing or continuing any action or enforcing any remedy against the bankrupt or the bankrupt’s property.6If the claim is not provable, the stay of proceedings does not affect it. Second, the discharge of an individual bankrupt ordinarily releases the bankrupt from claims provable in bankruptcy.7These events do not depend upon whether or not the creditor has filed a proof of claim. Rather, they arise if the claim falls within the definition of a provable claim.

Possessing a claim that is provable in bankruptcy against an individual bankrupt is not necessarily a good thing from the point of view of a creditor. Although the creditor is able to participate in a bankruptcy dividend, the creditor’s claim will usually be extinguished upon the discharge of the bankrupt. If there are few or no assets in the bankrupt estate, the creditor may be better off with a non-provable claim. A creditor with a non-provable claim cannot enforce it against the property of the bankrupt estate, since the debtor no longer holds title to the property. However, the creditor will be able to enforce it against future, post-discharge assets of the debtor, since a non-provable claim is not released when the debtor obtains a discharge.

The situation is different if the bankrupt is a corporation. Bankruptcy signals the end of the line for the corporation, unless all of the claims of the creditors are satisfied.8Without a provable claim, a creditor will recover nothing. The corporation will cease to carry on

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operations and all of its assets will be distributed to creditors who have proven their claims in the bankruptcy.

1) The Proof of Claim Procedure

A bankrupt is required to submit to the trustee a statement of affairs that sets out the names and addresses of all the creditors.9The trustee uses this information to identify the creditors in order to send them the prescribed proof of claim form together with the notice of the first meeting of creditors.10The trustee also publishes a notice of the bankruptcy in a local newspaper11and will provide the proof of claim forms to creditors who respond to the advertisement.

The proof of claim must make reference to a statement of account showing the particulars of the claim and make reference to vouchers or other evidence by which it can be substantiated.12The statement of account and supporting evidence must be sufficient to enable the trustee to make an informed decision as to whether the claim has merit.13

The creditor also gives particulars of any security held by the creditor and indicates any payments received by the creditor in the past three months.14Proof of claims for unpaid wages owing to workers can be made in a single proof by a union, a federal or provincial labour department, or other person acting on behalf of the creditors.15Once the proof of claim is completed, the creditor delivers it to the trustee.16After examining it, the trustee may admit the claim or disallow it in whole or in part.17The trustee may also allow the claim but disallow a right to priority provided by the BIA. Alternatively, the trustee may request that the creditor provide further evidence in support of the claim.18If the claim is a contingent claim or an unliquidated claim, the trustee must determine if it is provable, and, if it is, the trust-

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ee is required to value it.19If the trustee disallows a claim in whole or part or makes a determination in respect of a contingent or liquidated claim, the trustee must notify the creditor of the reasons. A notice of disallowance or notice of valuation must be served or sent by registered mail or courier.20The disallowance or valuation of the trustee is final unless the creditor appeals the trustee’s decision to the court within a thirty-day period after service of the notice.21

An appeal by a creditor from a notice of disallowance or on the valuation of a contingent or liquidated claim is usually before a registrar.22The matter is heard as a trial de novo in which the judge is not limited to the information available to the trustee but can consider evidence submitted by the creditor in support of the claim.23Every creditor who has filed a proof of claim is entitled to examine the proofs of other creditors.24Even if a trustee chooses not to disallow a claim, a bankrupt or another creditor may apply to court for an order expunging or reducing it.25

2) The Definition of a Provable Claim

In order to bring involuntary bankruptcy proceedings against a debtor, a creditor must be owed a debt.26If these proceedings are successful, the court will make a bankruptcy order. However, the persons who are able to share the proceeds of the bankrupt estate are not limited to creditors who are owed debts. The BIA uses a wider meaning of "creditor" than that ordinarily denoted by the term. Any person who has a claim provable under the BIA falls within the definition of a creditor.27Provable claims are not limited to debts but include all liabilities to which the bankrupt was subject on the day of the bankruptcy.28

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Provable claims therefore encompass debts that are presently due as well as unmatured debts that will become due sometime in the future. Provable claims also include unliquidated claims against the debtor, i.e., rights of action that, if successful, will result in a judgment or order for the payment of money. The claim may be founded in contract, tort, unjust enrichment, or some other source of obligation.29The fact that the debtor disputes the debt or liability does not in itself alter its characterization as a provable claim, but it will likely be a factor in the trustee’s allowance or disallowance of the claim or the trustee’s valuation of it.

The status of contingent claims is more controversial. A contingent claim is one where the obligation may or may not arise in the future depending upon the occurrence of specified future events. For example, a contract under which a person agrees to guarantee the debt of another person is a contingent liability. The liability depends upon whether there is a default by the principal debtor, and this is something that may be unknowable at the date of the bankruptcy. The formulation used by the BIA to identify provable claims is broken into two branches.30The first branch covers "all debts and liabilities, present and future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt." The second branch is expressed as an alternative to the first. It covers all debts or liabilities "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."

In Ontario New Home Warranty Program v. Jiordan Homes Ltd.,31the court held that the liability of a bankrupt under a contract of indemnity is not a provable claim if the event that gives rise to the liability (the payment by the creditor who is claiming the indemnity) occurs after the discharge of the bankrupt. In reaching this conclusion, the court applied the second branch of the test, which appears to draw a distinction between contingent liabilities that crystallize before discharge and those that crystallize after discharge. As a consequence of this interpretation, the liability of the bankrupt under the contract of indemnity was not released by virtue of the bankruptcy discharge.

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The decision was...

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