B. The Bankruptcy Scheme of Distribution

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

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The BIA recognizes three categories of unsecured claims among those entitled to participate in the proceeds of realization of the bankrupt estate: preferred claims, ordinary claims, and postponed claims. Secured creditors do not form a class of claims that participate in the proceeds of the bankrupt estate. Secured creditors enforce their security outside the bankruptcy system. If the value of their collateral is insufficient to satisfy the obligation secured, they may prove for the deficiency in bankruptcy. The claim for a deficiency is merely an unsecured claim that does not provide the claimant with any right of priority over other claimants.

1) Preferred Claims

The BIA sets out a hierarchy of thirteen subclasses of preferred claims. Each subcategory must be fully paid out to the extent of the preference before the claimants in the next subclass are entitled to receive anything. In several instances, the amount of the preference is subject to a monetary limit or a time limit. In these cases, the claimant has a preferred claimant status only up to the limitation but is permitted to claim the balance as an ordinary claimant.73

If there are insufficient funds to pay all preferred creditors, the result may be that the higher ranking subclasses of preferred claims are paid in full, the next ranking subclass is entitled to a partial payment, and the lower subclasses receive nothing. In this case, the claimants who fall within the subclass entitled to a partial payment will participate in the available funds on a pro rata basis, unless some other order of distribution is specified.74Two of the subclasses are unlikely to have any application to current bankruptcies.75Prior to 1992, Crown claims and claims of workers’ compensation bodies were designated as preferred. The position of these types of claims was then altered so that they would have the status of either a secured or an ordinary unsecured claim.76The preferred status of these claims is recognized, but only in respect of bankruptcies

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that occurred before the prescribed date of 30 November 1992.77The other nine subclasses are discussed below in the descending order of their priority.

a) Funeral and Testamentary Expenses

If the bankrupt is deceased, the reasonable funeral and testamentary expenses incurred by the legal representative of the deceased person constitute a preferred claim.78This covers the situation where the legal representative of a deceased person makes an assignment in bankruptcy in respect of the estate, as well as the situation where a bankrupt dies after the occurrence of the bankruptcy.79b) Administrative Costs

The costs of administration are designated as preferred claims.80The costs of administration are subdivided into three further classes for the purposes of determining priority of payment. First priority is given to a person who takes over the administration of a bankrupt estate after a trustee is unable to do so because of death, incapacity, removal, or other cause.81Second priority is given to the expenses and fees of the trustee. Third priority is given to legal costs. A further set of priorities in respect of legal costs is set out in the BIA as follows:821. Commissions on collections.

  1. Costs incurred after the bankruptcy but before the first meeting of creditors.

  2. Costs of the bankruptcy assignment or of the costs incurred by an applicant creditor up to the issue of a bankruptcy order.

  3. Costs awarded against the trustee or a bankrupt estate.

  4. Costs of other legal services rendered to the trustee.

Expenses that were incurred by the debtor before the occurrence of a bankruptcy do not enjoy the status of administrative costs even though they may save the trustee from having to incur similar costs. Thus, a real estate agent who earned a commission for finding a buyer for the debtor’s home can claim only as an ordinary creditor despite the fact that this effort saved the trustee the expense of doing so.83Although the

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general rule is that pre-bankruptcy costs cannot be claimed as administrative costs,84courts have sometimes departed from this position. In Re Canada 3000 Inc.,85a creditor was required to provide services to a debtor company under a CCAA order. The company abruptly ceased operation and went into bankruptcy, leaving the creditor unpaid. The court used the principle in Ex parte James86to justify its decision to treat the costs as an administrative cost. In Tri Technology Resource Inc. v. Lamford Forest Products Ltd.,87the court held that environmental assessment costs that were incurred after the date of the bankruptcy but before appointment of a trustee qualified as administrative costs.

It is difficult to extract from these decisions a principle that describes when pre-bankruptcy or pre-appointment costs can be claimed as administrative costs. The fact that such costs save the trustee from incurring the expense is clearly not enough to engage the principle. There must be some further element of essential service or necessity such that the trustee is obliged to pay for the services.

c) Superintendent’s Levy

The levy payable to the Superintendent of Bankruptcy is given the status of a preferred claim. The BIA provides for payment of a levy on all payments made by the trustee by way of dividend or otherwise on account of the claims of creditors.88An exception is made for the costs of the first-seizing creditor, which is not subject to the levy. The levy is used to defray the expenses the Office of the Superintendent of Bankruptcy in supervising the bankruptcy system. The levy is charged proportionately against all payments of claims that rank below that of the levy, and is deducted and remitted to the superintendent by the trustee.89The levy is payable only in respect of payments to creditors of proceeds of the bankrupt estate. It does not apply to payments by the trustee of property that belongs to a third party or to property that is not distributable to creditors such as exempt property and property held by the debtor in trust.90

The levy is currently set at a rate of 5 percent. If the distribution to creditors is more than $1 million, the rate drops to 1.25 percent on

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the portion over $1 million and not more than $2 million, and to 0.25 percent on anything above $2 million.91d) Unpaid Wages and Pension Contributions

Employee claims were at one time afforded the status of a preferred claim to the extent of $2,000. This preferred status did not ensure that employees would receive payment of their wages, since the preferred claim was often defeated by the claim of a secured creditor. The introduction of the Wage Earner Protection Program Act92and the creation of superpriority charges in favour of employee claims and pension contributions93have significantly improved the position of claims of employees in a bankruptcy of the employer.

The preferred creditor status of unpaid employees has been modified to reflect these changes. An unpaid employee may claim as a preferred creditor to the extent that there are insufficient current assets to satisfy the obligation that is secured by the employee charge.94In other cases, the superpriority that is afforded the employee’s charge or the pension charge may mean that some or all of the assets will no longer be available as security in respect of the secured creditor’s claim. The secured creditor can prove a claim as a preferred creditor in respect of the amount lost as a result of the superpriority.95

e) Family Support Claims

Family support claims are designated as preferred claims to the extent that the arrears are provable.96A distinction is drawn between periodic amounts and lump-sum amounts. The preferred status is conferred in respect of periodic amounts only if they have accrued in the year before the date of the bankruptcy. A similar time limitation is not imposed in respect of lump-sum amounts that are payable.

f) Municipal Taxes

Municipal taxes that are secured against real property by provincial law have the status of a secured claim.97Municipal taxes that are not

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secured against real property are given the status of a preferred claim.98

There are two limitations associated with the preferred claim to municipal taxes.99First, the taxes must have been assessed or levied within a two-year period before the bankruptcy. Second, the claim for taxes cannot exceed the value of the interest of the bankrupt in the property in respect of which the taxes were imposed.100It is the value of the debtor’s interest in the property and not the value of the property itself that is used. If the debtor has merely a leasehold interest in the property, it is the value of this interest that limits the preferred claim. If the interest has no value, there will be no preferred claim in respect of the municipal taxes. The amount due must be in respect of a municipal tax. In order to qualify, the amounts collected must be earmarked for municipal purposes. It is not sufficient that the provincial legislation deems the sums to be municipal taxes.101g) Landlord’s Claim for Rent

A landlord’s claim for rent qualifies as a preferred claim.102The claim is limited in two ways. First, the rent must be in respect of arrears during the three-month period immediately preceding the bankruptcy. A claim for accelerated rent also qualifies as a preferred claim but is limited to a three-month period following the bankruptcy.103Second, the preferred claim is limited to the amount realized from the...

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