The Proof, Valuation, and Payment of Claims

• Author: Roderick J. Wood
• Pages: 260-294

260

CHAPTER 9

THE PROOF,

VALUATION, AND

PAYMENT OF CLAIMS

After the property of the bankrupt estate has been assembled and li-

quidated, 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 claim-

ants? 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 pro-

visions 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.”1 This al-

lows as many claimants as possible to participate in the process and

share in the liquidation proceeds.2 This 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 t hough a debt was not due until some future d ate.

The right to prove a claim in bankr uptcy is subject to the principles

that govern executory contracts.3 A claimant cannot prove a claim

if the trustee aff‌irms the contract, since the claimant will receive the

1 Re McKay (1922), 2 CBR 462 (Ont HCJ).

2 Newfoundland an d Labrador v AbitibiBowater In c, 2012 SCC 67 at para 35

[AbitibiBowater].

3 See Chapter 6, Sect ion B.

The Proof, Valuation, and Pay ment of Claims 261

agreed-upon performance. If the trustee disclaims the contract, the claim-

ant is entitled to prove a claim for breach of contract in the bankruptcy.

A. PROVABLE CLAIMS

A creditor must f‌ile a proof of claim with the trustee in order to partici-

pate in the distribution of the assets of a bankrupt estate.4 The f‌iling of

a proof of claim also permits the creditor to vote at meetings of credit-

ors.5 A failure to f‌ile a proof of claim before the f‌irst meeting of credit-

ors does not preclude the creditor from participating i n the distribution

of assets. However, it is unwise for a creditor to wait too long before

f‌iling a proof of claim, since th at cred itor wi ll not be entitled to disturb

the dividends that have already been paid out to other creditors.6

The 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.7 If the claim is not provable, the stay of

proceedings does not affect it. Second, the discharge of an individ-

ual bankrupt ordinarily releases the bankrupt from claims provable

in bankruptcy.8 These 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 indi-

vidual bankrupt is not necessarily a good thing from the point of view

of a creditor. Although the creditor is able to participate in a bank-

ruptcy dividend, the cred itor’s clai m will usually be exting uished upon

the discharge of the bankrupt. If there are few or no assets in the bank-

rupt estate, the creditor may be better off with a non-provable claim. A

creditor with a non-provable claim cannot enforce it against the prop-

erty 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.

4 BIA, s 124(1).

5 See Chapter 8, Sect ion A(2).

6 BIA, s 150.

7 Ibid, s 69.3(1) and see Chapter 6, Section A.

8 BIA, s 178(2). Certain t ypes of claims li sted in s 178(1) are not release d. See

Chapter 10, Section G.

BANKRUPTCY AND INSOLVENC Y LAW262

The situation is different if the bankrupt is a corporation. Bank-

ruptcy signals the end of the line for the corporation, unless all of

the claims of the creditors are satisf‌ied.9 Without a provable claim, a

creditor will recover nothing. The corporation will cease to carry on

operations and all of its as sets 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.10 The 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.11 The trustee also publishes a notice of the bank-

ruptcy in a local newspaper12 and 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.13 The statement of

account and supporting evidence must be suff‌icient to enable the trust-

ee to make an informed decision as to whether the claim has merit.14

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.15 Proof of claims for unpaid wages owing to workers can be

made in a single proof by a union, a federal or provincial labour depart-

ment, or other person acting on behalf of the creditors.16

Once the proof of claim is completed, the creditor delivers it to

the trustee.17 After examining it, the trustee may admit the claim or

9 BIA, s 169(4).

10 Ibid, s 158(d).

11Ibid, s 102(2).

12Ibid, s 102(4). It is not neces sary to do so in summa ry administrat ion bankrupt-

cies. See BIA, s 155(c).

13 See Re Port Chevrolet Olds mobile Ltd (2004), 49 CBR (4th) 146 (BCCA).

14Re Nor ris (1988), 67 CBR (NS) 246 (Ont HCJ), rev’d on other grounds (1989), 75

CBR (NS) 97 (Ont CA).

15The period is twelve month s in the case of a related par ty. This information is

relevant for the pur poses if any of the payment s might be avoided as prefer-

ences. See Chapt er 7, Section B .

16BIA, s 126(2).

17Ibid, s 124(2).