The Proof, Valuation, and Payment of Claims

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 241-272

241

CHA PTER 9

THE PROOF,

VALUATION, AND

PAYMENT OF CLAIMS

After the property of the bankrupt est ate has been a ssembled 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 bank ruptcy estate?

How will these funds be di stributed among the participating claim-

ants? The f‌irst question is addresse d in the provi sions of the BI A t hat

deal with the proof of claims. The second question is dealt with in pro-

visions that addre ss the scheme of distr ibution in bankruptcy.

The right to prove a claim against a bankrupt estate is “based upon

the theor y that the debtor’s business has come to an end and th at all

obligations whether already incurred or merely contingent are to be

disposed of and cleared off in the bankruptcy proceedings.”1 This

means that creditors will be entitled to share in the bankrupt estate

even though t he 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.2 A claimant cannot prove a claim if the

trustee aff‌ir ms 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 bank ruptcy.

1 Re McKay (1922), 2 C.B.R. 462 (Ont . H.C.J.).

2 See Chapter 6, Sect ion B.

BANKR UPTCY A ND INSOLVENC Y LAW242

A. PROVA BLE CLAIM S

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.3 The f‌iling of

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

ors.4 A failure to f‌ile a proof of claim before the f‌irst meeting of creditors

does not preclude the creditor from participati ng in the distr ibution of

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

a proof of claim, si nce that creditor will not be entitled to d isturb t he

dividends that have already been paid out to other creditors.5

The concept of a provable claim is signif‌ic ant in a number of other

respects. First, a provable claim is subject to the automatic bankr uptcy

stay of proceedings. This prevents the creditor from commenci ng or

continuing any action or enforcing any remedy against the bankr upt

or the bankrupt’s propert y.6 If the claim is not provable, the stay of

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

ual bankrupt ordinari ly relea ses the bankrupt from claims provable

in ban kruptcy.7 These events do not depend upon whether or not the

creditor has f‌iled a proof of cl aim. R ather, they a rise if the claim falls

within the def‌in ition of a provable claim.

Possessing a claim that is provable in ban kruptcy against an indi-

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

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

ruptcy dividend, the creditor’s claim will usually be extingui shed 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 ca nnot enforce it again st the prop-

erty of the bankrupt est ate, 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 i s different if the bankrupt is a corporation. Bank-

ruptcy signals the end of the li ne for the corporation, un less all of

the cl aims of the creditors are satisf‌ied.8 Without a provable claim, a

creditor w ill recover noth ing. The corporation will cease to carry on

3 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 124(1) [BIA].

4 See Chapter 8, Sec tion A(2).

5 BIA, above note 3, s. 150.

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

7 Ibid., s. 178(2). Cert ain types of clai ms listed in s. 178(1) are not re leased. See

Chapter 10, Section G.

8 Ibid., s. 169(4).

The Proof, Valuation, and Pay ment of Claims 243

operations and all of its assets will be distributed to creditors who have

proven their claims in t he bankruptcy.

1) The Proof of Claim Procedure

A bankrupt i s required to submit to the trustee a statement of affairs

that sets out t he names and addresses of all the c reditors.9 The trustee

uses this informat ion 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.10 The tr ustee also publishes a notice of t he bank-

ruptcy in a local newspaper11 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 t he particulars of the claim a nd ma ke reference to vouchers

or other evidence by which it can be substantiated.12 The statement of

account and supporting evidence must be suff‌icient to enable the tr ust-

ee to make an informed decision as to whether the claim has merit.13

The creditor also gives part iculars of any securit y held by the creditor

and indicate s any payments received by the creditor in t he past three

months.14 Proof of cla ims 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.15

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

the trustee.16 After exami ning it, the tr ustee may admit the claim or

disallow it in whole or in par t.17 The tr ustee may also allow the claim

but disallow a right to priority provided by the BIA. Altern atively, the

trustee m ay request t hat the creditor provide further ev idence in sup-

port of the claim.18 If the claim is a contingent claim or an unliquidated

claim, the trustee must determine if it is provable, and, if it is, the tr ust-

9 Ibid., s. 158(d).

10 Ibid., s. 102(2).

11 Ibid., s. 102(4). It is not nece ssary to do so in summ ary administr ation bank-

ruptcies. See ib id., s. 155(c).

12 See Re Port Chevrole t Oldsmobile Ltd. (2004), 49 C.B.R. (4th) 146 (B.C.C.A.).

13 Re Norris (1988), 67 C.B.R. (N.S.) 246 (Ont. H.C.J.), rev’d on other grounds

(1989), 75 C.B.R. (N.S.) 97 (Ont. C.A.).

14 The per iod is twelve months in the c ase of a related party. This in formation is

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

ences. See Chap ter 7, Sect ion B.

15 BIA, above note 3, s. 126(2).

16 Ibid., s. 124(2).

17 Ibid., s. 135(2).

18 Ibid., s. 135(1).