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Insolvency & Proof of Claims

Canadian insolvency law provides powerful tools for companies in financial distress to restructure and solvent companies to purchase assets at a discount.  However you are most likely to be involved in the insolvency system as the creditor of a bankrupt person or company.  

As a creditor you receive a creditor’s package from the trustee in bankruptcy.  The package includes notice of the bankruptcy, a statement of affairs listing assets and liabilities and a blank proof of claim.  The proof of claim may seem simple enough; you fill in the amount you are owed, send it to the trustee, and wait for a cheque.  However if you do not include enough detail in the proof of claim this can be fatal to your proof of claim and can seriously prejudice you in any appeal if the trustee disallows the claim.

To understand what should be in the proof of claim it is important to understand the entire procedure for making a claim in a bankruptcy.  The first step is to complete the proof of claim with as much detail as possible and to include any documents that are needed to substantiate the claim.  

The trustee will receive the claim and review it.  If the trustee is satisfied that the claim is valid, the trustee will allow the claim.  If the trustee is not satisfied with the claim then the claim will be disallowed.  If the trustee is not satisfied, the trustee will often contact the creditor to ask for clarification or to ask for further documents however the trustee is not required to do this; the trustee can simply disallow the claim without notice.

Once the claim is disallowed the creditor has a very brief period of time to appeal the disallowance.  The claim is appealed by bringing a motion to the Bankruptcy Court.  At this point it becomes very important that all documents to substantiate the claim were included with the proof of claim.  As a general rule the Bankruptcy Court will treat the appeal of the disallowance as a true appeal and not a hearing de novo.  

“True appeal” means that the court will only consider the documents that were provided to the trustee in bankruptcy with the proof of claim.  No new documents can be filed.  There is no opportunity to “cooper up” the claim or to get on the stand and explain the situation.  If information was not provided to the trustee in the first place then the court will not consider it even if that information would show that the claim is valid.  The court will decide whether the trustee made the right decision based on the information that was provided to the trustee.

On the other hand “hearing de novo” means that the court will allow new evidence and will decide for itself whether the claim should be allowed.  New evidence is allowed, the claim can be coopered up, and there may be the opportunity to get on the stand and explain the proof of claim.

The general rule is that the appeal is a true appeal with no new evidence allowed, however there are exceptions to this rule.  The appeal will be a hearing de novo, with the ability to file new evidence, if “…to proceed otherwise would result in an injustice to the creditor.”  It is not exactly clear what “injustice to the creditor” means.  It is not enough to show that the claim is valid but more evidence is needed to prove this.  The appeal has been heard as a hearing de novo where the trustee relied on documents that the creditor was not aware of or where there were issues of credibility that could only be resolved by putting witnesses on the stand.

It is important to keep this law in mind when preparing the proof of claim.  While it may seem like a hassle to complete the proof of claim it is very important to be thorough.  If your valid claim is disallowed, filing a thorough claim will make the appeal easier.  More importantly filing a thorough claim will make it that much more likely that the trustee will allow the claim and you can avoid the appeal process altogether.

We are available to assist you in completing a proof of claim, to give general advice on what to include with the claim, or to provide any other insolvency advice.

If you have any questions relating to this article or wish to discuss your particular concerns, you may reach the author at wjaskiewicz@kmblaw.com or (905) 276-0424

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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