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The Proof of Claim Process: A Creditor’s Day in Court

Published: 10/14/2010

By David Ward

For creditors of a bankruptcy estate, the proof of claim process will frequently be of most interest and importance. It is at this stage where a creditor’s rights and claims against the bankrupt are first assessed by the trustee in bankruptcy. Success at proving a claim will determine whether or not there is any right to receive a distribution from the bankruptcy estate, as well as the amount of a payment.

Given the importance of the proof of claim process, it will be of interest to insolvency practitioners and stakeholders alike that the nature of the process was recently clarified, at least so far as Ontario is concerned.

In Charlestown Residential School, Re, a decision of the Ontario Superior Court of Justice, Registrar Janet E. Mills examined the issue of whether an appeal of a trustee’s disallowance of claim ought to be a “true appeal” (i.e.- based on materials relied upon by the trustee) or a “hearing de novo” (i.e. - in which the Court may allow new and additional evidence to be adduced in support of a claim).

In reaching her decision, Registrar Mills first noted that there are competing lines of authority in Canada on the issue.

Authorities in Nova Scotia adopt the trial de novo approach, holding that the Court is not limited to considering only the information that was before the trustee, but rather is entitled to accept and consider all relevant information in assessing the admissibility of the claim. The rationale for this approach is that in assessing claims the trustee is acting more in the nature of an estate administrator, with no oral hearing taking place or formal record being created.

The countervailing position is taken in British Columbia where it has been held that an appeal from disallowance is properly an ordinary or true appeal. The rationale for this approach is that allowing the Court to consider new material as a matter of course undermines the efficiency of the bankruptcy system. It does this by allowing creditors an underserved opportunity to “cooper up” their proofs of claim and take a “second kick at the can” through a de novo appeal as of right to the court.

Upon consideration of the conflicting lines of authority, Registrar Mills determined that, on balance, it was reasonable to place a positive onus upon a creditor to properly prove his or her claim in bankruptcy at first instance. Registrar Mills ruled that appeals are generally to proceed as true appeals based solely on the materials relied upon by the trustee in making the decision to disallow the claim. The approach was considered compelling because it recognizes the experience and expertise of the trustee who, by the provisions of section 135 of the BIA, is required to carefully examine every proof of claim and act equitably in determining whether to allow or disallow a claim.

Registrar Mills did qualify her decision by noting that an appeal may proceed as a de novo proceeding in circumstances where an injustice would be the result if the parties were restricted to just the record. This could be the case, for example, if new and important evidence first became available following a trustee disallowance.

The decision in Charlestown Residential School, Re is an important decision. Creditors and their lawyers are reminded that it may prove critical to file their absolute best case with the trustee in bankruptcy. The risk of not doing so, may well be being tied to the same evidence on appeal to the Court.

Please contact David Ward at dward@casselsbrock.com with questions or for a copy of Charlestown Residential School, Re decision.