Restructuring and InsolvencyRestructuring and Insolvency Group e-COMMUNIQUÉ - October 2010Published: 10/21/2010 By Bruce Leonard, Alex Tarantino, David Ward In This Issue
The Proof of Claim Process: A Creditor’s Day in CourtBy 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. Case Comment – Re I. Waxman & Sons Ltd.In the recent Ontario Court of Appeal case of Re I. Waxman & Sons Ltd., the Canada Revenue Agency (“CRA”) was able to collect all taxes owing despite the CRA’s status as an unsecured creditor under section 86(1) of the Bankruptcy and Insolvency Act (“BIA”). The CRA was able to accomplish this by obtaining a jeopardy collection order under subsection 225.2(2) of the Income Tax Act (“ITA”) promptly following notification that I. Waxman & Sons was seeking to appoint a receiver. After securing the jeopardy collection order from the Federal Court, the CRA collected a large portion of the taxes owing by I. Waxman & Sons, prior to the appointment of the receiver. As the Ontario Court of Appeal summarized, the CRA’s position on application for the jeopardy collection order was that “because it (the CRA) could take no steps to attempt to collect or to secure its position vis-à-vis other creditors, the collection of the debt would be jeopardized by a delay...The CRA explained that if the receivership order were granted, the CRA's claim in the receivership would be unsecured and the stay of proceedings resulting from the receivership order would preclude the CRA from doing anything to improve its position in the future. As an unsecured claimant, the CRA would only realize its pro rata share of any funds that remained after the secured creditors…” Remarkably, this argument was accepted by the Federal Court and the jeopardy collection order was granted. Subsequently, I. Waxman & Sons was declared bankrupt and CRA submitted a proof of claim in the bankruptcy for amounts owing after the payments received from the jeopardy collection order. The trustee informed the CRA that it was asserting a right of set-off from the amounts received under the jeopardy collection order, against the dividend amounts to be distributed to the CRA as an unsecured creditor in the estate. The trustee asserted that the effect of the jeopardy collection order was to create a preference for the benefit of the CRA contrary to the order of priorities as set out in the BIA. The Ontario Court of Appeal ultimately disagreed with the trustee’s position. In making this determination, the Court stated that, in accordance with section 70(1) of the BIA, the payments to CRA were completely executed prior to the bankruptcy. Further, the Court felt that section 86(1) of the BIA, which provides that the CRA is an unsecured creditor, had no application as the debts were completely executed prior to the bankruptcy. The Court concluded that CRA was statutorily entitled to seek the jeopardy collection order, and upon obtaining it, permitted to immediately collect the amounts owing. So long as these amounts are collected prior to a subsequent bankruptcy, the Ontario Court of Appeal appears to have taken the position that they are not subject to attack under the BIA’s priority provisions. This decision is noteworthy as the CRA found a way to essentially alter the BIA order of priorities and its statutorily provided position as an unsecured creditor. If the precedent established in this case is followed, the CRA will be able to be paid in priority to other creditors, if it is able to secure a jeopardy collection order upon notification of a receivership application, and is able to collect the amounts owing before bankruptcy. The CCAA Scene: Recent and Notable - October 2010Abitibi Professional Notes - October 2010By Deborah S. Grieve, Bruce Leonard, David Ward Deborah S. Grieve has been elected to the International Board of the International Women's Insolvency and Restructuring Confederation (IWIRC). She will be serving as the Director responsible for Canada, for a two year term. IWIRC is the premier organization devoted to enhancing the professional status of women in the practice of insolvency and restructuring. IWIRC members comprise every discipline in the industry and are located in every major market in the world. Bruce Leonard and David Ward participated in the First Annual American College of Bankruptcy/National Conference of Bankruptcy Judges International Insolvency Roundtable at the 84th Annual NCBJ Conference held on October 13-16, 2010 in New Orleans. Bruce and David jointly authored the Program Conference Materials which include a substantial compilation of resources related to the UNCITRAL Model Law on Cross Border Insolvency. The Roundtable, scheduled as an Opening Day Plenary Session, was chaired by Bruce. |