Pursuing Claims in Bankruptcy
September 26, 2014
Just because a debtor is bankrupt (or in another insolvency proceeding), does not necessarily mean creditors will not recover amounts owing from the debtor. This is particularly true for employees (including Unions/Union Trust Funds) who may have super-priority claims in a bankruptcy for unpaid wages and pension contributions. Proving your claim and the ranking of your claim versus other creditors is the central focus for effectively pursuing claims in bankruptcy. Below is a brief overview of the bankruptcy process in Canada.
Bankruptcy
Generally, any insolvent person who has no other way to meet his or her financial obligations may file for bankruptcy. In a bankruptcy, a corporation or person (called the “debtor”) who can no longer pay their debts, gives all of their non-exempt property to a Trustee in Bankruptcy who then sells the property and distributes the available funds to creditors. Bankruptcy can be voluntary, or forced by a creditor through the Courts. Once a debtor is declared bankrupt, all legal proceedings are stayed absent the Court’s permission.
Proof of Claim Form
After a bankruptcy has been filed, the Trustee will send out to all the known creditors: a notice of bankruptcy, a list of creditors and the amounts of their claims (known by the Trustee at that time). To recover money owed, a creditor must complete and submit a Proof of Claim to the Trustee. In this form, a creditor must set out: their contact information; the amount owed; the basis of the claim; the ranking of the claim (e.g. unsecured, priority, secured etc.); and must attach any supporting documents proving the claim. The Trustee then determines if the claim is allowed in whole or in part. A creditor has 30 days to appeal a disallowed claim to the Court. If the Trustee approves the Proof of Claim, the creditor may share in any dividends/distributions and vote at the first meeting of creditors (if one is held).
Meeting of creditors
Within five days of appointment, the Trustee must send a notice of the bankruptcy and a notice of the First Meeting of Creditors (if one is held) to the bankrupt, and any known creditors. At the first meeting of creditors, there will be a vote to confirm (or replace) the Trustee, and to appoint inspectors [inspectors are appointed to provide the Trustee with direction and authority]. At this meeting, creditors may also ask the Trustee and bankrupt questions, review the Trustee’s preliminary report and examine the bankrupt’s affairs. Sometime, the Trustee may also have the creditors vote on other resolutions/issues.
It is important to file your Proof of Claim prior to the First Meeting of Creditors, as this allows the creditor to: vote on a resolution; examine the Proofs of Claim of the other creditors; or require the production of bankrupt’s books or documents. The creditor may also vote by proxy by providing the Trustee with a completed proxy form.
Distribution
After the Trustee has sold all of the bankrupt’s property, the Trustee prepares a final statement of receipts and disbursements along with a dividend sheet. The dividend sheet contains a list of creditors who will receive dividends and the amount to which they are entitled. Dividends are distributed pursuant to a complex set of rules under the caselaw and the Bankruptcy and Insolvency Act. The distribution can also vary depending on the nature of the assets sold and any security on those assets. Although the following list is an oversimplification, and not necessarily true in each case or for every asset, often times distribution of proceeds follows the following ranking:
a) CRA Trust Claims;
b) certain employee super-priority claims;
c) secured claims;
d) Trustees fees and legal costs; and
e) unsecured claims.
Unsecured creditors are paid on a pro-rata basis, and after all secured and preferred creditors have been paid in full. However, in some cases, there will be no distribution for unsecured creditors.
Employees/Unions
If the creditor is an employee of the bankrupt, they may be entitled to have up to approximately $3,700 of their claim paid out by the Wage Earner Protection Program (WEPP) – certain claims for unpaid wages, vacation, severance and termination pay. Eligible claims are paid out through a government fund, regardless if there are any funds for distribution in the bankruptcy. If a WEPP payment is made, then Services Canada is subrogated to the employee’s claim in the bankruptcy (up to the amount paid out by WEPP).
In a bankruptcy, the Bankruptcy and Insolvency Act provides for super priority claims regarding unpaid wages/compensation and unpaid pension contributions. Caselaw in Ontario confirms unpaid monthly Union remittances/benefits and pension contributions qualify for these super priorities. In many cases, it is also possible for employees and Unions/Union Trust Funds to sue directors of bankrupt corporations personally for any unpaid wages and monthly remittances/benefits. It is therefore strongly recommended that you consult a knowledgeable lawyer to assist you with preparing a Proof of Claim, particularly if the claim is for a Union/Union Trust Fund regarding unpaid monthly contributions/remittances and pension contributions.
