Pursuing claims in bankruptcy

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In a bankruptcy, the bankruptcy trustee is in charge of collecting on any claims held by the bankrupt, and is also given additional powers under the Bankruptcy and Insolvency Act (BIA) to attack transactions entered into prior to bankruptcy. But what happens when the trustee fails or refuses to pursue a claim?

The trustee may feel that the claim has no merit or, more often, that there are insufficient resources in the bankrupt estate to fund the claim. In such cases, a creditor can apply to the court under section 38 of the BIA for an assignment of the trustee’s right to pursue the claim.

In the court application, the creditor who is applying must document that the trustee has been requested to take action on the claim and that the trustee has neglected or declined to act. The applicant should also include facts explaining the claim.

Risk as well as reward

If the application is approved by the court, the creditor can then proceed with the claim for their own benefit, but also at their own risk and expense. So, the creditor must be confident that the value of the claim is sufficient to cover at least the estimated costs of court proceedings and legal fees.

The “upside” of the claim is limited to the total amount of the creditor’s claim plus the costs of the proceeding; any additional recoveries go to the bankrupt estate.

Following court approval, the successful creditor must then notify all other creditors, who may elect to join the claim. In that case, the costs, as well as the benefits, of the claim are shared between the participating creditors pro rata to the amounts they are owed in the bankruptcy.

Creditors who are frustrated that a bankruptcy trustee is not pursuing a claim should consult with counsel to determine the strength of the case and available options to pursue legal remedies.

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