Proposal creditors attacking the claims of other proposal creditors

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When a non-consumer debtor files a proposal under the Bankruptcy and Insolvency Act (“BIA”), the creditors of the debtor have an opportunity to vote on the proposal. If the proposal is not accepted, the debtor is assigned into bankruptcy. In order to be accepted, a proposal must receive supporting votes from of a majority of the number of creditors, and those creditors must represent at least two thirds of the value of the claims against the debtor. Accordingly, a creditor with a large claim can in some cases control whether a proposal succeeds or fails. 

In Asian Concepts Franchising, Re, 2018 BCSC 1022, the debtor had made a proposal to its creditors. Initially, 13 out of 14 creditors voted in favour of the proposal, representing 98% of the value of the claims. The one opposing creditor, Adrenaline, subsequently took steps in court to increase the value of its claim, and decrease the value of other creditors’ claims, arguing the trustee had valued them improperly.

In the most recent application by Adrenaline, it attacked the claim of a particular creditor, Heartland, which had its vote in favour of the proposal valued and accepted by the trustee at $1.6million (just over half of the total value of the claims at that time).

Adrenaline relied on section 135(5) of the BIA, which allows creditors to attack proofs of claim submitted by others creditors. In reviewing the steps taken by the trustee to value the claim, the court determined that the trustee had failed to properly review or scrutinize Heartland’s claim. The court was of the view the trustee accepted Heartland’s primarily on the basis of an agreement between Heartland and the debtor to settle an amount for the claim and secure Heartland’s vote in favour of the proposal. For that reason, the court determined it was in a position to consider and value Heartland’s claim itself.

Following review, Heartland’s claim was reduced by approximately half, to just over $800,000. Adrenaline has apparently given notice to other creditors in the proposal that it plans to similarly attack the valuation of their claims cast in support of the proposal, and if further reductions occur, the result of the vote could change from the proposal being accepted to it being rejected, and the debtor going bankrupt.

In proposals, the relationships between all stakeholders come in to play. There are numerous interests to consider, and numerous avenues for protecting and advancing those interests, and so any stakeholder would be wise to seek the assistance of experienced insolvency counsel.

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