In order for a creditor to participate in a dividend in a bankruptcy, the creditor must file a proof of claim and have that proof of claim accepted by the trustee in bankruptcy.
The creditor will be given notice of the bankruptcy by the trustee at the beginning of the proceeding and will be provided with a proof of claim form. The creditor always has the choice to not file a proof of claim, but failure to do so will prevent the creditor from actively participating in the bankruptcy, in particular, from:
- voting on matters related to the bankruptcy;
- obtaining an order allowing the creditor to pursue a claim on behalf of the estate under section 38 of the Bankruptcy and Insolvency Act (“BIA”) or participate with other creditors in relation to such claims;
- opposing the discharge of the bankrupt; and,
- participating in any dividend that might be declared and become payable to creditors.
Sections 149(1) and (2) of the BIA provided that:
(1) The trustee may, after the first meeting of the creditors, send a notice, in the prescribed manner, to every person with a claim of which the trustee has notice or knowledge but whose claim has not been proved. The notice must inform the person that, if that person does not prove the claim within a period of 30 days after the sending of the notice, the trustee will proceed to declare a dividend or final dividend without regard to that person’s claim.
(2) Where a person notified under subsection (1) does not prove the claim within the time limit or within such further time as the court, on proof of merits and satisfactory explanation of the delay in making proof, may allow, the claim of that person shall, notwithstanding anything in this Act, be excluded from all share in any dividend, but a taxing authority may notify the trustee within the period referred to in subsection (1) that it proposes to file a claim as soon as the amount has been ascertained, and the time for filing the claim shall thereupon be extended to three months or such further time as the court may allow.
Section 150 of the BIA provides that:
A creditor who has not proved his claim before the declaration of any dividend is entitled on proof of his claim to be paid, out of any money for the time being in the hands of the trustee, any dividend or dividends he may have failed to receive before that money is applied to the payment of any future dividend, but he is not entitled to disturb the distribution of any dividend declared before his claim was proved for the reason that he has not participated therein, except on such terms and conditions as may be ordered by the court.
In Re Levick, 2019 NSSC 45, the court was faced with the question of whether a creditor, in this case Canada Revenue Agency (“CRA”), would be entitled to share in a dividend where:
- CRA had not filed a proof of claim.
- Notice had been sent by the trustee to CRA under section 149 of the BIA for CRA to prove its claim.
- The 30 day period under section 149(1) had passed without CRA filing a proof of claim and the trustee declared a dividend.
- CRA then filed a proof of claim.
- The trustee then amended the statement of receipts and disbursements to provide for payment of a dividend to CRA.
The bankrupt sought to have CRA’s proof of claim disallowed on the basis that it had been filed outside the 30 day period set in the notice. The issue for the Court was whether CRA could file a proof of claim after a dividend had been declared and participate in the dividend.
The Court found that there was competing authorities on this issue, but followed the decision in Bank of Nova Scotia v. Janzen (Trustee of) (1989), 71 C.B.R. (N.S.) 277 (N.S.S.C.). In that case, the court took a broad approach to a creditor with a just claim to participate in a dividend. In particular, the court stated:
To disallow a creditor’s proof of claim filed before the distribution of a dividend is too harsh a penalty, even if the creditor was negligent in filing its proof in the first instance. The objective of bankruptcy legislation to give all creditors and opportunity to share in the assets can be achieved by penalizing the late filing creditor by charging against the creditor’s share of the estate the cost of additional work required by the trustee to alter the dividend sheet, etc.
The court further applied the concept that “so long as there remain undistributed assets in bankruptcy a creditor is entitled to come in and prove, as is the case in an administration suit so long as there are assets unadministered.”
Section 150 of the BIA prevents a late filing creditor from interfering with any prior distributions by the trustee. The court in Re Levick declined to interpret sections 149 and 150 of having the combined effect that if a notice to prove a claim has been sent, a creditor who fails to file a proof of claim is forever barred from making a claim and participating in any subsequently paid dividend.
Whether such approach will be taken by courts outside of Nova Scotia is yet to be seen. Accordingly, creditors who receive notice under section 149(1) of the BIA to prove their claim in the bankruptcy should do so within the time prescribed.