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Trustee's disallowance of claim a reminder to creditors to take proofs of claims seriously

A recent decision of the Supreme Court of BC took issue with a bankruptcy trustee's investigation of a proof of claim, but also serves as a reminder that creditors need to take the proof of claim process seriously, particularly where there is any complexity to their claim, or else they risk unneeded cost and inconvenience.

In Hayes Canyon Road Maintenance Ltd., Re, 2019 BCSC 195, a judge of the Supreme Court of BC confirmed the decision of a registrar in bankruptcy, who had overturned the bankruptcy trustee's disallowance of a creditor claim. The creditor was the former law firm of the bankrupt, who was asserting a "solicitor's lien" claim against the bankrupt for legal services provided.

The trustee decided that the law firm had been representing a shareholder rather than the bankrupt company and as the basis for its disallowance. On appeal, the law firm noted that the actual pleadings and other legal work product made clear that the services provided were for the benefit of the company. However, the trustee argued that the law firm creditor had not provided it with those documents, and so was justified in its disallowance, even though the trustee could have otherwise accessed them.

At the hearing of the appeal of the disallowance, the registrar reviewed the pleadings and other legal documents, and determined the trustee had misunderstood the law firm's claim, and so the court allowed their claim. On further appeal by the trustee to the Supreme Court of BC, the trustee argued that the appeal should proceed based only on the documents submitted by the creditor in the first instance. The court rejected this, noting the trustee's obligation to investigate claims under the Bankruptcy and Insolvency Act, and ultimately upheld the registrar's decision.

While the law firm creditor was technically successful in their claim, "success" came almost a year after filing the initial proof of claim, after three days of court hearings, and as with all litigation, an order for only partial recovery of the legal costs incurred. The amount of the law firm creditor's claim? $6,761.44.

When a creditor's claim is complex or hangs on a legal principle other than a simple contract for goods or services, or when a trustee is indicating their unpreparedness to accept a proof of claim, creditors would be wise to promptly seek the advice and, depending on the circumstances, the representation of experienced insolvency counsel.

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