Distribution of Post-Filing Interest on Proven Claims in Bankruptcies and Proposals

Issue

When should post-filing interest on proven claims be paid in bankruptcies and in proposals?

Position

The Bankruptcy and Insolvency Act (BIA) requires that the payment of post-filing interest on proven claims be treated consistently in bankruptcies and in proposals. If sufficient funds are available, post-filing interest is payable on proven claims in bankruptcies, as well as in proposals to the extent that the terms of the proposal support payment of post-filing interest.

Analysis

Canadian insolvency regimes are designed to be harmonious, in order to discourage “statute shopping” and avoid “skewed incentives against reorganizing” (see Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 (CanLII), [2010] 3 SCR 379Footnote 1, at paragraphs 24 and 47). In the context of post-filing interest, this means that interpretations that permit collection of post-filing interest in one type of insolvency proceeding, but deny it in another, are to be avoided. The BIA requires that post-filing interest be paid in bankruptcies, in the event of a surplus, and in proposals, in the event of a surplus and if payment is consistent with the terms of the proposal.

Bankruptcy Proceedings

In a bankruptcy, creditors may prove their claim for the amount owing as at the date of bankruptcy, including any interest that has accrued on their claim up to the date of bankruptcy (pre-filing interest): ss.121(1) and ss.122(2) of the BIA.

The maximum a creditor may receive is one hundred cents on the dollar plus interest as provided for under the section 134 of the BIA:

No creditor to receive more than 100 cents in dollar

134 Subject to section 130, a creditor shall in no case receive more than one hundred cents on the dollar and interest as provided by this Act.

If estate funds are available after satisfying proven claims (principal plus pre-filing interest), creditors are also entitled to post-filing interest at the rate of 5% per year under section 143 of the BIA:

Interest from date of bankruptcy

143 Where there is a surplus after payment of the claims as provided in sections 136 to 142, it shall be applied in payment of interest from the date of the bankruptcy at the rate of five per cent per annum on all claims proved in the bankruptcy and according to their priority.

If there remains a surplus after payment of section143 post-filing interest and estate expenses, the surplus will be returned to the bankrupt according to section 144 of the BIA:

Right of bankrupt to surplus

144 The bankrupt, or the legal personal representative or heirs of a deceased bankrupt, is entitled to any surplus remaining after payment in full of the bankrupt’s creditors with interest as provided by this Act and of the costs, charges and expenses of the bankruptcy proceedings.

Proposal Proceedings

In a proposal, creditors may prove their claim for the amount owing as at the date of commencement of the proposal proceeding, including any pre-filing interest that has accrued on their claim up to that date: ss. 62(1.1) and ss.66.28(1) of the BIA.

As in a bankruptcy, typically the value of proven claims and administration expenses is in excess of the value of contributions to the proposal and interest accruing on those contributions, leaving a shortfall. Therefore, the issue of paying section143 post-filing interest to proven creditors and returning excess funds to the debtor will rarely arise.

The creditors’ entitlement to section143 post-filing interest will be determined based on the terms of the proposal. For example, section143 post-filing interest will not be an issue if the proposal provides for a distribution of:

  1. shares of the proposal debtor (ss.50(3));
  2. promissory notes (ss.50(3)), (which may have their own contractual interest provisions); or
  3. a fixed sum payable to creditors (e.g. the creditors accept and the court approves a proposal whereby all creditors, each owed $10,000, will receive fixed payments of $6,000 each; or the creditors accept and the court approves a proposal whereby all creditors will receive fixed recovery of 50 cents on the dollar).

In these proposal scenarios, the proposal is satisfied upon making the above distributions, with the debtor having no further obligations. There is no surplus to distribute, as the proposal is not designed to generate a surplus. In the event that the proposal trustee holds funds after making the distribution and satisfying proposal expenses, these funds will be returned to the proposal debtor. This is because the requirements of the proposal’s distribution have been satisfied, and therefore the debtor has no obligation to make further payments, including by way of forfeiting funds, or interest that has accrued on those funds, that may be held by the proposal trustee or administrator.

In other proposal scenarios, post-filing section143 interest may be applicable. For example, the proposal may provide for the sale of an asset and the distribution of the proceeds to creditors. It may be possible that the sale generates funds beyond what is required to satisfy proven claims. The surplus may then, by virtue of the subsection 66(1) and subsection66.4(1) mutatis mutandis provisions of the BIA, be distributed to creditors as post-filing interest under section143 of the BIA, with any remaining surplus returned to the proposal debtor under section144 of the BIA. Unlike the fixed recovery examples, this example provides for open-ended recovery (limited only by section134 of the BIA), and is therefore compatible with payment of post-filing interest on proven claims.

For the treatment of post-filing interest under Companies’ Creditors Arrangement Act plans of arrangement see: All Canadian Investment Corporation (Re), 2020 BCSC 1683 (CanLII)Footnote 2.

Conclusion

All funds collected by a trustee in a bankruptcy proceeding, including interest thereon, should be used to satisfy proven claims and administration expenses. If sufficient funds are available to satisfy proven claims in full, any surplus should be used to pay post-filing interest on proven claims, with any remaining surplus returned to the debtor.

All funds collected by a proposal trustee or administrator, including interest thereon if consistent with the proposal terms, should be used to satisfy proven claims and administration expenses. If sufficient funds are available to satisfy proven claims in full, the terms of the proposal and extent of the surplus should be examined to determine if any surplus should be used to pay post-filing interest on proven claims and/or returned to the debtor.