In most cases, the claims of creditors in a bankruptcy are a result of extending credit to a debtor for goods or services which are quantifiable and supported by invoices or loan agreements.
There may be situations where a person may have a claim against the bankrupt that is not quantifiable or a certainty at the date of bankruptcy. These types of claims would fall under the category of being contingent or unliquidated claims.
A contingent claim may or may not become a debt depending on some future event occurring. An example would be if the bankrupt co-signed a loan for another party. The lender would only have a claim against the bankrupt if the primary borrower defaults on the loan.
An unliquidated claim is a claim that may exist at the date of bankruptcy but the exact amount has yet to be determined.
An example would be an employee of a bankrupt company potentially having, under certain conditions, a common law provable unsecured claim for damages as a result of wrongful dismissal caused by the employer’s bankruptcy.
Another example would be the claim of a lessor that is not subject to the provisions of Section 47 of the Consumer Protection Act.
These creditors would have a claim that factors in the unexpired term of the lease less the realizable value of the equipment leased under the agreement.
Upon receipt of a contingent or unliquidated claim, the trustee in bankruptcy will attempt to place a value on the claim based on the circumstances surrounding the claim. In the case of an employee claim for wrongful dismissal, the trustee would review the law applicable to the claim, the years of service, age and prospects of the employee finding alternative employment.
Another factor that the trustee will consider in evaluating contingent or unliquidated claims will be whether there is an element of probability of liability occurring.
If the claim is too remote or speculative, the claim would not be admitted as it would not be considered a provable claim.
Another unusual scenario occurs if a third party has guaranteed an obligation of the bankrupt to a creditor such as a bank. This scenario may bring in the concept of subrogation. Subrogation occurs when one person takes over the rights or remedies of another party against a third party.
The most common situation where subrogation may occur is when a guarantor is called upon by a bank to pay the outstanding obligations of the bankrupt. The guarantor would step into the shoes of the bank and have the same rights and remedies as the bank to pursue a claim against the bankrupt.
The above is only meant to be an overview and not a complete treatment of the subject. Due to the complexity of these types of claims, legal advice should be sought when they are encountered.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.
Republished from the Brandon Sun print edition January 11, 2014