Case snapshot
At a glance
- Case
- Can a Proof of Claim Be Expunged in Ontario Bankruptcy Proceedings?
- Court / Tribunal
- Ontario Superior Court of Justice
- Citation
- 2026 ONSC 3931 ↗
- Date
- July 6, 2026
- Area of law
- Employment Law
- Key issue
- Whether the court could expunge or reduce proofs of claim filed in a bankruptcy estate, and whether set-off could be applied against an unliquidated negligence claim before liability was determined.
- Outcome
- The court dismissed the expungement motion on one claim, adjourned the second claim to civil proceedings to avoid duplication, and stayed distribution pending determination of the set-off issue.
- Why it matters
- Anyone with a financial claim against a bankrupt employer or debtor needs to understand how Ontario courts protect — and challenge — proofs of claim before any money is distributed.
Legal principle
The rule from this case
Under the Bankruptcy and Insolvency Act, a trustee has the power to admit or disallow proofs of claim. When a debtor challenges an admitted claim by asking the court to expunge it, the onus stays on the debtor to prove the claim should not have been allowed. Courts review the trustee's decision fresh (de novo), but that does not shift the burden of proof away from the party seeking expungement. Set-off under the Bankruptcy and Insolvency Act can only be applied where the amounts owed on both sides are certain and not contingent. Where one side of the ledger depends on a negligence finding that has not yet been made, a court will not allow that uncertain amount to cancel out an admitted claim. Instead, the set-off question is deferred until the underlying liability is resolved in civil court, and any distribution to the creditor is stayed in the meantime.
Important limits
What this does not mean
This decision does not mean that every proof of claim filed in a bankruptcy is automatically safe from challenge. Courts can and do reduce or expunge claims where the evidence shows the trustee made an error in admitting them. The dismissal here simply reflects that the debtor failed to meet the burden of proving the admitted claim was illegitimate on the record before the court. The decision also does not give courts unlimited power to order disgorgement or reopen paid accounts under section 135(5) of the Bankruptcy and Insolvency Act. The court confirmed that its jurisdiction under that provision is confined to expunging or reducing the proof of claim as filed — it cannot go further and order a creditor to repay money already distributed.
What Is a Proof of Claim in a Bankruptcy, and Can It Be Challenged?
A proof of claim is the formal document a creditor files to say “this person or company owes me money” in a bankruptcy proceeding. Yes, it can be challenged — but the party seeking to remove or reduce it carries the burden of proof.
In Re 1896841, 2026 ONSC 3931 (CanLII) (full decision), the Ontario Superior Court of Justice examined two separate proofs of claim filed against a bankrupt estate. The debtor brought a motion to have both claims expunged — essentially wiped out. The court dealt with each claim differently, and the reasons explain a lot about how Ontario bankruptcy law works in practice.
Who Has to Prove What When a Claim Is Challenged?
The debtor — the person or company that went bankrupt — bears the onus of proving that an admitted claim should be removed. This is an important point that is often misunderstood.
When a trustee in bankruptcy admits a proof of claim, that decision carries weight. A court reviewing the trustee’s decision does so on a fresh basis (called a de novo review), meaning it looks at the evidence itself rather than simply deferring to the trustee. But a fresh review does not flip the burden of proof. The debtor still has to show, on the balance of probabilities, that the claim was admitted in error or is not a legitimate claim. In this case, the court found the debtor did not meet that standard on the first claim, and the expungement motion was dismissed.
What Happens When a Claim Involves Complex Negligence Allegations?
When a proof of claim is tangled up with an unresolved negligence lawsuit, Ontario courts may send the claim adjudication to civil court rather than decide it in the bankruptcy proceeding.
The second claim in this case involved allegations of professional negligence. Resolving it properly would have required expert evidence and a full trial-like process. The court applied the principles from Petrowest and Farb v. Centurion — a framework for deciding whether a bankruptcy claim is better handled in a separate civil action. Because trying the negligence issues inside the bankruptcy would risk duplicating the civil proceeding and potentially producing inconsistent findings, the court adjourned that expungement motion and directed the matter to the civil court. Funds related to that claim were retained pending the outcome.
Can a Debt Be Set Off Against a Claim Before Negligence Is Proven?
No — not when the amount of the alleged negligence is still uncertain and contingent on a court finding liability.
Set-off under the Bankruptcy and Insolvency Act allows a debtor to say, in effect, “you owe me money too, so let’s net it out.” But that only works when both amounts are known and not dependent on future events. Here, the alleged negligence had not been proven, so the amount the creditor might owe back was entirely speculative. The court refused to apply set-off at this stage and stayed any distribution to that creditor until the civil court resolved the underlying negligence question.
How Far Does a Court’s Power Go to Correct Errors in a Bankruptcy?
The court’s jurisdiction under section 135(5) of the Bankruptcy and Insolvency Act is narrower than many people assume — it covers expunging or reducing a proof of claim, and nothing more.
The debtor in this case argued the court should go further: ordering disgorgement of funds already paid out and reopening accounts that had already been settled. The court rejected that argument clearly. Section 135(5) gives the court the power to expunge or reduce the proof of claim that was filed. It does not give the court authority to order a creditor to hand back money already distributed, or to reopen closed accounts. Broader relief of that kind requires a different legal basis entirely.
Does This Affect Employees or Workers With Claims Against a Bankrupt Employer?
Yes — workers who are owed wages, severance, or other amounts by a bankrupt employer file proofs of claim, and those claims can be challenged by the trustee or the debtor.
If you have a financial claim against a bankrupt employer, understanding how proofs of claim work — and how they can be defended or attacked — matters enormously. Our Ontario employment lawyers regularly advise employees navigating insolvency situations, including how to protect wage and severance claims when an employer enters bankruptcy. If you are in the Hamilton or Burlington area, our team is particularly familiar with local proceedings and can help you assess your position early. Learn more about how we help workers in the region through our Hamilton employment law page.
If you signed an employment contract that affects your entitlements on termination or insolvency, it is worth having that document reviewed before a crisis arises. Our employment contract review service can identify gaps in your protection before they become costly.
Practical Takeaways for Creditors and Employees in Bankruptcy Proceedings
- File your proof of claim promptly and accurately. An admitted claim is harder to challenge, but only if it is properly documented from the start.
- Know who bears the burden. If someone challenges your admitted claim, the onus is generally on them — not you — to prove it should be removed.
- Expect delays when negligence is involved. If your claim overlaps with an unresolved lawsuit, the bankruptcy court may send part of the process to civil court, which takes more time.
- Set-off is not automatic. A debtor cannot simply subtract an unproven negligence amount from what they owe you. That argument must wait for a court finding on liability.
- Get advice early. The intersection of employment law and insolvency law is technical. A creditor who waits too long may miss deadlines or lose priority in the distribution queue.
UL Lawyers offers a free initial consultation from our Burlington office and serves clients across Ontario. If you have questions about a claim against a bankrupt employer or need guidance on your rights in an insolvency proceeding, reach out to our Ontario employment law team to discuss your situation.
This article is automated commentary on a public court decision and is for general information only — not legal advice. Decisions rely on facts unique to each case. If you are affected by a similar issue, contact a lawyer for advice specific to your situation.
FAQ
Frequently asked questions
Expunging a proof of claim means asking the court to remove or cancel a creditor's claim entirely. The party seeking expungement must prove the claim was admitted in error or is not a legitimate debt owed by the bankrupt estate.
Yes. When an employer goes bankrupt, unpaid wages and severance become claims against the estate. Employees must file a proof of claim and may receive only a portion of what they are owed depending on how much money is available for distribution.
Set-off allows a debtor to reduce what they owe a creditor by an amount the creditor owes them. In bankruptcy, set-off is only permitted when both amounts are certain — if one side depends on an unproven negligence claim, the court will defer the set-off question until liability is determined.