I'll post some elements of answer to my own question from what I understand. Anyone feel free to make a better, less sloppy answer.
First, there are several versions of this document online. They all have some typographic defects at some point. So when in doubt, better check those 3 versions first.
Second, there's a lot of implicit stuff going on with this first actual proof. So let's clarify some of them.
Reachable bound of $y - \bar{y}$
I think that, no, the bound on $y - \bar{y}$ cannot be reached. Let's try to go for the worst case with $k = p+1$. Let's assume $p = 6$ and the radix $\beta = 10$.
\begin{align}
y & = \overbrace{0.000000}^{k=7}\overbrace{999999}^{p=6} \\
\bar{y} & = \overbrace{0.000000}^{p+1=7} \\
y - \bar{y} & = 0.000000999999 \\
& = 9 \times (10^{-7}+\dots+10^{-12}) \\
& = (\beta - 1)(\beta^{-p-1}+\dots+\beta^{-p-p}) \\
& \lt (\beta - 1)(\beta^{-p-1}+\dots+\beta^{-p-p}+\beta^{-p-(p+1)}) \\
& \lt (\beta - 1)(\beta^{-p-1}+\dots+\beta^{-p-p}+\beta^{-p-k})
\end{align}
I had to add an extra term to the sum (i.e. an extra digit) to get the same formula as the paper. Hence the $=$ got transformed to $\lt$.
This exact bound simplify the second case of the proof. Although a looser and simpler bound $y - \bar{y} \lt \beta^{-p}$ would be enough for the first case when $x - y \ge 1$.
No rouding error when $x - \bar{y} \lt 1$
The assertion that if $x - \bar{y} \lt 1$, then $\delta = 0$ seems true. The rounding error $\delta$ is the error we introduce by removing the guard digit to produce the final result. This is sometimes needed because $\bar{y}$ has $p+1$ digits and $x - \bar{y}$ might as well have $p+1$ digits.
For instance:
\begin{align}
x & = 2.00000 \\
y & = 0.0123456 \\
\bar{y} & = 0.012345 \\
x - \bar{y} & = 1.987655
\end{align}
The result has $7$ digits therefore has to be rounded to $6$ digits.
But when $x - \bar{y} \lt 1$ then the result starts with the digit $0$. Meaning that at most only $p$ significant digits remain from the $p+1$ digits used to perform the subtraction. For example:
\begin{align}
x & = 1.00000 \\
y & = 0.0123456 \\
\bar{y} & = 0.012345 \\
x - \bar{y} & = 0.987655
\end{align}
The result $x - \bar{y}$ already has 6 digits. So no rounding error need to be introduced.
However, it is worth noting that this doesn't change anything to the error introduced by truncating $y$ to $\bar{y}$.
Minimum value of $x - y$
When the paper say that the smallest value $x - y$ can take is:
$$1.0 - 0.\overbrace{0 \dots 0}^k\overbrace{\rho \dots \rho}^k$$
there's actually a typo that has been corrected in other documents. What was ment to be written is:
$$1.0 - 0.\overbrace{0 \dots 0}^k\overbrace{\rho \dots \rho}^p$$
which make more sens and is the general formula when $k$ is fixed. Maybe a better form could be:
\begin{align}
x - y & \ge 1.0 - 0.\overbrace{0 \dots 0}^k\overbrace{\rho \dots \rho}^p \\
& \ge 0.\overbrace{\rho \dots \rho}^k\overbrace{0 \dots 0}^{p-1}1 \\
& \gt 0.\overbrace{\rho \dots \rho}^k
\end{align}
Which lead naturally to the formula written in the paper.
Third case: $x - \bar{y} = 1$
And finally, another implicit point of this proof (not asked but worth writing down): why would having both $x - y \lt 1$ and $x - \bar{y} \ge 1$ imply that $x - \bar{y} = 1$?
I think the informal answer would be that since $x$ is a float with $p$ digits, then $x - 1$ is also a float with $p$ or $p - 1$ significant digits (if $x >= 2$ or $x < 2$ respectively). Meaning that truncating $y$ to $\bar{y}$ cannot make it less than $x - 1$ since $y > x - 1$ and $x - 1$ is a candidate value for $\bar{y}$ and is less than $y$.
In other words: $x - y \lt 1$ imply that $x - \bar{y} \le 1$. Therefore, having this and $x - \bar{y} \ge 1$ at the same time imply that $x - \bar{y} = 1$.
