We know that the Limitations Act, 2002 (the “Act”) proscribes a claim if a proceeding is not brought to enforce it within two years of the claimant knowing or being deemed to know of the claim. What happens when the Act disallows any further action on a claim and the debtor becomes bankrupt? Can the creditor still file a proof of claim and share in the bankruptcy? Can the creditor be the person to petition the debtor into bankruptcy? These questions were answered in Re Temple, a 2012 decision of the Ontario Superior Court of Justice.
The creditors loaned the debtor approximately $600,000 in 2005. The debtor paid nothing further on the loans after 2007.
In 2011, the creditors moved to assign the debtor into bankruptcy. We assume that the creditors were not relying on the debtor having any other debts. The debtor resisted the application on a number of grounds. Most importantly, the debtor argued that the creditors could not apply to assign the debtor into bankruptcy because, as a result of the Act, they no longer had any rights to sue for their claims.
The judge first noted that the Act deals with a claim. He held that a bankruptcy application is not a “claim” to remedy an injury, loss, or damage. Accordingly, the judge held that, at least at first blush, the Act does not prevent a person from bringing a bankruptcy application, even if that person is no longer able to bring an action to enforce the debt. However, does it prevent an application by implication?
The debtor argued that, for a creditor to bring an application, the debt must not have been statute barred at the time of the application or at the time of the bankruptcy hearing. The judge immediately rejected the latter contention noting that it would be unreasonable for creditors to lose their rights simply because it took the court time to schedule a bankruptcy hearing. The only real defence related to the first contention and the state of the debt at the time of the application.
The Bankruptcy and Insolvency Act (the “BIA”) requires that the debtor must owe a debt to an applicant who applies for a bankruptcy order. If the Act applies to a debt, is the debt “owing” for purposes of the BIA? The answer to this question depends on the effect of the Act on a debt: does the Act extinguish the debt or does it render the debt unenforceable for purposes of commencing a proceeding to enforce the debt?
The same issue arises when claims of creditors are being considered. Under section 121 of the BIA, all debts and liabilities to which a bankrupt is subject are deemed to be provable under the BIA. If a bamkrupt owes a debt that is due more than two years before the bankruptcy and no action has been brought to enforce the claim, can it be said that the debt is not one to which the bankrupt is “subject”?
The common law view of the Act is that the Act bars a remedy, but does not actually extinguish the debt (i.e. the legal right survives, but cannot be enforced). The British Columbia limitations statute specifically extinguishes a debt; the Ontario Act does not. It merely states that no proceedings may be taken to enforce a claim once it is time barred.
The judge stated that,
“If the policy behind limitation periods is to prevent stale claims from being litigated, that policy would not be relevant to situations such as set-off. If there were debts owed between two persons, would set-off be disallowed because one of the debts was older than the applicable limitation period? There would be no policy reason behind such a result. If one of the debts was no longer owed, however, because of an intervening limitation period, disallowing a set-off would be the result.
“In my view, in Ontario it cannot be said that a debt is extinguished if an action on the debt is not brought within two years of its being due. Rather, the debt continues to be owed. Thus such a debt can be the basis on which an application for a bankruptcy order can be made. Such a debt can also be the basis for a provable claim by a creditor in a bankruptcy.”
In consequence, the judge held that the Act does not apply to a bankruptcy application or, by inference, to creditors claiming in a bankruptcy that other creditors may have initiated.
In addition to the main issue, the judge dealt with other, less interesting, issues.
1. The debtor argued that he was not liable to the creditors because, he argued, the creditors had later agreed that the debtor’s corporation would assume the liability for the debts and the creditors accepted that liability in full satisfaction and substitution for the old contract by which the debtor was personally liable. This concept is called “novation”. The trouble with this defence was that the debtor, by his own evidence, never discussed the assumption of his liability with the creditors. The judge rejected the argument.
2. The Act allows the time to commence an action to re-start if the debtor, or his agent, acknowledges the debt in writing. The judge held, based on evidence with which I shall not bore you, that the debtor had acknowledged the debt and that the two-year limitation period had not passed at the date of the bankruptcy application.
The creditors were unable to sue the debtor because of the Act, but were able to force the debtor into bankruptcy. They could then use the force of the BIA to collect the debts. We expect that this rather surprised the debtor who thought he was home free once the two years under the Act had passed.
In this case, the creditors were able to bring the application because the debtor owed them money. They would not have been in the same position if all they had was a claim for damages. A claim for damages is not a claim for debt and they would not have been able to bring an application based on a “debt”.
The moral of this case to financial institutions is obvious. If they allow their claims to fall through the cracks and miss a limitation period, they can still apply to assign the debtor into bankruptcy and make their claim through the BIA. They will have to share any proceeds with other creditors, but that may still be worthwhile. Further, if another creditor assigns the debtor into bankruptcy, a financial institution whose claim is otherwise statute barred may still deliver a proof of claim and will lose no rights to a proportionate share in the proceeds.
Not surprisingly, this creditor has appealed this decision.