Missing the limitations period for bringing a court action to recover a debt does not extinguish other legal rights and remedies in respect of that debt, such as bringing an application for bankruptcy or proving a claim in a bankruptcy estate.
In Re Bankruptcy of Kenneth Temple, 2012 ONSC 376, G lent money to T and his business partner in 2006 to fund a number of real estate ventures. T made some payments against the debt, the last of which was made in 2007. In 2011, G brought an application for a bankruptcy order against T. At the time of the application, they were owed $350,000 in principal and more than $475,000 in accrued interest.
The bankruptcy application was issued more than two years after the debt was due, and no action had been commenced to collect on the debt, as required under the Limitations Act, 2002 (Ontario) (the “Limitations Act”).
One defence raised by T was that the debt owing to G was statute barred. T argued that the expiration of the limitation period prevented G from taking action against T in respect of the debt, including by way of an application for bankruptcy.
In the first Canadian case to deal with this issue, the Ontario Superior Court of Justice ruled that the Limitations Act does not apply to a bankruptcy application.
The Limitations Act works to prevent a party from commencing a proceeding in respect of a “claim” after a designated period. The Limitations Act defined “claim” to mean “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission”. The Court held that it could not reasonably be said that a bankruptcy application is a proceeding in respect of a “claim to remedy an injury, loss or damage that occurred as a result of an act or omission”.
After a thorough analysis of the common law (including English cases) and a comparison of other provincial limitations legislation, the Court concluded the Limitations Act does not extinguish the debt itself, but rather it only bars an action from being commenced in respect of it. In other words - it extinguishes a procedural remedy only.
Accordingly, the debt continues to exist and can be the basis of a bankruptcy application. The Court also held the debt can also be the basis for a provable claim by a creditor in a bankruptcy. This conclusion would not, of course, preclude an order in a proper case under section 43(11) of the BIA staying a bankruptcy application if it were inequitable to permit the application. While not addressed by the Court, presumably if a significant time has elapsed between the expiration of the applicable limitations period and the commencement of a bankruptcy application, a court may find the application to be inequitable notwithstanding that there is a debt still due.
For further information regarding this matter, please contact any member of our Restructuring and Insolvency Group. Please contact if you have any questions or comments about this article.