The Ontario Court of Appeal has delivered a precedent-setting decision that places a time limit on court actions filed by creditors under s. 38 of the Bankruptcy and Insolvency Act.
It’s the first time the court has provided clarification and lawyers say it’s welcome news.
James Zibarras of Brauti Thorning Zibarras LLP represented Indcondo Building Corp. in the case.
He says the decision in favour of his client will assist lawyers in representing clients who file under the act.
“When a party goes bankrupt, all of their creditors have to pursue their claims through the trustee in bankruptcy,” he says. “The creditor can seek a s. 38 order, which allows the creditor to pursue the trustee’s cause of action, although the creditor can’t actually pursue a claim.
The only person who can pursue a claim is the trustee. But if the trustee refuses to pursue a claim, then the creditor can step into the shoes of the trustee and pursue the claim under s. 38.”
In Zibarras’ view, the clarification on the time limitation is helpful. “Even though the trustee is brought in to pursue the claims, the claim really belongs to the creditor.
So you have to find out when the creditor first found out about their claim, and the limitation period will end two years after the creditor found out about the claim.”
Previous to the ruling, there was a six-year limitation period as well as consideration for special circumstances that would extend it, Zibarras notes. But under the new act, there are no accommodations for special circumstances allowing creditors to extend their deadline to make a claim.
“So if you miss your limitation period, you’re done. There’s no recourse,” Zibarras says. “The good news is that this Court of Appeal decision brings clarity to the issue.”
His client, Indcondo, had launched an action to reverse some fraudulent conveyances entered by the defendants to circumvent a $9-million court order. The main defendant, Cave Hill Properties Ltd., declared bankruptcy, which stayed the action and prevented Indcondo from seeking enforcement of the judgment.
According to Zibarras, the Court of Appeal effectively went with the discoverability of the creditor and relied on s. 12 of the Limitations Act in issuing its decision.
“It’s a bit of a unique situation as the issue has never been defined by the Court of Appeal for the purposes of the Limitations Act in terms of whose discoverability applies,” he says.
“When there is a bankruptcy and outstanding claims, it’s very important that those claims are pursued as quickly as possible because it’s not going to be two years from the date that the trustee found out about it. It’s going to be two years from the date that the creditor found out about it.”
The lower court had held that discoverability is in the hands of the trustee, while the appeal court affirmed that it’s with the creditor.
Zibarras adds that the decision is significant because if the appeal court had upheld the lower court ruling, there could have been new life given to expired claims against a bankrupt company following the appointment of a trustee as the discoverability would have essentially restarted the clock.
As well, in using s. 38 of the bankruptcy act, Zibarras’ client was able to pursue its claim through the trustee’s cause of action.
“It is an important development,” Zibarras says.
Michael MacNaughton, a partner at Borden Ladner Gervais LLP and a member of the firm’s insolvency and restructuring group, says the decision will affect creditors.
“Certainly, a creditor will think long and hard before it institutes a s. 38 proceeding because they will need to decide whether the limitation period is different and perhaps shorter than the limitation period that could apply to the trustee of bankruptcy,” he says.
In 2009, the government amended the bankruptcy act to repeal its sections dealing with settlements and reviewable transactions. Instead, it replaced them with a general cause of action for transfers at undervalue under s. 96.
Transfers at arms length were also subject to s. 96 if they took place within a year before the date of the initial bankruptcy in the event the debtor was insolvent at the time or it aimed to defeat, defraud or delay a creditor.
So if a trustee institutes a proceeding and brings a motion to recover payment under s. 96 within a two-year window, everyone will be watching, says MacNaughton.
“I think if there isn’t clarity in the law now as to whether provincial limitations apply to proceedings instituted by a trustee in bankruptcy or a creditor under s. 38 for a preference proceeding or a reviewable transaction proceeding or perhaps a transfer of undervalue proceeding, then trustees and creditors will have to be careful, especially in Ontario, to institute proceedings and watch their timeline.”