That Debt is Statute-Barred: Not So Fast

In December 2005, Kenneth Temple incurred a debt in the amount of $425,000.00 with a maturity date of May 31, 2006. The debt went unpaid and, in February 2011, the creditor brought an application before Justice Newbould to put Mr. Temple into bankruptcy1Re Bankruptcy of Kenneth Temple, 2012 ONSC 376 [Temple]..

Due to the operation of the Limitations Act, the creditor was precluded from bringing a claim for the debt. The Limitations Act reads that “Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.”2Limitations Act, 2002, S.O. 2002, c. 24, Sch. B [Limitations Act]. Generally, a debt is “discovered” on the day it is due, so Mr. Temple argued that the debt could not be the basis of a bankruptcy and that, even if it could, it would not be a provable claim in the bankruptcy. Notably, theLimitations Act does not operate to extinguish a debt (as noted by Justice Newbould, some other provincial limitations statutes do operate in this fashion3Temple at para. 23.).

But, what difference does it make? Indeed, Mr. Temple cited Houlden, Morawetz & Sarra,Bankruptcy & Insolvency Law of Canada, 4th ed. for the proposition that a “claim” must be recoverable by a legal process in order to form the basis of a bankruptcy application.4Ibid. at para. 12.

— Not So Fast —

Justice Newbould found that a bankruptcy application is not a “proceeding in respect of a claim” as that phrase is used in the Limitations Act.5Ibid. at para. 14, Though he did not refer to the case, Justice Newbould’s reasons parallel those in Jacob’s Hold Inc. v. Canadian Imperial Bank of Commerce 62000 CanLII 22730 (S.C.)., wherein Jarvis J. held that the application to appoint an Interim Receiver did not amount to a “proceeding for the recovery of a debt, the realization of security or the taking of any property of a farmer” as those words are used in the Farm Debt Mediation Act.7Ibid. at para. 3.

Well, surely then, even if a stale debt can form the basis of a bankruptcy application, the debt itself is not provable in the bankruptcy: “[a]ll debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt… shall be deemed to be claims provable…”8Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 121(1). And again, the Limitations Act precludes a “proceeding in respect of a claim” on the debt outside the two-year limitation period.

— Not So Fast —

Justice Newbould found that the Limitations Act only precludes a remedy and does not extinguish rights — that is, the Limitations Act is procedural legislation, not substantive.9Temple, supra, at para. 22-24. In other words, Temple was still “subject” to the debt on the date of the bankruptcy application because the debt was still alive despite the absence of any other available remedy.

What does this all mean? Until a higher court decides otherwise, this seemingly anomalous result stands. A debt that is outside the limitation period of two years may be collectable, at least partially, inside the bankruptcy of the debtor. But…

— Not So Fast —

The saving grace of Justice Newbould’s decision appears at paragraph 28: “This 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 for some kind of laches, perhaps of the kind involved in Re Tynte.” Laches is an equitable doctrine that, very generally speaking, applies to preclude claims that were not brought in a reasonable time, where the claimant has acquiesced, and where the defendant has suffered a detrimental change in position.

Whether laches applies in a future case is an open question. In Temple, over three years had passed since the last payment on the debt. Interestingly, in Re Tynte, based on the Court’s discussion of the case, it appears that only two years had passed since the limitation period had expired.10Ibid. at para. 13.

(Update – May 19 2021: The part of Justice Newbould’s decision discussed above was considered obiter (that is, not essential to the outcome of the case and therefore not binding on other judges) by S.F. Dunphy J. in John Trevor Eyton (Re), 2021 ONSC 3646. At the time of this update, it is unknown whether that decision is under appeal; however, considering the extensive discussion of law running contrary to Re Temple, it is suggested that Re Temple cannot be relied on any longer.)

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