On May 19 2021 the Honourable Sean F. Dolphy, Judge of the Ontario Superior Court of Justice upheld an earlier decision by a Registrar of the Superior Court of Justice in Bankruptcy that a debt that is statute-barred by Ontario’s Limitations Act, 2002 (meaning that the two year time limit for a creditor to sue a debtor for an outstanding account expired) cannot be proven, or claimed, by a creditor against a debtor in bankruptcy either because the collection of debt can no longer be enforced through a legal proceeding.
When a person or business files bankruptcy they are required to list all debts owing. All creditors listed are then sent a notice of the bankruptcy by the bankruptcy trustee along with a creditor’s package outlining all of the debts the debtor owes and a report of the debtor’s income, expenses and any assets. Along with this package is included a Proof of Claim which the creditor is required to complete which proves the debt outstanding by the debtor to the creditor. The Proof of Claim contains the amount owing and a statement or affidavit from the creditor providing the details of the amount owing and owing from when.
What the court is saying is that the “owing from when” part matters. Every province has its own Limitations Act which says how much time a creditor has to start a legal claim to enforce payment of a debt outstanding. In most provinces, including Ontario, British Columbia and Ontario, the time limit is two years. In some other provinces the time limit is longer.
Although there are variables, “owing from” is generally the date the debt was incurred or when the debtor last made a payment to the creditor towards the debt. In the case decision issued last May the original debt was well over two years old and the date of last payment was April 2016. The debtor filed bankruptcy April 2019, one year past the two year limitation act time limit allowed for the creditor to enforce payment of the debt through a legal proceeding.
Ontario’s Limitation Act says “…a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.” Justice Dolphy, in reviewing a couple of other previous cases over the past ten years dealing with the age of a debt and if it could be claimed in bankruptcy – and these cases varied in their decision and reasons, declared that the word “proceeding” can also be defined as the requirement and process of a creditor filing its Proof Claim.
CGI Credit Guard first became aware of this issue of “owing from when” regarding a Proof of Claim filed by a client against a bankrupt debtor in Alberta in August 2020. The debt was owing from December 2015. The Bankruptcy Trustee, BDO Canada, advised they were disallowing the claim because it was “statute barred as set out in the provincial or territorial legislation”. CGI Credit Guard argued for our client with the trustee who said that there was recent case law to support their decision but they could not readily provide that documentation. CGI Credit Guard advised that if the decision was made to disallow the claim our agency would work with our client to appeal the decision. The trustee subsequently decided to allow our client’s proof of claim. Recently the trustee, in a follow up report, sent the Ontario Superior Court decision from May 2021. We have no idea what case law the trustee was referring to from last August because, as previously mentioned, previous cases have varied on the subject.
The “owing from when” limitation period will likely now start to be widely used by bankruptcy trustees to help debtors reduce overall debt which will ultimately mean that an individual or business will avoid that consequence of not paying a bill. This is especially true of the many individuals and businesses who file a Proposal under the Bankruptcy and Insolvency Act instead of an actual bankruptcy. Typically in a bankruptcy the debtor has little to nothing left over to pay creditors and generally unsecured creditors receive a small dividend or nothing at all. However when a debtor files a Proposal they are offering to pay a percentage of all unsecured debt over a length of time, typically five years. The percentage can range from a single digit to 100 Percent of the total debt owing. If a debtor has debts that are older than two years, as stated in the Ontario, British Columbia and Alberta limitation acts, then the individual or business would not have to include those debts in the proposal.
For example if the total debt owing is $80,000 amongst 12 creditors and $15,000 of that debt is more than two years old and is owed to 4 creditors, the debtor would only be making a proposal on $65,000. If the individual or business intended to propose 25 percent as total payment under the proposal that would mean that instead of paying $20,000 at $333 per month for five years (25 percent of $80,000) to all 12 creditors, the debtor business or individual only has to pay $16,250 (25 percent of $65,000) at $270 per month to 9 creditors.
The language of each province’s limitation act is different.
In Ontario the language says that after the two year time limit “a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.”
In Alberta the Limitations Act says the creditor, after two years, cannot seek a “remedial order” which is defined as “a judgment or an order made by a court in a civil proceeding”.
The British Columbia Limitation Act says that the two year limitation period does not apply to “a court proceeding in which the only relief sought is to obtain a declaration”
There is clearly more to be decided on when a debt has to be included in a bankruptcy or proposal but this recent court decision confirms the old adage that the older a debt is, the harder it is to collect.
Regardless, CGI Credit Guard continues to advocate for creditors rights and pursue collection of debts of all ages, shapes and sizes for our clients regardless of volume or amount.
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