Are you a lender of a demand loan? The time limit you have to enforce payment of the loan may be shorter than expected pursuant to British Columbia’s current Limitation Act1 which came into effect June 1, 2013 (the “Current Act”).

The General Two-Year Limitation Period Applies to Demand Loans

On June 1, 2015, limitation periods for claims discovered after the Current Act came into effect (and therefore governed by the Current Act) will start to expire as, in most circumstances, claimants must sue within two years of discovery of a claim.

A demand loan has no fixed terms or conditions for repayment of the principal loan amount and allows a lender to enforce payment at any time upon demand. Under the Current Act, once demand has been made and the debtor has failed to perform the obligation to pay (when the claim is “discovered”), the lender has a limitation period of two years from that date to bring an action to enforce payment of the demand loan.

Under the former Limitation Act2 (the “Old Act”), the limitation period for lenders to bring an action was six years and it would start running from the date that the loan was entered into. No prior demand was necessary to bring an action to enforce payment.

The Limitation Period Will Reset if the Debt is Aknowledged

As with the Old Act, the time limit under the Current Act to bring an action resets if the debtor acknowledges liability by performing any of the following: (i) making a partial payment on the demand loan; (ii) providing a written, signed acknowledgment of the debtor’s liability to the lender, lender’s agent or an official receiver or trustee acting under the Bankruptcy and Insolvency Act; or (iii) performing an obligation under or in respect of a security agreement.

Does the Old Act or the Current Act Apply?

Generally, the two-year limitation period under the Current Act applies to claims “discovered” on or after June 1, 2013. The Current Act will not operate retroactively and the Old Act applies to claims discovered before June 1, 2013. There is some uncertainty based on the wording of the Current Act as to when a claim is discovered for loans advanced before June 1, 2013, but it is likely that the triggering event is once demand has been made and the debtor has failed to perform the obligation to pay.

Consider the following scenarios to determine which Act applies: 

1. Loan is made before June 1, 2013 and demand occurs before June 1, 2013

The six-year limitation period under the Old Act applies and the clock starts running from the date the loan is advanced. If the loan was advanced six years prior to demand being made (and the debt has not been acknowledged), the lender is no longer able to enforce its rights as the limitation period would have expired.

2. Loan is made before June 1, 2013 and demand occurs after June 1, 2013

Given that demand is made after June 1, 2013 (the triggering “discovery” event under the Current Act), the two-year limitation period under the Current Act applies. For example, a lender who advanced a loan on May 31, 2013 and made demand on June 1, 2013 would find that the limitation period to bring an action to enforce payment expired on June 1, 2015 (instead of May 31, 2019 (being the six-year limitation period under the Old Act)). This could inadvertently prejudice a lender since the limitation period for the demand loan expires earlier under the Current Act than the Old Act, which provided for a six-year limitation period from the date that the loan was entered into.

3. Loan is made before June 1, 2013 and demand is never made

Given that the loan is made before June 1, 2013 and the lender has never made demand, the limitation period under the Old Act applies and the lender has six years from the date that the loan was entered into to bring a claim. If the lender does not bring a claim within this six-year limitation period (and the debt has not been acknowledged), the lender is no longer able to enforce its rights as the limitation period would have expired.

4. Loan is made before June 1, 2013, demand occurs before June 1, 2013 or after June 1, 2013, but the debt is acknowledged by the debtor after June 1, 2013

Given that the debtor acknowledged the debt after June 1, 2013, the limitation period for the lender to bring an action to enforce payment is reset and the two-year limitation period under the Current Act likely applies. Again, this could inadvertently prejudice a lender since the limitation period for the demand loan expires earlier under the Current Act than the Old Act.

5. Loan is made after June 1, 2013 and demand occurs after June 1, 2013

The two-year limitation period under the Current Act applies and the running period for the lender to bring an action to enforce payment starts on the first day the debtor fails to perform the obligation to pay after the demand has been made.

Lenders Should Act Promptly

Lenders need to be careful before making demand on a loan that was advanced before June 1, 2013 as they may inadvertently shorten the limitation period to commence a claim. Lenders should review the demand loans they advanced before the Current Act came into force to ensure they properly comply with the limitation period under the Old Act and consider obtaining acknowledgments and forbearance agreements from the debtor and, if in doubt, commence legal action from the earliest possible date when a claim is discovered. Lenders should also properly document debtor acknowledgements of debt or partial payments made on demand loans that fall under both legislative regimes so its enforcement rights are preserved.