Often, when creditors start to take action against a debtor, the debtor will seek relief through the Bankruptcy and Insolvency Act(i). Some Trustees in bankruptcy even advertise that the bankruptcy process can be an important step on the road to “financial well being”. Creditors, upon receiving notice of their Debtor’s bankruptcy, may feel that the chance of any recovery all but disappears with the assignment into bankruptcy. However, there are at least two situations where prudent creditors should maintain their vigilance on a bankrupt, as the failure to do so could result in the creditor being precluded from further or additional recovery.
One circumstance of which creditors need to be aware is when the bankrupt receives a Conditional Order of Discharge, but fails to satisfy those conditions for an extended period of time. A Conditional Order of Discharge places obligations on the bankrupt, upon the satisfaction of which the bankrupt becomes automatically fully discharged.
In the case of Re: Boostrom(ii), the Court dealt with an application for a full discharge by a bankrupt who failed to satisfy the conditions of a Conditional Order within a reasonable time. Later, when the bankrupt sought a full discharge, the Court wrote:
“[b]efore granting an Absolute Order of Discharge individuals either unable or unwilling to perform their duties in a timely fashion should provide an explanation. Furthermore, in many circumstances where bankrupts have the capability but simply haven't performed their duties some additional consequence should flow. In my view to simply grant Absolute Orders in such circumstances, without more, is to reward what often amounts to blatant disregard of the process and potentially places the integrity of the bankruptcy system in disrepute.(”iii)
The Court went on to say that such bankrupts must advise the court of all of their financial circumstances from the date of the Conditional Order, and that unless an explanation for the delay is given, assets that have accrued in the estate of the bankrupt may be available to the creditors. This can result in a significantly higher return to creditors than would have been the case under the original Conditional Order.
From a practical perspective, one should consider what would motivate a bankrupt, who has ignored the terms of a Conditional Order for an extended period of time, to apply for an Absolute Discharge? It might be precisely because the bankrupt has accrued or stands to accrue significant assets, and wants the benefit for himself or herself. Therefore, a diligent and prudent creditor would be well advised to monitor the bankruptcy and, if the bankrupt seeks an Absolute Order for Discharge, will insist that the bankrupt provide full financial disclosure prior to the application for discharge.
A second situation where diligent creditors stand to benefit over dilatory debtors is when the trustee in bankruptcy gets discharged even though the bankrupt remains bankrupt. At the moment a debtor makes an assignment in bankruptcy, s. 69.3 of the Bankruptcy and Insolvency Act provides for a stay of proceedings “until the Trustee has been discharged”. In some cases, the Trustee will be discharged prior to the bankrupt, and during that time period, creditors can take unfettered action against the bankrupt and his or her assets.
Creditors need to be aware of the recent Alberta Court of Queen’s Bench decision in the bankruptcy of Dyrland (.iv) This decision deals with the operation of the two year provincial limitations legislation along with the operation of the s. 69.3 stay. It is settled law that the s. 69.3 stay of proceedings also suspends the operation of a provincial limitation period (in Alberta, typically, a two year limitation). Accordingly, if a claim arises, and one year later the debtor makes an assignment in bankruptcy, the creditor will have one more year, after the discharge of the Trustee, to initiate a claim.
In Dyrland, the creditor proved its claim in the bankruptcy and received a partial dividend from the Trustee. Then the Trustee was discharged. The bankrupt remained bankrupt, and though the Trustee was discharged, the creditor did not issue any claim. More than two years later, a new Trustee was appointed to finalize the administration of the estate and pay out some additional funds.
The creditor wanted its pro rata share of the funds and took the position that, having already proven its claim and receiving a dividend, it was not required to issue a claim in order to further participate in the bankruptcy. Justice Veit of the Alberta Court of Queen’s Bench disagreed. She wrote that, notwithstanding the bankrupt remaining in bankruptcy:
“the discharge of the Trustee removes [the creditor’s] claim from the bankruptcy framework and places it back within the provincial framework of the collection of debts in which limitation rules apply”.(v) In this case, the creditor lost its ability to further participate in the bankruptcy and, therefore, did not receive any share of the additional money held by the Trustee.
Practically speaking, Dyrland means that creditors must:
(a) issue a Statement of Claim prior to a bankruptcy and within two years of Default
(b) issue a Statement of Claim after the discharge of the Trustee, where the cumulative time passage from default to the date of bankruptcy, plus the date the Trustee was discharged to the date of filing the Statement of Claim is less than two years.
As an additional and analogous matter, where a claim has been initiated prior to a bankruptcy, any mandatory timelines within that litigation (i.e. service of Statement of Claim) would likely also recommence with the discharge of the Trustee.
In light of the above, creditors would be well advised to keep their files open and to remain vigilant with respect to bankrupts until the bankrupt and the Trustee are both fully and absolutely discharged.
WHEN DOES THE LIMITATION PERIOD BEGIN TO RUN ON A GUARANTEE? WHAT YOU NEED TO KNOW
Legislative changes and some recent court rulings in Ontario have caused some confusion with respect to the limitation period for guarantees. In 2004 Ontario proclaimed in force a new Limitations Act(vi) which codified the rule of discoverability requiring that proceedings in a claim be commenced within 2 years of the date that the injury, loss or damage is discovered. This is similar to the current Alberta Limitations Act(vii) which provides that a claimant must seek a remedial order within two years after the date on which the claimant knew, or in the circumstances ought to have known, that the injury occurred.
In early 2008, in the Chorny (viii) decision, an Ontario court held that the limitation period relating to a demand guarantee was not from the date that demand was made on the guarantee but instead expired when the limitation period lapsed on the principal obligations. In this decision the Plaintiff corporation had advanced three loans to a borrower which were secured by way of a personal guarantee. The borrower defaulted on the loans and the Plaintiff corporation commenced legal action against the borrower. The Plaintiff corporation, however, was unable to proceed immediately because it had been previously struck from the corporate registry and lacked capacity to bring the action. The Plaintiff was subsequently reinstated and re-commenced legal action. The Plaintiff was now outside of the limitations period on the original debts owed by the borrower, so the Plaintiff commenced legal action against the guarantor. The Ontario Court refused to accept the Plaintiff’s argument that the limitation period against the guarantor did not commence until demand for payment was issued on the guarantor. Rather, the Court applied the principle of co-extensiveness and held that the limitation period commenced on the date of default on the original debt and, consequently, the Plaintiff was time barred from pursing the guarantor. The Court’s finding that the guarantees were unenforceable upon the expiration of the principal debt was a deviation from the traditional common law approach in Ontario. This case suggested that while the guarantee is a contract between the lender and the guarantor, the liability still relates to the principal debtor. Therefore, if the principal debt is void or unenforceable the contract of guarantee will also be void or unenforceable.
Later in 2008, in the Williamson (ix) decision, the Court reaffirmed the traditional common law approach in Ontario finding that the limitation period for a principal debt and for a guarantee may commence at different times. In Williamson, the Bank demanded on a guarantee following the principal debtor’s inability to repay the Bank. Williamson argued that the limitation period began to run either when the demand on the principal debtor was made or when the Bank became aware that full payment would not be received from the principal debtor; and, in any case, that the limitation period had lapsed. The Bank maintained that when a guarantee states that the guarantor’s obligations commence upon formal demand, as was the case with the Williamson guarantee, the guarantor is not liable until demand is actually made. The Court agreed with the Bank and distinguished its decision from that in the Chorny case.
Williamson has clarified that the Ontario limitations act has not affected well-settled common law principles regarding a lender’s ability to enforce an independent guarantee.
In 2008, the Ontario Limitations Act was amended to specifically address demand obligations. The Act now expressly provides that the date that the limitation period begins with respect to a demand obligation is the first day upon which there is a failure to perform the obligation, once a demand for the performance is made.
All lenders should ensure that their guarantee agreements clearly provide a demand as a pre-condition to a guarantor’s obligations being triggered, so that the limitation period does not commence until demand is made. Lenders may also want to consider adding to their guarantees a provision that the basic two year limitation period is extended or suspended which is permitted under both the Ontario and Alberta limitations acts. It is advisable to consult with legal counsel when drafting and enforcing guarantees to ensure that lenders are protected from unintended effects of the limitations legislation.