On January 27, 2012, Justice Newbould of the Ontario Superior Court of Justice (Commercial List) (the “Court”) released his decision in Temple (Re),1 holding that the Ontario Limitations Act, 20022 (the “Act”) does not apply to a bankruptcy application and does not operate to extinguish a debt owing to a creditor.

The Ontario Limitations Act, 2002

The purpose of limitation periods is to provide legal certainty by preventing plaintiffs from unreasonably delaying the commencement of a proceeding. Any proceeding brought after the applicable limitation period is generally “statute-barred” and dismissed. The Act, which came into force in January 2004, was a substantial change to the limitations regime in Ontario. It provides two general limitation periods: a basic two-year limit and an ultimate 15-year limit.

The two-year clock begins to run on the basic limitation period when the underlying claim is discovered by the injured party.3 A claim is discovered when the injured party becomes aware that the injury, loss or damage has occurred, or when a reasonable person ought to have known that such injury, loss or damage has occurred.4 Conversely, the 15 year clock begins to run on the ultimate limitation period when the act or omission giving rise to the claim occurred, regardless of whether or not the injury, loss or damage is known (with very limited exceptions).5 The ultimate limitation period applies when the injured party does not have, or a reasonable person would not have, knowledge of the injury, loss or damage giving rise to the claim.

The Facts of Temple (Re)

Mr. Gore was the accountant for Mr. Temple and Mr. Nykoliation (collectively, the “Borrowers”), and their various property development corporations (collectively the “Corporations”). In addition to his role as their accountant, Mr. Gore was involved in arranging loans for the Borrowers and their Corporations. Mr. Gore had personally been involved in arranging nearly $1.2 million in loans in favour of the Borrowers.6

Mr. Gore and his wife (collectively, the “Lenders”) had personally provided the Borrowers with an unsecured loan of $425,000 bearing interest at 10% per annum (the “Loan”) to support the Corporations. Little of the Loan, which matured on May 31, 2006, had been repaid. The last payment made by the Borrowers was in November 2007, over two years before the bankruptcy order was issued on February 3, 2011.7 The Borrowers raised several defences against the Lenders’ bankruptcy application.

Expiry of Limitation Period

One of the defences launched by the Borrowers was that, pursuant to the basic two-year limitation period provided by the Act, the Lenders were statute-barred from making an application for bankruptcy as the Loan had matured nearly five years prior to the application.8 The Court wholly dismissed this defence on several grounds. First, the Court noted that under the Act a limitation period applies only to a “claim,” which is defined as “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission.”9 The Court held that a bankruptcy application is not a proceeding in respect of a claim to remedy an injury, loss or damage.10 Therefore, the Court ruled that the Act does not apply to bankruptcy proceedings and does not operate to stop a creditor from enforcing its rights through a bankruptcy application pursuant to the Bankruptcy and Insolvency Act (the “BIA”),11 which is rooted in an ongoing obligation of a debtor to a creditor.

Extinguishing Debt

The Borrowers then raised the alternative defence that the basic two-year limitation period operated to extinguish the debt owing under the Loan. They argued that the Lenders failed to launch the bankruptcy application within two years of the last payment made on the Loan. Under the BIA, a creditor may only bring an application for a bankruptcy order when there is a debt owing to the creditor by the debtor.12 If the debt owing under the Loan was extinguished by operation of the Act, the Lenders would be precluded from bringing a bankruptcy application against the Borrowers. The Court ruled that the Act does not extinguish debts, but rather operates to prevent proceedings from being commenced in respect of a “claim” which, as noted above, does not capture a bankruptcy application under the BIA.13 Therefore, the Loan continued to be owed and could be the basis on which an application for bankruptcy or a creditor claim could be made. The fact that no proceeding was commenced regarding the continuing Loan obligations within the basic two-year limitation period is not a defence to a bankruptcy application.14

Unreasonable Delay

The holding in Temple (Re) does not provide creditors a license to unreasonably delay commencing an action. Although the Act neither operates generally to extinguish a debt owing to a creditor nor to bar a creditor from commencing a bankruptcy application after the expiry of the basic two-year limitation period, in certain circumstances, a prolonged delay may give rise to an equitable defence against a bankruptcy application pursuant to subsection 43(11) of the BIA and the doctrine of laches. The Court illustrated this point by reference to the case of Re Tynte,15 where a creditor waited eighteen years before making a bankruptcy application. The creditor in this case was held to have unreasonably delayed enforcing its rights and was precluded from enforcing its claim in bankruptcy proceedings.16 Therefore, the protection from the Act provided to creditors by Temple (Re) carries the caveat that creditors must act reasonably and not unduly “sit on their rights.”

Conclusion and Implications

Temple (Re) is authority that the Act does not apply to applications for bankruptcy under the BIA nor does it operate to extinguish debts. Generally, a debt owing by a debtor to a creditor can be the basis on which an application for bankruptcy or a provable claim by that creditor can be made despite the basic two-year limitation period provided under the Act. The Court’s decision in this case is not only a statement of good law, but a critical victory for the commercial realities of the debtor-creditor relationship as it provides creditors and debtors with valuable time to settle their affairs out of court while concurrently safeguarding creditors’ rights to pursue a remedy under the BIA. However, creditors must always act reasonably and avoid excessive or unreasonable delays as they may lose their ability to enforce their rights.

Chris Berrigan