During the past 14 months, courts in Ontario have rendered three decisions dealing with the application of limitation periods to claims for fraudulent conveyances or preferences. A “limitation period” is a period of time, specified in a statute, within which a plaintiff must commence a court proceeding to seek a remedy. Otherwise, the claim is said to be “statute-barred” and an action to enforce the claim will be dismissed.
The recent decisions have brought some clarity to the law in this area, but have left other questions unanswered.
The Limitations Act, 2002 came into force on January 1, 2004, and replaced the long-existing Limitations Act. The Limitations Act, 2002 gives a person the period of two years after the person discovers that he/she/it has a claim within which to commence a court proceeding to seek a remedy. A “claim” is defined as “a claim to remedy an injury, loss or damage as a result of an act or omission.”
The old Limitations Act proceeded on an entirely different basis. It listed specific types of actions and fixed limitation periods for them, ranging from two to 20 years “after the cause of action arose.” If an action was not listed, there was no limitation period applicable to it.
Such was the case for actions attacking transactions as fraudulent conveyances under the Fraudulent Conveyances Act. That Act did not then (and still does not) set out any limitation period, and the old Limitations Act did not specify one for this type of claim (Perry, Farley & Onyschuk v. Outerbridge Management Ltd. (2001), 26 C.B.R. (4th) 64, 54 O.R. (3d) 131, 199 D.L.R. (4th) 279 (Ont. C.A. [In Chambers])). The same was undoubtedly true of actions attacking transactions under the Assignments and Preferences Act, either as fraudulent conveyances (section 4(1)) or as fraudulent preferences (section 4(2)).
Fraudulent Conveyances Act and Assignments and Preferences Act
The enactment of the Limitations Act, 2002 has changed the law regarding limitation periods and claims asserted under the Fraudulent Conveyances Act and the Assignments and Preferences Act.
In Toronto Standard Condominium Corporation No. 1703 v. 1 King West Inc., 2009 Can LII 55330 (S.C.J. [Master]), affirmed 2010 ONSC 2129 (S.C.J. [Div. Ct.]), the plaintiff, a residential condominium corporation, commenced action in March 2007 against the condominium developer and others, alleging numerous deficiencies in the construction of the condominium building. In December 2008, the plaintiff sought to amend its statement of claim, by adding a new claim that two mortgages made by the developer and registered against unsold units were void as fraudulent conveyances, and by adding the mortgagees as defendants. The court refused the plaintiff’s motion.
The Master who heard the motion held that the proposed claim under the Fraudulent Conveyances Act was a “claim” as defined in the Limitations Act, 2002, and that the plaintiff should have discovered it more than two years earlier, when the mortgages were registered. A sole judge of the Divisional Court dismissed the plaintiff’s appeal.
Another case, Indcondo Building Corporation v. Sloan, 2010 ONSC 2473, reversed 2010 ONCA 890, involved application of a limitation period where a debtor went bankrupt, the trustee in bankruptcy would not pursue a claim that a transfer of property by the debtor was a fraudulent conveyance under the Fraudulent Conveyances Act or the Assignments and Preferences Act and a creditor obtained an assignment of the claim under section 38 of the Bankruptcy and Insolvency Act.
Both the motion judge and the Court of Appeal applied the Limitations Act, 2002 to an action by a trustee in bankruptcy to attack an alleged fraudulent conveyance. However, they had different answers to the question: Whose discovery of the claim is relevant – the trustee’s discovery or the creditor’s? The motion judge considered only the trustee’s discovery relevant, but held that the creditor stepped into the shoes of the trustee, and where the trustee was statute-barred, so was the creditor.
The Court of Appeal held that this was a case of a “proceeding commenced by a person claiming through a predecessor in right, title or interest” (Limitations Act, 2002, section 12(1)) and that, under that section, the discoverability date was the earlier of the date of discovery of the claim by the trustee in bankruptcy and the date of discovery by the creditor. In this case, the creditor knew of the transaction before the trustee, but, ironically, at that time, the Limitations Act, 2002 was not yet in force. Pursuant to section 24(6) of the Limitations Act, 2002, there was no limitation period applicable to a fraudulent conveyance action, and the action was not statute-barred.
Bankruptcy and Insolvency Act
The Bankruptcy and Insolvency Act contains two provisions under which a trustee in bankruptcy may seek to have a transaction entered into by the bankrupt before bankruptcy declared void:
section 95 – fraudulent preferences, and
section 96 – transfers at undervalue.
Section 96 also enables the trustee to recover a money judgment against a party to a transaction with the debtor.
Section 95 deals with transactions made by an insolvent debtor that give one creditor a preference over another creditor. Section 96 deals with transactions for which the debtor receives no consideration at all or consideration that is conspicuously less than the fair market value of the consideration given by the debtor.
Under both sections, where the other person dealt at arm’s length with the debtor, what the trustee needs to provide is more onerous, and the review period (the length of time before bankruptcy when the transaction occurred) is shorter, than in a case where that person and the debtor did not deal at arm’s length.
The Bankruptcy and Insolvency Act does not set out any limitation period after which an action under section 95 or 96 may not be commenced. Nor does that Act specifically import provincial law as it does in other areas (e.g., section 67(1)(b) and section 146). The question arises: does the Limitations Act, 2002 apply to such an action? In Re: Edwards, 2010 ONSC 5718 (S.C.J. [Reg.]), reversed (sub nom. Edwards v. Food Family Credit Union) 2011 ONSC 1573 (S.C.J.), the court provided the answer: No.
In that case, the bankrupt made withdrawals from his non-exempt RRSP on April 2, 3 and 4, 2006, and paid the net proceeds to a creditor, his credit union. He made an assignment in bankruptcy on April 7, 2006. The trustee in bankruptcy commenced a proceeding to challenge the payments under section 95 on May 28, 2008. The Registrar held that the Limitations Act, 2002 applied, and that the action was statute-barred.
On appeal, Marrocco J. allowed the trustee’s appeal. He reasoned that, because limitation periods have been specified in other sections of the Bankruptcy and Insolvency Act, the omission of a limitation period for actions under section 95 was an intentional determination by Parliament. He concluded:
The application of a provincial limitation period would, thus, trigger a conflict of laws and, in accordance with the doctrine of paramountcy, render the Limitations Act[, 2002] inoperative.
Marrocco J. confined his conclusion to cases in which a trustee in bankruptcy is proceeding solely under section 95 of the Bankruptcy and Insolvency Act (and also, one presumes, to cases when a trustee is proceeding solely under section 96). However, he noted that, in an earlier case, a judge of the Supreme Court of Canada observed that the conclusion might be different where a trustee proceeds under both a provincial statute and the Bankruptcy and Insolvency Act.
If a trustee in bankruptcy seeks to set aside a prebankruptcy transaction under the Fraudulent Conveyances Act or the Assignments and Preferences Act and also under the Bankruptcy and Insolvency Act, and the trustee commences the court proceeding more than two years after the date of the trustee’s appointment, will the entire proceeding be statute-barred or just the claims based on the provincial statute(s)? Marrocco J. was not required to reach a decision on that issue and it will have to wait for another day to be answered with certainty.