Court File and Parties

Court File No.: 31-2477545 Motion Heard: March 2, 2021 Superior Court of Justice – Ontario (In Bankruptcy and Insolvency)

Re: John Trevor Eyton, Bankrupt

Before: Master J. E. Mills

Counsel: S. Babe, Counsel, for the Moving Party Creditor J. Ross Macfarlane, Counsel, for the Trustee

Heard: March 2, 2021

Endorsement

[1] This matter is an appeal pursuant to s. 135(4) of the Bankruptcy and Insolvency Act (the “BIA”) from the Trustee’s disallowance of the claim submitted by the creditor Forty-One Peter Street Inc. (the “Creditor”).

[2] It is undisputed by the Creditor that the debt owed by the bankrupt is statute barred pursuant to the provisions of the Limitations Act, 2002 and would not otherwise be enforceable by way of legal proceeding. The underlying debt was incurred in 2001 when the creditor advanced $250,000 to the bankrupt, supported by a promissory note dated April 10, 2001. A letter agreement was subsequently signed in 2009 and a security interest was granted by the bankrupt in certain shares. The security interest in the shares was not perfected at the date of the insolvency proceeding and the last payment made by the bankrupt on the debt was April 19, 2016. More than two years has elapsed since the debt was in default and there was no acknowledgement in writing by the bankrupt to confirm the existence and enforceability of the debt prior to the expiry of the limitation period.

[3] The Creditor was disclosed on the Statement of Affairs with an estimated unsecured debt of $600,000. This disclosure does not constitute an acknowledgement of the debt for Limitations Act purposes. [1]

[4] On July 27, 2020, the creditor filed an unsecured proof of claim in the amount of $688,620.67. In accordance with its obligations under the BIA, the Trustee examined the proof of claim together with the supporting evidence provided by the creditor and issued a notice of disallowance on November 13, 2020, stating “The last payment was made in April, 2016, which is more than two years prior to the Bankruptcy. This would result in the claim being statute barred.”

[5] The Creditor filed this appeal on December 11, 2020. The matter proceeded as a true appeal of the disallowance, relying upon the documents provided to the Trustee to support the proof of claim. The standard of review is correctness. [2]

[6] It is the position of the Creditor that while unenforceable by legal proceeding, the debt continues to exist and is a proper claim, provable in bankruptcy. The creditor relies on the decision of Newbould, J. (as he then was) in Re Temple, 2012 ONSC 376 [3] wherein it was held that a statute barred debt may found an application for bankruptcy. The debt is not extinguished if statute barred by the Limitations Act. The debt continues to be owed and may constitute an act of bankruptcy. It can therefore be the basis upon which a bankruptcy order may be made and can also be the basis for a provable claim by a creditor. [4]

[7] The Trustee relies on a long history of caselaw which has held that in order to be a provable claim in bankruptcy, the debt must be recoverable by legal process. If the debt is statute barred at the date of bankruptcy, the proof of claim is not sustainable. [5] This principle was adopted by the Privy Council in 1943 [6], the Alberta Court of Appeal in 1988 [7] and the Ontario Court of Appeal in 1996. [8]

[8] The Privy Council noted “… the petitioning creditor’s debt and the debts provable must be debts recoverable by legal process. For example, a debt barred by the Statute of Limitations is not a debt on which a bankruptcy petition can be presented, nor is it one provable in bankruptcy”. [9] The Alberta Court of Appeal stated “… a provable claim must be one that is recoverable by legal process.” [10] Relying on this statement, Madam Justice Weiler for the Ontario Court of Appeal stated “Inasmuch as there is no right to enforce payment, the promise is not one which can be proved as a claim.” [11]

[9] As a result of these decisions, the law as it presently stands in Ontario is that a statute barred debt may found a bankruptcy application but then could not constitute a provable claim in bankruptcy. Regrettably, the line of cases relied upon by the Trustee were not put before Justice Newbould as he stated at paragraph 12 of Re Temple that there was no Canadian authority for the proposition that a statute barred debt could not support an application of a bankruptcy order. That statement was correct but there was ample authority that the debt could not then be a provable claim in the bankruptcy.

[10] Counsel agreed that as a Registrar in Bankruptcy, I am bound by the legal principle of stare decisis, I am compelled to follow the decisions of the courts which sit in appellate jurisdiction over me and that decisions from other jurisdictions may, at best, be persuasive to my deliberations. The challenge is that I face conflicting decisions from Ontario courts, both of which are above me. To follow the precedent from the Court of Appeal decision in Royal Bank of Canada v. Central Capital Corp., 1996 ONCA 1521 results in an apparent absurdity from the Superior Court of Justice decision in Re Temple, 2012 ONSC 376. Regrettably, that is what I must do and what I believe is the correct result.

[11] A debt which is statute barred is unenforceable at law and therefore may not be a provable claim in bankruptcy. A creditor ought not enjoy a windfall on an otherwise unenforceable debt simply because the debtor was assigned, voluntarily or otherwise, into bankruptcy. To allow the statute barred debt to be proven would permit the creditor to receive dividends on a pari passu basis with all other properly proven creditors who, but for the bankruptcy, would have been able to legally enforce their debts. Creditors must not be permitted to use the provisions of the BIA to effectively revive their enforcement rights and collect on statute barred debts. This is not the intention of the BIA which provides for the fair and orderly distribution of the bankrupt’s property among the creditors with proven and enforceable claims.

[12] The statute barred debt is not extinguished. Its existence and the failure to voluntarily pay the debt may constitute an act of bankruptcy to support an application for a bankruptcy order, but contrary to the obiter of Newbould, J., the debt may not stand as a provable claim in bankruptcy.

[13] In Duca v. 2203824 Ontario Inc., 2020 ONSC 3119 [12], the Dietrich, J. accepted the obiter in Re Temple, to find that statute barred debts could be provable claims in a receivership proceeding. The Duca matter involved a receivership process which had been subject to court supervision and where creditor enforcement rights had been stayed by court order. Compelling creditors to seek lift stay orders in order to protect their enforcement rights from becoming statute barred would interfere with the efficient and effective administration of a receivership. This case is distinct from the matter before me where the claim was statute barred prior to the commencement of the insolvency process and before the imposition of the stay of proceedings pursuant to s. 69 of the BIA. The Duca decision may be distinguished on its facts and I do not find it to be binding upon me.

[14] The appeal is therefore dismissed, and the Trustee’s disallowance is affirmed.

[15] Counsel agreed that as this was an important issue which required clarification of the law, they would not seek any costs. I thank both counsel for their very capable submissions on this appeal and in accordance with their agreement, I order no costs.

Master J. E. Mills Date: March 8, 2021

Citations:

[1] Young v. Moncreiff (1945), 27 C.B.R. 1 (Alta. Dist. Ct.). [2] Credifinance Securities Limited. v. DSLC Capital Corp., 2011 ONCA 160 at para. 24; Re Charlestown Residential School (2010), 70 C.B.R. (5th) 13 (Ont. S.C.). [3] Re Temple, 2012 ONSC 376. [4] At para. 28. [5] Re Morton; Ex Parte Morton, Bartling and Company Limited, 1922 SKQB 146; Houlden, Morawetz & Sarra, 2020-2021 Annotated Bankruptcy and Insolvency Act, para. G-47. [6] Reference Re the Debt Adjustment Act, 1937 (Alberta) Attorney-General for Alberta v. Attorney-General for Canada et al. [7] Farm Credit Corporation v. Dunwoody Limited (Holowach), 1988 ABCA 216. [8] Royal Bank of Canada v. Central Capital Corp., 1996 ONCA 1521. [9] Reference Re the Debt Adjustment Act, 1937 (Alberta), supra. at p. 11. [10] Holowach, supra, at para. 7. [11] Royal Bank of Canada v. Central Capital Corp., supra., at para. 107. [12] Duca v. 2203824 Ontario Inc., 2020 ONSC 3119, at paras. 54 to 60.