In John Trevor Eyton (Re), 2021 ONSC 3646 (“Eyton II”), Justice Dunphy determined that while a claim that is statute-barred under the Limitations Act, 2002, SO 2002, c 24 (the “Limitations Act”) continues to exist insofar as it has not actually been extinguished, it is not a claim provable in proceedings under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”).
By promissory note dated April 10, 2001, the creditor advanced $250,000 to the bankrupt. The parties entered into an agreement on September 15, 2009 pursuant to which the bankrupt acknowledged his indebtedness and committed to a payment plan of $6,000 per month beginning on October 1, 2009. No payment was made by the bankrupt after April 2016. The bankrupt was deemed to have filed an assignment in bankruptcy on April 3, 2019. The creditor filed an unsecured proof of claim dated July 27, 2020.
The trustee in bankruptcy disallowed the claim as “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.” The creditor appealed the disallowance. Master Mills (as she then was) dismissed the appeal in In re: John Trevor Eyton, 2021 ONSC 1719 (“Eyton I”). Justice Dunphy, in turn, dismissed the appeal from the order of Master Mills.
According to Justice Dunphy, “[t]he underlying policy of the BIA is to provide for the equitable distribution of the assets of the bankrupt among all creditors of the same rank. A statute-barred claim is not of the same rank as an enforceable claim because the creditor cannot enforce payment of it.”
Section 121(1) of the BIA states that “[a]ll debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.”
In general, under section 4 of the Limitations Act, “a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.” The term “proceeding” is broad and encompasses many remedies.
Section 124 of the BIA requires every creditor to prove its claim in order to receive a distribution. Justice Dunphy was of the view that the filing of a proof of claim form is a “proceeding” when given a broad and purposive interpretation of the term.
In that context, Justice Dunphy held as follows:
While a statute-barred claim continues to exist in the sense that it has not actually been extinguished, it is not a claim upon which any proceeding to enforce payment may be brought. The bankrupt cannot be said to be “subject” to a claim that cannot be enforced.
There are any number of categories of claim that subsist in the Twilight Zone of being undischarged but unenforceable. Illegal gambling debts or debts arising from the sale of illegal narcotics come to mind: payment of such a “debt” is not without consideration but the obligation so extinguished can never be enforced and thus exist as a category of right without a remedy. Such debts can never be considered as a debt to which the bankrupt is “subject” enabling them to be proved in bankruptcy and share ratably with other creditors.
Until the release of the decisions in Eyton I and Eyton II, many Ontario bankruptcy and insolvency practitioners thought that a claim that had expired under the Limitations Act could nevertheless be a “provable claim” under the BIA. Justice Dunphy’s decision in Eyton II makes it clear that a claim which is statute-barred under the Limitations Act is unenforceable and therefore not a “provable claim” in bankruptcy proceedings. Moving forward, trustees in bankruptcy should be expected to scrutinize the claims of creditors for limitations issues, including discoverability, which will add a layer of complexity to the proof of claims process.