Is a statue-barred debt a claim provable in bankruptcy?
The underlying debt was incurred in 2001, when the Creditor advanced $250,000 to the bankrupt, supported by a promissory note. 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 on the debt was April 19, 2016.
More than two years 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. The Creditor was disclosed on the Statement of Affairs, but such disclosure does not constitute an acknowledgement of the debt for the purposes of the Limitations Act.
On July 27, 2020, the Creditor filed an unsecured proof of claim. The Trustee examined the proof of claim and the supporting evidence 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.”
The Creditor appealed pursuant to s. 135(4) of the Bankruptcy and Insolvency Act. The Creditor did not dispute that the debt owed by the bankrupt was statute barred and would not otherwise be enforceable by way of legal proceeding. However, the Creditor argued that a statute barred debt was not extinguished and was a proper claim provable in bankruptcy.
The law in Ontario is that 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 the debt may not stand as a provable claim in bankruptcy. A creditor should 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 cannot use the provisions of the BIA to effectively revive their enforcement rights and collect on statute barred debts. Such outcome would be contrary to the purpose of the BIA, which is to provide for the fair and orderly distribution of the bankrupt’s property among the creditors with proven and enforceable claims.
The Court dismissed the appeal and affirmed the Trustee’s disallowance.
Counsel: Sam Babe of Aird & Berlis for the Moving Party Creditor and J. Ross Macfarlane of Flett Beccario for the Trustee
Judge: Master J.E. Mills