What impact does a company’s bankruptcy have on the limitation period for commencing a claim against its directors?
The Appellants were judgment creditors of a bankrupt company (the “Debtor”). On October 25, 2016, they obtained an order under s. 38 of the Bankruptcy and Insolvency Act (the “BIA“), which assigned to them the Debtor’s right to sue its former principal for breach of his duties as director of the Debtor, and promptly commenced an action for contribution and indemnity in respect of the judgment amount.
Since the Appellants were pursuing a claim belonging to the Debtor, the two-year limitation period for the claim ran from the earlier of when either the Appellants or the Debtor knew or ought reasonably to have known of the elements giving rise to the claim. The motions judge concluded that the Appellants became aware of the facts forming the claim against the director in July 2006, and so, the claim was statute-barred under the Limitations Act. The Appellants appealed from the decision of the motions judge.
At issue in the appeal was whether the motions judge erred in concluding that the limitation period ran against the Appellants because of their personal knowledge of the relevant facts, even though they had no capacity to sue in the Debtor’s name until after the company was bankrupt. The Appellants did not challenge the timing of their own knowledge of the wrongdoing alleged in the claim; rather, they argued that they were not in a position to do anything about it until the Debtor was declared bankrupt.
On bankruptcy the property of the bankrupt—including any cause of action that the bankrupt may have—vests in the trustee. The trustee is entitled to assert both claims that previously belonged to the bankrupt and claims that arise by virtue of the bankruptcy. Section 38 of the BIA permits the assignment of those claims to a creditor of the bankrupt. Assignment of a cause of action raises the application of s. 12(1) of the Limitations Act because the assignor of a claim is considered a predecessor in right, title or interest. The relevant discoverability date is the earlier of that of the predecessor or the person claiming through the predecessor. The assignment does not have the effect of restarting the running of the limitation period.
The Appellants were pursuing a claim that initially belonged to the Debtor and that vested in the trustee on the Debtor’s bankruptcy. This claim could not have been pursued prior to the Debtor’s bankruptcy because the Appellants had no right, title or interest in the claim. As such, any personal knowledge they might have had before the bankruptcy respecting the claim did not cause the limitation period to run against them. In determining when the limitation period began to run, the question was when the Appellants, as “claimants”, knew or ought to have known of the elements prescribed in s. 5(1)(a) of the Limitations Act.
The motions judge’s conclusion that, because of their personal knowledge of the material facts in relation to the Debtor’s claim, the limitation period began to run against the Appellants as early as July 2006 and as late as April 2013, was therefore in error. Their knowledge of those matters did not become relevant until they had or ought reasonably to have had the authority to pursue the claim, which was, at the very earliest, upon the bankruptcy of the Debtor in January 2015. Until the Appellants had control over the claim, they were not “claimants” for the purpose of s. 5(1)(a) of the Limitations Act, and therefore their knowledge was not the knowledge of “claimants” under the section.
However, the Court held that the motions judge did not err in concluding that the limitation period ran against the Appellants’ predecessor—the Debtor—based on its knowledge of the claim. The two-year limitation period began to run against the Debtor in respect of the claim on the earlier of when the Debtor first knew or ought reasonably to have known of the matters set out in s. 5(1)(a) of the Limitations Act. In this case, the limitation period had expired against the Debtor by the time the Appellants commenced their action. The Debtor knew or ought to have known of a potential claim against its director by April 2013, at the latest, which is when a Judgment containing various references to the director’s wrongdoing was released.
The Court of Appeal dismissed the appeal with costs.
Counsel: Philip Anisman for the appellants and Niklas Holmberg and Breanna Needham of Lax O’Sullivan Lisus Gottlieb LLP for the respondent.