Limitation periods, proposals and bankruptcies

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On its appointment a trustee in bankruptcy may have the right to initiate various claims on behalf of the estate. Those claims include claims that the bankrupt may have had the right to initiate prior to the bankruptcy, as well as new claims that are unique to the trustee; for example, statutory claims under section 95 (preference claims) or section 96 (claims for transactions at under value) of the Bankruptcy and Insolvency Act (the “BIA”).

However, a trustee in bankruptcy is subject to limitation periods created by a limitation statute or other statutory provision just like other claimants. If the trustee in bankruptcy fails to initiate a claim on behalf of the estate within the applicable limitation period, the benefit of such claim will be lost. Accordingly, a trustee in bankruptcy must be aware of the relevant limitation periods and act within the time prescribed or risk losing the right to pursue a claim and perhaps open itself to a claim of negligence by the creditors.

The need to act more quickly in respect of claims has become more important in British Columbia as the limitations periods that were once six years for most types of claims are now generally only two years. The start of the limitation period may become blurred where there is a proposal trustee who then becomes a bankruptcy trustee when the creditors vote against acceptance of the proposal. This was the situation in Re Saran.

Baldeep Kaur Saran was a dentist who failed to pay her taxes for several years and accumulated approximately $3,000,000 of tax debt. Nine months prior to her bankruptcy, she sold one of her dental offices (which were operated as sole proprietorships) to a company. Her husband was the sole director, officer and shareholder of the purchasing company. The purchase price was paid by a combination of cash and promissory notes. The sale price of $185,000 was based on a valuation obtained a year earlier that valued the business at between $170,000 and $200,000.

The Bankrupt filed a Notice of Intention to Make a Proposal (the “NOI”) on October 8, 2014 and filed her proposal on December 22, 2015. The promissory notes given in partial payment on the sale were known to the proposal trustee through the statement of affairs. At the initial meeting of creditors on February 3, 2015, Canada Revenue Agency (“CRA”) questioned whether the sale of the dental office was for proper value. At a subsequent meeting of the creditors on March 25, 2015, the creditors voted against acceptance of the proposal.

The Trustee obtained a valuation as of December 31, 2012 (the date of the original valuation), of $470,000; and, as of January 1, 2014 (the date of the sale), of $500,000. Based on these valuations, the bankruptcy trustee concluded that the dental office had a value of $500,000 as of the date of the sale and as such was a sale at under value contrary to section 96 of the BIA. The trustee filed a motion to set aside the sale on March 21, 2017, returnable on March 22, 2017. There were two adjournments prior to the hearing of the preliminary question on the limitation defence.

The Respondents argued that the claim was statute barred as the limitation period ran from either October 8, 2014, the date of the NOI, or at the latest, February 3, 2015, the date when the issue was raised at the first meeting of creditors. Their position was that the proposal trustee had all the required information regarding the sale and that it could have been a sale at under value so had an obligation to report to the creditors on the sale. The bankruptcy trustee argued that the limitation period ran, at the earliest, from the date of the bankruptcy, which was the date when the trustee could exercise the powers of a bankruptcy trustee.

The court agreed with the trustee. In particular, the court found that:

· The duties of a trustee under a proposal and a trustee in bankruptcy are very different – they wear different hats;

· A trustee under a proposal is entitled to rely on information provided by the debtor as the statement of affairs is a sworn document, but a trustee in bankruptcy is required to verify the statement of affairs, which only happens after the date of bankruptcy;

· There is no proprietary interest in a proposal trustee in respect of the assets of the debtor, so no right to pursue a claim, whereas the trustee in bankruptcy is required to take possession and control of the property, books and records of the bankrupt and thereafter is entitled to pursue claims on behalf of the estate.

The court concluded that in the circumstances, the fact that the motion was brought within two years of the date of the bankruptcy, the limitation period had not expired. The court found that the earliest the trustee could have determined the sale was for under value was March 25, 2015, the date the proposal was defeated and the debtor became a bankrupt. The trustee argued that the limitation period did not start to run until even a later date, but specific determination of that later date was not required in the circumstances. It was clear that any prior “knowledge” the trustee had while wearing the hat of the proposal trustee was not imputed to the bankruptcy trustee so as to result in an earlier date for the start of the limitation period. The preliminary objection was accordingly dismissed.

Limitation periods vary by province and by the type of claim. Bankruptcy trustee must be aware of the appropriate limitation periods for different types of claims. They should be diligent in identifying potential claims following their appointment and expeditiously pursue those claims so as to avoid the risk of a limitation defence being raised.

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