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Limitation Periods - Discovery by a Proposal vs Bankruptcy Trustee

For the purposes of raising a limitations defence, is a trustee in bankruptcy deemed to have 'discovered' a potential claim at the time that it was discoverable by them when they were acting as a proposal trustee? This was the question for the Ontario Supreme Court earlier this year in Re. Saran 2018 ONSC 2998.

In this case, the bankrupt was a dentist who owned two dental clinics. Her husband was her office manager at both clinics. He also controlled two companies, one of which purchased the assets of one of her dental clinics for $185,000 in January 2014. In October 2014 the bankrupt filed a notice of intention to make a proposal, and later she filed a proposal. A creditors' meeting was subsequently held in February 2015 where it was alleged by the main creditor, CRA, that the sale of the clinic was a sale at undervalue. The bankrupt's proposal was subsequently rejected and she was deemed to have made an assignment in bankruptcy on March 25, 2015. The trustee in bankruptcy had a valuation done of the assets of the sold dental clinic and they were appraised at $500,000 at the time of the transfer. On March 21, 2017 the trustee in bankruptcy brought a motion in court seeking a declaration that the sale of the clinic was a sale at undervalue. The respondents claimed that the trustee's motion was statute barred pursuant to the Limitations Act of Ontario 2002, S.O. 2002, c. 24, Sched. B as the claim should have been discoverable by the trustee in October 2014 or at the creditors' meeting in February 2015.

The court held that the trustee's motion was brought in time as a proposal trustee has very different duties from a trustee in bankruptcy. They wear different hats and have different entitlements and responsibilities. As proposal trustee, the trustee was entitled to rely on the information provided by the bankrupt whereas a trustee in bankruptcy is required to verify that information. The debtor's assets do not vest in a proposal trustee like they do with a trustee in bankruptcy. Accordingly, the earliest that the trustee in bankruptcy could have discovered the sale at undervalue was the day it was appointed as trustee in bankruptcy, March 25, 2015, and accordingly the trustee's motion was brought in time.

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