Law Times

Law TiMes • March 21, 2011 An online resource 1.800.263.3269 Focus On RESTRUCTURING & INSOLVENCY Appeal court sets time limits Creditors must file claims under BIA within two years BY DARYL-LYNN CARLSON For Law Times T he Ontario Court of Appeal has delivered a precedent-setting decision that places a time limit on court actions fi led by creditors under s. 38 of the Bankruptcy and Insolvency Act. In its decision in Indcondo Building Corp. v. Sloan, the appeal court asserted that a creditor must fi le a claim within two years of discovering it. It's the fi rst time the court has pro- vided clarifi cation and lawyers say it's welcome news. James Zibarras of Brauti Th orning Zibarras LLP represented Indcondo Building Corp. in the case. He says the decision in favour of his client will assist lawyers in representing clients who fi le under the act. "When a party goes bankrupt, all of their creditors have to pursue their claims through the trustee in bankruptcy," he says. "Th e creditor can seek a s. 38 or- der, which allows the creditor to pursue the trustee's cause of action, although the creditor can't actually pursue a claim. Th e only person who can pursue a claim is the trustee. But if the trustee refuses to pursue a claim, then the creditor can step into the shoes of the trustee and pursue the claim under s. 38." In Zibarras' view, the clarifi cation on the time limitation is helpful. "Even though the trustee is brought in to pur- sue the claims, the claim really belongs to the creditor. So you have to fi nd out when the creditor fi rst found out about their claim, and the limitation period will end two years after the creditor found out about the claim." Previous to the ruling, there was a six-year limitation period as well as con- sideration for special circumstances that would extend it, Zibarras notes. But under the new act, there are no accommodations for special circumstances allowing creditors to extend their deadline to make a claim. "So if you miss your limitation period, you're done. Th ere's no re- course," Zibarras says. "Th e good news is that this Court of Appeal decision brings clarity to the is- sue." His client, Indcondo, had launched an action to reverse some fraudulent conveyances entered by the defendants to circumvent a $9-million court order. Th e main defendant, Cave Hill Properties Ltd., declared bankruptcy, which stayed the action and prevented Indcondo from seeking enforce- ment of the judgment. According to Zibarras, the Court of Appeal eff ectively went with the discoverability of the creditor and relied on s. 12 of the Limitations Act in issuing its decision. "It's a bit of a unique situation as the is- sue has never been defi ned by the Court of Appeal for the purposes of the Limitations Act in terms of whose discoverability applies," he says. "When there is a bankruptcy and outstanding claims, it's very important that those claims are pur- sued as quickly as possible because it's not going to be two years from the date that the trustee found out about it. It's going to be two years from the date that the creditor found out about it." Th e lower court had held that discov- erability is in the hands of the trustee, while the appeal court affi rmed that it's with the creditor. Zibarras adds that the decision is sig- nifi cant because if the appeal court had "It is an important develop- ment," Zibarras says. Michael MacNaughton, a part- ner at Borden Ladner Gervais LLP and a member of the fi rm's insol- vency and restructuring group, says the decision will aff ect credi- tors. "Certainly, a creditor will think long and hard before it institutes a s. 38 proceeding because they will need to decide whether the limitation period is diff erent and perhaps shorter than the limita- tion period that could apply to the trustee of bankruptcy," he says. In 2009, the government amended the bankruptcy act to repeal its sections dealing with settlements and reviewable trans- actions. Instead, it replaced them with a general cause of action for transfers at undervalue under s. 96. Transfers at arms length were also subject to s. 96 if they took place within a year before the date of the initial bankruptcy in the event the debtor was insolvent at the time or it aimed to defeat, de- fraud or delay a creditor. So if a trustee institutes a pro- 'The good news is that this Court of Appeal decision brings clarity to the issue' of time limits, says James Zibarras. upheld the lower court ruling, there could have been new life given to ex- pired claims against a bankrupt com- pany following the appointment of a trustee as the discoverability would have essentially restarted the clock. As well, in using s. 38 of the bank- ruptcy act, Zibarras' client was able to pursue its claim through the trustee's cause of action. ceeding and brings a motion to re- cover payment under s. 96 within a two-year window, everyone will be watching, says MacNaughton. "I think if there isn't clarity in the law now as to whether provincial limitations apply to proceedings in- stituted by a trustee in bankruptcy or a creditor under s. 38 for a preference proceeding or a reviewable transaction proceeding or perhaps a transfer of un- dervalue proceeding, then trustees and creditors will have to be careful, espe- cially in Ontario, to institute proceed- ings and watch their timeline." Lawyers finding ways to expedite restructurings A BY DARYL-LYNN CARLSON For Law Times s a result of the recent global recession, lawyers who were in- volved in major restructurings during that period have learned a few ways to expedite matters and stream- line the process, particularly after Canada adopted some helpful features of the Model Law on Cross-Border Insolvency developed by the United Nations Commission on International Trade Law in 2009. Shayne Kukulowicz, a partner at Fraser Milner Casgrain LLP and na- tional co-chairman of the fi rm's in- solvency and restructuring group, has been involved in several signifi cant re- structurings spawned by the economic downturn. Th ey include varying degrees of involvement in restructurings by Can- west Global Communications Corp., TerreStar Networks Inc., Masonite International Inc., White Birch Paper Co., and Nortel Networks Corp. "Th ere has been a shifting landscape in the nature of restructurings that we've seen over the past few years with the high number of cross-border fi lings and the involvement of hedge funds and bondholders which have resulted in more complexity and some very in- teresting dynamics," he says. "Because of the cost and complexity of [Com- panies' Creditors Arrangement Act] proceedings and Chapter 11 proceed- ings in the U.S., there has been a real emphasis on eff orts to pre-negotiate or prepackage restructurings. In other words, you try to get your primary debt holders on side before you actually fi le so that there is more certainty as to the outcome and the process is streamlined with less time actually in a formal pro- ceeding and reduced costs." He notes the pattern has helped ex- pedite complex restructurings that have a cross-border scope, such as Masonite. As well, Kukulowicz says hedge funds and bondholders have had an increasingly larger role in restructur- ings in recent years. Th at adds to the complexity of the process due to the number of lenders with diff erent po- sitions and the fact that the composi- tion of such creditor groups may con- stantly change. In the Nortel matter, in which FMC is counsel for the offi cial committee of un- secured creditors, Kukulowicz notes that See All, page 13 www.lawtimesnews.com Shayne Kukulowicz expects there will be more restructurings this year. PAGE 9

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