In a recent Ontario Court of Appeal decision, Justice van Rensburg held that the limitation period for the discoverability of a claim does not restart upon an assignment in bankruptcy being filed by a corporation where the claim is a claim of the corporation.
Ridel v. Goldberg, 2019 ONCA 636 ("Ridel"), was an appeal by the judgment creditors of e3m Investments Inc. ("e3m"), a company which became bankrupt in January 2015.
Ridel arises from a long-standing dispute between the Ridels and Mr Goldberg, who was the founder, CEO, president, and director of e3m. Mr Goldberg was also the sole shareholder of e3m until September 2003, at which point e3m issued nearly half of its outstanding common shares to nine sophisticated and active investors. Specifically, this claim arose due to e3m's failure to properly supervise Mr Armando Cassin, an employee of e3m, and his mishandling of the Ridels investment accounts. In 2013, a judgment was granted against e3m and Mr Cassin, concluding that e3m was vicariously liable for Mr Cassin's conduct and also directly liable to the appellants. An appeal was granted in order to determine whether the motions judge erred in concluding that the appellants' claim was discovered or ought reasonably to have been discovered prior to the appellants obtaining a section 38 order of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3)(the "BIA") within the meaning of section 5(1)(a)(iv) of the Limitations Act, 2002, S.O. 2002,c.24, Sched. B (the "Limitations Act")?
In the appeal, Justice van Rensburg examined two avenues as to when the matter referred to in section 5(1)(a) was discovered. The first explanation stipulated that the application of the test in section 5(1)(a) first requires that the claims at issue be defined or identified. In order for this to occur, the appellants had to have been claimants, who knew or ought reasonably to have known of the matter referred to in section 5(1)(a). Justice van Rensburg states that before the claimants had control over the claims, or the means to obtain control of them, i.e. upon the bankruptcy of e3m in January 2015, they were not claimants and as such their knowledge did not satisfy the requirement under this section.
The second explanation that Justice van Rensburg provided, and the one that she ultimately ended up adopting, was under section 12 of the Limitations Act. Under the section 12 analysis, the discovery date for the limitations period is when the appellants' "predecessor", i.e. e3m itself, knew or ought to have known of a potential claim against Goldberg. The discoverability of the matter was found to have occurred by the time the appellants commenced their action against Goldberg for breach of his duties to e3m, which at the latest was by the 2013 judgment by Justice Pepall (as she was then). Therefore, the limitation period expired long before any action was commenced by e3m against Goldberg. Alternatively, in order to halt the limitations clock, the shareholders could have assumed control of e3m's board and caused e3m to make a claim against Goldberg. Rather, the shareholders made the informed choice of pursuing this appeal.
Within her reasoning, Justice van Rensburg distinguished this case from Indcondo Building Corporation v. Sloan, 2010 ONCA 890 ("Indcondo"), stating that while Indcondo confirms that section 12(1) applies in the context of an assignment of a claim by a trustee in bankruptcy under section 38 of the BIA, it is not determinative of the timing of when the appellants knew or ought to have known of the matters in section 5(1)(a). Furthermore, Indcondo was distinguished on the
basis that in that case there was no disagreement about when the creditor knew all the elements of section 5(1)(a).
Claimants in Ontario should be careful not to allow the two-year limitation period, from the date of discovery (whether actual or imputed), to expire where the claim is derivative of a corporation. A bankruptcy will not assist in restarting the limitation period and claimants will be out of luck if they do not pursue derivative claims diligently and in a timely manner. This case will have a significant impact on claims in Ontario whether or not a bankruptcy occurs, and should be at the front of practitioners' minds when acting for claimants whose cause of action arises from actions of principals of companies who have caused damage to those companies.