Legal Blog

BIA Attacks

We often discuss attacking a transfer under the Fraudulent Conveyances Act and the Assignment and Preferences Act. These are provincial statutes (in this case, Ontario). However, the Bankruptcy and Insolvency Act, a Canada statute, also has effective, and sometimes more effective, provisions to set aside improper transactions. These are set out in s. 95 and s. 96 of the BIA. Both sections were discussed in Ernst & Young Inc. v. Anwar, a 2025 decision of the Saskatchewan Kings Bench.

Purposes

Section 95 of the BIA governs fraudulent preferences (i.e.  transactions an insolvent person makes before bankruptcy that unfairly favour one creditor over others).

Section 96 governs undervalued transfers that strip assets from a bankrupt before bankruptcy. It is interpreted expansively to protect the integrity of the bankruptcy process.

These sections allow a trustee in bankruptcy to distribute assets among all creditors fairly by disallowing preferential payments to some creditors and setting aside improper transfers.

Overview s. 95

A preference takes place when an insolvent person makes a payment or transfers property that improves one creditor’s position over others. A debtor is an “insolvent person” when the debtor cannot meet obligations as they generally become due, has ceased paying debts in the ordinary course, or has liabilities that exceeds its assets.

Preferences can be attacked if (i) they are made within three months before bankruptcy to an arm’s length creditor with a view to giving that creditor a preference over another creditor (i.e. intent is important) or (ii) if they are made within 12 months to a non-arm’s length creditor that has the effect of giving that creditor a preference over another creditor. In an non-arm’s length transfer, it is irrelevant whether one or more of the parties had an intent to prefer one creditor over another; the criterion is whether it had that effect.

These preferences are void against the trustee as if the transaction never occurred. The creditor must return the money or property to the bankrupt’s estate and, if it does not, the trustee may obtain judgment against the creditor for the value of the preference.

Overview s. 96

The key to this section is a transfer, either for no consideration or for a consideration that is conspicuously less than fair market value. A transfer includes cash or assets and repayment of alleged debts that do not necessarily exist.

Arm’s length transfer: The trustee must show that (i) the transfer occurred within one year before bankruptcy, (ii) the debtor was insolvent at the time or the transfer rendered it insolvent, and (iii) the debtor intended to defraud, defeat, or delay its creditors. Intent is very important.

Non-arm’s length transfer: If the transfer occurred within one year before bankruptcy, the trustee need not prove insolvency or intent; undervalue is sufficient. If the transfer occurred within one to 5 years before bankruptcy, the trustee must prove either that the debtor was insolvent at the time or the debtor intended to defraud, defeat, or delay creditors.

Like the remedies in s. 95, if the trustee proves the allegations under s. 96, the court may declare the transfer void against the trustee and order any party or any privy to pay the shortfall to the bankrupt estate.

Non-Arm’s Length and Privy

Transfers between family members, controlled corporations, and insiders are presumed to be non-arm’s length transactions.

The court may order any party to the transfer, and any other person who is “privy” to the transfer, to repay the undervalued amount. Persons are privies if they are at non-arm’s length and either directly or indirectly receive a benefit from the transfer or cause a benefit to be received by someone else. This widens the recovery scope to insiders who direct a scheme, family members who benefit, and corporations used to channel funds.

The Case

Two corporations operated a franchised H&R Block tax-preparation business. They defaulted on their financial obligations, resulting first in a court-appointed receivership and then in bankruptcy. Father ran the businesses, and, it seems, the family generally, although father was neither a director nor a shareholder of the corporations. Other members of the family who were involved in the businesses, either directly or peripherally, were wife, daughter, nephew1, nephew1’s wife, and nephew2.

The trustee determined, and the judge agreed, that about $1.4 million, by way of various transfers, had passed to father, wife, and nephew1 (who was also a lawyer in the law firm that handled many of the transactions).

The judge decided that almost all these payments could be categorised as transfers at undervalue. A few smaller payments to nephew1 could have been categorised as repayment of loans. However, some of those payments were made within the s. 95 period and were, if not transfers at undervalue, improper preferences.

As in most cases, this case depended almost entirely upon its facts. The judge took 26 paragraphs to dissect the transfers.

Privies

The judge analysed each of the transfers and the extent to which the various transferees were involved, and ultimately decided that:

• father was a privy in transfers at undervalue to himself and was a privy to the transfers at undervalue to wife;
• wife was a privy to transfers at undervalue to herself and, given her role as a shareholder and signing authority for one of the debtor corporations, was aware of and a privy to all undervalue transactions in which that corporation was involved;
• nephew1 (lawyer) was not a party to any of the transfers at undervalue, but his role in the corporations’ operations, including the advancing of loans, legal representation, and oversight of funds held in trust meant that he knew, ought to have known or at least ought to have enquired about the likely undervalue of the funds transferred to father. He was therefore a privy;
• the concerns the judge had about nephew1 would not be ascribed to his law firm or to the professional corporations of the partners that ran it;
• wife of nephew1 was a director of both corporations, and was therefore a privy to transfers that the corporation made;
• daughter’s role as a director of one of the corporations placed her in a position that she was a privy to transfers that the corporation made; and
• there was no evidence that nephew2 had any involvement in father’s business activities.

Upshot

After none of the transferees repaid the undervalued amount to the bankrupt estates, the judge held another hearing to determine what should be done to enforce the original order.

The judge had authority, when exercising his discretion about the liability of a privy, to hold the privies jointly responsible for the transfers. In exercising this discretion, the judge was guided by the following considerations: did the privy

(i) receive a benefit from the transfer,

(ii) have actual or constructive knowledge of the transfer,

(iii) make any effort to prevent the transfer, and

(iv) through any act or omission, facilitate another person to receive a benefit from the transfer.

and (v) was the privy in a position that could reasonably have allowed that person to prevent the transfer?

The judge then went through the considerations for each of the privies and determined that, other than nephew1, all the privies were jointly and severally liable in the amount of $1.2 million; nephew1would only be jointly and severally liable for $900,000, but would be liable for an additional $50,000 for an improper preference. The judge ordered costs against the privies in varying amounts fixed in aggregate at $90,000.

 

Image courtesy of Pixabay.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.