Legal Blog

BIA Fraud

We often attack transfers using the Fraudulent Conveyances Act. However, that is not the only arrow in our quiver. Once the debtor assigns or is assigned into bankruptcy, the provisions of the Bankruptcy and Insolvency Act take effect – in addition to the remedies under the Fraudulent Conveyances Act. The criteria to set aside a transfer under the two statutes are similar, but not identical. The criteria set out under the BIA were discussed in Jovkovic v. DaSilva, a 2023 decision of the Ontario Court of Appeal.

 

Background

The bankrupt and his spouse jointly bought a property in 2004. The plaintiff brought his action against the bankrupt in March 2015. Other creditors emerged in late 2015 arising out of contracts between them and the bankrupt. The bankrupt transferred his interest in the property to his spouse in June 2016. The other creditors commenced their actions against the bankrupt shortly after that. The bankrupt assigned into bankruptcy in November 2017.

The plaintiff obtained an order under s. 38 of the BIA by which the trustee in bankruptcy assigned its cause of action to the plaintiff and any other creditors who joined in the plaintiff’s action. In this case, three other creditors joined in the action and, therefore, would share the costs and fruits of the action proportionately. We assume that the s. 38 order was necessary because the trustee refused to attack the 2016 transfer – probably for lack of assets in the bankrupt’s estate.

The trustee assessed the fair market value of the property at the time of the transfer at $380,000; the parties accepted that valuation. The plaintiff argued that the spouse had paid nothing for the transferred interest. The bankrupt and the spouse contended that the spouse had provided adequate consideration because:

• the spouse had refinanced the property in August 2017 and used the proceeds to pay some of the bankrupt’s debts; accordingly, she really paid over $500,000 for the interest in the property. The judge held that the time to value consideration allegedly given for a transaction was as of the time of the transaction, not 14 months later.
• the transfer was made merely to correct title to give effect to the original intentions of the defendants and, further, the defendants were experiencing marital difficulties at the time of the transfer. However, the defendants produced no evidence to support this submission and the judge quickly disposed of it.

Accordingly, the judge found that the spouse paid nothing for the transferred interest in the property.

BIA Provisions

Section 96(1) of the BIA provides:

(1) on application by the trustee, a court may declare that a transfer at undervalue is void as against the trustee – or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor – if …

(b) the party was not dealing at arm’s length with the debtor and …

(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph one begins and

(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or

(B) the debtor intended to defraud, defeat or delay a creditor.

Section 2 defines an “insolvent person” as a person who is not bankrupt and who resides, carries on business or has property in Canada and whose liabilities to creditors provable as claims amount to $1000 and,

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of his property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.

Findings

The judge made the following findings of fact:

• The transfer was at undervalue, indeed at no value.
• The bankrupt and his spouse were not dealing at arms’ length.
• The transfer took place less than 5 years before the date of bankruptcy.
• The bankrupt was an insolvent person.
• Even though it was unnecessary for her findings, the judge also concluded that the bankrupt’s conduct indicated that, in making the transfer, the bankrupt intended to defraud, defeat, or delay his creditors.

The reasoning supporting the finding of insolvency was as follows: (i) the plaintiff obtained judgment for an amount exceeding the value of the bankrupt’s half interest in the property, (ii) the bankrupt adduced no evidence to show that he had any assets other than the half interest in the property, and (iii) he had a business, but produced no financial statements that would indicate that the business had any value whatever; further, the evidence suggested that the business was struggling at the time of the transfer.

Remedy

The judge held that the plaintiff had satisfied the requirements of s. 96. She therefore had a choice: (i) set aside the transfer or (ii) order the spouse to pay the difference between the value of the half interest in the property and the value of the consideration (nil).

These two remedies could be very different depending on whether the value of the property increased or decreased between the date of the transfer and the date of the judgment. If, as has been the case for the past 8 years or so, the value has increased, then a person attacking the transaction would be far happier with half the property than the difference in value.

Without giving reasons for her decision on this issue, the judge set aside the transfer.

Appeal

The defendants appealed. They argued:

• The application judge did not account for the mortgage on the property and, accordingly, the value of the interest was far less than $190,000. The Court of Appeal did not care. The spouse paid nothing for the one-half interest in the property when, at that time, the property had substantial equity. The amount of that equity was irrelevant because it was conspicuously more than the consideration (nil) that the bankrupt had received.
• The judge reversed the onus of proof regarding insolvency and assets. The Court disagreed. The comments that the application judge made about the defendants’ lack of evidence was merely a factual statement about what was in the record The judge concluded the bankrupt was insolvent based on the bankrupt’s own evidence given in his examination by the trustee and on the evidence adduced by the bankrupt’s other creditors. In short, the plaintiff produced reliable evidence and the defendants did not.
• The judge erred in her comments that the bankrupt had attempted to defeat his creditors. The Court noted, however, that this statement was mere obiter (a finding not relevant to the actual decision) and that the application judge’s decision was based on her finding of insolvency.

The Court of Appeal dismissed the appeal. As an aside, the application judge awarded $28,500 in costs against the defendants and the Court of Appeal awarded an additional $7,000 in costs.

 

Image courtesy of TheDigitalWay.

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