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A Comprehensive Analysis of Transfers at Undervalue under Section 96 of the BIA – Part 1

By Michael Myers, Papazian Heisey Myers

A. Introduction and Overview

This is the first in a series of articles examining the Transfer at Undervalue provisions set out in section 96 of the Bankruptcy and Insolvency Act[1] (which I’ll refer to in these articles as the “BIA”). A Transfer at Undervalue in BIA parlance includes both: (i) a pre-bankruptcy gift of property (by the now bankrupt debtor); and (ii) a pre-bankruptcy sale of property (by the now bankrupt debtor) for a price that is conspicuously less than the fair market value of that item; in either case (iii) that was made to an arm’s length transferee within one year of the bankruptcy or (iv) that was made to a non-arm’s length transferee within five years of the bankruptcy. In these articles, I will call the third party transferee of the Transfer at Undervalue, the “Recipient”.

In this author’s experience, the Transfer at Undervalue provisions of the BIA are both very powerful and yet, underutilized. Powerful, because the BIA provisions impugning a Transfer at Undervalue give a trustee (or a creditor with a section 38 Order[2]) the ability to ask a court to divest a non-bankrupt Recipient of her or his property (that was recently acquired from the bankrupt under a Transfer at Undervalue) in many scenarios without proving that the bankrupt had any fraudulent intention at the time that the Transfer at Undervalue was made. The elimination of the need to prove fraudulent intent (on the part of the bankrupt transferor) is a significant lowering of the threshold that is found in provincial fraudulent conveyance statutes. It appears to be a significant policy shift away from the intent of the debtor/transferor (which has always been the backbone of the provincial fraudulent conveyance legislation) towards the effect of the impugned transfer (being the diminution of the assets in the bankrupt estate to the prejudice of the creditors of the estate). This is a radical departure from the historic norms of common law jurisdictions, where property ownership has always been jealously protected by Parliament, the legislatures and the courts.

And yet, despite being legislation allowing trustees and creditors to deprive a Recipient of her or his vested property rights, without having to prove fraudulent intent, Transfer at Undervalue litigation is still not commonplace. One can only presume that trustees are slow to initiate Transfer at Undervalue litigation because there are often few, if any, assets available in the estate to fund any litigation. Creditors typically have more resources available to fund Transfer at Undervalue litigation. But trustees with larger estates and creditors’ alike appear to be reluctant to bring Transfer at Undervalue proceedings, perhaps because the lower threshold established by section 96 of the BIA is not yet widely appreciated. Few trustees or creditors appear to be alive to the fact that the courts are now empowered to void a Transfer at Undervalue (or order repayment to the estate by a Recipient) even when there was no fraudulent intent on the part of the bankrupt transferor.

Transfer at Undervalue legislation has now been included in the BIA for almost nine years. A body of case law is emerging that demonstrates the court’s willingness to reverse many Transfers at Undervalue (especially Transfers at Undervalue to spouses, children and to other non-arm’s length Recipients). However, the court’s robust enthusiasm to reverse Transfers at Undervalue have stopped short when an economically disadvantaged spouse’s share of her or his matrimonial home is the property that was transferred, even though section 96 of the BIA does not differentiate between ‘family assets’ and ‘non-family assets’. In at least one instance, the Court[3] has tempered its willingness to impugn a Transfer at Undervalue of this sort because of what appear to be emotional ruminations (under the guise of fairness to the spouse) rather than strictly legal considerations. And the dearth of reported Appellant Court decisions[4] analyzing Transfers at Undervalue of matrimonial homes between spouses has resulted in Trustees and creditors being unable to predict with any degree of accuracy whether a court will be willing to void a Transfer at Undervalue received by an economically disadvantaged spouse –when the asset Transferred at Undervalue is all of a part of a matrimonial home representing her or his primary asset and means of support[5].

The reluctance of some courts to treat all Transfers at Undervalue the same (irrespective of the kind of property that is transferred) is disconcerting – especially because the BIA prohibits all Transfers at Undervalue without distinguishing between various classes of assets. Judicial imposition of family law considerations into the interpretation of a section 96 Transfer at Undervalue proceeding adds confusion rather than predictability into the mix. And while supporting economically disadvantaged spouses under the guise of family law policy considerations may seem just at first blush, fairness in BIA litigation must necessarily promote the object and scheme of the BIA; which focuses on the protection of the creditors of the estate above all other considerations, especially the interests of the Recipient[6] (of the Transfer at Undervalue).

This brief Overview will be followed with additional articles examining the Transfer at Undervalue provisions of the BIA in more depth; what they mean, how they work, what courts have said about them and when they are effective to return to the bankrupt estate property or funds distributed by the bankrupt prior to her or his bankruptcy in contravention of section 96 of the BIA. Next I will look at the legislative history and evolution of section 96 of the BIA.

[1] Bankruptcy and Insolvency Act, RSC 1985, c B-3

[2] A section 38 Order references section 38 of the BIA; which allows a creditor to obtain an Order of the court to take ownership of litigation from a trustee in circumstances where the trustee fails or refuses to do so

[3] Mercado Capital v. Qureshi, 2017 ONSC 5572

[4] At the time of first publication, the Ontario Court of Appeal has yet to release its decision from the appeal of Mercado Capital v. Qureshi decision cited above

[5] Compare Re Paul W. Lee, 2017 ONSC 388 and Re Rehman, 2015 ONSC 188

[6] Pitblado LLP v Houde, 2015 MBQB 85 @ para 45