By Michael Myers, Papazian Heisey Myers
C. Transfers at Undervalue Defined
This is the third in a series of articles examining the Transfer at Undervalue provisions set out in section 96 of the Bankruptcy and Insolvency Act (which I’ll refer to in these articles as the “BIA”). This article will look at the meaning of the phrase “Transfer at Undervalue” as it is used in section 96 of the BIA.
A ‘Transfer at Undervalue’ is defined in section 2 of the BIA as “a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor”.
This definition is awkwardly drafted. It includes 2 words (‘debtor’ and ‘property’) that are themselves defined in the BIA. It also deals with two separate types of transactions that may be undertaken by a debtor; being a ‘disposition of property’ as well as the ‘provision of services’. And finally, at the same time, it also sets out two different measures of consideration that may be received by the debtor on account of the ‘disposition of property’ or the ‘provision of services’; the first being ‘no consideration’ and the second being consideration that is ‘conspicuously less than the fair market value of the consideration given by the debtor’.
In essence, this definition of Transfer at Undervalue identifies four separate impugned transactions that may be undertaken by a debtor in contravention of section 96 of the BIA, being:
- a disposition of property by a debtor for which no consideration is received by the debtor
- a disposition of property by a debtor for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor
- a provision of services by a debtor for which no consideration is received by the debtor
- a provision of services by a debtor for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor
It will, no doubt, take many years for the courts to fully explore each of these Transfer at Undervalue permutations and combinations. However, for most estates, it is the disposition of property (either for no consideration or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor) that will be the more common and most likely to raise a flag, be investigated and give rise to a section 96 Transfer at Undervalue proceeding in the Courts.
As a preliminary matter, in order to determine whether a Transfer at Undervalue has occurred, a trustee or creditor must consider at the onset whether:
– the bankrupt is a debtor within the meaning of the BIA
– property was disposed of (or services were provided) within the meaning of the BIA.
The word ‘debtor’ is defined in section 2 of the BIA as “including an insolvent person and any person who, at the time an act of bankruptcy was committed by him, resided or carried on business in Canada and, where the context requires, includes a bankrupt”. Clearly, every bankrupt appears to be a ‘debtor’ under this definition and as such, is capable of having participated in or effected a Transfer at Undervalue.
“Property” is also defined in section 2 of the BIA to mean “money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property”. As this definition of property is very broad, virtually every asset owned by a debtor (but disposed of prior to the bankruptcy) will certainly be ‘property’ within the meaning of this definition and as a result, may be the subject matter of a disposition of property within the meaning of a Transfer at Undervalue.
The analysis under section 96 of the BIA becomes more challenging for a trustee or creditor who then must determine whether:
– there was a disposition of that property within the meaning of the BIA
– and if so, was any consideration received by the debtor
– and if so, was the consideration received by the debtor conspicuously less than the fair market value of the consideration given by the debtor.
Unfortunately, the word ‘disposition’ is not defined in the BIA. There are many statutes in Canada that use the word ‘disposition’. As a consequence, its meaning has been judicially considered in many contexts; usually given a broad and expansive (rather than a restrictive) interpretation. However, the word ‘disposition’ has not been the subject of extensive judicial consideration within the context of section 96 of the BIA. As such, the full extent of its meaning in section 96 is not yet clear. But that being said, one can be fairly certain that any transfer of property, whether by gift or a sale, to a third party (prior to bankruptcy) will fall within the ambit of a ‘disposition of property’ and as such, will be capable of triggering a Transfer at Undervalue under section 96.
But not all changes of ownership of property will necessarily be a ‘disposition’ of that property. For example, on the death of a joint owner of property (that is, a property owned by two individuals as joint tenants (and not tenants in common)), the law provides that the surviving ‘joint’ owner takes title to the entire property automatically, and that the jointly owned property does not pass through the deceased’s intestate or testamentary estate. This automatic vesting in the surviving joint owner was held to be an extinguishment of the deceased’s (joint) ownership and not to be a disposition of the property[1] by the debtor. As a result, the death of a joint owner of property (and the resulting 100% ownership befalling the survivor) was not a ‘disposition of property’ and therefore, did not give rise to a Transfer at Undervalue within the meaning of the BIA.
No doubt, over time, case law will delineate exactly what is and what is not a ‘disposition of property’ under section 96.
Whether we are dealing with a disposition of property or the provision of services, the trustee (or creditor) must also determine whether the now bankrupt debtor received any consideration for the disposition. If the debtor did receive consideration, the trustee (or creditor) must then determine whether the value of the consideration received by the debtor was conspicuously less that the fair market value of the consideration given by the debtor. Again, there is not yet a significant body of case law decided under section 96 of the BIA to assist a trustee or a creditor who is attempting to determine this issue.
Under predecessor legislation[2], the Supreme Court of Canada did examine a disposition of property and did not take issue with the proposition that a sale of an asset at 94% of its fair market value was not ‘conspicuously less’ that the fair market value of that asset. Presumably, the Supreme Court was aware that a typical sales commission charged by a broker to its seller client might be in the 6% range. So a seller, selling without a broker, who sells for 94% of fair market value, is getting the exact same net return as a seller selling for 100% of fair market value while using the services of a broker (assuming a 6% commission).
Of course, subsection 96(2) of the BIA is also of assistance. This subsection provides that a trustee ……. “shall state what, in the trustee’s opinion, was the fair market value of the property or services and what, in the trustee’s opinion, was the value of the actual consideration given or received by the debtor……, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee”.
Case law has established that the evidence proffered by a trustee under section 96(2) is determinative, unless contrary evidence is submitted. When contrary evidence is submitted, the court is the final arbiter of the values. There is also case law that has held that this deference to the trustee’s opinion of value is not available to a creditor who initiates a section 96 application under a section 38 (of the BIA) order.
Following this review of the definition of ‘transfer at undervalue’, the next article in this series will examine more closely the detailed rules regarding the timing of a Transfer at Undervalue in terms of the relationship between the debtor and the Recipient (transferee).
[1] Cameron (Re), 2011 ONSC 6471
[2] The now repealed s100(1) and s100(2) of the BIA
