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A Comprehensive Analysis of Transfers at Undervalue under Section 96 of the BIA – Part 6

By Michael Myers, Papazian Heisey Myers

F. Interpreting the word ‘MAY’

This is the sixth 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”). In this article I will examine the meaning of the word ‘may’ as it is used in section 96 of the BIA, and the extent of the discretion that is afforded to a judge as a consequence.

But first, a quick look at the wording of subsection 96(1) of the BIA, which provides that…

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 …….. 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 …… The important words here (shown in bold) is that the court mayimpugn a Transfer at Undervalue ifthe conditions in subsections 96(1)(a) or 96(1)(b) are establish by the trustee or creditor.

I personally found it surprising to discover that the meaning of the word ‘may’ that is used in a statute (as in section 96 of the BIA) has been the subject of debate and judicial interpretation for many decades. Some have argued that the word “may” gives a court a broad discretion to make an order under section 96 of the BIA having regard to unfettered equitable principles of fairness. Others have proposed that the word “may” is to be interpreted as being imperative (or equivalent to the word “shall”) so that the court has no discretion at all and must make an order if one of the conditions in subsections 96(1)(a) or 96(1)(b) is establish.  And yet a third posit is that when one of these section 96 conditions is established, the inclusion of the word “may” in section 96 of the BIA gives the judge a limited discretion to decide:

  • whether or not to make an order at all, and
  • if an order is to be made, whether the order will be:
    • to just void the Transfer at Undervalue, or
    • to just require the Recipient of the Transfer at Undervalue to “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”, or
    • to make both orders.

Clearly, with at least three distinct interpretations, the meaning of the word “may” is equivocal. Fortunately, the Supreme Court of Canada has set out clear principles detailing the manner in which statutes are to be interpreted when ambiguities are discovered.[1] The courts our now obliged to interpret the meaning of an ambiguous word or phrase:

  • having regard to the context in which the word or phrase is used
  • in its grammatical and ordinary sense
  • harmoniously with the scheme of the act, the object of the act and the intention of Parliament (or the legislature).

This is known as Dreiger’s Modern Principle but is sometimes referred to as the Modern Approach (to statutory interpretation).

And equally as fortunately, the Supreme Court of Canada has used the Modern Approach to shut down this debate over the meaning of the word “may”, by deciding in R v. Johnson[2] and in R v. Lavigne[3] that the conditional use of the word “may” in a statute does not give the court a broad unfettered discretion, and does not mean “shall”. Rather, these and other Ontario Court of Appeal cases[4] have decided that the use of the word “may” in a statute such as section 96 of the BIA gives the judge a limited discretion when enforcing that provision. And that that limited discretion is to be guided by equitable principles[5] (sometimes referred to as a “principled exercise of discretion”); the scope of which (limited discretion) can be inferred from the purpose and scheme of the act or from other contextual factors.[6]

To recap, the word “may” has various meanings, but when the Modern Approach to statutory interpretation is employed, its meaning in section 96 becomes clear. The use of the word “may” in section 96 (coupled with the use of the word “if”) gives the court hearing a Transfer at Undervalue matter a limited discretion as to whether or not a remedy ought to be imposed and if one is to be imposed, which remedy (voiding or ordering payment, or both) is appropriate in the circumstances. This discretion must be exercised in a principled manner, meaning that it is not an unfettered discretion. Rather, the limited discretion afforded to the judge has to be exercised in a manner which promotes the object and scheme of the BIA.

The Ontario Court of Appeal has twice[7] repeated with approval a test first identified in Dreiger’s seminal text on statutory interpretation[8], with which one can assess the appropriateness of the court’s interpretation. Most recently, in 2017, the Ontario Court of Appeal[9] said that: “As Ruth Sullivan[10] notes, statutory interpretation is a multi-dimensional exercise and requires a court to consider whether a particular interpretation complies with the legislative text, promotes the intention of the legislature, and produces a result that is reasonable and just, in compliance with accepted legal norms.

I take this to mean that a principled exercise of discretion afforded to a judge hearing a Transfer at Undervalue is one which:

  • promotes fairness among the unsecured creditors of the bankrupt
  • maximizes the assets in the bankrupt estate
  • does not allow debtors to dispose of property (whether by gift or sale at less than fair market value) within certain time frames prior to bankruptcy
  • does not condone Recipients (of the property disposed of) to benefit unjustly from their receipt of such property

That being said, how this judicial discretion actually works in practice is another matter. For instance, if we assume one of the most straight-forward (and common) of fact scenarios, where both spouses are the owners of their matrimonial home, and one spouse transfers her or his ½ interest in the matrimonial home to her or his non-arm’s length spouse within one year of his bankruptcy? How is a judge to decide a section 96 Transfer at Undervalue matter with these facts? What options are available to the judge who must decide this case and exercise equitable jurisdiction in a principled manner?

These were the facts in the 2017 Re Lee[11] decision, where the judge wrote …… “the bankrupt argues that the court has a residual discretion to decline to grant relief under [section] 96 in light of the use of the word “may” in the opening words of the section…… The ultimate purpose of the section is to ensure that the property of a bankrupt is treated fairly and justly balancing the rights of all stakeholders.  The bankrupt and his family’s rights are provided for in statutory exemptions from seizure, family income rules, and in other provisions of the bankruptcy and insolvency regime.  Section 96 imposes a strict test to remedy non-arm’s length transfers among family members. While [section 96] allows relief using the word “may”, in my view, on proof of the requisite facts, relief should be granted at the amount calculated in accordance with the statute, in all but the most exceptional circumstances. This is especially so in the case of a non-arm’s length transaction that is attacked within one year… In my view, judgment should be nearly automatic in such case.”

 But this has to be contrasted with the decision of Mr. Justice Hainey in the Mercado Capital v Qureshi[12] decision which is currently under appeal to the Ontario Court of Appeal[13]. In this case, Mr. Qureshi was the sole owner of the matrimonial home. He sold it and used the sale proceeds (and other funds) to purchase a new matrimonial home, and registered this new matrimonial home in both his name and in his wife’s name, as joint tenants. Mr. Justice Hainey distinguished these facts from Re Lee[14] quoted from above, and took a very different approach in his interpretation of section 96 of the BIA.

One hopes that any ambiguity in the use of the word “may” in section 96 of the BIA and the extent of the discretion afforded to a judge in this section will be clarified by the courts in due course, so that trustees, creditors and bankrupts alike will better understand just what assets (if any) may be transferred by a debtor to her or to his non-arm’s length spouse prior to bankruptcy.

The next article in this series will examine the “no benefit / no prejudice” rule that appears to be emerging as a guide for judges to use when called upon to exercise their equitable discretion under section 96 of the BIA in a principled manner.

© Michael Myers, 2018

[1] Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27

[2] 2003 SCC 46

[3] 2006 SCC 10

[4] See also Stelco Inc. (Re), 2005 CanLII 8671 @ para 44

[5] Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 @ para 81

[6] Supra, note 2 @ para 17

[7] Price Waterhouse Ltd. v. Standard Trust Co., 1995 CanLII 3508 (ONCA) and R v. Del Mastro, 2017 ONCA 711

[8] Elmer A. Dreiger, The Construction of Statutes (Toronto: Butterworths, 1974)

[9] R v. Del Mastro, 2017 ONCA 711 @ para 61

[10] Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed. (Markham: LexisNexis, 2014), at pp. 7-10

[11] Re Paul W. Lee, a Bankrupt, 2017 ONSC 388 @ para 16

[12] 2017 ONSC 5572

[13] At the time of writing this paper, the Court of Appeal’s reserved decision has not been released

[14] Supra, note 11