Intention to stay in business sufficient to rebut preference?

RPG Receivables Purchase Group Inc. v. American Pacific Corporation, 2025 ONCA 371
Is an intention to preserve a customer relationship and stay in business sufficient to rebut the presumption of an intention to prefer?

Summary: In this case, the Ontario Court of Appeal overturned a decision finding that a debtor’s intention to preserve a customer relationship and stay in business was sufficient to rebut the presumption that the debtor intended to prefer the customer in making payments to the customer slightly more than a month before assigning itself into bankruptcy. The Court ruled that this intention was not sufficient to rebut the presumption, since in this case there was no objectively reasonable basis for the debtor’s desire to stay in business. An intention to pay past indebtedness to one creditor to enable to continuation of the debtor’s business is only inconsistent with an intention to prefer if the plan to continue in business has a reasonable basis. The debtor’s plan must be more than simply a desire to keep going, regardless of whether doing so will continue or deepen the already existing insolvency.

Specialty Chemical Industries Inc. (“Specialty”), a bulk chemical purchasing broker, made payments totalling USD $400,000 to one of its major suppliers, the respondent American Pacific Corporation (“AmPac”), slightly more than a month before Specialty assigned itself into bankruptcy. AmPac was one of three major chemical suppliers of Specialty, and its products accounted for 21% of Specialty’s sales. After making the payments to AmPac, Specialty had less than $35,000 left in its bank account. It had $11 million of unpaid liabilities due and owing to its creditors, including $5.6 million to its two other major chemical suppliers. Prior to its bankruptcy, Specialty had one customer, Autoliv ASP, Inc. (“Autoliv”), an automotive safety product supplier.

Specialty’s trustee in bankruptcy was unsuccessful in its claim to recover the amount of the payments from AmPac. The bankruptcy judge found that Specialty was insolvent at the time of the payments to AmPac. He was also satisfied that the payments had the effect of giving AmPac a preference over other creditors. However, the bankruptcy judge found that Specialty’s intention, in making payments of past indebtedness to AmPac while leaving other creditors unpaid, was to be able to buy more product from AmPac to supply to its only customer, and thus to preserve that relationship and continue in business. Accordingly, this rebutted the presumption that the payments were made with a view to giving AmPac a preference over other creditors.

The appellant, as assignee of the trustee’s right of action, challenged the bankruptcy judge’s conclusion on two bases. First, it argued that the bankruptcy judge improperly considered evidence that Specialty was under pressure to make the payments when the BIA says that evidence of pressure is inadmissible to support a transaction. Second, it argued that the bankruptcy judge erred in treating Specialty’s intention to preserve a customer relationship and stay in business as sufficient to rebut the presumption, when there was no objectively reasonable basis for Specialty’s desire to stay in business.

With respect to the first ground of appeal, the Court of Appeal noted that section 95(2) of the BIA, which provides that a payment which had the effect of conferring a preference is “in the absence of evidence to the contrary, presumed to have been made … with a view to giving the creditor the preference”, does not render inadmissible any evidence that the debtor was put under pressure. What the section prevents is a particular use of that evidence. As long as evidence is not used to proffer pressure as the justification for a preferential transaction, the restriction in s. 95(2) is respected. When a justification for the transaction is proffered other than pressure, evidence that the debtor was under pressure may be considered so that the court has a proper understanding of the entire circumstances.

The question then becomes whether the totality of the evidence actually rebuts the presumption that the payments were made with a view to giving AmPac a preference over other creditors. It was on this issue, which was the appellant’s second ground of appeal, that the existence or non-existence of a reasonable business continuation plan was germane. Accordingly, the Court of Appeal rejected the appellant’s first ground of appeal.

As to the second ground, the Court noted that an insolvent debtor’s intention to pay past indebtedness to one creditor to enable the continuation of the debtor’s business is inconsistent with an intention to give that creditor a preference only if the plan to continue in business has a reasonable basis. What constitutes a reasonable basis is informed by the purpose of the anti-preference provisions of the BIA, which is to prevent frustration of the bedrock principle of bankruptcy law that all ordinary creditors should rank equally. The debtor’s plan must, therefore, be more than simply a desire to keep going, regardless of whether doing so will continue or deepen the already existing insolvency.

The reasonableness of a debtor’s plan is to be assessed from the point of view of its substantive effect on creditors as a whole. There must be a reasonable basis for the debtor to believe that continuing in business will enhance the value of the enterprise for the benefit of all creditors. The preferential payment, in such a situation, enables activity that will benefit creditors, and the latter is properly considered to be the debtor’s dominant intent. However, making a preferential payment to facilitate carrying on business without a reasonable basis to believe that doing so will benefit creditors generally does not rebut the presumption, because there is no reasonable basis to believe that the harm caused by the preference will be ameliorated by the continuation of the business. The harm to creditors might instead be accentuated by the enabled activity.

The bankruptcy judge did not consider, let alone find, that Specialty had a plan with a reasonable basis in the legally required sense. There was no objective evidence that the relationship with its only customer, Autoliv, would be preserved and that its business would continue, on a basis different from what had already resulted in Specialty’s insolvency. The payments totalling USD $400,000 far exceeded any benefit Specialty would receive from the supply to the customer of roughly USD $100,000 worth of additional product it hoped to obtain from AmPac. In these circumstances, there was no evidence on which a business continuation plan with a reasonable basis could be found.

Accordingly, the Court of Appeal held that the bankruptcy judge erred in finding the presumption was rebutted. It allowed the appeal, set aside the order of the bankruptcy judge, and, in its place, ordered that the AmPac payments were void and must be repaid by AmPac to the appellant.

Judges: Lauwers, Zarnett and Pomerance JJ.A.

Professionals involved:

• Brendan Bissell of Reconstruct and Joël Turgeon of Perley-Robertson, Hill & McDougall for the appellant, RPG Receivables Purchase Group Inc.

• Stephen Brown-Okruhlik and Madeline Klimek of McMillan for the respondent, American Pacific Corporation