Intercompany transfers: corporate reorganization or asset stripping?

2398035 Ontario Inc. v. 2180366 Ontario Inc, 2026 ONSC 2470
When does moving money between related companies cross the line from corporate restructuring into a transfer at undervalue?

Summary: The Ontario Superior Court has declared approximately $16.2 million in intercompany transfers by a group of real estate entities void as transfers at undervalue under section 96 of the Bankruptcy and Insolvency Act, rejecting arguments that the payments reflected anticipated future joint venture profits. Justice Myers held that the borrower entities, which had received approximately $45 million in project-specific loans, transferred funds to affiliated non-borrower companies for no apparent consideration, leaving the borrowers insolvent and contributing to a roughly $35 million shortfall suffered by the lenders after the project lands were later sold by the trustee. The Court found there was no evidence of completed development work, binding joint venture agreements, budgets, or any entitlement to profits at the time of the transfers, and concluded that the respondents failed to establish any consideration for the payments. In a detailed discussion of section 96(1)(b)(ii)(B) of the BIA, the Court reviewed the principles governing fraudulent intent and “badges of fraud,” finding that the transfers among non-arm’s-length parties, coupled with the absence of credible explanations, supported an inference that the transactions were intended to defeat or delay creditors. The Court ultimately held that the principals breached their fiduciary obligations by diverting lender funds away from the borrowing entities and ordered the recipient companies to repay the impugned amounts to the trustee.

Paramount Group agreed to lend approximately $45 million to corporations owned and controlled by the three Mizzi siblings pursuant to commitment letters between the Paramount Group entities and Mizzi companies evidencing loans for specific projects. Each Mizzi borrower was the owner of a different project site. They were single-purpose entities. The commitment letters discussed future joint ventures between Paramount and Mizzi entities to develop each site on a new entity to be held on a 50/50 basis. However, joint venture agreements were never signed.

$16.2 million of those funds were transferred to other Mizzi companies for no apparent consideration. The transfers to the non-borrowers left the borrowers insolvent. The Trustee in bankruptcy of the borrower companies applied to set aside certain transfers at undervalue under s. 96 of the Bankruptcy and Insolvency Act, RSC 1990, c B-3, or alternatively, as fraudulent conveyances under s. 2 of the Fraudulent Conveyances Act, RSO 1990, c. F.29.

The Trustee argued that the bankrupt Mizzi borrowers received no consideration for any of the impugned transfers. The Trustee’s evidence was that there was no sign of any development work having been conducted at any of the project sites. The Trustee sold all the project lands and left Paramount Group (and its creditors) suffering a $35 million shortfall. The commitment letters expressly provided for the payment of lending fees and segregation of some future interest payments in favour of the lenders. These were payments for the loan transaction. They were not early payments for future joint venture profits. Nothing in the agreements provided for Mizzi companies to take out “profit” from the advances of the various loans. The borrowers were supposed to develop each project. There was no profit to realize before projects were developed and sold.

The Respondents (being the non-borrower recipients) conceded that the transfers from the bankrupt Mizzi borrowers to the non-borrower Mizzi recipient companies were transfers at undervalue. However, they submitted that the expectations of the parties to the loans (i.e. Paramount Group and Mizzi) was that there would be some profit earned by the Mizzi side of future joint ventures at some point. Therefore, some amount of the funds transferred to the Mizzi recipient companies represented some amount on account of anticipated future profits. As such, at least part of each impugned transfer was made for consideration in relation to the future profit of the Mizzi side.

The Court did not accept these submissions, finding that funds were transferred contemporaneously with the advances of the loans before any development work had been done. The joint ventures had yet to be formed. There were only agreements to agree that required negotiations to be held. There were no contracts between a joint venture and any Mizzi company for development or construction. There were no budgets. There was no real or projected profit agreed in favour of anyone at the time of the transfers at undervalue. The onus was on the Respondents to establish that they had paid consideration or transferred value to the bankrupt Mizzi borrowers in return for the impugned transfers.

The law regarding s. 96(1)(b)(ii)(B) of the BIA is well established that because a third party cannot definitively establish the unstated intention of someone who makes a payment, the intention will be inferred upon proof of sufficient recognized criteria referred to as “badges of fraud.” If the court finds sufficient badges of fraud to justify an inference that a payment was made with the intent to defraud, defeat, or delay creditors, the burden of proof will switch to the payor party to prove its bona fides. The Trustee argued that multiple badges of fraud were present in these circumstances, including that all transfers were among non-arm’s-length parties and that no adequate explanation was provided as to why the transfers were made.

The Court found that the bankrupts and those controlling them, who had statutory fiduciary duties to their respective bankrupt corporations, made the impugned transfers at undervalue with the intention to defraud, defeat, or delay creditors. Funds were borrowed from Paramount Group or its investors and were transferred by the Mizzi siblings to avoid the bankrupt debtors’ obligations to repay their ultimate lenders. That was dishonesty amounting to fraudulent intention.

The Court declared the transfers as void as against the Trustee under s. 96 of the BIA, and required each of the recipients to pay to the Trustee the impugned amounts.

Judge: FL Myers J

Professionals involved:

• George Benchetrit, Maya Poliak, and Maleeha Anwar of Chaitons for Grant Thornton Inc. in its capacities as trustee in bankruptcy of the Applicants

• Robert Zochodne of Zochodne Bucci Law for Mary Campisi

• Micheal Simaan of Kramer Simaan for Enzo Mizzi and all corporate respondents