When can a bankrupt transfer personal assets to a family member without the transactions being considered a preference?
The Debtor was the sole owner and director of his company. The company had a big contract but it was not being paid by the contractor and, in turn, it could not pay its debts. In 2015, the Debtor borrowed, on behalf of the company, $451,000 from three family members, pledging a piece of land, a Corvette sports car, and a Mercedes SUV. The collateral was owned by the Debtor but the loans were made to the company.
The company was dissolved on January 2, 2016. Shortly after, following the Debtor’s default on the loans, the cars were transferred to the respective lenders. The Debtor made an assignment into bankruptcy on December 12, 2016. The land transfer made to the third lender under identical circumstances was declared void against the trustee. The pledge of the land did not create an interest in the land, but merely a moral obligation on the part of the Debtor.
Sections 4(2)(a), 4(2)(e) and 4(5) of the Bankruptcy and Insolvency Act (the “BIA“) deem the family members not to be dealing at arm’s length with the Debtor. The loan agreements, on their face, did not provide for consideration for the pledge of collateral, which would make these agreements enforceable against the Debtor. The Debtor was not expressly a party to the agreements. The collateral was transferred to family members, apparently without consideration, within 12 months of the bankruptcy.
- The transaction creates or evidences a proprietary interest in an asset in favour of a creditor;
- The asset is personal property;
- The creditor’s proprietary interest functions to secure payment or performance of an obligation; and
- The interest arises out of an agreement between the parties.
The Debtor was intended to be a party to the loan agreements and was a party with a personal obligation to deal with the security in the manner set forth in the agreements, despite any wording ambiguities contained in the agreements.
A security interest can be perfected either by registration or by taking possession of the collateral, but only while it is actually held as collateral and not while it is held as a result of seizure of repossession. Here, there was no registration, and, therefore, no perfection of the security by those means. The lenders took possession of the vehicles after the loans were not paid. They did not repossess the vehicles in any ordinary sense. Taking title was not a replevy. Further, “seizure” imports something that occurs without consent, or, by way of legal process, not a voluntary surrender. Here, the vehicles were offered up “as collateral” when the loans were not paid. Therefore, valid security interests were created by the pledges and then perfected by the voluntary transfers and the giving up of possession as at the date of the bankruptcy.
The Court held that the transfers were exempt under s. 95(2.1) of the BIA and, therefore, were not preferences caught by the BIA. For the purposes of s. 96 of the BIA, value or consideration must flow to the bankrupt in an amount approaching something in the range of 80-85% of the fair market value of these assets. Both of the loans in this case were in line with the value of the collateral vehicles. The Debtor received a personal benefit from these loan arrangements. There was a valid, adequate consideration for the purposes of s. 96 of the BIA.
The Court allowed the applications and declared them not to be void against the trustee. The vehicles will not come into the Debtor’s estate for the benefit of his creditors.
Counsel: Bren Cargill of Sharek Logan & van Leenen LLP for the Applicant, Domingos Pereira and Shaun Wetmore of McCuaig Desrochers LLP for the Applicant, Elza Pereira