In our last post, we discussed various acts that may be deemed as offences under the Bankruptcy and Insolvency Act (BIA). But in addition to these offences, other provisions in the BIA authorize the attack and setting aside of improper transactions entered into by the debtor prior to bankruptcy, without the necessity of proving criminal charges.
The key question is whether the transaction resulted in the debtor giving away more than they received. For example, if a debtor, prior to bankruptcy, transferred their interest in their home to their spouse, with little or no money being paid by the spouse for the transfer, such a transaction would be ripe for attack under the BIA.
Any transaction found to be improper can be unwound, with the party who received the benefit of the transaction being required to pay the amount of that benefit over to the trustee in bankruptcy.
The determination of whether a transaction is improper is made in the light of several factors, including:
- The time period during which the transfer was made
- The relationship between the debtor and the other party involved
- The financial situation of the debtor at the time of the transfer
- The intent or motive of the debtor in making the transfer
Transactions at arm's length
If the debtor and the other party are unrelated and dealing with each other at arm's length, then a transaction may be set aside only if it occurred within one year prior to the date of the bankruptcy filing. As well, the debtor must have been insolvent at the time of the transaction or have been rendered insolvent by it. Finally, there must also have been deliberate intent by the debtor to defraud, defeat or delay their creditors.
Transactions at non-arm's length
Where the involved parties are not at arm's length - such as between family and friends - a wider net is cast over transactions entered into prior to bankruptcy, in two respects. First, the scenario described above is extended from one year to five years prior to the date of the bankruptcy filing.
Second, within the one year period immediately prior to bankruptcy, there is no need to show that the debtor was insolvent, nor that there was any intent to defraud, defeat or delay.
Those in financial straits, or those dealing with someone who is, are well-advised to consult with an insolvency and bankruptcy lawyer for guidance on how to properly protect their interests and discharge their obligations.