The British Columbia Court of Appeal recently provided insight into how a bankrupt's assets will be valued when determining if they were transferred at less than fair market value.
In Randen v HPCB-Online Ltd., 2018 BCCA 123, a chain of bookstores sold about 10% of its book inventory to a related company for approximately $22,000.00, and assigned itself into bankruptcy a few weeks later.
The trustee for the bankrupt bookstores commenced an application under section 100 of the Bankruptcy and Insolvency Act ("BIA"), which allows the court to review non-arm's length transactions in the period leading up to bankruptcy to determine if they were for fair market value. In so doing, section 100 calls for the court to rely on the trustee's position of fair market value "unless other values are proven"
At the original hearing of the application, the lower court determined that the purchase was for conspicuously less than fair market value, and ordered that the purchaser company pay the balance of fair market value as determined by the court, being $287,000.00. In so doing, the lower court rejected the trustee's opinion of fair market value (which was approximately $1.5 million) as being inconsistent with the earlier position of the trustee. The Purchaser appealed and so did the trustee.
The Court of Appeal confirmed that the court did not err in refusing to accept the trustee's opinion of value, despite the language of section 100. In so doing, the Court of Appeal noted that the court was entitled to consider all of the evidence in order to determine if the trustee's opinion was reliable, and that section 100 could not lead to the "extraordinary result" of requiring the court to accept values that had clearly been demonstrated to be unreliable.
The Court of Appeal also determined the trial judge erred in valuing the fair market value of the books on the basis of potential retail sales of the books, as opposed to what a buyer would have paid for the wholesale book inventory, and in failing to value other aspects of the business included in the purchase. The matter was returned to the court below for reconsideration.
Section 100 of the BIA has been repealed and effectively replaced by section 96 of the BIA, but it continues to apply to transactions that took place before 2009. Section 100 provided that the court was to rely on the trustee's opinion regarding fair market value "unless other values are proven"; the current section 96 requires the court to rely on the trustee's opinion "in the absence of evidence to the contrary".
While section 100 has been repealed, the decision provides useful guidance for the proper calculation of fair market value and the power of interested parties to dispute it, including under the current section 96. Creditors, bankrupts, and the purchasers of a bankrupt's property would be wise to seek the advice of experienced insolvency counsel in the face of any potential disputes regarding transactions involving a bankrupt.