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Attacking creditor-proofing transactions

Creditors are often frustrated to find that their debtors don't have assets or other means to pay their debts. Even more frustrating is when creditors discover that their debtors did have assets, which have recently been disposed of.

What can creditors do in such situations?

A variety of tools exist to allow "creditor-proofing" transactions to be set aside, depending on the circumstances. Let's look at two.

Fraudulent Conveyances

The BC Fraudulent Conveyance Act allows the court to set aside any transfer or other disposition of property which is intended to prejudice creditors. "Disposition of property" is widely interpreted, and can include a trust, a gift, a payment of money, a transfer for some consideration, a lease, a mortgage, and even a transfer of an asset from one form to another (for example, the transferring of cash into an RRSP).

The key element is intention: did the transferor carry out the disposition to shelter the asset from creditors? Since people don't usually admit to such intentions, the courts have developed "badges of fraud" which indirectly show an intention to prejudice. Such badges include:

  • little or no consideration for the transfer
  • the transferor continues in possession of the goods (despite having transferred them to someone else)
  •  transfers done with great haste
  •  documents are back-dated.

Where such badges are shown to exist, the court may conclude that the transfer was contrary to the Fraudulent Conveyance Act and order that it be set aside.

Transfers at undervalue

Creditors whose debtor has become bankrupt have another tool at their disposal: section 96 of the Bankruptcy and Insolvency Act. Unlike the Fraudulent Conveyance Act, which can be traced all the way back to England's Statute of Elizabeth of 1571, this provision is relatively recent, having been proclaimed in 2009.

To some extent, section 96 was enacted to address some of the difficulties with the role of intention under the Fraudulent Conveyance Act. Instead of intention, the section mainly focuses on value: if a transfer or disposition of property, or the provision of services, by the debtor was provided for free, or for consideration which was "conspicuously less than the fair market value", then the trustee in bankruptcy can apply to court for an order setting the transaction aside as a "transfer at undervalue".

Strict time limits apply to transfers at undervalue. In most cases, transactions can only be attacked as transfers at undervalue if they took place within one year prior to the bankruptcy. This time period is extended to five years where:

  •  the transaction involved someone not at arm's length to the debtor and
  •  either:
    • the debtor was insolvent at the time of the transaction (or the transaction rendered the debtor insolvent) or
    • the debtor carried out the transaction with the intention of prejudicing a creditor.

Creditors are sometimes advised to push their debtor into bankruptcy specifically so that a particular transaction can be attacked as a transfer at undervalue.

Evaluating these and other tools for attacking creditor-proofing requires an experienced insolvency lawyer.

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